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Filed Pursuant to Rule 424(b)(3)
Registration No. 333-149236
PROSPECTUS
Offer
to Exchange up to
$100,000,000
of 9.250% Senior Subordinated Notes due 2013 —
Series B
for
$100,000,000
of 9.250% Senior Subordinated Notes due 2013 —
Series B
that
have been Registered under the Securities Act of 1933
Terms of the
Exchange Offer
| • | We are offering to exchange up to $100,000,000 of our outstanding 9.250% Senior Subordinated Notes due 2013 — Series B for new notes with substantially identical terms that have been registered under the Securities Act of 1933, as amended, and are freely tradable. | |
| • | We will exchange all outstanding notes that are validly tendered and not validly withdrawn before the exchange offer expires for an equal principal amount of new notes. | |
| • | The exchange offer expires at 12:00 a.m. midnight, New York City time, on July 16, 2008, unless extended. We do not currently intend to extend the exchange offer. | |
| • | Tenders of outstanding notes may be withdrawn at any time prior to the expiration of the exchange offer. | |
| • | The exchange of outstanding notes for new notes will not be a taxable event for U.S. federal income tax purposes. |
Terms of the New
9.250% Senior Subordinated Notes — Series B
Offered in the Exchange Offer
Maturity
| • | The new notes will mature on August 15, 2013. |
Interest
| • | Interest on the new notes is payable on February 15 and August 15 of each year. | |
| • | Interest will accrue from February 15, 2008. |
Redemption
| • | We may redeem some or all of the notes at any time on or after August 15, 2009 at redemption prices listed in “Description of the New Notes — Optional Redemption,” and we may redeem some or all of the notes before that date by the payment of a make-whole premium. Subject to certain limitations, we may also redeem up to 35% of the new notes using the proceeds of certain equity offerings completed before August 15, 2008. |
Ranking
| • | The notes are unsecured senior subordinated obligations of the Company. The notes are subordinated in right of payment to all existing and future senior debt of the Company, including the indebtedness of the Company under the Credit Agreement. The notes are pari passu in right of payment with all existing and any future senior subordinated indebtedness of the Company. The notes are senior in right of payment to any future subordinated indebtedness of the Company. The notes are guaranteed by the Guarantors as described under “Description of the New Notes — Note Guarantees”. The notes are effectively subordinated to all existing and any future indebtedness and other liabilities of the Company’s subsidiaries that are not Guarantors. |
Change of
Control
| • | If we experience a change of control, subject to certain conditions, we must offer to purchase the new notes. |
Guarantees
| • | All payments on the notes, including principal and interest, will be jointly and severally guaranteed on a senior subordinated basis by all of our existing domestic subsidiaries and certain of our future subsidiaries. |
Please read “Risk Factors” on page 9 for a
discussion of factors you should consider before participating
in the exchange offer.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or passed upon the adequacy or accuracy of this
prospectus. Any representation to the contrary is a criminal
offense.
Each broker-dealer that receives new notes for its own account
pursuant to the exchange offer must acknowledge that it will
deliver a prospectus in connection with any resale of such new
notes. The letter of transmittal states that by so acknowledging
and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an “underwriter” within the
meaning of the Securities Act of 1933, as amended. This
prospectus, as it may be amended or supplemented from time to
time, may be used by a broker-dealer in connection with resales
of new notes received in exchange for old notes where such old
notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities. You may
not participate in the exchange offer if you are a broker-dealer
that acquired outstanding notes directly from us. Broker-dealers
who acquired the old notes directly from us in the initial
offering must, in the absence of an exemption, comply with the
registration and prospectus delivery requirements of the
Securities Act of 1933, as amended, in connection with secondary
resales and cannot rely on the position of the staff of the
Securities and Exchange Commission enunciated in Exxon Capital
Holding Corp., SEC No-Action Letter (available May 13,
1988) or interpretive letters to similar effect. See
“Plan of Distribution.”
The information in this prospectus is not complete and may be
changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these
securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
The date of this
prospectus is June 17, 2008.
This prospectus is part of a registration statement we filed
with the Securities and Exchange Commission. In making your
investment decision, you should rely only on the information
contained in this prospectus and in the accompanying letter of
transmittal. We have not authorized anyone to provide you with
any other information. If you receive any unauthorized
information, you must not rely on it. We are not making an offer
to sell these securities in any state where the offer is not
permitted. You should not assume that the information contained
in this prospectus, or the documents incorporated by reference
into this prospectus, is accurate as of any date other than the
date on the front cover of this prospectus or the date of such
document, as the case may be.
TABLE OF
CONTENTS
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No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this
prospectus. You should not rely on any unauthorized information
or representations. This prospectus is an offer to exchange only
the notes offered by this prospectus, and only under the
circumstances and in those jurisdictions where it is lawful to
do so. The information contained in this prospectus is current
only as of its date.
Cardtronics, Inc. is a Delaware corporation. Our principal
executive offices are located at 3110 Hayes Road,
Suite 300, Houston, Texas 77082 and our telephone number is
(281) 596-9988.
Our website address is www.cardtronics.com. Information
contained on our website is not part of this prospectus.
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WHERE YOU CAN
FIND MORE INFORMATION
We have filed with the SEC a registration statement on
Form S-4
under the Securities Act of 1933, as amended, with respect to
the notes being offered by this prospectus. This prospectus,
which constitutes a part of the registration statement, does not
contain all the information that is included in the registration
statement and its exhibits and schedules. Certain portions of
the registration statement have been omitted as allowed by the
rules and regulations of the SEC. Statements in this prospectus
which summarize documents are not necessarily complete, and in
each case you should refer to the copy of the document filed as
an exhibit to the registration statement. You may read and copy
the registration statement, including exhibits and schedules
filed with it, and reports or other information we may file with
the SEC at the public reference facilities of the SEC at
100 F Street, N.E., Washington, D.C. 20549. You
may call the SEC at
1-800-SEC-0330
for further information regarding the operation of the public
reference rooms. In addition, the registration statement and
other public filings can be obtained from the SEC’s
internet site at
http://www.sec.gov.
We file reports and other information with the SEC. Such
reports and other information filed by us may be read and copied
at the SEC’s public reference room at
100 F Street, NE, Washington, D.C. 20549. For
further information about the public reference room, call
1-800-SEC-0330.
The SEC also maintains a website on the Internet that contains
reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC, and
such website is located at
http://www.sec.gov.
You may request a copy of these filings at no cost, by writing
or calling us at the following address: 3110 Hayes Road,
Suite 300, Houston, Texas 77082, telephone number is
(281) 596-9988,
Attention: Chief Financial Officer. In addition, for so long as
any of the notes remain outstanding, we have agreed to make
available to any prospective purchaser of the notes or
beneficial owner of the notes, in connection with any sale
thereof, the information required by Rule 144A(d)(4) under
the Securities Act.
INDUSTRY AND
MARKET DATA
In this prospectus, we rely on and refer to information and
statistics regarding economic trends and conditions and other
data pertaining to the ATM industry. We have obtained this data
from our own research, surveys and studies conducted by third
parties such as Dove Consulting Group, Inc., industry or other
publications, such as ATM&Debit News, the U.K.
Payment Statistics publication from APACS, and other
publicly available sources. We believe that our sources of
information and estimates are reliable and accurate, but we have
not independently verified them. Our statements about the ATM
industry in general, the number and type of ATMs in various
markets, and the size and operations of our competitors in this
prospectus are based on our management’s belief, this
statistical data, internal studies, and our knowledge of
industry trends.
INTELLECTUAL
PROPERTY
We own or have rights to various trademarks, copyrights and
trade names used in our business, including the following:
“CARDTRONICS” (registered with the
U.S. Patent & Trademark Office —
registration no. 1.970.030); “bankmachine”
(registered under the Trade Marks Act of 1994 of Great Britain
and Northern Ireland — trademark registration
no. 2350262); “ALLPOINT” (registered with the
U.S. Patent & Trademark Office —
registration no. 2.940.550); and “VCOM”
(registered with the U.S. Patent & Trademark
Office — registration no. 2.598.789). In
addition, this prospectus also includes trademarks, service
marks, and trade names of other companies.
FORWARD-LOOKING
STATEMENTS
This prospectus contains forward-looking statements that involve
risks and uncertainties. We may, in some cases, use words such
as “project,” “believe,”
“anticipate,” “plan,” “expect,”
“estimate,” “intend,” “should,”
“would,” “could,” “will,” or
“may,” or other words that convey uncertainty of
future events or outcomes to identify these forward-looking
statements. Forward-looking statements in this prospectus may
include statements about: our financial outlook and the
financial outlook of the ATM industry; our ability to compete
successfully with our competitors; our cash needs;
implementation of our corporate strategy; our financial
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performance; our ability to expand our bank branding and
surcharge-free service offerings; our ability to provide new ATM
solutions to financial institutions; our ability to pursue and
successfully integrate acquisitions; our ability to implement
new services on our advanced-functionality
VcomTM
terminals; our ability to strengthen existing customer
relationships and reach new customers; our ability to expand
internationally; and our ability to meet the service levels
required by our service level agreements with our customers.
There are a number of important factors that could cause actual
results to differ materially from the results anticipated by
these forward-looking statements. These important factors
include those that we discuss in this prospectus under the
caption “Risk Factors”, which begin on page 9 of
this prospectus. You should read these factors and the other
cautionary statements made in this prospectus as being
applicable to all related forward-looking statements wherever
they appear in this prospectus. If one or more of these factors
materialize, or if any underlying assumptions prove incorrect,
our actual results, performance or achievements may vary
materially from any future results, performance or achievements
expressed or implied by these forward-looking statements. We
undertake no obligation to publicly update any forward-looking
statements, except as required by law, whether as a result of
new information, future events or otherwise.
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SUMMARY
This summary highlights information contained elsewhere in
this prospectus. As a result, this summary may not contain all
the information that may be important to you. You should read
this entire prospectus carefully before making an investment
decision. You should carefully consider the information set
forth under “Risk Factors.” In addition certain
statements include forward-looking information which involves
risks and uncertainties. See “— Forward-looking
Statements.” Unless the context indicates otherwise, the
terms “we,” “us,” “our,” the
“Company,” and “Cardtronics” refer to
Cardtronics, Inc. and its subsidiaries. We refer to automated
teller machines as “ATMs” throughout this prospectus.
Pro forma financial and non-financial information contained in
this prospectus gives effect to our acquisition of the financial
services business of
7-Eleven,
Inc. (“7-Eleven”), which we refer to as the
“7-Eleven ATM Transaction,” including the
related financing transactions, as if they had occurred prior to
the period for which such information is given. Such pro forma
information is presented for illustrative purposes only and is
not necessarily indicative of what our actual results would have
been nor is it necessarily indicative of what our results will
be in future periods. All financial and non-financial
information presented for periods subsequent to July 20,
2007, the effective date of the 7-Eleven ATM Transaction,
includes the effects of such acquisition and the related
financing transactions on an actual rather than a pro forma
basis.
Company
Overview
Cardtronics, Inc. is a single-source provider of automated
teller machine (“ATM”) solutions. We provide ATM
management and equipment-related services (typically under
multi-year contracts with initial terms generally of five to
seven years) to large, nationally-known retail merchants as well
as smaller retailers and operators of facilities such as
shopping malls and airports. As of March 31, 2008, we
operated over 32,600 ATMs throughout the United States, the
United Kingdom, and Mexico, making us the operator of the
world’s largest network of ATMs.
We believe our high-traffic retail locations and national
footprint make us an attractive partner for regional and
national financial institutions that are seeking to increase
their market penetration. As of March 31, 2008, over 10,000
of our Company-owned ATMs (discussed below) were under contract
with well-known banks to place their logos on those machines and
to provide convenient surcharge-free access to their customers.
We also operate the Allpoint network, which we believe is the
largest surcharge-free ATM network within the United States
based on the number of participating ATMs. Allpoint provides
surcharge-free ATM access to customers of participating
financial institutions that lack a significant ATM network.
We deploy and operate ATMs under two distinct arrangements with
our merchant customers: Company-owned and merchant-owned. Under
Company-owned arrangements, we provide the ATM and are typically
responsible for all aspects of its operation, including
transaction processing, procuring cash, supplies, and
telecommunications as well as routine and technical maintenance.
Under merchant-owned arrangements, the merchant owns the ATM and
is usually responsible for providing cash and performing simple
maintenance tasks, while we provide more complex maintenance
services, transaction processing, and connection to electronic
funds transfer (“EFT”) networks. As of March 31,
2008, approximately 66% of our ATMs were Company-owned and 34%
were merchant-owned. While we may continue to add merchant-owned
ATMs to our network as a result of acquisitions and internal
sales efforts, our focus for internal growth remains on
expanding the number of Company-owned ATMs in our network due to
the higher margins typically earned and the additional revenue
opportunities available to us under Company-owned arrangements.
As operator of the world’s largest network of ATMs, we
believe we are well-positioned to increase the size of our
network through both internal growth and through acquisitions.
On July 20, 2007, we purchased substantially all of the
assets of the financial services business of 7-Eleven (the
“7-Eleven Financial Services Business”), which
included 5,500 ATMs located in 7-Eleven stores across the United
States. Approximately 2,000 of the acquired ATMs are
advanced-functionality financial services kiosks branded as
“Vcom” terminals. We also entered into a placement
agreement that gives us the exclusive right, subject to certain
conditions, to operate all of the ATMs and Vcom terminals in
existing and future 7-Eleven store locations in the United
States for 10 years following the acquisition date. For
additional information on this acquisition, see “Recent
Transactions” below.
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Our revenue is recurring in nature and is primarily derived from
ATM surcharge fees, which are paid by cardholders, and
interchange fees, which are paid by the cardholder’s
financial institution for the use of the applicable EFT network
that transmits data between the ATM and the cardholder’s
financial institution. We generate additional revenue by
branding our ATMs with signage from banks and other financial
institutions, resulting in surcharge-free access to our ATMs and
added convenience for their customers, as well as increased
usage of our ATMs. Our branding arrangements include
relationships with leading national financial institutions,
including Citibank, N.A., HSBC Bank USA, N.A., JPMorgan Chase
Bank, N.A., Sovereign Bank, and Washington Mutual Bank. We also
generate revenue by collecting fees from financial institutions
that participate in our surcharge-free networks, the largest of
which is the Allpoint Network.
For the three months ended March 31, 2008, we processed
over 53.9 million cash withdrawal transactions, which
resulted in approximately $5.1 billion in cash
disbursements, and processed over 29.1 million of other ATM
transactions, which included balance inquiries, fund transfers,
and other non-withdrawal transactions. For the year ended
December 31, 2007, and on a pro forma basis giving effect
to the 7-Eleven ATM Transaction, we processed over
207.4 million cash withdrawal transactions, which resulted
in approximately $19.4 billion in cash disbursements, and
processed over 95.4 million of other ATM transactions.
Excluding the pro forma effects of the 7-Eleven ATM Transaction,
we processed over 166.2 million cash withdrawal
transactions, resulting in approximately $15.6 billion in
cash disbursements, and processed over 80.3 million of
other ATM transactions.
For the three months ended March 31, 2008, we generated
revenues of $120.6 million. For the year ended
December 31, 2007, we generated pro forma revenues of
$465.8 million, which included approximately
$4.2 million in revenues associated with past upfront
payments received by 7-Eleven in connection with the development
and provision of certain advanced-functionality services through
the Vcom terminals. Such payments, which we refer to as
placement fees, related to arrangements that ended prior to our
acquisition of the 7-Eleven Financial Services Business, and
thus will not continue in the future. While we believe we will
continue to earn some placement fee revenues related to the
acquired 7-Eleven Financial Services Business, we expect those
amounts to be substantially less than those earned historically.
Excluding these fees, our pro forma revenues for the year ended
December 31, 3007 would have totaled $461.6 million.
Excluding the pro forma effects of the 7-Eleven ATM Transaction,
we generated revenues of $378.3 million for the year ended
December 31, 2007.
Our transaction and revenue growth have primarily been driven by
investments that we have made in certain strategic growth
initiatives, and we expect these initiatives will continue to
drive revenue growth and margin improvement. However, such
investments negatively affected our operating profits and
related margins. For example, we have significantly increased
the number of Company-owned ATMs in our United Kingdom and
Mexico operations during the past year and the first quarter of
2008. While such deployments have resulted in an increase in
revenues, they have negatively impacted our operating margins,
as transactions for many of those machines have yet to reach the
higher consistent recurring transaction levels seen in our more
mature ATMs. Additionally, we have recently increased our
investment in sales and marketing personnel to take advantage of
what we believe are opportunities to capture additional market
share in our existing markets and to provide enhanced service
offerings to financial institutions. We have also incurred
additional costs to develop our in-house transaction processing
capabilities to better serve our clients and maximize our
revenue opportunities. Additional costs were also necessary to
meet the triple data security encryption standard
(“Triple-DES”) adopted by the EFT networks. Finally,
we recorded $5.7 million in impairment charges during the
year ended December 31, 2007, $5.1 million of which
related to our merchant contract with Target that we acquired in
2004, as the anticipated future cash flows are not expected to
be sufficient to cover the carrying value of the related
intangible asset. We are currently working with this merchant to
restructure the terms of the existing contract in an effort to
improve the underlying cash flows associated with such contract
and to offer the additional services, which we believe could
significantly increase the future cash flows earned under this
contract. For additional discussion of this impairment, see
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Years Ended
December 31, 2007, 2006, and 2005 — Amortization
Expense.”
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All these expenditures adversely impacted our income from
operations, which totaled $15.2 million on a pro forma
basis for the year ended December 31, 2007 (excluding the
upfront placement fees associated with the 7-Eleven Financial
Services Business that are not expected to continue in the
future). Excluding the pro forma effects of the 7-Eleven ATM
Transaction, for the year ended December 31, 2007, our
income from operations totaled $9.9 million, and we
generated a net loss of $27.1 million.
Recent
Transactions
Initial Public Offering. On
December 14, 2007, we completed our initial public offering
of 12,000,000 shares of common stock at a price of $10.00
per share. Total common shares outstanding immediately after the
offering were 38,566,207 after taking into account the
conversion of all Series B Redeemable Convertible Preferred
Stock into common shares and a 7.9485:1 stock split that
occurred in conjunction with the offering. The net proceeds from
the offering were approximately $110.1 million and were
used to pay down debt previously outstanding under our revolving
credit facility.
Series B Redeemable Convertible Preferred Stock
Conversion. Prior to our initial public
offering, 929,789 shares of Series B Redeemable
Convertible Preferred Stock were outstanding. In connection with
our initial public offering, these preferred shares were
converted into shares of our common stock. Based on the $10.00
initial public offering price and the terms of our shareholders
agreement, the 894,568 shares held by certain funds
controlled by TA Associates, Inc. (the “TA Funds”)
converted into 12,259,286 shares of common stock (on a
split-adjusted basis). The remaining 35,221 shares of
Series B Redeemable Convertible Preferred Stock not held by
the TA Funds converted into 279,955 shares of our common
stock (on a split-adjusted basis). As a result of this
conversion, no shares of preferred stock were outstanding
subsequent to the initial public offering, and we have no
immediate plans to issue any preferred stock. For additional
information on the conversion of the Series B shares
controlled by the TA Funds, see “Certain Relationships and
Related Party Transactions — Preferred Stock Private
Placement with TA Associates.”
7-Eleven ATM Transaction. On
July 20, 2007, we purchased substantially all of the assets
of the
7-Eleven
Financial Services Business for approximately
$137.3 million in cash. That amount included a
$1.3 million payment for estimated acquired working capital
and approximately $1.0 million in other related closing
costs. The 7-Eleven ATM Transaction included approximately 5,500
ATMs located in 7-Eleven stores throughout the United States, of
which approximately 2,000 are advanced-functionality Vcom
terminals. In connection with the 7-Eleven ATM Transaction, we
entered into a placement agreement that will provide us, subject
to certain conditions, a ten-year exclusive right to operate all
ATMs and Vcom terminals in 7-Eleven locations throughout the
United States, including any new stores opened or acquired by
7-Eleven. Because of the significance of this acquisition, our
historical operating results are not expected to be indicative
of our future operating results. See “Unaudited Pro Forma
Condensed Consolidated Financial Statements” and
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” included elsewhere in
this prospectus for additional information on this acquisition.
Senior Subordinated Notes Offering. On
July 20, 2007, we issued $100.0 million in
9.25% senior subordinated notes due 2013 —
Series B (the “Series B Notes” or the
“outstanding notes”) pursuant to Rule 144A of the
Securities Act. The Series B Notes are the notes that are
subject to the exchange offer described herein. Net proceeds
from the offering, which totaled approximately
$95.3 million after taking into account debt issuance
costs, were utilized to fund the 7-Eleven ATM Transaction.
Revolving Credit Facility
Modifications. On March 19, 2008, we
amended our revolving credit agreement to increase the
authorized capital expenditure level that the Company may incur
on a rolling
12-month
basis from $75.0 million to $90.0 million.
In July 2007, in conjunction with the 7-Eleven ATM Transaction,
we amended our revolving credit facility to, among other things,
(i) increase the maximum borrowing capacity under the
revolver from $125.0 million to $175.0 million in
order to partially finance the 7-Eleven ATM Transaction and to
provide additional financial flexibility, (ii) increase the
amount of “indebtedness” (as defined in the credit
facility agreement) to allow for the new issuance of the
Series B Notes, (iii) extend the term of the credit
agreement
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from May 2010 to May 2012, (iv) increase the amount of
capital expenditures we can incur on a rolling
12-month
basis from $60.0 million to a maximum of
$75.0 million, and (v) amend certain restrictive
covenants contained within the facility. This amendment, which
was contingent upon the closing of the 7-Eleven ATM Transaction,
became effective on July 20, 2007.
In May 2007, we amended our revolving credit facility to modify,
among other items, (i) the interest rate spreads on
outstanding borrowings and other pricing terms, and
(ii) certain restrictive covenants contained within the
facility. Such modification will allow for reduced interest
expense in future periods, assuming a constant level of
borrowing.
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The Exchange
Offer
On July 20, 2007, we completed a private offering of the
Series B Notes. As part of the private offering, we entered
into a registration rights agreement with the initial purchasers
of the outstanding notes in which we agreed, among other things,
to deliver this prospectus to you and to use our best efforts to
complete the exchange offer within 360 days after the date
we issued the outstanding notes. The following is a summary of
the exchange offer.
| Exchange Offer | We are offering to exchange new notes for outstanding notes. | |
| Expiration Date | The exchange offer will expire at 12:00 a.m. midnight, New York City time, on July 16, 2008, unless we decide to extend it. We do not currently intend to extend the exchange offer. | |
| Condition to the Exchange Offer | The registration rights agreement does not require us to accept outstanding notes for exchange if the exchange offer or the making of any exchange by a holder of the outstanding notes would violate any applicable law or interpretation of the staff of the SEC. A minimum aggregate principal amount of outstanding notes being tendered is not a condition to the exchange offer. In addition, we will not be obligated to accept for exchange the outstanding notes of any holder that has not complied with the procedures for tendering outstanding notes. For additional information, see “Exchange Offer — Conditions to the Exchange Offer.” | |
| Procedures for Tendering Outstanding Notes | To participate in the exchange offer, you must follow the procedures established by The Depository Trust Company, which we call “DTC,” for tendering notes held in book-entry form. These procedures, which we call “ATOP,” require that the exchange agent receive, prior to the expiration date of the exchange offer, a computer generated message known as an “agent’s message” that is transmitted through DTC’s automated tender offer program and that DTC confirm that: | |
|
• DTC has received your instructions to exchange your
notes; and
|
||
|
• you agree to be bound by the terms of the letter of
transmittal.
|
||
| For additional information, see “Exchange Offer — Terms of the Exchange Offer” and “Exchange Offer — Procedures for Tendering.” | ||
| Guaranteed Delivery Procedures | None. | |
| Withdrawal of Tenders | You may withdraw your tender of outstanding notes at any time prior to the expiration date. To withdraw, you must submit a notice of withdrawal to exchange agent using ATOP procedures before 12:00 a.m. midnight, New York City time, on the expiration date of the exchange offer. For additional information, see “Exchange Offer — Withdrawal of Tenders.” | |
| Acceptance of Outstanding Notes and Delivery of New Notes | If you fulfill all conditions required for proper acceptance of outstanding notes, we will accept any and all outstanding notes that you properly tender in the exchange offer on or before 12:00 a.m. midnight, New York City time, on the expiration date. We will return any outstanding note that we do not accept for exchange to |
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| you without expense promptly following the expiration or termination of the exchange offer. We will deliver the new notes promptly after the expiration date and acceptance of the outstanding notes for exchange. For additional information, see “Exchange Offer — Terms of the Exchange Offer.” | ||
| Fees and Expenses | We will bear all expenses related to the exchange offer. See “Exchange Offer — Fees and Expenses.” | |
| Use of Proceeds | The issuance of the new notes will not provide us with any new proceeds. We are making this exchange offer solely to satisfy our obligations under our registration rights agreement. | |
| Consequences of Failure to Exchange Outstanding Notes | If you do not exchange your outstanding notes in this exchange offer, you will no longer be able to require us to register the outstanding notes under the Securities Act except in the limited circumstances provided under our registration rights agreement. In addition, you will not be able to resell, offer to resell or otherwise transfer the outstanding notes unless we have registered the outstanding notes under the Securities Act, or unless you resell, offer to resell or otherwise transfer them under an exemption from the registration requirements of, or in a transaction not subject to, the Securities Act. | |
| U.S. Federal Income Tax Considerations | The exchange of new notes for outstanding notes in the exchange offer should not be a taxable event for U.S. federal income tax purposes. See “Federal Income Tax Considerations.” | |
| Exchange Agent | We have appointed Wells Fargo, National Association as exchange agent for the exchange offer. You should direct questions and requests for assistance and requests for additional copies of this prospectus (including the letter of transmittal) to the exchange agent addressed as follows: Wells Fargo Bank, National Association, Attention: Corporate Trust Operations, Sixth and Marquette Avenue, MAC N9303-121, Minneapolis, MN 55479. Eligible institutions may make requests by facsimile at (612) 667-6282. |
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Terms of the New
Notes
The new notes will be identical to the outstanding notes
except that the new notes will be registered under the
Securities Act and will not have restrictions on transfer,
registration rights or provisions for additional interest and
will contain different administrative terms. The new notes will
evidence the same debt as the outstanding notes, and the same
indenture will govern the new notes and the outstanding
notes.
The following summary contains basic information about the
new notes and is not intended to be complete. It does not
contain all the information that is important to you. For a more
complete understanding of the new notes, please refer to the
section of this prospectus entitled “Description of the New
Notes.”
| Issuer | Cardtronics, Inc. | |
| Notes Offered | $100.0 million aggregate principal amount of 9.25% Senior Subordinated Notes due 2013 — Series B (the “Notes”). | |
| Maturity | The Notes will mature on August 15, 2013. | |
| Interest | Interest on the Notes will accrue at the rate of 9.25% per annum from February 15, 2008 and will be payable semi-annually, in cash, in arrears on February 15 and August 15 of each year, commencing on August 15, 2008. | |
| Guarantees | All payments on the Notes, including principal and interest, will be jointly and severally guaranteed on a senior subordinated basis by all of our existing domestic subsidiaries and certain of our future subsidiaries. See “Description of the New Notes — Note Guarantees.” | |
| Ranking | The Notes and the guarantees will be general unsecured obligations and will rank: | |
|
• junior in right of payment to all of our existing
and future senior indebtedness, including borrowings under our
bank credit facility;
|
||
|
• pari passu in right of payment with all of
our existing and any future senior subordinated debt, including
the $200.0 million aggregate principal amount of
9.25% senior subordinated notes due 2013 issued under the
indenture dated as of August 12, 2005 (the
“Series A Notes”); and
|
||
|
• senior in right of payment to any future
subordinated debt.
|
||
| As of March 31, 2008, we had outstanding indebtedness of approximately $345.9 million, net of applicable discounts. Of this amount, approximately $49.7 million would have ranked senior in right of payment to the new Notes and guarantees, which consisted of $39.5 million outstanding under our revolving credit facility, $8.5 million outstanding under certain borrowing arrangement in place with respect to our Mexico subsidiary, including guarantees of such amounts, and $1.7 million of capital lease obligations. | ||
| Optional Redemption | We may redeem some or all of the Notes on or after August 15, 2009 at the redemption prices set forth in this prospectus. At any time prior to August 15, 2009, we may redeem the Notes, in whole or in part, at a price equal to 100% of their outstanding principal amount plus the make-whole premium described under “Description of the New Notes — Optional Redemption.” |
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| In addition, we may redeem up to 35% of the aggregate principal amount of the Notes at a redemption price of 109.25% using the proceeds of certain equity offerings completed on or before August 15, 2008. We may make this redemption only if, after the redemption, at least 65% of the aggregate principal amount of the Notes originally issued remains outstanding. | ||
| Change of Control | If we sell substantially all of our assets or experience specific kinds of changes of control, we must offer to repurchase the Notes at a price in cash equal to 101% of their principal amount, plus accrued and unpaid interest, if any, to the date of purchase. | |
| Certain Covenants | The indenture governing the Notes contains covenants that, among other things, limit our ability and the ability of our subsidiaries to: | |
|
• incur or guarantee additional indebtedness;
|
||
|
• incur senior subordinated debt;
|
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|
• make certain restricted payments;
|
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|
• consolidate or merge with or into other companies;
|
||
|
• conduct asset sales;
|
||
|
• restrict dividends or other payments to us;
|
||
|
• engage in transactions with affiliates or related
persons;
|
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|
• create liens;
|
||
|
• redeem or repurchase capital stock; and
|
||
|
• issue and sell preferred stock in restricted
subsidiaries.
|
||
| These limitations will be subject to a number of important qualifications and exceptions. See “Description of the New Notes — Certain Covenants.” | ||
| Absence of a Public Market | The new Notes generally will be freely transferable; however, there can be no assurance as to the development or liquidity of any market for the new Notes. |
Investment in the Notes involves substantial risks. See
“Risk Factors” immediately following this summary for
a discussion of certain risks relating to the exchange offer.
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RISK
FACTORS
Before making an investment decision with respect to the
exchange offer you should carefully consider the following
risks, as well as the other information contained in this
prospectus memorandum, including our consolidated financial
statements and the related notes and “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.” We believe that the risks and uncertainties
described below are the material risks and uncertainties facing
us as well as risks related to the exchange offer. Additional
risks and uncertainties that we are unaware of, or that we
currently deem immaterial, also may become important factors
that affect us. If any of the following risks occur, our
business, financial condition or results of operations could be
materially and adversely affected.
Risks
Related to Our Business
We
depend on ATM transaction fees for substantially all of our
revenues, and our revenues would be reduced by a decline in the
usage of our ATMs or a decline in the number of ATMs that we
operate.
Transaction fees charged to cardholders and their financial
institutions for transactions processed on our ATMs, including
surcharge and interchange transaction fees, have historically
accounted for most of our revenues. We expect that ATM
transaction fees, including fees we receive through our bank
branding and surcharge-free network offerings, will continue to
account for a substantial majority of our revenues for the
foreseeable future. Consequently, our future operating results
will depend on (i) the continued market acceptance of our
services in our target markets, (ii) maintaining the level
of transaction fees we receive, (iii) our ability to
install, acquire, operate, and retain more ATMs,
(iv) continued usage of our ATMs by cardholders, and
(v) our ability to continue to expand our surcharge-free
offerings. Additionally, it is possible that alternative
technologies to our ATM services will be developed and
implemented. If such alternatives are successful, we will likely
experience a decline in the usage of our ATMs. Moreover,
surcharge fees are set by negotiation between us and our
merchant partners and could change over time. Further, growth in
surcharge-free ATM networks and widespread consumer bias toward
such networks could adversely affect our revenues, even though
we maintain our own surcharge-free offerings.
During 2007, we saw a decline in the average number of ATMs that
we operate in the United States. Such decline, which totaled
approximately 1.6% for our consolidated U.S. ATM portfolio,
exclusive of ATMs acquired in the 7-Eleven ATM Transaction, is
primarily due to customer losses experienced in our
merchant-owned ATM business, offset somewhat by new
Company-owned ATM locations that were deployed during the year.
The decline in ATMs on the merchant-owned side of the business
totaled approximately 6.2% during the year ended
December 31, 2007, and was due primarily to (i) an
internal initiative launched by us to identify and eliminate
certain underperforming accounts, (ii) increased
competition from local and regional independent ATM service
organizations, and (iii) certain network security upgrade
requirements.
Although we did not see as significant a decline in the average
number of ATMs during the first quarter of 2008, we cannot
assure you that our ATM transaction fees will not decline in the
future. Accordingly, a decline in usage of our ATMs by ATM
cardholders or in the levels of fees received by us in
connection with such usage, or a decline in the number of ATMs
that we operate, would have a negative impact on our revenues
and would limit our future growth.
In the
United States, the proliferation of payment options other than
cash, including credit cards, debit cards, and stored-value
cards, could result in a reduced need for cash in the
marketplace and a resulting decline in the usage of our
ATMs.
The U.S. has seen a shift in consumer payment trends since
the late 1990’s, with more customers now opting for
electronic forms of payment (e.g., credit cards and debit cards)
for their in-store purchases over traditional paper-based forms
of payment (e.g., cash and checks). Additionally, certain
merchants are now offering free cash back at the point-of-sale
for customers that utilize debit cards for their purchases, thus
providing an additional incentive for consumers to use such
cards. According to the Study of Consumer Payment Preferences
for 2005/2006, as prepared by Dove Consulting and the
American Bankers Association, paper-based forms of payment
declined from approximately 57% of all in-store payments made in
1999 to
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44% in 2005. While most of the increase in electronic forms of
payment during this period came at the expense of traditional
checks, the use of cash to fund in-store payments declined from
39% in 1999 to 33% in 2001. Although the use of cash has been
relatively stable since that date (remaining at roughly 33% of
all in-store payments through 2005), continued growth in
electronic payment methods (most notably debit cards and
stored-value cards) could result in a reduced need for cash in
the marketplace and a resulting decline in the usage of our ATMs.
We
have incurred substantial losses in the past and may continue to
incur losses in the future.
We have incurred net losses in three of the past five fiscal
years and incurred a net loss of $4.6 million for the three
months ended March 31, 2008. As of March 31, 2008, we
had an accumulated deficit of $35.0 million. There can be
no guarantee that we will achieve profitability in the future.
If we achieve profitability, given the competitive and evolving
nature of the industry in which we operate, we may not be able
to sustain or increase such profitability on a quarterly or
annual basis.
Interchange
fees, which comprise a substantial portion of our ATM
transaction revenues, may be lowered at the discretion of the
various EFT networks through which our ATM transactions are
routed, thus reducing our future revenues.
Interchange fees, which represented approximately 29.3% of our
ATM operating revenues for the three months ended March 31,
2008 and 27.8% of our total pro forma ATM operating revenues for
the year ended December 31, 2007, are set by the various
EFT networks through which our ATM transactions are routed.
Accordingly, if such networks decided to lower the interchange
rates paid to us for ATM transactions routed through their
networks, our future ATM transaction revenues would decline.
We
derive a substantial portion of our revenue from ATMs placed
with a small number of merchants. If one or more of our top
merchants were to cease doing business with us, or to
substantially reduce its dealings with us, our revenues could
decline.
For the three months ended March 31,2008, we derived 44.7%
of our total revenues from ATMs placed at the locations of our
five largest merchants. For the year ended December 31,
2007, we derived 45.4% of our total pro forma revenues from ATMs
placed at the locations of our five largest merchants. For the
three months ended March 31, 2008 and the year ended
December 31, 2007, our top five merchants (based on our
total revenues) were 7-Eleven, CVS, Walgreens, Target, and
ExxonMobil. 7-Eleven, which represents the single largest
merchant customer in our portfolio, comprised 30.9% of our total
revenues for the three months ended March 31, 2008 and
33.0% of our total pro forma revenues for the year ended
December 31, 2007. Accordingly, a significant percentage of
our future revenues and operating income will be dependent upon
the successful continuation of our relationship with 7-Eleven
and these other four merchants.
The loss of any of our largest merchants, or a decision by any
one of them to reduce the number of our ATMs placed in their
locations, would decrease our revenues. These merchants may
elect not to renew their contracts when they expire. The
contracts we have with our top five merchants, as outlined
above, have expiration dates of July 20, 2017;
January 19, 2012; December 31, 2013; January 31,
2012; and December 31, 2013, respectively. Even if such
contracts are renewed, the renewal terms may be less favorable
to us than the current contracts. If any of our five largest
merchants fails to renew its contract upon expiration, or if the
renewal terms with any of them are less favorable to us than
under our current contracts, it could result in a decline in our
revenues and gross profits.
A
substantial portion of our future revenues and operating profits
will be generated by the 7-Eleven merchant relationship.
Accordingly, if 7-Eleven’s financial condition deteriorates
in the future and it is required to close some or all of its
store locations, or if our ATM placement agreement with 7-Eleven
expires or is terminated, our future financial results would be
significantly impaired.
7-Eleven is the single largest merchant customer in our
portfolio, representing 30.9% of our total revenues for the
three months ended March 31, 2008 and 33.0% of our total
pro forma revenues for the years
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ended December 31, 2007. Accordingly, a significant
percentage of our future revenues and operating income will be
dependent upon the successful continuation of our relationship
with 7-Eleven. If 7-Eleven’s financial condition were to
deteriorate in the future and, as a result, it was required to
close a significant number of its domestic store locations, our
financial results would be significantly impacted. Additionally,
while the underlying ATM placement agreement with 7-Eleven has
an initial term of 10 years, we may not be successful in
renewing such agreement with 7-Eleven upon the end of that
initial term, or such renewal may occur with terms and
conditions that are not as favorable to us as those contained in
the current agreement. Furthermore, if we fail to satisfy the
terms and conditions contained in our ATM placement agreement
with 7-Eleven, 7-Eleven has the right to terminate the placement
agreement or our exclusive right to provide certain services.
We
rely on EFT network providers, transaction processors, armored
courier providers, and maintenance providers; if they fail or no
longer agree to provide their services, we could suffer a
temporary loss of transaction revenues or the permanent loss of
any merchant contract affected by such disruption.
We rely on EFT network providers and have agreements with
transaction processors, armored courier providers, and
maintenance providers and have more than one such provider in
each of these key areas. These providers enable us to provide
card authorization, data capture, settlement, and ATM cash
management and maintenance services to the merchants we serve.
Typically, these agreements are for periods of up to two or
three years each. If we improperly manage the renewal or
replacement of any expiring vendor contract, or if our multiple
providers in any one key area failed to provide the services for
which we have contracted and disruption of service to our
merchants occurs, our relationship with those merchants could
suffer. For example, during the first quarter of 2008, our
results of operations were negatively impacted by a higher
percentage of downtime experienced by our ATMs in the United
Kingdom as a result of certain third-party service-related
issues and, while we expect such service-related issues to be
resolved during 2008, it is likely that such issues will
continue to negatively impact the operating results of our
United Kingdom operations in the near-term. If such disruption
of service is significant or continues longer than anticipated,
our relationships with the affected merchants could be
negatively impacted. Furthermore, any disruptions in service in
any of our markets, whether caused by us or by third party
providers, may result in a loss of revenues under certain of our
contractual arrangements that contain minimum service-level
requirements.
If we,
our transaction processors, our EFT networks or other service
providers experience system failures, the ATM products and
services we provide could be delayed or interrupted, which would
harm our business.
Our ability to provide reliable service largely depends on the
efficient and uninterrupted operations of our in-house EFT
processing platform, third-party transaction processors,
telecommunications network systems, and other service providers.
Accordingly, any significant interruptions could severely harm
our business and reputation and result in a loss of revenue.
Additionally, if any such interruption is caused by us,
especially in those situations in which we serve as the primary
transaction processor, such interruption could result in the
loss of the affected merchants or damage our relationships with
such merchants. Our systems and operations and those of our
transaction processors and our EFT network and other service
providers could be exposed to damage or interruption from fire,
natural disaster, unlawful acts, terrorist attacks, power loss,
telecommunications failure, unauthorized entry, and computer
viruses. We cannot be certain that any measures we and our
service providers have taken to prevent system failures will be
successful or that we will not experience service interruptions.
Our
armored transport business in the United Kingdom exposes us to
additional risks beyond those currently experienced by us in the
ownership and operation of ATMs.
Our recent decision to create an in-house armored transport
operation within the United Kingdom exposes us to significant
risks, including the potential for
cash-in-transit
losses, as well as claims for personal injury, wrongful death,
worker’s compensation, punitive damages, and general
liability. While we will seek to maintain appropriate levels of
insurance to adequately protect us from such risks, there can be
no assurance that we will avoid significant future claims or
adverse publicity related thereto. Furthermore, there can be no
assurance that our insurance coverage will be adequate to cover
potential liabilities or that such insurance coverage will
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remain available at costs that are acceptable to us. The
availability of quality and reliable insurance coverage is an
important factor in our ability to successfully operate this
aspect of our operations. A successful claim brought against us
for which coverage is denied or which is in excess of our
insurance coverage could have a material adverse effect on our
business, financial condition and results of operations.
If not
done properly, the transitioning of our United Kingdom armored
transport services from third-party service providers to our own
internal operations could lead to service interruptions, which
would harm our business and our relationships with our
merchants.
We have no prior experience in providing armored transport
services to the ATM industry. Accordingly, we have hired, and
will continue to hire, additional personnel with experience in
running armored transport services, including personnel with the
requisite industry and security-related experience. Because this
is a new business for us, there is an increased risk that our
transition efforts will not be successful, thus resulting in
service interruptions for our merchants. Furthermore, if not
performed properly, the provisioning of armored transport
services to our ATMs could result in such ATMs either running
out of cash, thereby resulting in lost transactions and
revenues, or having excess cash, thereby unnecessarily
increasing our operating costs. Furthermore, if such issues were
to occur, it could damage our relationships with the affected
merchants, thus negatively impacting our business, financial
condition and results of operations.
If not
done properly, the transitioning of our ATMs from third-party
processors to our own in-house EFT processing platform could
lead to service interruptions and/or the inaccurate settlement
of funds between the various parties to our ATM transactions,
which would harm our business and our relationships with our
merchants.
As of March 31, 2008, we had transitioned approximately
20,300 of our Company- and merchant-owned ATMs from third-party
processors to our own in-house EFT processing platform, and we
expect to have the remainder of the ATMs in our portfolio
converted over by December 31, 2008. Historically, we had
limited experience in ATM transaction processing and, therefore,
hired additional personnel with experience in running an ATM
transaction processing operation during 2006 and 2007, including
personnel we hired in connection with the 7-Eleven ATM
Transaction. Because EFT processing is a relatively new business
for us, there is an increased risk that our processing
conversion efforts will not be successful, thus resulting in
service interruptions for our merchants. Furthermore, if not
performed properly, the processing of transactions conducted on
our ATMs could result in the inaccurate settlement of funds
between the various parties to those transactions and expose us
to increased liability.
Security
breaches could harm our business by compromising customer
information and disrupting our in-house EFT processing services,
thus damaging our relationships with our merchant customers and
exposing us to liability.
As part of our in-house EFT processing services, we
electronically process, store, and transmit sensitive cardholder
information utilizing our ATMs. In recent years, companies that
process and maintain such cardholder information have been
specifically and increasingly targeted by sophisticated criminal
organizations in an effort to obtain such information and
utilize it for fraudulent transactions. Unauthorized access to
our computer systems, or those of our third-party service
providers, could result in the theft or publication of such
information or the deletion or modification of sensitive
records, and could cause interruptions in our operations. While
such security risks are mitigated by the use of encryption and
other security techniques, any inability to prevent security
breaches could damage our relationships with our merchant
customers and expose us to liability.
Computer
viruses could harm our business by disrupting our ATM
transaction processing services, causing non-compliance with
network rules and damaging our relationships with our merchant
customers.
Computer viruses could infiltrate our systems, thus disrupting
our delivery of services and making our applications
unavailable. Although we utilize several preventative and
detective security controls in our
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network, any inability to prevent computer viruses could damage
our relationships with our merchant customers and cause us to be
in non-compliance with applicable network rules and regulations.
Operational
failures in our in-house ETF processing facilities could harm
our business and our relationships with our merchant
customers.
An operational failure in our in-house EFT processing facilities
could harm our business and damage our relationships with our
merchant customers. Damage or destruction that interrupts our
ATM processing services could damage our relationships with our
merchant customers and could cause us to incur substantial
additional expense to repair or replace damaged equipment. We
have installed
back-up
systems and procedures to prevent or react to such disruptions.
However, a prolonged interruption of our services or network
that extends for more than several hours (i.e., where our backup
systems are not able to recover) could result in data loss or a
reduction in revenues as our ATMs would be unable to process
transactions. In addition, a significant interruption of service
could have a negative impact on our reputation and could cause
our present and potential merchant customers to choose
alternative ATM service providers.
Errors
or omissions in the settlement of merchant funds could damage
our relationships with our merchant customers and expose us to
liability.
We are responsible for maintaining accurate bank account
information for our merchant customers and accurate settlements
of funds into these accounts based on the underlying transaction
activity. This process relies on accurate and authorized
maintenance of electronic records. Although we have certain
controls in place to help ensure the safety and accuracy of our
records, errors or unauthorized changes to these records could
result in the erroneous or fraudulent movement of funds, thus
damaging our relationships with our merchant customers and
exposing us to liability.
We
rely on third parties to provide us with the cash we require to
operate many of our ATMs. If these third parties were unable or
unwilling to provide us with the necessary cash to operate our
ATMs, we would need to locate alternative sources of cash to
operate our ATMs or we would not be able to operate our
business.
In the United States, we rely on agreements with Bank of
America, N.A. (“Bank of America”), Wells Fargo, N.A.
(“Wells Fargo”), and Palm Desert National Bank
(“PDNB”) to provide us with the cash that we use in
approximately 18,000 of our domestic ATMs where cash is not
provided by the merchant (“vault cash”). In the United
Kingdom, we rely on a vault cash agreement with
Alliance & Leicester Commercial Bank
(“ALCB”) to provide us with the cash that we use in
approximately 2,200 of our U.K. ATMs where cash is not provided
by the merchant. Finally, Bansi, S.A. Institucion de Banca
Multiple (“Bansi”), a regional bank in Mexico and a
minority interest owner in Cardtronics Mexico, is our sole vault
cash provider in Mexico and provides us with the cash that we
use in approximately 1,200 of our Mexico ATMs. As of
March 31, 2008, the balance of vault cash held in our U.S,
U.K., and Mexico ATMs was approximately $747.3 million,
$164.5 million, and $14.3 million, respectively.
Under our vault cash agreements, we pay a vault cash rental fee
based on the total amount of vault cash that we are using at any
given time. At all times during this process, legal and
equitable title to the cash is held by the cash providers, and
we have no access or right to the cash. Each provider has the
right to demand the return of all or any portion of its cash at
any time upon the occurrence of certain events beyond our
control, including certain bankruptcy events of us or our
subsidiaries, or a breach of the terms of our cash provider
agreements. Our current agreements with Bank of America and
Wells Fargo expire in October 2009 and July 2009, respectively.
However, Bank of America can terminate its agreement with us
upon 360 days prior written notice, and Wells Fargo can
terminate its agreement with us upon 180 days prior written
notice. Additionally, while our current agreement with ALCB does
not expire until January 2009, it contains certain provisions,
which, if triggered, may allow ALCB to terminate its agreement
with us and demand the return of its cash upon 180 days
prior written notice. We recently renewed our agreement with
Bansi, which now expires in March 2009.
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If our cash providers were to demand return of their cash or
terminate their arrangements with us and remove their cash from
our ATMs, or if they were to fail to provide us with cash as and
when we need it for our ATM operations, our ability to operate
these ATMs would be jeopardized, and we would need to locate
alternative sources of cash in order to operate these ATMs.
The
recent deterioration experienced in global credit markets could
have a negative impact on financial institutions that we conduct
business with.
We have a significant number of customer and vendor
relationships with financial institutions in all of our key
markets, including relationships in which those financial
institutions pay us for the right to place their brands on our
ATMs. Additionally, we rely on a select few financial
institution partners to provide us with the vast majority of the
cash that we maintain in our Company-owned ATMs. While we have
not experienced any significant changes in our relationships
with such financial institutions to date, and do not expect any
deterioration, the continued turmoil seen in the global credit
markets could have a negative impact on those financial
institutions and our relationships. In particular, if the
liquidity positions of the financial institutions with whom we
conduct business were to deteriorate significantly, such
institutions may be unable to perform under their existing
agreements with us. In the case of our financial institution
branding partners, we would likely be required to find
alternative financial institutions to brand the ATMs negatively
impacted by any contractual defaults that may result from a
continued deterioration in global credit markets. If such
defaults were to occur, we can provide no guarantee that we
would be successful in our efforts to identify new branding
partners, or that the underlying economics of any new branding
arrangements would be consistent with our current branding
arrangements. Furthermore, the current credit environment may
make it more difficult for us to negotiate new branding
arrangements with financial institutions, or to renew or extend
existing branding arrangements on terms and conditions that are
acceptable to us. With respect to our vault cash providers,
reference is made to the risk factor included immediately above
for the potential impact on our business if our financial
institution partners were no longer able to meet our ATM vault
cash needs.
Changes
in interest rates could increase our operating costs by
increasing interest expense under our credit facilities and our
vault cash rental costs.
Interest on our outstanding indebtedness under our revolving and
swing line credit facilities is based on floating interest
rates, and our vault cash rental expense is based on market
interest rates. As a result, our interest expense and cash
management costs are sensitive to changes in interest rates.
Vault cash is the cash we use in our machines in cases where
cash is not provided by the merchant. We pay rental fees on the
average amount of vault cash outstanding in our ATMs under
floating rate formulas based on the London Interbank Offered
Rate (“LIBOR”) to Bank of America and PDNB in the
U.S. and ALCB in the U.K., and based on the federal funds
effective rate to Wells Fargo in the U.S. Additionally, in
Mexico, we pay a monthly rental fee to our vault cash provider
under a formula based on the Mexican Interbank Rate. Although we
currently hedge a significant portion of our vault cash interest
rate risk related to our domestic operations through
December 31, 2012, we may not be able to enter into similar
arrangements for similar amounts in the future. Furthermore, we
have not currently entered into any derivative financial
instruments to hedge our variable interest rate exposure in the
U.K. or Mexico. Any significant future increases in interest
rates could have a negative impact on our earnings and cash flow
by increasing our operating costs and expenses. See
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Disclosure about
Market Risk; Interest Rate Risk” included elsewhere in this
prospectus.
We
maintain a significant amount of cash within our Company-owned
ATMs, which is subject to potential loss due to theft or other
events, including natural disasters.
As of March 31, 2008, there was approximately
$926.1 million in vault cash held in our domestic and
international ATMs. Although legal and equitable title to such
cash is held by the cash providers, any loss of such cash from
our ATMs through theft or other means is typically our
responsibility. While we maintain insurance to cover a
significant portion of any losses that may be sustained by us as
a result of such events, we are still required to fund a portion
of such losses through the payment of the related deductible
amounts
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under our insurance policies. Furthermore, increases in the
frequency
and/or
amounts of such thefts and losses could negatively impact our
operating results as a result of higher deductible payments and
increased insurance premiums. Additionally, damages sustained to
our merchant customers’ store locations in connection with
any ATM-related thefts, if extensive and frequent enough in
nature, could negatively impact our relationships with such
merchants and impair our ability to deploy additional ATMs in
those locations (or new locations) with those merchants in the
future. Finally, affected merchants may request that we
permanently remove ATMs from store locations that have suffered
damage as a result of any ATM-related thefts, thus negatively
impacting our financial results.
The
ATM industry is highly competitive and such competition may
increase, which may adversely affect our profit
margins.
The ATM business is and can be expected to remain highly
competitive. While our principal competition comes from national
and regional financial institutions, we also compete with other
independent ATM companies in the United States and the United
Kingdom. Several of our competitors, namely national financial
institutions, are larger, more established, and have greater
financial and other resources than we do. Our competitors could
prevent us from obtaining or maintaining desirable locations for
our ATMs, cause us to reduce the surcharge revenue generated by
transactions at our ATMs, or cause us to pay higher merchant
fees, thereby reducing our profits. In addition to our current
competitors, additional competitors may enter the market. We can
offer no assurance that we will be able to compete effectively
against these current and future competitors. Increased
competition could result in transaction fee reductions, reduced
gross margins and loss of market share.
In the United Kingdom, we face competition from several
companies with operations larger than our own. Many of these
competitors have financial and other resources substantially
greater than our U.K. subsidiary.
The
election of our merchant customers to not participate in our
surcharge-free network offerings could impact the networks’
effectiveness, which would negatively impact our financial
results.
Financial institutions that are members of our Allpoint and
MasterCard surcharge-free networks pay a fee in exchange for
allowing their cardholders to use selected Cardtronics owned
and/or
managed ATMs on a surcharge-free basis. The success of these
networks is dependent upon the participation by our merchant
customers in such networks. In the event a significant number of
our merchants elect not to participate in such networks, the
benefits and effectiveness of the networks would be diminished,
thus potentially causing some of the participating financial
institutions to not renew their agreements with us, and thereby
negatively impacting our financial results.
We may
be unable to integrate our recent and future acquisitions in an
efficient manner and inefficiencies would increase our cost of
operations and reduce our profitability.
Our acquisitions involve certain inherent risks to our business,
including the following:
| • | the operations, technology, and personnel of any acquired companies may be difficult to integrate; | |
| • | the allocation of management resources to consummate these transactions may disrupt our day-to-day business; and | |
| • | acquired networks may not achieve anticipated revenues, earnings or cash flow. |
If our acquisitions do not achieve anticipated financial
contributions, we may be required to write down the carrying
value of the intangible assets associated with any acquired
company, which would adversely affect our reported earnings. For
example, in 2007, we recorded a $5.1 million pre-tax
impairment charge to write-off the unamortized intangible asset
value associated with our merchant contract with Target, which
we acquired in 2004.
Since April 2001, we have acquired 14 ATM networks and one
surcharge-free ATM network. Prior to our E*TRADE Access
acquisition in June 2004, we had acquired only the assets of
deployed ATM networks, rather than businesses and their related
infrastructure. We currently anticipate that our future
acquisitions will
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likely reflect a mix of asset acquisitions and acquisitions of
businesses, with each acquisition having its own set of unique
characteristics. To the extent that we elect to acquire an
existing company or the operations, technology, and personnel of
another ATM provider, we may assume some or all of the
liabilities associated with the acquired company and face new
and added challenges integrating such acquisition into our
operations.
Any inability on our part to effectively manage our past or
future growth could limit our ability to successfully grow the
revenue and profitability of our business.
Our
international operations involve special risks and may not be
successful, which would result in a reduction of our gross
profits.
As of March 31, 2008, approximately 11.6% of our ATMs were
located in the United Kingdom and Mexico. During the year ended
December 31, 2007, our international ATMs contributed the
following to our gross profit measures:
| • | 22.7% of our gross profits exclusive of depreciation, accretion, and amortization; | |
| • | 18.5% of our pro forma gross profits exclusive of depreciation, accretion, and amortization; | |
| • | 23.4% of our gross profits inclusive of depreciation, accretion, and amortization; and | |
| • | 18.2% of our pro forma gross profits inclusive of depreciation, accretion, and amortization. |
We expect to continue to expand in the United Kingdom. and
Mexico and potentially into other countries as opportunities
arise.
Our international operations are subject to certain inherent
risks, including:
| • | exposure to currency fluctuations, including the risk that our future reported operating results could be negatively impacted by unfavorable movements in the functional currencies of our international operations relative to the United States dollar, which represents our consolidated reporting currency; | |
| • | difficulties in complying with the different laws and regulations in each country and jurisdiction in which we operate, including unique labor and reporting laws; | |
| • | unexpected changes in laws, regulations, and policies of foreign governments or other regulatory bodies, including changes that could potentially disallow surcharging or that could result in a reduction in the amount of interchange fees received per transaction; | |
| • | difficulties in staffing and managing foreign operations, including hiring and retaining skilled workers in those countries in which we operate; and | |
| • | potentially adverse tax consequences, including restrictions on the repatriation of foreign earnings. |
Any of these factors could reduce the profitability and revenues
derived from our international operations and international
expansion.
Our
proposed expansion efforts into new international markets
involve unique risks and may not be successful.
We currently plan to expand our operations internationally with
a focus on high growth emerging markets, such as those in the
Central and Eastern Europe, Central and South America, and
Asia-Pacific regions. Because the off-premise ATM industry is
relatively undeveloped in these emerging markets, we may not be
successful in these expansion efforts. In particular, many of
these markets do not currently employ or support an off-premise
ATM surcharging model, meaning that we would have to rely on
interchange fees as our primary source of revenue. While we have
had some success in deploying non-surcharging ATMs in selected
markets (most notably in the United Kingdom), such a model
requires significant transaction volumes to make it economically
feasible to purchase and deploy ATMs. Furthermore, most of the
ATMs in these markets are owned and operated by financial
institutions, thus increasing the risk that cardholders would be
unwilling to utilize an off-premise ATM with an unfamiliar
brand. Finally, the regulatory environments in many of these
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markets are evolving and unpredictable, thus increasing the risk
that a particular deployment model chosen at inception may not
be economically viable in the future.
We
operate in a changing and unpredictable regulatory environment.
If we are subject to new legislation regarding the operation of
our ATMs, we could be required to make substantial expenditures
to comply with that legislation, which may reduce our net income
and our profit margins.
With its initial roots in the banking industry, the
U.S. ATM industry has always been regulated, if not by
individual states, then by the rules and regulations of the
federal Electronic Funds Transfer Act, which establishes the
rights, liabilities, and responsibilities of participants in EFT
systems. The vast majority of states have few, if any, licensing
requirements. However, legislation related to the U.S. ATM
industry is periodically proposed at the state and local level.
To date, no such legislation has been enacted that materially
adversely affects our business. In the United Kingdom, the ATM
industry is largely self-regulating. Most ATMs are part of the
LINK network and must operate under the network rules set forth
by LINK, including complying with rules regarding required
signage and screen messages. Additionally, legislation is
proposed from time-to-time at the national level, though nothing
to date has been enacted that materially affects our business.
Finally, the ATM industry in Mexico has been historically
operated by financial institutions. Banco de Mexico supervises
and regulates ATM operations of both financial institutions and
non-bank ATM deployers. Although, Banco de Mexico’s
regulations permit surcharge fees to be charged in ATM
transactions, it has not issued specific regulations for the
provision of ATM services. In addition, in order for a non-bank
ATM deployer to provide ATM services in Mexico, the deployer
must be affiliated with Promocion y Operacion S.A. de C.V.
(“PROSA-RED”) or
E-Global,
which are credit card and debit card proprietary networks that
transmit information and settle ATM transactions between its
participants. As only financial institutions are allowed to be
participants of PROSA-RED or
E-Global,
Cardtronics Mexico entered into a joint venture with Bansi, who
is a member of PROSA-RED. As a financial institution, Bansi and
all entities in which it participates, including Cardtronics
Mexico, are regulated by the Ministry of Finance and Public
Credit (“Secretaria de Hacienda y Crédito
Público”) and supervised by the Banking and Securities
Commission (“Comisión Nacional Bancaria y de
Valores”). Additionally, Cardtronics Mexico is subject to
the provisions of the Ley del Banco de Mexico (Law of Banco de
Mexico), the Ley de Instituciones de Crédito (Mexican
Banking Law), and the Ley para la Transparencia y Ordenamiento
de los Servicios Financieros (Law for the Transparency and
Organization of Financial Services).
We will continue to monitor all such legislation and attempt, to
the extent possible, to prevent the passage of such laws that we
believe are needlessly burdensome or unnecessary. If regulatory
legislation is passed in any of the jurisdictions in which we
operate, we could be required to make substantial expenditures
which would reduce our net income.
The
passing of legislation banning or limiting surcharge fees would
severely impact our revenue.
Despite the nationwide acceptance of surcharge fees at ATMs,
consumer activists have from time to time attempted to impose
local bans or limits on surcharge fees. Even in the few
instances where these efforts have passed the local governing
body (such as with an ordinance adopted by the city of Santa
Monica, California), federal courts have overturned these local
laws on federal preemption grounds. However, those efforts may
resurface and, should the federal courts abandon their adherence
to the federal preemption doctrine, those efforts could receive
more favorable consideration than in the past. Any successful
legislation banning or limiting surcharge fees could result in a
substantial loss of revenues and significantly curtail our
ability to continue our operations as currently configured.
In the United Kingdom, the Treasury Select Committee of the
House of Commons published a report regarding surcharges in the
ATM industry in March 2005. This committee was formed to
investigate public concerns regarding the ATM industry,
including (1) adequacy of disclosure to ATM customers
regarding surcharges, (2) whether ATM providers should be
required to provide free services in low-income areas and
(3) whether to limit the level of surcharges. While the
committee made numerous recommendations to Parliament regarding
the ATM industry, including that ATMs should be subject to the
Banking Code (a
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voluntary code of practice adopted by all financial institutions
in the U.K.), the U.K. government did not accept the
committee’s recommendations. Despite the rejection of the
committee’s recommendations, the U.K. government did
sponsor an ATM task force to look at social exclusion in
relation to ATM services. As a result of the task force’s
findings, approximately 600 additional free-to-use ATMs (to be
provided by multiple ATM providers) were required to be
installed in low income areas throughout the U.K. While this is
less than a 2% increase in free-to-use ATMs through the U.K.,
there is no certainty that other similar proposals will not be
made and accepted in the future. If the legislature or another
body with regulatory authority in the U.K. were to impose limits
on the level of surcharges for ATM transactions, our revenue
from operations in the U.K. would be negatively impacted.
In Mexico, surcharging for off-premise ATMs was legalized in
late 2003, but was not formally implemented until July 2005. As
such, the charging of fees to consumers to utilize off-premise
ATMs is a relatively new experience in Mexico. Accordingly, it
is too soon to predict whether public concerns over surcharging
will surface in Mexico. However, if such concerns were to be
raised, and if the applicable legislative or regulatory bodies
in Mexico decided to impose limits on the level of surcharges
for ATM transactions, our revenue from operations in Mexico
would be negatively impacted.
The
passing of legislation requiring modifications to be made to
ATMs could severely impact our cash flows.
In November 2006, a U.S. District Court Judge ruled that
the United States’ currencies (as currently designed)
violate the Rehabilitation Act, a law that prohibits
discrimination in government programs on the basis of
disability, as the paper currencies issued by the U.S. are
identical in size and color, regardless of denomination. Under
the ruling, the U.S. Treasury Department has been ordered
to develop ways in which to differentiate paper currencies such
that an individual who is visually-impaired would be able to
distinguish between the different denominations. In response to
the November 2006 ruling, the Justice Department filed an appeal
with the U.S. Court of Appeals for the District of Columbia
Circuit, requesting that the decision be overturned on the
grounds that varying the size of denominations could cause
significant burdens on the vending machine industry and cost the
Bureau of Engraving and Printing an initial investment of
$178.0 million and up to $50.0 million in new printing
plates. In May 2008, the U.S Court of Appeals for the District
of Columbia Circuit upheld the November 2006 ruling. While it is
still uncertain at this time whether this decision will be
appealed to the U.S Supreme Court and what the outcome of that
appeals process would be, depending on the specific remediation
efforts agreed to, participants in the ATM industry (including
us) could be forced to incur significant costs to upgrade
current ATM hardware and software components. If required, such
capital expenditures could limit our free cash such that we do
not have enough cash available for the execution of our growth
strategy, research and development costs, or other purposes.
The
passing of anti-money laundering legislation could cause us to
lose certain merchant accounts and reduce our
revenues.
Recent concerns by the U.S. federal government regarding
the use of ATMs to launder money could lead to the imposition of
additional regulations on our sponsoring financial institutions
and our merchant customers regarding the source of cash loaded
into their ATMs. In particular, such regulations could result in
the incurrence of additional costs by individual merchants who
load their own cash, thereby making their ATMs less profitable.
Accordingly, some individual merchants may decide to discontinue
their ATM operations, thus reducing the number of merchant-owned
accounts that we currently manage. If such a reduction were to
occur, we would see a corresponding decrease in our revenues.
In
connection with the 7-Eleven ATM Transaction, we acquired
advanced-functionality Vcom machines with significant potential
for providing new services. Failure to achieve market acceptance
among users could lead to continued losses from the Vcom
Services, which could adversely affect our operating
results.
In the 7-Eleven ATM Transaction, we acquired approximately 5,500
ATM machines, including 2,000 advanced-functionality Vcom
machines. The advanced functionalities provided by the Vcom
machines include check cashing, money transfer, remote deposit
capture, and bill payment services (collectively, the “Vcom
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Services”). Additional growth opportunities that we believe
to be associated with the acquisition of Vcom machines,
including the expansion of such services to our existing ATMs,
may be impaired if we cannot achieve market acceptance among
users of those services.
The Vcom Services generated an operating loss of
$1.3 million during the three months ended March 31,
2008 and we have estimated that the Vcom Services generated an
operating loss of $6.4 million for the year ended
December 31, 2007. However, excluding upfront placement
fees, which may not continue in the future, the Vcom Services
generated an operating loss of $10.6 million for the year
ended December 31, 2007. For the period from our
acquisition (July 20, 2007) through December 31,
2007, the Vcom Services generated an operating loss of
$5.0 million. By continuing to provide the Vcom Services,
we currently expect that we may incur up to $10.0 million
in operating losses associated with such services for the first
12-18 months
subsequent to the 7-Eleven ATM Transaction. We plan to continue
to operate the Vcom terminals and restructure the Vcom
operations to improve the financial results of such operations;
however, we may be unsuccessful in those efforts, and the future
losses associated with the acquired Vcom operations could be
significantly higher than those currently estimated, which would
negatively impact our future operating results and financial
condition. In addition, in the event we decide to terminate the
Vcom Services, we may be required to pay up to $1.0 million
of contract termination payments, and may incur additional costs
and expenses, which could negatively impact our future operating
results and financial condition. Finally, to the extent we
pursue future advanced-functionality services independent of our
Vcom efforts, we can provide no assurance that such efforts will
be profitable.
We
have identified material weaknesses in our internal control over
financial reporting. These material weaknesses, if not
corrected, could affect the reliability of our financial
statements and have other adverse consequences.
Section 404 of the Sarbanes-Oxley Act of 2002, and the SEC
rules with respect thereto, require management of public
companies to assess the effectiveness of their internal control
over financial reporting annually and to include in their Annual
Reports on
Form 10-K
a management report on that assessment. To that end, our
management assessment as of December 31, 2007 has been
reflected in our Annual Report on
Form 10-K
for the year ended December 31, 2007. Additionally, because
we are currently a non-accelerated filer, as defined by the SEC,
we are not required to include an attestation report by our
independent registered public accounting firm on the
effectiveness of our internal control over financial reporting
until we file our Annual Report on
Form 10-K
for the year ending December 31, 2008. Under
Section 404 and the SEC’s rules, a company cannot find
that its internal control over financial reporting is effective
if any “material weaknesses” exist in its controls
over financial reporting. A “material weakness” is a
control deficiency, or combination of control deficiencies in
internal control over financial reporting such that there is a
reasonable possibility that a material misstatement of the
annual or interim financial statements will not be prevented or
detected.
We have identified material weaknesses in our internal control
over financial reporting as of December 31, 2007, including
material weaknesses associated with our control environment over
financial reporting, our expenditures and accounts payable
cycle, and the controls surrounding end-user developed
applications. We have taken, and will continue to take, actions
to remediate the material weaknesses and improve the
effectiveness of our internal control over financial reporting;
however, we cannot assure you that we will be able to correct
these material weaknesses by the end of 2008. Any failure in the
effectiveness of internal control over financial reporting, if
it results in misstatements in our financial statements, could
have a material adverse effect on financial reporting or cause
us to fail to meet reporting obligations, and could negatively
impact investor perceptions.
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Our
operating results have fluctuated historically and could
continue to fluctuate in the future, which could affect our
ability to maintain our current market position or
expand.
Our operating results have fluctuated in the past and may
continue to fluctuate in the future as a result of a variety of
factors, many of which are beyond our control, including the
following:
| • | changes in general economic conditions and specific market conditions in the ATM and financial services industries; | |
| • | changes in payment trends and offerings in the markets in which we operate; | |
| • | competition from other companies providing the same or similar services that we offer; | |
| • | the timing and magnitude of operating expenses, capital expenditures, and expenses related to the expansion of sales, marketing, and operations, including as a result of acquisitions, if any; | |
| • | the timing and magnitude of any impairment charges that may materialize over time relating to our goodwill, intangible assets or long-lived assets; | |
| • | changes in the general level of interest rates in the markets in which we operate; | |
| • | changes in regulatory requirements associated with the ATM and financial services industries; | |
| • | changes in the mix of our current services; and | |
| • | changes in the financial condition and credit risk of our customers. |
Any of the foregoing factors could have a material adverse
effect on our business, results of operations, and financial
condition. Although we have experienced growth in revenues in
recent quarters, this growth rate is not necessarily indicative
of future operating results. A relatively large portion of our
expenses are fixed in the short-term, particularly with respect
to personnel expenses, depreciation and amortization expenses,
and interest expense. Therefore, our results of operations are
particularly sensitive to fluctuations in revenues. As such,
comparisons to prior periods should not be relied upon as
indications of our future performance.
If our
goodwill or other intangible assets become impaired, we may be
required to record a significant charge to
earnings.
We have a large amount of goodwill and other intangible assets
and are required to perform periodic assessments for any
possible impairment for accounting purposes. As of
March 31, 2008, we had goodwill and other intangible assets
of $360.6 million, or 59.9% of our total assets. We
periodically evaluate the recoverability and the amortization
period of our intangible assets under accounting principles
generally accepted in the United States (“GAAP”). Some
of the factors that we consider to be important in assessing
whether or not impairment exists include the performance of the
related assets relative to the expected historical or projected
future operating results, significant changes in the manner of
our use of the assets or the strategy for our overall business,
and significant negative industry or economic trends. These
factors, assumptions, and any changes in them could result in an
impairment of our goodwill and other intangible assets. In the
event that we determine our goodwill or amortizable intangible
assets are impaired, we may be required to record a significant
charge to earnings in our financial statements, which would
negatively impact our results of operations and that impact
could be material. For example, during the year ended
December 31, 2007, we recorded approximately
$5.7 million of impairment charges related to certain
previously-acquired merchant contracts, including
$5.1 million associated with our previously acquired
merchant contract with Target. Other impairment charges in the
future may also adversely affect our results of operations.
Risks
Related to Our Indebtedness, the New Notes, and the Exchange
Offer
If you
do not properly tender your outstanding notes, you will continue
to hold unregistered outstanding notes and your ability to
transfer outstanding notes will be adversely
affected.
We will only issue new Notes in exchange for outstanding notes
that you timely and properly tender. Therefore, you should allow
sufficient time to ensure timely delivery of the outstanding
notes and you should
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carefully follow the instructions on how to tender your
outstanding notes. Neither we nor the exchange agent is required
to tell you of any defects or irregularities with respect to
your tender of outstanding notes.
If you do not exchange your outstanding notes for new Notes
pursuant to the exchange offer, the outstanding notes you hold
will continue to be subject to the existing transfer
restrictions. In general, you may not offer or sell the
outstanding notes except under an exemption from, or in a
transaction not subject to, the Securities Act and applicable
state securities laws. We do not plan to register outstanding
notes under the Securities Act unless our registration rights
agreement with the initial purchasers of the outstanding notes
requires us to do so. Further, if you continue to hold any
outstanding notes after the exchange offer is consummated, you
may have trouble selling them because there will be fewer such
notes outstanding.
We
have a substantial amount of indebtedness, which may adversely
affect our cash flow and our ability to operate our business,
remain in compliance with debt covenants and make payments on
our indebtedness.
As of March 31, 2008, we had outstanding indebtedness of
approximately $345.9 million, which represents
approximately 79.8% of our total capitalization of
$433.7 million. Our substantial indebtedness could have
important consequences to you. For example, it could:
| • | make it more difficult for us to satisfy our obligations with respect to our indebtedness, and any failure to comply with the obligations of any of our debt instruments, including financial and other restrictive covenants, could result in an event of default under the indentures governing our senior subordinated notes and the agreements governing our other indebtedness; | |
| • | require us to dedicate a substantial portion of our cash flow to pay principal and interest on our debt, which will reduce the funds available for working capital, capital expenditures, acquisitions, and other general corporate purposes; | |
| • | limit our flexibility in planning for and reacting to changes in our business and in the industry in which we operate; | |
| • | make us more vulnerable to adverse changes in general economic, industry and competitive conditions, and adverse changes in government regulation; | |
| • | limit our ability to borrow additional amounts for working capital, capital expenditures, acquisitions, debt service requirements, execution of our growth strategy, research and development costs, or other purposes; and | |
| • | place us at a disadvantage compared to our competitors who have less debt. |
Any of these factors could materially and adversely affect our
business and results of operations. If we do not have sufficient
earnings to service our debt, we may be required to refinance
all or part of our existing debt, sell assets, borrow more money
or sell securities, none of which we can guarantee we will be
able to do.
Repayment
of our debt, including the Notes, is dependent on cash flow
generated by our subsidiaries.
We are a holding company with no material assets other than the
equity interests of our subsidiaries. Our subsidiaries conduct
substantially all of our operations and own substantially all of
our assets. Therefore, repayment of our indebtedness, including
the Notes, is dependent on the generation of cash flow by our
subsidiaries and their ability to make such cash available to us
by dividend, debt repayment or otherwise. Our subsidiaries may
not be able to, or be permitted to, make distributions to enable
us to make payments in respect of our indebtedness, including
the Notes. Each of our subsidiaries is a distinct legal entity,
and under certain circumstances, legal and contractual
restrictions may limit our ability to obtain cash from our
subsidiaries. While the indenture governing the Notes limits the
ability of our restricted subsidiaries to incur consensual
restrictions on their ability to pay dividends or make other
inter-company payments to us, these limitations are subject to
certain qualifications and exceptions. In the event that we do
not receive distributions from our subsidiaries, we may be
unable to make required principal and interest payments on our
indebtedness, including the Notes.
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Your
right to receive payments on the Notes will be junior to our
existing and future senior debt, and the guarantees of the Notes
are junior to all of the guarantors’ existing and future
senior debt.
The Notes and the guarantees will rank behind all of our and the
guarantors’ existing and future senior indebtedness. As of
March 31, 2008, the Notes and the guarantees would have
been subordinated to $49.7 million of senior indebtedness,
which consisted of $39.5 million outstanding under our
revolving credit facility, $8.5 million outstanding under
certain borrowing arrangement in place with respect to our
foreign subsidiaries, including guarantees of such amounts, and
$1.7 million of capital lease obligations. As of
March 31, 2008, our available borrowing capacity under the
credit facility totaled approximately $128.3 million. We
are permitted to incur substantial other indebtedness, including
senior debt, in the future.
As a result of this subordination, upon any distribution to
creditors of our property or the property of the guarantors in a
bankruptcy, liquidation or reorganization or similar proceeding,
the holders of our senior indebtedness and the holders of the
senior indebtedness of the guarantors are entitled to be paid in
full in cash before any payment may be made with respect to the
Notes or the guarantees. In addition, all payments on the Notes
and the guarantees will be blocked in the event of a payment
default on senior debt and may be blocked for up to 179
consecutive days in the event of specified non-payment defaults
on designated senior indebtedness. In the event of a bankruptcy,
liquidation or reorganization or similar proceeding relating to
us or the guarantors, the indenture relating to the notes
requires that amounts otherwise payable to holders of the Notes
in a bankruptcy or similar proceeding be paid instead to holders
of senior indebtedness until the holders of senior indebtedness
are paid in full. As a result, holders of the Notes may not
receive all amounts owed to them and may receive less, ratably,
than holders of trade payables and other unsubordinated
indebtedness.
Your
right to receive payments on these Notes is effectively
subordinated to the rights of existing and future creditors of
our subsidiaries that are not guarantors on the
Notes.
None of our foreign subsidiaries will guarantee the Notes. As a
result, holders of the Notes will be effectively subordinated to
the indebtedness and other liabilities of these subsidiaries,
including trade creditors. Therefore, in the event of the
insolvency or liquidation of a foreign subsidiary, following
payment by that subsidiary of its liabilities, such subsidiary
may not have any remaining assets to make payments to us as a
shareholder or otherwise. In the event of a default by any such
subsidiary under any credit arrangement or other indebtedness,
its creditors could accelerate such debt, prior to such
subsidiary distributing amounts to us that we could have used to
make payments on the notes. For additional details on our
non-guarantor subsidiaries, see the notes to our consolidated
financial statements included elsewhere in this prospectus.
To
service our indebtedness, we will require a significant amount
of cash. Our ability to generate cash depends on many factors
beyond our control, and any failure to meet our debt service
obligations could harm our business, financial condition and
results of operations.
Our ability to pay interest on and principal of the Notes and to
satisfy our other debt obligations principally will depend upon
our future operating performance. As a result, prevailing
economic conditions and financial, business and other factors,
many of which are beyond our control, will affect our ability to
make these payments.
If we do not generate sufficient cash flow from operations to
satisfy our debt service obligations, including payments on the
Notes, we may have to undertake alternative financing plans,
such as refinancing or restructuring our indebtedness, selling
assets, reducing or delaying capital investments or seeking to
raise additional capital. Our ability to restructure or
refinance our debt will depend on the capital markets and our
financial condition at such time. Any refinancing of our debt
could be at higher interest rates and may require us to comply
with more onerous covenants, which could further restrict our
business operations. In addition, the terms of existing or
future debt instruments, including our credit agreement and the
indenture governing the notes may restrict us from adopting some
of these alternatives. Furthermore, neither affiliates of
CapStreet II, L.P. and CapStreet Parallel II, L.P. (together
with the CapStreet Group, LLC, “CapStreet”) nor
affiliates of TA Associates, Inc. (our two largest outside
investors) have any obligation to provide us with debt or equity
financing in the future. Our inability to generate sufficient
cash flow to satisfy our debt service obligations, or
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to refinance our obligations on commercially reasonable terms,
would have an adverse effect, which could be material, on our
business, financial position, results of operations and cash
flows, as well as on our ability to satisfy our obligations in
respect of the Notes.
The
terms of our credit agreement and the indentures governing our
senior subordinated notes may restrict our current and future
operations, particularly our ability to respond to changes in
our business or to take certain actions.
Our credit agreement and the indentures governing our senior
subordinated notes include a number of covenants that, among
other items, restrict our ability to:
| • | sell or transfer property or assets; | |
| • | pay dividends on or redeem or repurchase stock; | |
| • | merge into or consolidate with any third party; | |
| • | create, incur, assume or guarantee additional indebtedness; | |
| • | create certain liens; | |
| • | make investments; | |
| • | engage in transactions with affiliates; | |
| • | issue or sell preferred stock of restricted subsidiaries; and | |
| • | enter into sale and leaseback transactions. |
In addition, we are required by our credit agreement to maintain
specified financial ratios and limit the amount of capital
expenditures incurred in any given
12-month
period. As a result of these ratios and limits, we are limited
in the manner in which we conduct our business and may be unable
to engage in favorable business activities or finance future
operations or capital needs. Accordingly, these restrictions may
limit our ability to successfully operate our business and
prevent us from fulfilling our debt obligations. A failure to
comply with the covenants or financial ratios could result in an
event of default. In the event of a default under our credit
agreement, the lenders could exercise a number of remedies, some
of which could result in an event of default under the
indentures governing the senior subordinated notes. An
acceleration of indebtedness under our credit agreement would
also likely result in an event of default under the terms of any
other financing arrangement we have outstanding at the time. If
any or all of our debt were to be accelerated, there can be no
assurance that our assets would be sufficient to repay any such
indebtedness in full. If we are unable to repay outstanding
borrowings under our bank credit facility when due the lenders
will have the right to proceed against the collateral securing
such indebtedness. See “Management’s Discussion and
Analysis of Financial Condition and Results of
Operations — Liquidity and Capital
Resources — Financing Facilities” included
elsewhere in this prospectus for an additional discussion of our
financing instruments.
The
Notes and the guarantees are not secured by our assets nor those
of the guarantors, and the lenders under our credit agreement
are entitled to remedies available to a secured lender, which
gives them priority over you to collect amounts due to
them.
The Notes and the guarantees will be our and the
guarantors’ unsecured obligations. In contrast, our
obligations outstanding under our credit agreement are secured
by a lien on, and a pledge of substantially all of, our assets,
including the stock of our subsidiaries. In addition to
contractual subordination, the Notes will be effectively
subordinated to this secured debt to the extent of the value of
the collateral securing such debt. In addition, we may incur
additional secured debt, and the Notes will be effectively
subordinated to any such additional secured debt we may incur to
the extent of the value of the collateral securing such debt.
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Because the Notes and the guarantees will be unsecured
obligations, the assets that secure our secured debt will be
available to pay obligations on the Notes only after all such
secured debt has been repaid in full. Accordingly, your right of
repayment may be compromised if any of the following situations
occur:
| • | we enter into bankruptcy, liquidation, reorganization, or other winding-up proceedings; | |
| • | there is a default in payment under our credit agreement; or | |
| • | there is an acceleration of any indebtedness under our credit agreement. |
If any of these events occurs, the secured lenders could sell
those of our assets in which they have been granted a security
interest, to your exclusion, even if an event of default exists
under the indenture governing the Notes at such time. As a
result, upon the occurrence of any of these events, there may
not be sufficient funds to pay amounts due on the Notes.
We may
not be able to repurchase the Notes upon a change of
control.
The indenture governing the Notes will require us to offer to
repurchase the Notes when certain change of control events
occur. These events include sale of the company transactions, a
change in the majority of our Board of Directors, or an event
that results in a person or group other than The CapStreet
Group, LLC, TA Associates, Inc. or their affiliates owning more
than 50% of our outstanding voting securities. If we experience
a change of control, you will have the right to require us to
repurchase your Notes at a purchase price in cash equal to 101%
of the principal amount of your Notes plus accrued and unpaid
interest, if any. Our credit agreement provides that certain
change of control events (including a change of control as
defined in the indenture governing the Notes) constitute a
default. Any future credit agreement or other agreements
relating to senior indebtedness to which we become a party may
contain similar provisions. If we experience a change of control
that triggers a default under our credit agreement, we could
seek a waiver of such default or seek to refinance our credit
agreement. In the event we do not obtain such a waiver or
refinance our credit agreement, such default could result in
amounts outstanding under our credit agreement being declared
due and payable. In the event we experience a change of control
that results in us having to repurchase the Notes, we may not
have sufficient financial resources to satisfy all of our
obligations under our credit agreement and the Notes. In
addition, the change of control covenant in the indenture does
not cover all corporate reorganizations, mergers or similar
transactions and may not provide you with protection in a highly
leveraged transaction. See “Description of the New Notes
— Certain Covenants.”
The
guarantees may not be enforceable because of fraudulent
conveyance laws.
Our existing and certain of our future subsidiaries will
guarantee our obligations under the Notes. Our issuance of the
Notes and the issuance of the guarantees by the guarantors may
be subject to review under state and federal laws if a
bankruptcy, liquidation or reorganization case or a lawsuit,
including in circumstances in which bankruptcy is not involved,
were commenced at some future date by, or on behalf of, our
unpaid creditors or the unpaid creditors of a guarantor. Under
the federal bankruptcy laws and comparable provisions of state
fraudulent transfer laws, a court may void or otherwise decline
to enforce the Notes or a guarantor’s guarantee, or
subordinate the Notes or such guarantee to our or the applicable
guarantor’s existing and future indebtedness. While the
relevant laws may vary from state to state, a court might do so
if it found that when we issued the Notes or when the applicable
guarantor entered into its guarantee or, in some states, when
payments became due under the Notes or such guarantee, we or the
applicable guarantor received less than reasonably equivalent
value or fair consideration and either:
| • | were insolvent or rendered insolvent by reason of such incurrence; | |
| • | were engaged in a business or transaction for which one of our or such guarantor’s remaining assets constituted unreasonably small capital; or | |
| • | intended to incur, or believed that we or such guarantor would incur, debts beyond our or such guarantor’s ability to pay such debts as they mature. |
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The court might also void the Notes or a guarantee, without
regard to the above factors, if the court found that we issued
the Notes or the applicable guarantor entered into its guarantee
with actual intent to hinder, delay or defraud its creditors. In
addition, any payment by us or a guarantor pursuant to the Notes
or the guarantees could be voided and required to be returned to
us, or such guarantor, or to a fund for the benefit of our or
such guarantor’s creditors.
A court would likely find that we, or a guarantor, did not
receive reasonably equivalent value or fair consideration for
the Notes or such guarantee if we, or such guarantor, did not
substantially benefit directly or indirectly from the issuance
of the Notes. If a court were to void the Notes or a guarantee,
you would no longer have a claim against us or the applicable
guarantor, as the case may be.
Sufficient funds to repay the Notes may not be available from
other sources, including the remaining guarantors, if any. In
addition, the court might direct you to repay any amounts that
you already received from us or any guarantor, as the case may
be.
The measures of insolvency for purposes of these fraudulent
transfer laws will vary depending upon the law applied in any
proceeding to determine whether a fraudulent transfer has
occurred. Generally, however, we or a guarantor, as applicable,
would be considered insolvent if:
| • | the sum of our or such guarantor’s debts, including contingent liabilities, was greater than the fair saleable value of our or such guarantor’s assets; | |
| • | if the present fair saleable value of our or such guarantor’s assets were less than the amount than would be required to pay our or such guarantor’s probable liability on our or such guarantor’s existing debts, including contingent liabilities, as they become absolute and mature; or | |
| • | we or such guarantor could not pay our or such guarantor’s debts as they become due. |
To the extent a court voids the Notes or any of the guarantees
as fraudulent transfers or holds the Notes or any of the
guarantees unenforceable for any other reason, holders of the
Notes would cease to have any direct claim against us or the
applicable guarantor. If a court were to take this action, our
or the applicable guarantor’s assets would be applied first
to satisfy our or the applicable guarantor’s liabilities,
if any, before any portion of its assets could be applied to the
payment of the Notes.
Each guarantee will contain a provision intended to limit the
guarantor’s liability to the maximum amount that it could
incur without causing the incurrence of obligations under its
guarantee to be a fraudulent transfer. This provision may not be
effective to protect the guarantees from being voided under
fraudulent transfer law, or may reduce the guarantor’s
obligation to an amount that effectively makes the guarantee
worthless.
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EXCHANGE
OFFER
Purpose
and Effect of the Exchange Offer
In connection with the issuance in July 2007 of the outstanding
notes, we entered into a registration rights agreement. Under
the registration rights agreement, we agreed to:
| • | within 240 days after the original issuance of the outstanding notes on July 20, 2007, file a registration statement with the SEC with respect to a registered offer to exchange each outstanding note for a new Note having terms substantially identical in all material respects to such note, except that the New note will not contain terms with respect to transfer restrictions; | |
| • | use our reasonable best efforts to cause the registration statement to be declared effective under the Securities Act within 360 days after the original issuance of the outstanding notes; | |
| • | promptly following the effectiveness of the registration statement, offer the new Notes in exchange for surrender of the outstanding notes; and | |
| • | keep the exchange offer open for not less than 20 business days (or longer if required by applicable law) after the date notice of the exchange offer is mailed to the holders of the outstanding notes. |
We have fulfilled the agreements described in the first two of
the preceding bullet points and are now offering eligible
holders of the outstanding notes the opportunity to exchange
their outstanding notes for new Notes registered under the
Securities Act. Holders are eligible if they are not prohibited
by any law or policy of the SEC from participating in this
exchange offer. The new Notes will be substantially identical to
the outstanding notes except that the new Notes will not contain
terms with respect to transfer restrictions, registration rights
or additional interest.
Under limited circumstances, we agreed to use our best efforts
to cause the SEC to declare effective a shelf registration
statement for the resale of the outstanding notes. We also
agreed to use our best efforts to keep the shelf registration
statement effective for up to two years after its effective
date. The circumstances include if:
| • | a change in law or in applicable interpretations thereof of the staff of the SEC does not permit us to effect the exchange offer; or | |
| • | for any other reason the exchange offer is not consummated within 360 days from July 20, 2007, the date of the original issuance of the outstanding notes; or | |
| • | any of the initial purchasers notify us following consummation of the exchange offer that outstanding notes held by it are not eligible to be exchanged for new Notes in the exchange offer; or | |
| • | certain holders are not eligible to participate in the exchange offer, or such holders do not receive freely tradeable securities on the date of the exchange. |
We will pay additional cash interest on the applicable
outstanding notes, subject to certain exceptions:
| • | if either this registration statement or, if we are obligated to file one, a shelf registration statement is not declared effective by the Commission by the date required, | |
| • | if we fail to consummate the exchange offer prior to the date that is 360 days after July 20, 2007, or | |
| • | after this registration statement or a shelf registration statement, as the case may be, is declared effective, such registration statement thereafter ceases to be effective or usable (subject to certain exceptions) (each such event referred to in the preceding clauses being a “registration default”); |
from and including the date on which any such registration
default occurs to but excluding the date on which all
registration defaults have been cured.
The rate of the additional interest will be 0.25% per year for
the first
90-day
period immediately following the occurrence of a registration
default, and such rate will increase by an additional 0.25% per
year
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with respect to each subsequent
90-day
period until all registration defaults have been cured, up to a
maximum additional interest rate of 1.0% per year. We will pay
such additional interest on regular interest payment dates. Such
additional interest will be in addition to any other interest
payable from time to time with respect to the outstanding notes
and the new Notes.
Upon the effectiveness of this registration statement, the
consummation of the exchange offer, the effectiveness of a shelf
registration statement, or the effectiveness of a succeeding
registration statement, as the case may be, the interest rate
borne by the Notes from the date of such effectiveness or
consummation, as the case may be, will be reduced to the
original interest rate. However, if after any such reduction in
interest rate, a different registration default occurs, the
interest rate may again be increased pursuant to the preceding
paragraph.
To exchange your outstanding notes for transferable new Notes in
the exchange offer, you will be required to make the following
representations:
| • | any new Notes will be acquired in the ordinary course of your business; | |
| • | you have no arrangement or understanding with any person or entity to participate in the distribution of the new Notes; | |
| • | you are not engaged in and do not intend to engage in the distribution of the new Notes; | |
| • | if you are a broker-dealer that will receive new Notes for your own account in exchange for outstanding notes, you acquired those notes as a result of market-making activities or other trading activities and you will deliver a prospectus, as required by law, in connection with any resale of such new Notes; and | |
| • | you are not our “affiliate,” as defined in Rule 405 of the Securities Act. |
In addition, we may require you to provide information to be
used in connection with the shelf registration statement to have
your outstanding notes included in the shelf registration
statement and benefit from the provisions regarding additional
interest described in the preceding paragraphs. A holder who
sells outstanding notes under the shelf registration statement
generally will be required to be named as a selling security
holder in the related prospectus and to deliver a prospectus to
purchasers. Such a holder will also be subject to the civil
liability provisions under the Securities Act in connection with
such sales and will be bound by the provisions of the
registration rights agreement that are applicable to such a
holder, including indemnification obligations.
The description of the registration rights agreement contained
in this section is a summary only. For more information, you
should review the provisions of the registration rights
agreement that we filed with the SEC as an exhibit to the
registration statement of which this prospectus is a part.
Resale of
New Notes
Based on no action letters of the SEC staff issued to third
parties, we believe that new Notes may be offered for resale,
resold and otherwise transferred by you without further
compliance with the registration and prospectus delivery
provisions of the Securities Act if:
| • | you are not our “affiliate” within the meaning of Rule 405 under the Securities Act; | |
| • | such new Notes are acquired in the ordinary course of your business; and | |
| • | you do not intend to participate in a distribution of the new Notes. |
The SEC, however, has not considered the exchange offer for the
new Notes in the context of a no action letter, and the SEC may
not make a similar determination as in the no action letters
issued to these third parties.
If you tender in the exchange offer with the intention of
participating in any manner in a distribution of the new Notes,
you
| • | cannot rely on such interpretations by the SEC staff; and |
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| • | must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction. |
Unless an exemption from registration is otherwise available,
any security holder intending to distribute new Notes should be
covered by an effective registration statement under the
Securities Act. This registration statement should contain the
selling security holder’s information required by
Item 507 of
Regulation S-K
under the Securities Act. This prospectus may be used for an
offer to resell, resale or other retransfer of new Notes only as
specifically described in this prospectus. Only broker-dealers
that acquired the outstanding notes as a result of market-making
activities or other trading activities may participate in the
exchange offer. Each broker-dealer that receives new Notes for
its own account in exchange for outstanding notes, where such
outstanding notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities,
must acknowledge by way of the letter of transmittal that it
will deliver a prospectus in connection with any resale of the
new Notes. Please read the section captioned “Plan of
Distribution” for more details regarding the transfer of
new Notes.
Terms of
the Exchange Offer
Subject to the terms and conditions described in this prospectus
and in the letter of transmittal, we will accept for exchange
any outstanding notes properly tendered and not withdrawn prior
to 12:00 a.m. midnight, New York City time, on the
expiration date. We will issue new Notes in principal amount
equal to the principal amount of outstanding notes surrendered
under the exchange offer. Outstanding notes may be tendered only
for new Notes and only in integral multiples of $1,000.
The exchange offer is not conditioned upon any minimum aggregate
principal amount of outstanding notes being tendered for
exchange.
As of the date of this prospectus, $100,000,000 in aggregate
principal amount of the outstanding notes is outstanding. This
prospectus is being sent to DTC, the sole registered holder of
the outstanding notes, and to all persons that we can identify
as beneficial owners of the outstanding notes. There will be no
fixed record date for determining registered holders of
outstanding notes entitled to participate in the exchange offer.
We intend to conduct the exchange offer in accordance with the
provisions of the registration rights agreement, the applicable
requirements of the Securities Act and the Securities Exchange
Act of 1934 and the rules and regulations of the SEC.
Outstanding notes whose holders do not tender for exchange in
the exchange offer will remain outstanding and continue to
accrue interest. These outstanding notes will be entitled to the
rights and benefits such holders have under the indenture
relating to the notes and the registration rights agreement.
We will be deemed to have accepted for exchange properly
tendered outstanding notes when we have given oral or written
notice of the acceptance to the exchange agent and complied with
the applicable provisions of the registration rights agreement.
The exchange agent will act as agent for the tendering holders
for the purposes of receiving the new Notes from us.
If you tender outstanding notes in the exchange offer, you will
not be required to pay brokerage commissions or fees or, subject
to the letter of transmittal, transfer taxes with respect to the
exchange of outstanding notes. We will pay all charges and
expenses, other than certain applicable taxes described below,
in connecting with the exchange offer. It is important that you
read the section labeled “— Fees and
Expenses” for more details regarding fees and expenses
incurred in the exchange offer.
We will return any outstanding notes that we do not accept for
exchange for any reason without expense to their tendering
holder as promptly as practicable after the expiration or
termination of the exchange offer.
Expiration
Date
The exchange offer will expire at 12:00 a.m. midnight, New
York City time, on July 16, 2008, unless, in our sole
discretion, we extend it.
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Extensions,
Delays in Acceptance, Termination or Amendment
We expressly reserve the right, at any time or various times, to
extend the period of time during which the exchange offer is
open. We may extend the exchange offer and delay acceptance of
any outstanding notes by giving written notice of such extension
to the holders of the notes. During any such extensions, all
outstanding notes previously tendered will remain subject to the
exchange offer, and we may accept them for exchange.
In order to extend the exchange offer, we will notify the
exchange agent orally or in writing of any extension. We will
notify the registered holders of outstanding notes of the
extension no later than 9:00 a.m., New York City time, by
press release on the business day after the previously scheduled
expiration date.
If any of the conditions described below under
“— Conditions to the Exchange Offer” have
not been satisfied, we reserve the right, in our sole discretion
to extend the exchange offer and delay accepting for exchange
any outstanding notes or to terminate the exchange offer, by
giving oral or written notice of such, extension or termination
to the exchange agent. Subject to the terms of the registration
rights agreement, we also reserve the right to amend the terms
of the exchange offer in any manner. If we amend the terms of
the exchange offer in a material manner or waive any material
condition, we will extend the exchange offer period if necessary
to provide that at least five business days remain in the offer
period following notice of such waver or material change.
Any such delay in acceptance, extension, termination or
amendment will be followed as promptly as practicable by written
notice thereof to the registered holders of outstanding notes.
If we amend the exchange offer in a manner that we determine to
constitute a material change, we will promptly disclose such
amendment by means of a prospectus supplement. The supplement
will be distributed to the registered holders of the outstanding
notes. Depending upon the significance of the amendment and the
manner of disclosure to the registered holders, we will extend
the exchange offer if the exchange offer would otherwise expire
during such period.
Conditions
to the Exchange Offer
We will not be required to accept for exchange, or exchange any
new Notes for, any outstanding notes if the exchange offer, or
the making of any exchange by a holder of outstanding notes,
would violate applicable law or any applicable interpretation of
the staff of the SEC. Similarly, we may terminate the exchange
offer as provided in this prospectus the expiration of the
exchange offer in the event of such a potential violation.
In addition, we will not be obligated to accept for exchange the
outstanding notes of any holder that has not made to us the
representations described under “— Purpose and
Effect of the Exchange Offer,” “— Procedures
for Tendering” and “Plan of Distribution” and
such other representations as may be reasonably necessary under
applicable SEC rules, regulations or interpretations to allow us
to use an appropriate form to register the new Notes under the
Securities Act.
We expressly reserve the right to amend or terminate the
exchange offer, and to reject for exchange any outstanding notes
not previously accepted for exchange, upon the occurrence of any
of the conditions to the exchange offer specified above. All of
these conditions must be satisfied or waived at or before the
expiration of the exchange offer. We will give notice of any
extension, amendment, non-acceptance or termination to the
holders of the outstanding notes promptly.
These conditions are for our sole benefit, and we may assert
them or waive them in whole or in part at any time or at various
times in our sole discretion if we waive any conditions we will
do so for all holders of the notes. If we fail at any time to
exercise any of these rights, this failure will not mean that we
have waived our rights. Each such right will be deemed an
ongoing right that we may assert at any time or at various times.
In addition, we will not accept for exchange any outstanding
notes tendered, and will not issue new Notes in exchange for any
such outstanding notes, if at such time any stop order has been
threatened or is in effect
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with respect to the registration statement of which this
prospectus constitutes a part or the qualification of the
indenture relating to the notes under the Trust Indenture
Act of 1939.
Procedures
for Tendering
In order to participate in the exchange offer, you must properly
tender your outstanding notes to the exchange agent as described
below. It is your responsibility to properly tender your notes.
We have the right to waive any defects. However, we are not
required to waive defects and are not required to notify you of
defects in your exchange.
If you have any questions or need help in exchanging your notes,
please call the exchange agent whose address and phone number
are described in the section of the prospectus entitled
“Where You Can Find More Information.”
All of the outstanding notes were issued in book-entry form, and
all of the outstanding notes are currently represented by global
certificates held for the account of DTC. We have confirmed with
DTC that the outstanding notes may be tendered using the
Automated Tender Offer Program (“ATOP”) instituted by
DTC. The exchange agent will establish an account with DTC for
purposes of the exchange offer promptly after the commencement
of the exchange offer and DTC participants may electronically
transmit their acceptance of the exchange offer by causing DTC
to transfer their outstanding notes to the exchange agent using
the ATOP procedures. In connection with the transfer, DTC will
send an “agent’s message” to the exchange agent.
The agent’s message will state that DTC has received
instructions from the participant to tender outstanding notes
and that the participant agrees to be bound by the terms of the
letter of transmittal.
By using the ATOP procedures to exchange outstanding notes, you
will not be required to deliver a letter of transmittal to the
exchange agent. However, you will be bound by its terms just as
if you had signed it.
There is no procedure for guaranteed late delivery of the Notes.
Determinations
under the Exchange Offer
We will determine in our sole discretion all questions as to the
validity, form, eligibility, time of receipt, acceptance of
tendered outstanding notes and withdrawal of tendered
outstanding notes. Our determination will be final and binding.
We reserve the absolute right to reject any outstanding notes
not properly tendered or any outstanding notes our acceptance of
which would be, in the opinion of our counsel, unlawful. We also
reserve the right to waive any defect, irregularities or
conditions of tender as to particular outstanding notes. Our
interpretation of the terms and conditions of the exchange
offer, including the instructions in the letter of transmittal,
will be final and binding on all parties. Unless waived, all
defects or irregularities in connection with tenders of
outstanding notes must be cured within such time as we shall
determine. Although we intend to notify holders of defects or
irregularities with respect to tenders of outstanding notes,
neither we, the exchange agent, nor any other person will incur
any liability for failure to give such notification. Tenders of
outstanding notes will not be deemed made until such defects or
irregularities have been cured or waived. Any outstanding notes
received by the exchange agent that are not properly tendered
and as to which the defects or irregularities have not been
cured or waived will be returned to the tendering holder as soon
as practicable following the expiration date.
When
We Will Issue New Notes
In all cases, we will issue new Notes for outstanding notes that
we have accepted for exchange under the exchange offer only
after the exchange agent receives, prior to 12:00 a.m.
midnight, New York City time, on the expiration date,
| • | a book-entry confirmation of such outstanding notes into the exchange agent’s account at DTC; and | |
| • | a properly transmitted agent’s message. |
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Return
of Outstanding Notes Not Accepted or Exchanged
If we do not accept any tendered outstanding notes for exchange
or if outstanding notes are submitted for a greater principal
amount than the holder desires to exchange, the unaccepted or
non-exchanged outstanding notes will be returned without expense
to their tendering holder. Such non-exchanged outstanding notes
will be credited to an account maintained with DTC. These
actions will occur promptly following the expiration or
termination of the exchange offer.
Your
Representations to Us
By agreeing to be bound by the letter of transmittal, you will
represent to us that, among other things:
| • | any new Notes that you receive will be acquired in the ordinary course of your business; | |
| • | you have no arrangement or understanding with any person or entity to participate in the distribution of the new Notes; | |
| • | you are not engaged in and do not intend to engage in the distribution of the new Notes; | |
| • | if you are a broker-dealer that will receive new Notes for your own account in exchange for outstanding notes, you acquired those notes as a result of market-making activities or other trading activities and you will deliver a prospectus, as required by law, in connection with any resale of such new Notes; and | |
| • | you are not our “affiliate,” as defined in Rule 405 of the Securities Act. |
Withdrawal
of Tenders
Except as otherwise provided in this prospectus, you may
withdraw your tender at any time prior to 12:00 a.m.
midnight, New York City time, on the expiration date. For a
withdrawal to be effective you must comply with the appropriate
procedures of DTC’s ATOP system. Any notice of withdrawal
must specify the name and number of the account at DTC to be
credited with withdrawn outstanding notes and otherwise comply
with the procedures of DTC.
We will determine all questions as to the validity, form,
eligibility and time of receipt of notice of withdrawal. Our
determination shall be final and binding on all parties. We will
deem any outstanding notes so withdrawn not to have been validly
tendered for exchange for purposes of the exchange offer.
Any outstanding notes that have been tendered for exchange but
that are not exchanged for any reason will be credited to an
account maintained with DTC for the outstanding notes. This
return or crediting will take place promptly after withdrawal,
rejection of tender or termination of the exchange offer. You
may re-tender properly withdrawn outstanding notes by following
the procedures described under “— Procedures for
Tendering” above at any time on or prior to the expiration
date.
Fees and
Expenses
We will bear the expenses of soliciting tenders. The principal
solicitation is being made by mail; however, we may make
additional solicitation by telegraph, telephone or in person by
our officers and regular employees and those of our affiliates.
We have not retained any dealer-manager in connection with the
exchange offer and will not make any payments to broker-dealers
or others soliciting acceptances of the exchange offer. We will,
however, pay the exchange agent reasonable and customary fees
for its services and reimburse it for its related reasonable
out-of-pocket expenses.
We will pay the cash expenses to be incurred in connection with
the exchange offer. They include:
| • | SEC registration fees; | |
| • | fees and expenses of the exchange agent and trustee; |
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| • | accounting and legal fees and printing costs; and | |
| • | related fees and expenses. |
Transfer
Taxes
We will pay all transfer taxes, if any, applicable to the
exchange of outstanding notes under the exchange offer. The
tendering holder, however, will be required to pay any transfer
taxes, whether imposed on the registered holder or any other
person, if a transfer tax is imposed for any reason other than
the exchange of outstanding notes under the exchange offer.
Consequences
of Failure to Exchange
If you do not exchange new Notes for your outstanding notes
under the exchange offer, you will remain subject to the
existing restrictions on transfer of the outstanding notes. In
general, you may not offer or sell the outstanding notes unless
they are registered under the Securities Act, or if the offer or
sale is exempt from the registration under the Securities Act
and applicable state securities laws. Except as required by the
registration rights agreement, we do not intend to register
resales of the outstanding notes under the Securities Act.
Accounting
Treatment
We will record the new Notes in our accounting records at the
same carrying value as the outstanding notes. This carrying
value is the aggregate principal amount of the outstanding notes
less any bond discount, as reflected in our accounting records
on the date of exchange. Accordingly, we will not recognize any
gain or loss for accounting purposes in connection with the
exchange offer.
Other
Participation in the exchange offer is voluntary, and you should
carefully consider whether to accept. You are urged to consult
your financial and tax advisors in making your own decision on
what action to take.
We may in the future seek to acquire untendered outstanding
notes in open market or privately negotiated transactions,
through subsequent exchange offers or otherwise. We have no
present plans to acquire any outstanding notes that are not
tendered in the exchange offer or to file a registration
statement to permit resales of any untendered outstanding notes.
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SELECTED
HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA
The following selected historical consolidated financial and
operating data should be read together with “Unaudited Pro
Forma Condensed Consolidated Financial Statements,”
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” and the consolidated
financial statements and related notes included elsewhere in
this prospectus. The selected consolidated balance sheet data as
of December 31, 2006 and 2007 and the selected consolidated
statements of operations data for the years ended
December 31, 2005, 2006 and 2007 have been derived from our
audited consolidated financial statements included elsewhere in
this prospectus. The balance sheet data as of December 31,
2003, 2004 and 2005, and the statements of operations data for
the years ended December 31, 2003 and 2004 have been
derived from our audited consolidated financial statements,
which are not included in this prospectus. The selected
consolidated balance sheet data as of March 31, 2008, and
the selected consolidated statements of operations data for the
three months ended March 31, 2008 and 2007 have been
derived from our unaudited interim consolidated financial
statements included elsewhere in this prospectus. The unaudited
balance sheet data as of March 31, 2007 has been derived
from our unaudited interim condensed consolidated financial
statements for such period, which are not included in this
prospectus. The unaudited interim period financial information,
in the opinion of management, includes all adjustments, which
are normal and recurring in nature, necessary for a fair
presentation for the periods shown. Results for the three months
ended March 31, 2008 are not necessarily indicative of the
results to be expected for the full year. Historical results are
not necessarily indicative of the results to be expected in the
future.
|
Three Months Ended |
||||||||||||||||||||||||||||
| Years Ended December 31, | March 31, | |||||||||||||||||||||||||||
| 2003 | 2004 | 2005 | 2006 | 2007 | 2007 | 2008 | ||||||||||||||||||||||
| (unaudited) | ||||||||||||||||||||||||||||
| (in thousands, except share and per share amounts, ratios, and number of ATMs) | ||||||||||||||||||||||||||||
|
Consolidated Statements of Operations Data:
|
||||||||||||||||||||||||||||
|
Revenues:
|
||||||||||||||||||||||||||||
|
ATM operating revenues
|
$ | 101,950 | $ | 182,711 | $ | 258,979 | $ | 280,985 | $ | 364,071 | $ | 71,656 | $ | 115,062 | ||||||||||||||
|
Vcom operating revenues
|
— | — | — | — | 1,251 | — | 1,235 | |||||||||||||||||||||
|
ATM product sales and other revenues
|
8,493 | 10,204 | 9,986 | 12,620 | 12,976 | 2,862 | 4,278 | |||||||||||||||||||||
|
Total revenues
|
110,443 | 192,915 | 268,965 | 293,605 | 378,298 | 74,518 | 120,575 | |||||||||||||||||||||
|
Cost of revenues:
|
||||||||||||||||||||||||||||
|
Cost of ATM operating revenues (exclusive of depreciation,
accretion, and amortization, shown separately below)(1)
|
80,286 | 143,504 | 199,767 | 209,850 | 275,286 | 54,736 | 86,832 | |||||||||||||||||||||
|
Cost of Vcom operating revenues
|
— | — | — | — | 6,065 | — | 2,269 | |||||||||||||||||||||
|
Cost of ATM product sales and other revenues
|
7,903 | 8,703 | 9,681 | 11,443 | 11,942 | 2,797 | 4,164 | |||||||||||||||||||||
|
Total cost of revenues
|
88,189 | 152,207 | 209,448 | 221,293 | 293,293 | 57,533 | 93,265 | |||||||||||||||||||||
|
Gross profit
|
22,254 | 40,708 | 59,517 | 72,312 | 85,005 | 16,985 | 27,310 | |||||||||||||||||||||
|
Operating expenses:
|
||||||||||||||||||||||||||||
|
Selling, general, and administrative expenses(2)(3)
|
7,229 | 13,571 | 17,865 | 21,667 | 29,357 | 6,444 | 8,551 | |||||||||||||||||||||
|
Depreciation and accretion expense
|
3,632 | 6,785 | 12,951 | 18,595 | 26,859 | 6,398 | 9,082 | |||||||||||||||||||||
|
Amortization expense(4)
|
3,842 | 5,508 | 8,980 | 11,983 | 18,870 | 2,486 | 4,503 | |||||||||||||||||||||
|
Total operating expenses
|
14,703 | 25,864 | 39,796 | 52,245 | 75,086 | 15,328 | 22,136 | |||||||||||||||||||||
|
Income from operations
|
7,551 | 14,844 | 19,721 | 20,067 | 9,919 | 1,657 | 5,174 | |||||||||||||||||||||
|
Other expense:
|
||||||||||||||||||||||||||||
|
Interest expense(5)
|
2,157 | 5,235 | 22,426 | 25,072 | 31,164 | 5,892 | 7,632 | |||||||||||||||||||||
|
Minority interest in subsidiary
|
— | 19 | 15 | (225 | ) | (376 | ) | 356 | 508 | |||||||||||||||||||
|
Other(6)
|
106 | 209 | 968 | (4,761 | ) | 1,585 | (231 | ) | 1,061 | |||||||||||||||||||
|
Total other expense
|
2,263 | 5,463 | 23,409 | 20,086 | 32,373 | 6,017 | 9,201 | |||||||||||||||||||||
|
Income (loss) before income taxes
|
5,288 | 9,381 | (3,688 | ) | (19 | ) | (22,454 | ) | (4,360 | ) | (4,027 | ) | ||||||||||||||||
|
Income tax provision (benefit)
|
1,955 | 3,576 | (1,270 | ) | 512 | 4,636 | (973 | ) | 565 | |||||||||||||||||||
|
Income (loss) before cumulative effect of change in accounting
principle
|
3,333 | 5,805 | (2,418 | ) | (531 | ) | (27,090 | ) | (3,387 | ) | (4,592 | ) | ||||||||||||||||
|
Cumulative effect of change in accounting principle for asset
retirement obligations, net of related income tax benefit of
$80(7)
|
134 | — | — | — | — | — | — | |||||||||||||||||||||
|
Net income (loss)
|
3,199 | 5,805 | (2,418 | ) | (531 | ) | (27,090 | ) | (3,387 | ) | (4,592 | ) | ||||||||||||||||
|
Preferred stock conversion, dividends and accretion expense(8)
|
2,089 | 2,312 | 1,395 | 265 | 36,272 | 67 | — | |||||||||||||||||||||
33
Table of Contents
|
Three Months Ended |
||||||||||||||||||||||||||||
| Years Ended December 31, | March 31, | |||||||||||||||||||||||||||
| 2003 | 2004 | 2005 | 2006 | 2007 | 2007 | 2008 | ||||||||||||||||||||||
| (unaudited) | ||||||||||||||||||||||||||||
| (in thousands, except share and per share amounts, ratios, and number of ATMs) | ||||||||||||||||||||||||||||
|
Net income (loss) available to common stockholders
|
$ | 1,110 | $ | 3,493 | $ | (3,813 | ) | $ | (796 | ) | $ | (63,362 | ) | $ | (3,454 | ) | $ | (4,592 | ) | |||||||||
|
Net income (loss) per common share:
|
||||||||||||||||||||||||||||
|
Basic
|
$ | 0.07 | $ | 0.20 | $ | (0.27 | ) | $ | (0.06 | ) | $ | (4.11 | ) | $ | (0.25 | ) | $ | (0.12 | ) | |||||||||
|
Diluted
|
$ | 0.06 | $ | 0.19 | $ | (0.27 | ) | $ | (0.06 | ) | $ | (4.11 | ) | $ | (0.25 | ) | $ | (0.12 | ) | |||||||||
|
Weighted average shares outstanding:
|
||||||||||||||||||||||||||||
|
Basic
|
16,521,361 | 17,795,073 | 14,040,353 | 13,904,505 | 15,423,744 | 13,965,875 | 38,589,878 | |||||||||||||||||||||
|
Diluted
|
17,262,708 | 18,855,425 | 14,040,353 | 13,904,505 | 15,423,744 | 13,965,875 | 38,589,878 | |||||||||||||||||||||
|
Other Financial Data (unaudited):
|
||||||||||||||||||||||||||||
|
Ratio of earnings to fixed charges(9)
|
1.3x | 1.5 | x | — | — | — | — | — | ||||||||||||||||||||
|
Cash flows from operating activities
|
$ | 21,629 | $ | 20,466 | $ | 33,227 | $ | 25,446 | $ | 55,462 | $ | 2,642 | $ | (10,325 | ) | |||||||||||||
|
Cash flows from investing activities
|
(29,663 | ) | (118,926 | ) | (139,960 | ) | (35,973 | ) | (202,883 | ) | (9,269 | ) | (26,084 | ) | ||||||||||||||
|
Cash flows from financing activities
|
10,404 | 94,318 | 107,214 | 11,192 | 158,155 | 5,704 | 31,855 | |||||||||||||||||||||
|
Operating Data (unaudited):
|
||||||||||||||||||||||||||||
|
Total number of ATMs (at period end)
|
12,021 | 24,581 | 26,208 | 25,259 | 32,319 | 25,438 | 32,577 | |||||||||||||||||||||
|
Total transactions
|
64,605 | 111,577 | 158,851 | 172,808 | 246,595 | 44,449 | 83,037 | |||||||||||||||||||||
|
Total cash withdrawal transactions
|
49,859 | 86,821 | 118,960 | 125,078 | 166,248 | 31,180 | 53,890 | |||||||||||||||||||||
|
Consolidated Balance Sheet Data:
|
||||||||||||||||||||||||||||
|
Cash and cash equivalents
|
$ | 5,554 | $ | 1,412 | $ | 1,699 | $ | 2,718 | $ | 13,439 | $ | 1,782 | $ | 8,908 | ||||||||||||||
|
Total assets
|
65,295 | 197,667 | 343,751 | 367,756 | 591,285 | 363,572 | 601,520 | |||||||||||||||||||||
|
Total long-term debt, including current portion
|
31,371 | 128,541 | 247,624 | 252,895 | 308,615 | 263,051 | 344,170 | |||||||||||||||||||||
|
Preferred stock(10)
|
21,322 | 23,634 | 76,329 | 76,594 | — | 76,661 | — | |||||||||||||||||||||
|
Total stockholders’ equity (deficit)
|
(6,329 | ) | (340 | ) | (49,084 | ) | (37,168 | ) | 107,111 | (42,185 | ) | 87,774 | ||||||||||||||||
| (1) | Excludes depreciation, accretion, and amortization expense of $6.8 million, $11.4 million, $20.6 million, $29.2 million, and $43.1 million for the years ended December 31, 2003, 2004, 2005, 2006 and 2007, respectively, and $8.5 million and $12.5 million for the three months periods ended March 31, 2007 and 2008, respectively. | |
| (2) | Includes non-cash stock-based compensation totaling $1.6 million, $1.0 million, $2.2 million, $0.8 million, and $1.0 million in 2003, 2004, 2005, 2006, and 2007, respectively, and $0.2 million in each of the three months periods ended March 31, 2007 and 2008, related to options granted to certain employees and a restricted stock grant made to our Chief Executive Officer in 2003. Additionally, the 2004 results include a bonus of $1.8 million paid to our Chief Executive Officer related to the tax liability associated with such grant. See Note 3 to our consolidated financial statements. | |
| (3) | Includes the write-off in 2004 of approximately $1.8 million in costs associated with our decision to not pursue a financing transaction to completion. | |
| (4) | Includes pre-tax impairment charges of $1.2 million, $2.8 million, and $5.7 million in 2005, 2006 and 2007, respectively, and $0.1 million during the three months ended March 31, 2007. | |
| (5) | Includes the write-off of $5.0 million and $0.5 million of deferred financing costs in 2005 and 2006, respectively, as a result of (i) amendments to our existing credit facility and the repayment of our existing term loans in August 2005, and (ii) certain modifications made to our revolving credit facility in February 2006. | |
| (6) | The “Other” line item for the years ended December 31, 2003, 2004, and 2005 and the three months ended March 31, 2008 primarily consists of losses on the disposal of fixed assets that were incurred in conjunction with the deinstallation of ATMs during the period. “Other” in 2006 reflects the recognition of approximately $4.8 million in other income primarily related to settlement proceeds received from Winn-Dixie Stores, Inc. (“Winn-Dixie”), one of our merchant customers, as part of its emergence from bankruptcy, a $1.1 million contract termination payment received from one of our customers, and a $0.5 million payment received from one of our customers related to the sale of a number of its stores to another party, which were partially offset by $1.6 million of losses on the sale or disposal of fixed assets. “Other” in 2007 includes $2.2 million of losses on the disposal of fixed assets during the period, which were partially offset by $0.6 million of gains related to the sale of the Winn-Dixie equity securities, which we received from Winn-Dixie in 2006 as a part of its bankruptcy settlement. Other income for the three months ended March 31, 2007 included $0.6 million in gains on the sale of equity securities awarded to Cardtronics pursuant to the bankruptcy plan of reorganization of Winn-Dixie Stores, Inc., one of the Company’s merchant customers. This amount was partially offset by $0.5 million in losses on the disposal of fixed assets that were incurred in conjunction with the deinstallation of ATMs during the period. | |
| (7) | Reflects the effect of our adoption of Statement of Financial Accounting Standards (“SFAS”) No. 143, Accounting for Asset Retirement Obligations. See Note 1(m) to our consolidated financial statements included elsewhere within this prospectus. | |
| (8) | Includes a one-time, non-cash charge of $36.0 million for the year ended December 31, 2007 associated with the conversion of the Company’s Series B redeemable convertible preferred stock into shares of the Company’s common stock in conjunction with the Company’s initial public offering. |
34
Table of Contents
| (9) | For purposes of determining the ratio of earnings to fixed charges, earnings are defined as our income from operations before income taxes, plus fixed charges. Fixed charges consist of interest expense on all indebtedness, amortization of debt issuance costs and the interest portion of lease payments. Earnings were insufficient to cover fixed charges by approximately $5.4 million, $0.2 million, and $22.8 million for the years ended December 31, 2005, 2006, and 2007, respectively, and $4.5 million and $4.0 million for the three months periods ended March 31, 2007 and 2008, respectively. | |
| (10) | The amount reflected on our balance sheet is shown net of issuance costs of $1.4 million as of December 31, 2006. During December 2007, the Company’s Series B Redeemable Convertible Preferred Stock were converted into shares of the Company’s common stock in conjunction with the Company’s initial public offering. |
35
Table of Contents
Supplemental
Selected Quarterly Financial Information (Unaudited)
Financial information by quarter is summarized below for the
quarter ended March 31, 2008 and each of the four quarters
in the years ended December 31, 2007 and 2006.
| Quarters Ended | ||||||||||||||||||||
| March 31 | June 30 | September 30 | December 31 | Total | ||||||||||||||||
| (in thousands, except per share amounts) | ||||||||||||||||||||
|
2008
|
||||||||||||||||||||
|
Total revenues
|
$ | 120,575 | N/A | N/A | N/A | $ | 120,575 | |||||||||||||
|
Gross profit (exclusive of depreciation, accretion, and
amortization)(1)
|
27,310 | N/A | N/A | N/A | 27,310 | |||||||||||||||
|
Net loss and net loss available to common stockholders
|
(4,592 | ) | N/A | N/A | N/A | (4,592 | ) | |||||||||||||
|
Net loss per common share:
|
||||||||||||||||||||
|
Basic
|
$ | (0.12 | ) | N/A | N/A | N/A | $ | (0.12 | ) | |||||||||||
|
Diluted
|
$ | (0.12 | ) | N/A | N/A | N/A | $ | (0.12 | ) | |||||||||||
|
2007
|
||||||||||||||||||||
|
Total revenues
|
$ | 74,518 | $ | 77,239 | $ | 110,587 | $ | 115,954 | $ | 378,298 | ||||||||||
|
Gross profit (exclusive of depreciation, accretion, and
amortization)(2)
|
16,985 | 17,607 | 24,866 | 25,547 | 85,005 | |||||||||||||||
|
Net loss(3)
|
(3,387 | ) | (5,615 | ) | (10,683 | ) | (7,405 | ) | (27,090 | ) | ||||||||||
|
Net loss available to common stockholders(3)
|
(3,454 | ) | (5,681 | ) | (10,750 | ) | (43,477 | ) | (63,362 | ) | ||||||||||
|
Net loss per common share(3):
|
||||||||||||||||||||
|
Basic
|
$ | (0.25 | ) | $ | (0.41 | ) | $ | (0.77 | ) | $ | (2.22 | ) | $ | (4.11 | ) | |||||
|
Diluted
|
$ | (0.25 | ) | $ | (0.41 | ) | $ | (0.77 | ) | $ | (2.22 | ) | $ | (4.11 | ) | |||||
|
2006
|
||||||||||||||||||||
|
Total revenues
|
$ | 69,141 | $ | 73,254 | $ | 76,365 | $ | 74,845 | $ | 293,605 | ||||||||||
|
Gross profit (exclusive of depreciation, accretion, and
amortization)(4)
|
16,043 | 18,370 | 18,980 | 18,919 | 72,312 | |||||||||||||||
|
Net income (loss)(5)
|
(3,124 | ) | 769 | (327 | ) | 2,151 | (531 | ) | ||||||||||||
|
Net income (loss) available to common stockholders(5)
|
(3,190 | ) | 703 | (394 | ) | 2,085 | (796 | ) | ||||||||||||
|
Net income (loss) per common share(5):
|
||||||||||||||||||||
|
Basic
|
$ | (0.23 | ) | $ | 0.05 | $ | (0.03 | ) | $ | 0.15 | $ | (0.06 | ) | |||||||
|
Diluted
|
$ | (0.23 | ) | $ | 0.03 | $ | (0.03 | ) | $ | 0.09 | $ | (0.06 | ) | |||||||
| (1) | Excludes $12.5 million of depreciation, accretion, and amortization for the quarter ended March 31, 2008. | |
| (2) | Excludes $8.5 million, $7.1 million, $15.7 million, and $11.8 million of depreciation, accretion, and amortization for the quarters ended March 31, 2007, June 30, 2007, September 30, 2007, and December 31, 2007, respectively. | |
| (3) | Includes pre-tax impairment charges of $0.1 million, $5.2 million, and $0.4 million for the quarters ended March 31, 2007, September 30, 2007, and December 31, 2007, respectively, related to certain contract-based intangible assets. Also, the “Net loss available to common stockholders” includes a one-time, non-cash charge of $36.0 million for the quarter ended December 31, 2007 associated with the conversion of the Company’s Series B Redeemable Convertible Preferred Stock into shares of the Company’s common stock in conjunction with the Company’s initial public offering. |
36
Table of Contents
| (4) | Excludes $8.9 million, $6.6 million, $7.1 million, and $6.6 million of depreciation, accretion, and amortization for the quarters ended March 31, 2006, June 30, 2006, September 30, 2006, and December 31, 2006, respectively. | |
| (5) | Includes pre-tax impairment charge of $2.8 million for the quarter ended March 31, 2006 related to certain contract-based intangible assets. Also includes $4.8 million in other income for the quarter ended December 31, 2006 primarily related to settlement proceeds received from Winn-Dixie, one of our merchant customers, as part of its emergence from bankruptcy. |
37
Table of Contents
UNAUDITED PRO
FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The unaudited pro forma condensed consolidated financial
statements give effect to the 7-Eleven ATM Transaction and the
related financing transactions. The pro forma financial
statements do not reflect the impact of our initial public
offering completed on December 14, 2007.
On July 20, 2007, we purchased substantially all of the
assets of the 7-Eleven Financial Services Business for
approximately $137.3 million in cash. That amount included
a $1.3 million payment for estimated acquired working
capital and approximately $1.0 million in other related
closing costs. The acquisition was funded by the sale of
$100.0 million 9.25% senior subordinated notes due
2013 — Series B and borrowings under our
revolving credit facility. The unaudited pro forma condensed
consolidated statement of operations for the year ended
December 31, 2007 gives effect to the 7-Eleven ATM
Transaction and the related financing transactions as if they
occurred on January 1, 2007. No unaudited pro forma
condensed consolidated statement of operations for the three
months ended March 31, 2008 has been presented as the
effects of the above transactions have been fully reflected in
our consolidated statement of operations for such period
included elsewhere in this prospectus. Additionally, no
unaudited pro forma condensed consolidated balance sheet has
been presented as the effects of the above transactions have
been fully reflected in our March 31, 2008 and
December 31, 2007 consolidated balance sheets included
elsewhere in this prospectus. The 7-Eleven ATM Transaction has
been accounted for using the purchase method of accounting and,
accordingly, the tangible and intangible assets acquired and
liabilities assumed in such transaction were recorded at their
estimated fair values as of the related acquisition date.
We acquired substantially all of the assets of the 7-Eleven
Financial Services Business, which, at the time of our
acquisition, operated approximately 3,500 ATMs that allow
customers to carry out traditional ATM services and
approximately 2,000 Vcom advanced-functionality machines that,
in addition to traditional ATM services, provide Vcom Services.
Historically, 7-Eleven has received upfront placement fees from
third-party service providers to help fund the development and
implementation efforts surrounding the Vcom Services, which have
been recognized as revenues in the accompanying historical
financial statements of the 7-Eleven Financial Services
Business. Although we may attempt to execute similar payment
arrangements with the same (or new) service providers in the
future, there is no guarantee that we will be successful in
doing so. Accordingly, such upfront placement fees may not occur
in the future, or may occur at lower levels than those realized
historically. Reference is made to Note 1 in the notes to
the unaudited pro forma condensed consolidated financial
statements for additional information regarding the amount of
upfront placement fees that have been recognized in the
historical financial statements of the 7-Eleven Financial
Services Business.
We currently expect to incur operating losses associated with
the Vcom Services portion of the acquired 7-Eleven ATM portfolio
within the first
12-18 months
subsequent to the acquisition date. By continuing to provide the
Vcom Services, we currently expect that we may incur up to
$10.0 million in operating losses associated with such
services for the first
12-18 months
subsequent to the 7-Eleven ATM Transaction. We plan to continue
to operate the Vcom terminals and restructure the Vcom
operations to improve the financial results of such operations.
To that end, we have made significant progress in our
restructuring efforts through March 31, 2008, including the
relocation and concentration of many of the Vcom units into
selected markets and the achievement of significant cost
reductions associated with the maintenance and operation of such
units. However, if we are ultimately unsuccessful in our
restructuring efforts, future losses associated with the
acquired Vcom operations could be significantly higher than
those currently estimated, which would negatively impact our
future operating results and financial condition. In addition,
in the event we decide to terminate the Vcom Services, we may be
required to pay up to $1.0 million of contract termination
payments, and may incur additional costs and expenses, which
could negatively impact our future operating results and
financial condition.
The unaudited pro forma condensed consolidated statement of
operations presented below is based on the assumptions and
adjustments described in the accompanying notes. The unaudited
pro forma condensed consolidated statement of operations is
presented for illustrative purposes only and is not necessarily
indicative of what our results of operations would have been had
the 7-Eleven ATM Transaction and the related
38
Table of Contents
financing transactions been consummated on the date indicated,
nor is it necessarily indicative of what our results of
operations will be in future periods. The unaudited pro forma
condensed consolidated statement of operations does not contain
any adjustments to reflect anticipated changes in operating
costs or synergies anticipated as a result of the 7-Eleven ATM
Transaction. The unaudited pro forma condensed consolidated
statement of operations, and accompanying notes thereto, should
be read in conjunction with the historical audited and unaudited
financial statements, and accompanying notes thereto, of
Cardtronics and the 7-Eleven Financial Services Business, all of
which are included elsewhere in this prospectus.
39
Table of Contents
CARDTRONICS,
INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2007
(in thousands)
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2007
(in thousands)
|
7-Eleven |
||||||||||||||||||||
|
Financial |
||||||||||||||||||||
|
Services |
||||||||||||||||||||
|
Cardtronics |
Business |
Pro Forma |
||||||||||||||||||
| Historical | (See Note 1) | Adjustments | Notes | Pro Forma | ||||||||||||||||
|
Revenues:
|
||||||||||||||||||||
|
ATM operating revenues
|
$ | 364,071 | $ | 79,313 | $ | — | $ | 443,384 | ||||||||||||
|
Vcom operating revenues
|
1,251 | 8,197 | — | 9,448 | ||||||||||||||||
|
ATM product sales and other revenues
|
12,976 | — | — | 12,976 | ||||||||||||||||
|
Total revenues
|
378,298 | 87,510 | — | 465,808 | ||||||||||||||||
|
Cost of revenues:
|
||||||||||||||||||||
|
Cost of ATM operating revenues (exclusive of depreciation,
accretion, and amortization, shown separately below. See
Note 7)
|
275,286 | 63,234 | (4,389 | ) | 2 | 334,131 | ||||||||||||||
|
Cost of Vcom operating revenues
|
6,065 | 9,126 | — | 15,191 | ||||||||||||||||
|
Cost of ATM product sales and other revenues
|
11,942 | — | — | 11,942 | ||||||||||||||||
|
Total cost of revenues
|
293,293 | 72,360 | (4,389 | ) | 361,264 | |||||||||||||||
|
Gross profit
|
85,005 | 15,150 | 4,389 | 104,544 | ||||||||||||||||
|
Operating expenses:
|
||||||||||||||||||||
|
Selling, general, and administrative expenses
|
29,357 | 2,437 | — | 31,794 | ||||||||||||||||
|
Depreciation and accretion expense
|
26,859 | 9,739 | (6,923 | ) | 4 | 29,675 | ||||||||||||||
|
Amortization expense
|
18,870 | 346 | 4,495 | 4 | 23,711 | |||||||||||||||
|
Total operating expenses
|
75,086 | 12,522 | (2,428 | ) | 85,180 | |||||||||||||||
|
Income from operations
|
9,919 | 2,628 | 6,817 | 19,364 | ||||||||||||||||
|
Interest expense, net
|
31,164 | 100 | 7,480 | 3 | 38,744 | |||||||||||||||
|
Other expense, net
|
1,209 | — | — | 1,209 | ||||||||||||||||
|
Income (loss) before income taxes
|
(22,454 | ) | 2,528 | (663 | ) | (20,589 | ) | |||||||||||||
|
Income tax provision (benefit)
|
4,636 | 976 | (976 | ) | 5 | 4,636 | ||||||||||||||
|
Net income (loss)
|
(27,090 | ) | 1,552 | 313 | (25,225 | ) | ||||||||||||||
|
Preferred stock conversion and accretion expense
|
36,272 | — | — | 36,272 | ||||||||||||||||
|
Net income (loss) available to common stockholders
|
$ | (63,362 | ) | $ | 1,552 | $ | 313 | $ | (61,497 | ) | ||||||||||
|
Net income (loss) per common share (see Note 6):
|
||||||||||||||||||||
|
Basic
|
$ | (4.11 | ) | $ | (3.99 | ) | ||||||||||||||
|
Diluted
|
$ | (4.11 | ) | $ | (3.99 | ) | ||||||||||||||
|
Weighted average shares outstanding:
|
||||||||||||||||||||
|
Basic
|
15,423,744 | 15,423,744 | ||||||||||||||||||
|
Diluted
|
15,423,744 | 15,423,744 | ||||||||||||||||||
See accompanying notes to unaudited pro forma condensed
consolidated financial statements.
40
Table of Contents
CARDTRONICS,
INC.
NOTES TO
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(1) The unaudited pro forma condensed consolidated
financial statements combine the historical results of
Cardtronics and the 7-Eleven Financial Services Business, and
assume, for purposes of the pro forma condensed consolidated
statements of operations, that the 7-Eleven ATM Transaction and
the related financing transactions all occurred on
January 1, 2007.
As discussed elsewhere in this prospectus, on July 20,
2007, we acquired substantially all of the assets associated
with the 7-Eleven Financial Services Business, including
approximately 3,500 ATMs that allow customers to carry out
traditional ATM services and approximately 2,000
advanced-functionality Vcom machines that offer traditional ATM
services, as well as some or all of the Vcom Services.
Historically, 7-Eleven has received upfront placement fees from
third-party service providers to help fund the development and
implementation efforts surrounding the Vcom Services, which have
been recognized as revenues in the accompanying historical
financial statements of the 7-Eleven Financial Services
Business. However, it is uncertain as to whether such payments
will occur in the future, or, if they do, whether such payments
will occur at levels consistent with those seen in the past.
During the year ended December 31, 2007, the 7-Eleven
Financial Services Business recognized approximately
$4.8 million in revenues associated with such upfront
placement fees, approximately $4.2 million of which related
to arrangements that ended prior to our acquisition of the
7-Eleven Financial Services Business, and thus will not continue
in the future. While we believe we will continue to earn some
placement fee revenues related to the acquired 7-Eleven
Financial Services Business, we expect those amounts to be
substantially less than those earned historically. The exclusion
of such fees (which were directly attributable to providing the
Vcom Services) would have resulted in lower operating results
for the 7-Eleven Financial Services Business.
Excluding the majority of the upfront placement fees, the Vcom
Services have historically generated operating losses,
including, based upon our analysis, $10.6 million for the
year ended December 31, 2007. For the period from the
acquisition (July 20, 2007) through December 31,
2007, the Vcom Services generated an operating loss of
$5.0 million. Despite these losses, we plan to continue to
operate the Vcom terminals and restructure the Vcom operations
to improve the financial results of such operations. To that
end, we have made significant progress in our restructuring
efforts through March 31, 2008, including the relocation
and concentration of many of the Vcom units into selected
markets and the achievement of significant cost reductions
associated with the maintenance and operation of such units.
However, if we are ultimately unsuccessful in our restructuring
efforts, future losses associated with the acquired Vcom
operations could be significantly higher than those currently
estimated, which would negatively impact our future operating
results and financial condition. In addition, in the event we
decide to terminate the Vcom Services, we may be required to pay
up to $1.0 million of contract termination payments, and
may incur additional costs and expenses, which could negatively
impact our future operating results and financial condition.
41
Table of Contents
CARDTRONICS,
INC.
NOTES TO
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(2) The reported amounts reflect the financing of and the
preliminary allocation of the purchase price for the 7-Eleven
ATM Transaction. Such acquisition was financed primarily through
the issuance and sale of $100.0 million 9.25% senior
subordinated notes due 2013 — Series B (the
“Series B Notes”), and additional borrowings
under our amended revolving credit facility. Our estimate of the
total purchase price is summarized as follows (in thousands):
|
Total cash consideration
|
$ | 135,000 | ||
|
Working capital adjustment and other related closing costs
|
2,312 | |||
|
Total estimated purchase price of acquisition
|
$ | 137,312 | ||
|
The total purchase price has been allocated on a preliminary
basis as follows (in thousands):
|
||||
|
Current assets
|
$ | 13,260 | ||
|
Property and equipment
|
22,588 | |||
|
Intangible assets:
|
||||
|
Customer contracts and relationships
|
78,000 | |||
|
Goodwill
|
62,191 | |||
|
Current liabilities
|
(19,540 | ) | ||
|
Other non-current liabilities
|
(19,187 | ) | ||
|
Total purchase price of acquisition
|
$ | 137,312 | ||
The purchase price allocation reflected above includes
$7.8 million and $11.7 million of additional other
current liabilities and other long-term liabilities,
respectively, related to certain unfavorable equipment leases
and an operating contract assumed as part of the 7-Eleven ATM
Transaction. The pro forma statement of operations includes
expense reductions of $6.0 million for the pro forma year
ended December 31, 2007, associated with the amortization
of these liabilities to reduce the corresponding ATM operating
expense amounts to fair value. Although these adjustments will
serve to reduce the Company’s future expenses recorded for
the cost of ATM operating revenues, the Company will still be
required to pay the higher rates stipulated in the assumed
leases and contract for the remaining terms of such agreements,
the substantial majority of which expire in 2009. Such
adjustments are considered to be preliminary and thus, may
change materially once the valuation of the acquired assets and
assumed liabilities is finalized, and the final purchase price
allocation is completed.
(3) The reported amounts reflect the issuance and sale of
the Series B Notes and additional borrowings under our
amended credit facility, which were utilized to fund the
7-Eleven ATM Transaction. The unaudited pro forma condensed
consolidated statement of operations assumes such debt was
issued or borrowed on January 1, 2007.
42
Table of Contents
CARDTRONICS,
INC.
NOTES TO
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The debt capitalization structure assumed to be outstanding for
all periods presented in the above pro forma financial
statements is as follows (in thousands):
|
$200.0 million 9.25% senior subordinated notes due
2013 issued in August 2005, net of the related discount
|
$ | 198,851 | ||
|
$100.0 million 9.25% senior subordinated notes due
2013 — Series B issued in July 2007, net of the
related discount
|
97,000 | |||
|
Revolving credit facility (including additional borrowings to
fund the 7-Eleven ATM Transaction)
|
102,954 | |||
|
Other long-term and current debt obligations, including capital
lease obligations
|
6,881 | |||
|
Total pro forma debt
|
$ | 405,686 | ||
On December 14, 2007, the Company completed its initial
public offering of 12,000,000 shares of common stock at a
price of $10.00 per share. The net proceeds from the offering
were approximately $110.1 million and were used to pay down
amounts previously outstanding under the Company’s
revolving credit facility. The effects of such pay down have
been reflected in the historical financial statements of
Cardtronics, Inc. included in the accompanying pro forma
financial statements for the period from December 14, 2007,
the initial public offering date, through December 31,
2007. However, as discussed in more detail below, the interest
savings realized by the Company for such period have not been
reflected in the final pro forma interest expense amounts.
For purposes of computing the interest expense amounts
associated with the above debt structure, a weighted-average
rate of 9.03% has been utilized. Assuming an increase of
25 basis points in the floating borrowing rate under our
revolving credit facility, pro forma interest expense would have
increased by $257,000 for the years ended December 31, 2007
and 2006.
43
Table of Contents
CARDTRONICS,
INC.
NOTES TO
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following reconciliation provides additional details behind
the pro forma interest expense adjustment reflected in the
accompanying unaudited pro forma condensed consolidated
statement of operations (in thousands):
|
Interest expense associated with the senior subordinated notes
issued in August 2005 ($198.9 million at an effective
interest rate of 9.4%)
|
$ | 18,620 | ||
|
Interest expense associated with the Series B Notes issued
in July 2007 ($97.0 million at an effective interest rate
of 9.5%)
|
9,250 | |||
|
Interest expense associated with the pro forma revolving credit
facility balance ($103.0 million at an effective interest
rate of 7.8%)
|
8,030 | |||
|
Interest expense associated with other indebtedness, including
acquired capital lease obligations
|
721 | |||
|
Amortization of deferred financing costs associated with the
Series B Notes issued in July 2007 and amended revolving
credit facility ($1.7 million and $0.4 million
amortized on a straight-line basis over 6 years and
5 years, respectively)
|
353 | |||
|
Amortization of discount associated with the Series B Notes
issued in July 2007
|
500 | |||
|
Amortization of deferred financing costs associated with the
senior subordinated notes issued in August 2005 and revolving
credit facility
|
1,270 | |||
|
Pro forma interest expense
|
38,744 | |||
|
Elimination of the historical interest expense of Cardtronics,
Inc. and the 7-Eleven Financial Services Business
|
(31,264 | ) | ||
|
Pro forma interest expense adjustment
|
$ | 7,480 | ||
The pro forma interest expense amount reflected above does not
reflect the use of the $110.1 million in net proceeds
received by the Company as part of its initial public offering
on December 14, 2007. Such proceeds, which were utilized to
the pay down substantially all of the Company’s outstanding
revolving credit facility borrowings on such date, resulted in
approximately $0.4 million in interest expense savings for
the period from December 14, 2007 through December 31,
2007.
Reference is made to Note 13, Long-term Debt, in the
accompanying audited consolidated financial statements of
Cardtronics, Inc. included elsewhere in this prospectus for a
schedule of the Company’s outstanding debt maturities as of
December 31, 2007.
(4) The reported amounts reflect the adjustments to the
historical depreciation and amortization expense resulting from
the effects of the purchase price allocations associated with
the 7-Eleven ATM Transaction. The acquired tangible assets were
assumed to have a weighted-average remaining useful life of
approximately 5.0 years and are being depreciated on a
straight-line basis over such period of time. The acquired
intangible customer contract/relationships are estimated to have
a ten year life and are being amortized over such period on a
straight-line basis, consistent with our past practice. The
reported amounts also reflect the depreciation and accretion
amounts related to our estimated asset retirement obligations
associated with the acquired ATMs and Vcom terminals.
(5) The adjustment to income taxes reflects rates of 0.0%
for our U.S. and Mexico operations and 28.0% for our U.K.
operations. Additionally, during the year ended
December 31, 2007, we determined that a valuation allowance
of approximately $4.8 million, net of amounts provided for
current year benefits, should be established for our net
deferred tax asset amounts in the U.S. due to uncertainties
surrounding our ability to utilize the related tax benefits in
future periods. For our Mexico operations, all current and
deferred tax
44
Table of Contents
CARDTRONICS,
INC.
NOTES TO
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
benefits accruing to such operations have been fully reserved
for due to the uncertain future utilization of such benefits.
(6) The share and per share information gives effect to the
7.9485 to 1 stock split that occurred in conjunction with our
initial public offering in December 2007.
(7) The Company presents “Cost of ATM operating
revenues” and “Gross profit” within its
consolidated financial statements exclusive of depreciation,
accretion and amortization. For the pro forma year ended
December 31, 2007, the total depreciation, accretion, and
amortization excluded from cost of ATM operating revenues and
gross profit is $50.8 million. This amount includes the
depreciation and accretion related to assets under capital
leases.
(8) Our Series B Redeemable Convertible Preferred
Stock converted into shares of our common stock in conjunction
with our initial public offering in December 2007. Of the
929,789 shares of Series B Redeemable Convertible
Preferred Stock outstanding prior to the initial public
offering, 894,568 shares held by TA Associates converted
into 12,259,286 shares of common stock (on a split-adjusted
basis) based on the $10.00 initial public offering price and the
terms of our shareholders agreement.
In connection with the above assumed conversion, the total
amount of our outstanding common stock and Series B
Redeemable Convertible Preferred Stock prior to the initial
public offering (on both a converted and split-adjusted basis)
remained the same. Accordingly, the incremental shares received
by TA Associates in connection with the above assumed beneficial
conversion totaled approximately $36.0 million in value
based on the $10.00 initial public offering price per share.
Such amount was reflected as a reduction of our net income (or
an increase in our net loss) available to common shareholders
immediately upon the conversion of TA Associates’
Series B Redeemable Convertible Preferred Stock and the
completion of our initial public offering in the fourth quarter
of 2007.
45
Table of Contents
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Management’s Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking
statements that are based on management’s current
expectations, estimates, and projections about our business and
operations. Our actual results may differ materially from those
currently anticipated and expressed in such forward-looking
statements as a result of numerous factors, including those we
discuss under Risk Factors. Additionally, you should read the
following discussion together with the financial statements and
the related notes included elsewhere in this prospectus.
Our discussion and analysis includes the following:
| • | Overview of Business | |
| • | Recent Events | |
| • | Results of Operations | |
| • | Liquidity and Capital Resources | |
| • | Critical Accounting Policies and Estimates | |
| • | New Accounting Pronouncements | |
| • | Commitments and Contingencies | |
| • | Disclosure about Market Risk |
We have also included a discussion of the 7-Eleven ATM
Transaction and the related financing transactions that occurred
in 2007 in certain portions of the following sections in order
to provide some detail on the impact such transactions are
expected to have on our results of operations and liquidity and
capital resource requirements. In some cases, certain unaudited
pro forma financial and operational information has been
presented herein as if the 7-Eleven ATM Transaction occurred on
January 1, 2006. Such unaudited pro forma information is
presented for illustrative purposes only and is not necessarily
indicative of what our actual financial or operational results
would have been had the 7-Eleven ATM Transaction been
consummated on such date. Such unaudited pro forma information
should be read in conjunction with our historical audited
financial statements, and accompanying notes thereto, as well as
our unaudited pro forma financial statements, each of which are
included elsewhere within this prospectus.
Overview
of Business
As of March 31, 2008, we operated a network of
approximately 32,600 ATMs throughout the United States, the
United Kingdom, and Mexico. Our extensive ATM network is
strengthened by multi-year contractual relationships with a wide
variety of nationally and internationally-known merchants
pursuant to which we operate ATMs in their locations. We deploy
ATMs under two distinct arrangements with our merchant partners:
Company-owned and merchant-owned.
Company-owned Arrangements. Under a
Company-owned arrangement, we own or lease the ATM and are
responsible for controlling substantially all aspects of its
operation. These responsibilities include what we refer to as
first line maintenance, such as replacing paper, clearing paper
or bill jams, resetting the ATM, any telecommunications and
power issues, or other maintenance activities that do not
require a trained service technician. We are also responsible
for what we refer to as second line maintenance, which includes
more complex maintenance procedures that require trained service
technicians and often involve replacing component parts. In
addition to first and second line maintenance, we are
responsible for arranging for cash, cash loading, supplies,
transaction processing, telecommunications service, and all
other services required for the operation of the ATM, other than
electricity. We typically pay a fee, either periodically, on a
per-transaction basis or a combination of both, to the merchant
on whose premises the ATM is physically located. We operate a
limited number of our Company-owned ATMs on a merchant-assisted
basis. In these arrangements, we own the ATM and provide all
transaction processing services, but the merchant generally is
responsible for providing and loading cash for the ATM and
performing first line maintenance.
46
Table of Contents
Typically, we deploy ATMs under Company-owned arrangements for
our national and regional merchant customers. Such customers
include 7-Eleven, Chevron, Costco, CVS/Pharmacy, Duane Reade,
ExxonMobil, Hess Corporation, Rite Aid, Safeway, Sunoco, Target,
and Walgreens in the United States; Alfred Jones, Martin McColl,
McDonalds, The Noble Organisation, Odeon Cinemas, Punch Taverns,
Spar, Tates, and Vue Cinemas in the United Kingdom; and OXXO in
Mexico. Because Company-owned locations are controlled by us
(i.e., we control the uptime of the machines), are usually
located in major national chains, and are thus more likely
candidates for additional sources of revenue such as bank
branding, they generally offer higher transaction volumes and
greater profitability, which we consider necessary to justify
the upfront capital cost of installing such machines. As of
March 31, 2008, we operated over 21,500 ATMs under
Company-owned arrangements.
Merchant-owned Arrangements. Under a
merchant-owned arrangement, the merchant owns the ATM and is
responsible for its first-line maintenance and the majority of
the operating costs; however, we generally continue to provide
all transaction processing services, second-line maintenance,
24-hour per
day monitoring and customer service, and, in some cases, retain
responsibility for providing and loading cash. We typically
enter into merchant-owned arrangements with our smaller,
independent merchant customers. In situations where a merchant
purchases an ATM from us, the merchant normally retains
responsibility for providing cash for the ATM. Because the
merchant bears more of the costs associated with operating ATMs
under this arrangement, the merchant typically receives a higher
fee on a per-transaction basis than is the case under a
Company-owned arrangement. In merchant-owned arrangements under
which we have assumed responsibility for providing and loading
cash and/or
second line maintenance, the merchant receives a smaller fee on
a per-transaction basis than in the typical merchant-owned
arrangement. As of March 31, 2008, we operated
approximately 11,100 ATMs under merchant-owned arrangements.
In the future, we expect the percentage of our Company-owned and
merchant-owned arrangements to continue to fluctuate in response
to the mix of ATMs we add through internal growth and
acquisitions. While we may continue to add merchant-owned ATMs
to our network as a result of acquisitions and internal sales
efforts, our focus for internal growth will remain on expanding
the number of Company-owned ATMs in our network due to the
higher margins typically earned and the additional revenue
opportunities available to us under Company-owned arrangements.
In-house Electronic Funds Transfer (“EFT”)
Processing Operations. In the fourth quarter of
2006, we began developing our own in-house EFT processing
platform that provides us with the ability to control the
processing of transactions conducted on our network of ATMs. Our
in-house EFT processing operations provide us with the ability
to control the content of the information appearing on the
screens of our ATMs, which should in turn serve to increase the
types of products and services that we will be able to offer to
financial institutions. For example, with the ability to control
screen flow, we expect to be able to offer customized branding
solutions to financial institutions, including one-to-one
marketing and advertising services at the point of transaction.
While our in-house EFT processing operations are focused on
controlling the flow and content of information on the ATM
screen, we will continue to rely on third party service
providers to handle the generic back-end connections to the EFT
networks and various fund settlement and reconciliation
processes for our Company-owned accounts. However, we expect
that this move will provide us with future operational cost
savings in terms of lower overall processing costs once our
conversion efforts are completed.
As of March 31, 2008, we had converted approximately 20,300
of our Company- and merchant-owned ATMs from third party
processors to our in-house EFT processing platform, including
the ATMs in our United Kingdom portfolio and our
advanced-functionality financial self-service kiosks, which are
branded as “Vcom” terminals. Additionally, we are
processing transactions for 675 ATMs owned by a third party who
has engaged us to serve as the processor for a portion of its
ATM portfolio. During 2007, we incurred $2.4 million in
costs associated with our efforts to transition our current
network of ATMs over to our in-house EFT processing platform,
and we incurred $0.2 million during the first quarter of
2008. We currently expect to spend an additional
$0.8 million this year to complete this conversion.
47
Table of Contents
Components
of Revenues, Cost of Revenues, and Expenses
Revenues
We derive our revenues primarily from providing ATM services
and, to a lesser extent, from branding arrangements,
surcharge-free network offerings, sales of ATM equipment, and
now, as a result of the 7-Eleven ATM Transaction, the provision
of advanced-functionality services conducted at our Vcom
terminals. We have historically classified revenues into two
primary categories: ATM operating revenues and ATM product sales
and other revenues. However, as a result of the 7-Eleven ATM
Transaction, we now have a separate category, Vcom operating
revenues, for the advanced-functionality services provided
through the acquired Vcom terminals.
ATM Operating Revenues. We present revenues
from ATM services, branding arrangements, and surcharge-free
network offerings as “ATM operating revenues” in our
consolidated statements of operations. These revenues include
the fees we earn per transaction on our network, fees we
generate from bank branding arrangements and our surcharge-free
networks, and fees earned from providing certain maintenance
services. Our revenues from ATM services have increased rapidly
in recent years due to the acquisitions we completed since 2001,
as well as through internal expansion of our existing and
acquired ATM networks. We expect that our ATM operating revenues
will significantly increase in 2008 as a result of the 7-Eleven
ATM Transaction and the deployment of additional Company-owned
ATMs in the U.K. and Mexico.
ATM operating revenues primarily consist of the three following
components: (1) surcharge revenue, (2) interchange
revenue, and (3) branding and surcharge-free network
revenue.
| • | Surcharge revenue. A surcharge fee represents a convenience fee paid by the cardholder for making a cash withdrawal from an ATM. Surcharge fees often vary by the type of arrangement under which we place our ATMs and can vary widely based on the location of the ATM and the nature of the contracts negotiated with our merchants. In the future, we expect that surcharge fees per surcharge-bearing transaction will vary depending upon negotiated surcharge fees at newly-deployed ATMs, the roll-out of additional branding arrangements, and future negotiations with existing merchant partners, as well as our ongoing efforts to improve profitability through improved pricing. For those ATMs that we own or operate on surcharge-free networks, we do not receive surcharge fees related to cash withdrawal transactions from cardholders who are participants of such networks, but rather we receive interchange and branding revenues (as discussed below.) Surcharge fees in the United Kingdom are typically higher than the surcharge fees charged in the United States. In Mexico, surcharge fees are generally less than those charged in the United States. | |
| • | Interchange revenue. An interchange fee is a fee paid by the cardholder’s financial institution for the use of an ATM owned by another operator and the applicable EFT network that transmits data between the ATM and the cardholder’s financial institution. We typically receive a majority of the interchange fee paid by the cardholder’s financial institution, with the remaining portion being retained by the EFT network. In the United States and Mexico, interchange fees are earned not only on cash withdrawal transactions but on any ATM transaction, including balance inquiries, transfers, and surcharge-free transactions. In the United Kingdom, interchange fees are earned on all ATM transactions other than surcharge-bearing cash withdrawals. Interchange fees are set by the EFT networks and vary according to EFT network arrangements with financial institutions, as well as the type of transaction. Such fees are typically lower for balance inquiries and fund transfers and higher for cash withdrawal transactions. | |
| • | Branding and surcharge-free network revenue. Under a bank branding agreement, ATMs that are owned and operated by us are branded with the logo of and operated as if they were owned by the branding financial institution. Customers of the branding institution can use those machines without paying a surcharge, and, in exchange, the financial institution pays us a monthly per-machine fee for such branding. Historically, this type of branding arrangement has resulted in an increase in transaction levels at the branded ATMs, as existing customers continue to use the ATMs and new customers of the branding financial institution are attracted by the surcharge-free service. Additionally, although we forego the surcharge fee on ATM transactions by the branding institution’s customers, we continue to |
48
Table of Contents
| earn interchange fees on those transactions along with the monthly branding fee, and typically enjoy an increase in surcharge-bearing transactions from users who are not customers of the branding institution as a result of having a bank brand on our ATMs. Overall, based on the above, we believe a branding arrangement can substantially increase the profitability of an ATM versus operating the same machine in an unbranded mode. Fees paid for branding an ATM vary widely within our industry, as well as within our own operations. We expect that this variance in branding fees will continue in the future. However, because our strategy is to set branding fees at levels well above that required to offset lost surcharge revenue, we do not expect any such variance to cause a decrease in our total revenues. |
A surcharge-free network is an arrangement which allows a
financial institution’s customers to use the majority of
the ATMs in our network on a surcharge-free basis. We currently
operate two such networks: our nationwide surcharge-free
Allpoint network, of which we are the owner and largest member,
and our MasterCard surcharge-free network. Under the Allpoint
surcharge-free network, each participating financial institution
pays us a fixed fee per cardholder to participate in the
network. Under the MasterCard surcharge-free network, we receive
a fee from MasterCard for each surcharge-free withdrawal
transaction conducted on our network. These fees are meant to
compensate us for the loss of surcharge revenues. Although we
forego surcharge revenues on those transactions, we do continue
to earn interchange revenues. We believe that many of these
surcharge-free transactions represent cash withdrawal
transactions from cardholders who have not previously utilized
the underlying ATMs, with increased transaction counts more than
offsetting the foregone surcharge. Consequently, we believe that
our surcharge-free network arrangements enable us to profitably
operate in that portion of the ATM transaction market that does
not involve a surcharge.
In addition to our Allpoint and MasterCard networks, the ATMs
and Vcom machines that we acquired in the 7-Eleven ATM
Transaction participate in the
CO-OP®
network, the nation’s largest surcharge-free network
devoted exclusively to credit unions. Additionally, the Vcom
machines located in 7-Eleven stores are under an arrangement
with Financial Services Center Cooperative, Inc.
(“FSCC”), a cooperative service organization that
provides shared branching services for credit unions, to provide
virtual branching services through the Vcom machines for members
of the FSCC network.
The following table sets forth, on a historical and pro forma
basis, information on our surcharge, interchange, branding and
surcharge-free networks fees, and other revenues per withdrawal
transaction for the periods indicated. The pro forma information
presented below assumes the 7-Eleven ATM Transaction occurred
effective January 1, 2007 but excludes any revenues and
transactions associated with the Vcom advanced-functionality
services for such periods.
|
Three Months Ended |
||||||||||||||||||||
|
Pro Forma |
March 31, |
|||||||||||||||||||
| 2005 | 2006 | 2007 | 2007 | 2008 | ||||||||||||||||
|
Per withdrawal transaction(1):
|
||||||||||||||||||||
|
Surcharge revenue(2)
|
$ | 1.52 | $ | 1.52 | $ | 1.36 | $ | 1.31 | $ | 1.22 | ||||||||||
|
Interchange revenue(3)
|
0.56 | 0.55 | 0.59 | 0.59 | 0.63 | |||||||||||||||
|
Branding and surcharge-free network revenue(4)
|
0.06 | 0.13 | 0.21 | 0.21 | 0.26 | |||||||||||||||
|
Other revenue(5)
|
0.04 | 0.05 | 0.03 | 0.03 | 0.03 | |||||||||||||||
|
Total ATM operating revenues
|
$ | 2.18 | $ | 2.25 | $ | 2.19 | $ | 2.14 | $ | 2.14 | ||||||||||
| (1) | Amounts are calculated based on total cash withdrawal transactions, including surcharge cash withdrawal transactions and surcharge-free cash withdrawal transactions. | |
| (2) | Excluding surcharge-free cash withdrawal transactions, per transaction amounts would have been $1.70, $1.80, and $1.88 for the years ended December 31, 2005, 2006, and 2007, respectively, $1.86 for the pro forma year ended December 31, 2007, and $1.88 for the three months ended March 31, 2008. | |
| (3) | Amounts calculated based on total interchange revenues earned on all ATM transaction types, including withdrawals, balance inquiries, transfers, and surcharge-free transactions. |
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| (4) | Amounts include all bank branding and surcharge-free network revenues, the majority of which are not earned on a per-transaction basis. | |
| (5) | Amounts include other miscellaneous ATM operating revenues. |
The following table breaks down, on a historical and pro forma
basis, our total ATM operating revenues into the various
components for the years indicated:
|
Three Months Ended |
||||||||||||||||||||
|
Pro Forma |
March 31, |
|||||||||||||||||||
| 2005 | 2006 | 2007 | 2007 | 2008 | ||||||||||||||||
|
Surcharge revenue
|
69.9 | % | 67.5 | % | 62.0 | % | 61.0 | % | 57.1 | % | ||||||||||
|
Interchange revenue
|
25.7 | 24.5 | 26.8 | 27.8 | 29.3 | |||||||||||||||
|
Branding and surcharge-free network revenue
|
2.6 | 6.0 | 9.7 | 10.0 | 12.4 | |||||||||||||||
|
Other revenue
|
1.8 | 2.0 | 1.5 | 1.2 | 1.2 | |||||||||||||||
|
Total ATM operating revenues
|
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||
Vcom Operating Revenues. The 7-Eleven ATM
Transaction initially provided us with approximately 2,000
advanced-functionality financial self-service kiosks referred to
as “Vcom” terminals that, in addition to standard ATM
services, offer more sophisticated financial services, including
check cashing, money transfer, remote deposit capture, and bill
payment services. The substantial majority of the historical
revenues from the Vcom Services consisted of upfront placement
fees, which represented upfront payments from third-party
service providers associated with providing certain of the
advanced-functionality services. Most of these fees were
payments received by 7-Eleven from a telecommunications
provider. Such fees were amortized to revenues over the
underlying contractual period, and there are no more significant
payments due to us under these contracts. Therefore, in order
for such placement fees to be received in the future, new
contracts must be negotiated, but such negotiation is not
assured. Accordingly, the percentage of Vcom operating revenues
related to placement fees are expected to be considerably lower
in the future.
ATM Product Sales and Other Revenues. We
present revenues from the sale of ATMs and other non-transaction
based revenues as “ATM product sales and other
revenues” in our consolidated statements of operations.
These revenues consist primarily of sales of ATMs and related
equipment to merchants operating under merchant-owned
arrangements, as well as sales under our value-added reseller
(“VAR”) program with NCR. While we expect to continue
to derive a portion of our revenues from direct sales of ATMs in
the future, we expect that this source of revenue will not
comprise a substantial portion of our total revenues in future
periods.
Cost of
Revenues
Our cost of revenues primarily consists of those costs directly
associated with transactions completed on our ATM network. These
costs, which are incurred to handle transactions completed on
both our ATM and Vcom terminals, include merchant fees,
processing fees, cost of cash, communications expense, repairs
and maintenance expense, and direct operations expense. To a
lesser extent, cost of revenues also includes those costs
associated with the sales of ATMs. The following is a
description of our primary cost categories:
Merchant Fees. We pay our merchants a fee that
depends on a variety of factors, including the type of
arrangement under which the ATM is placed and the number of
transactions at that ATM. For the three months ended
March 31, 2008 and the year ended December 31, 2007,
merchant fees represented 34.7% and 36.5%, respectively, of our
ATM operating revenues.
Processing Fees. Although we are in the
process of transitioning our Company-owned and merchant-owned
ATMs onto our in-house EFT processing platform, we continue to
pay fees to third-party vendors for processing transactions
originated at ATMs in our network that have not been
transitioned to our platform. These vendors, which include Star
Systems, Fiserv, Lynk, and Elan Financial Services in the United
States, LINK and Euronet in the United Kingdom, and PROSA-RED in
Mexico, communicate with the cardholder’s
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Table of Contents
financial institution through EFT networks to gain transaction
authorization and to settle transactions. As we have converted
most of our domestic Company-owned ATMs over to our own in-house
EFT processing platform, all of our Vcom terminals, and all of
our U.K. ATMs, we expect to see a slight reduction in our
overall processing costs on a go-forward basis. However, the
ATMs acquired in the 7-Eleven Transaction will not be converted
over to our in-house processing platform until 2010, as we have
a contract with a third party to provide the transaction
processing services for these machines through December 2009.
For the three months ended March 31, 2008 and the year
ended December 31, 2007, processing fees represented 2.5%
and 2.9%, respectively, of our ATM operating revenues.
Cost of Cash. Cost of cash includes all costs
associated with the provision of cash for our ATMs, including
fees for the use of cash, armored courier services, insurance,
cash reconciliation, associated wire fees, and other costs. As
the fees we pay under our contracts with our vault cash
providers are based on market rates of interest, changes in
interest rates affect our cost of cash. In order to limit our
exposure to increases in interest rates, we have entered into a
number of interest rate swaps on varying amounts of our current
and anticipated outstanding domestic ATM cash balances through
2010. For the three months ended March 31, 2008 and the
year ended December 31, 2007, cost of cash represented
19.7% and 19.0%, respectively, of our ATM operating revenues.
Communications. Under our Company-owned
arrangements, we are responsible for expenses associated with
providing telecommunications capabilities to the ATMs, allowing
the ATMs to connect with the applicable EFT network. For the
three months ended March 31, 2008 and the year ended
December 31, 2007, communications costs represented 3.4%
and 3.2%, respectively, of our ATM operating revenues.
Repairs and Maintenance. Depending on the type
of arrangement with the merchant, we may be responsible for
first and/or
second line maintenance for the ATM. We typically use third
parties with national operations to provide these services. Our
primary maintenance vendors are Diebold, NCR, and Pendum. For
the three months ended March 31, 2008 and the year ended
December 31, 2007, repairs and maintenance expense
represented 7.7% and 7.0%, respectively, of our ATM operating
revenues.
Direct Operations. These expenses consist of
costs associated with managing our ATM network, including
expenses for monitoring the ATMs, program managers, technicians,
and customer service representatives.
Cost of Equipment Revenue. In connection with
the sale of equipment to merchants and value-added resellers, we
incur costs associated with purchasing equipment from
manufacturers, as well as delivery and installation expenses.
We define variable costs as those incurred on a per transaction
basis. Processing fees and the majority of merchant fees fall
under this category. Processing fees and merchant fees accounted
for 49.3% and 52.2% of our cost of ATM operating revenues
(exclusive of depreciation, accretion, and amortization related
to ATMs and ATM-related assets) for the three months ended
March 31, 2008 and the year ended December 31, 2007,
respectively, and 52.9% for the year ended December 31,
2007 on a pro forma basis for the 7-Eleven ATM Transaction.
Therefore, we estimate that 50.7% and 47.8% of our cost of ATM
operating revenues (exclusive of depreciation, accretion, and
amortization related to ATMs and ATM-related assets) for the
three months ended March 31, 2008 and the year ended
December 31, 2007, respectively, and 47.1% for the year
ended December 31, 2007 on a pro forma basis is generally
fixed in nature, meaning that any significant decrease in
transaction volumes would lead to a decrease in the
profitability of our ATM service operations, unless there were
an offsetting increase in per-transaction revenues or decrease
in our fixed costs. We currently exclude depreciation,
accretion, and amortization from ATMs and ATM-related assets
from our cost of ATM revenues. However, the inclusion of such
costs would have increased the percentage of our cost of ATM
operating revenues that we consider fixed in nature by
approximately 6.2% for the three months ended March 31,
2008, 7.1% for the year ended December 31, 2007, and 7.0%
for the year ended December 31, 2007 on a pro forma basis.
The profitability of any particular ATM location, and of our
entire ATM services operation, is driven by a combination of
surcharge, interchange, and branding and surcharge-free network
revenues, as well as the level
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of our related costs. Accordingly, material changes in our
average surcharge fee or average interchange fee may be offset
by branding revenues, surcharge-free network fees, or other
ancillary revenues, or by changes in our cost structure. Because
a variance in our average surcharge fee or our average
interchange fee is not necessarily indicative of a commensurate
change in our profitability, you should consider these measures
only in the context of our overall financial results.
Indirect
Operating Expenses
Our indirect operating expenses include general and
administrative expenses related to administration, salaries,
benefits, advertising and marketing, depreciation and accretion
of the ATMs, ATM-related assets, and other assets that we own,
amortization of our acquired merchant contracts and other
amortizable intangible assets, and interest expense related to
borrowings under our revolving credit facility and our
$300.0 million in senior subordinated notes. We depreciate
our capital equipment on a straight-line basis over the
estimated life of such equipment and amortize the value of
acquired intangible assets over the estimated lives of such
assets.
Recent
Events
7-Eleven ATM Transaction. In July 2007, the
Company acquired the 7-Eleven Financial Services Business for
approximately $137.3 million in cash. The acquisition
included approximately 5,500 ATMs located in 7-Eleven stores
throughout the United States, of which approximately 2,000 are
Vcom machines that are capable of providing more sophisticated
financial services, such as check cashing, money transfer,
remote deposit capture, and bill payment services (collectively,
the “Vcom Services”). Additionally, in connection with
the 7-Eleven ATM Transaction, we entered into a placement
agreement that provides us with, subject to certain conditions,
a 10-year
exclusive right to operate all ATMs and Vcom terminals in
7-Eleven locations throughout the United States, including any
new stores opened or acquired by 7-Eleven.
The operating results of our United States segment now include
the results of the traditional ATM operations of the 7-Eleven
Financial Services Business, including the traditional ATM
activities conducted on the Vcom terminals. Additionally, as a
result of the different functionality provided by the Vcom
terminals, and the expected continued near-term operating losses
associated with providing the Vcom Services, such operations
have been identified as a separate reporting segment. Because of
the significance of this acquisition, our operating results for
the three months ended March 31, 2008 will not be
comparable to our historical results for the three months ended
March 31, 2007. In particular, our revenues and gross
profits will be substantially higher, but these increased
revenue and gross profit amounts will initially be substantially
offset by higher operating expense amounts, including higher
selling, general, and administrative expenses associated with
running the combined operations. In addition, depreciation,
accretion, and amortization expense amounts are significantly
higher as a result of the tangible and intangible assets
recorded as part of the acquisition.
Merchant-owned Account Attrition. In 2006 and
2007, we experienced significant attrition rates among our
smaller merchant-owned customers in the United States. While
part of the attrition was due to our initiative to identify and
either restructure or eliminate certain underperforming
merchant-owned accounts, an additional driver of this attrition
was local and regional independent ATM service organizations
that were targeting our smaller merchant-owned accounts upon the
termination of the merchant’s contracts with us, or upon a
change in the merchant’s ownership, which can be a common
occurrence. Accordingly, we launched a second initiative to
identify and retain those merchant-owned accounts where we
believed it made economic sense to do so. Our retention efforts
have been successful, as evident in the fact that the attrition
of approximately 750 ATMs in 2007 was significantly lower than
the attrition of over 1,900 experienced in 2006.
In the first quarter of 2008, our U.S. merchant-owned
portfolio declined by over 550 machines, over 90% of which was
the result of the EFT networks’ mandate that all ATMs be
compliant with a relatively new data encryption standard
(“Triple-DES”). Rather than incurring the costs to
update or replace their existing machines to be Triple-DES
compliant, merchants with lower transacting ATMs decided to
dispose of their ATMs. Specifically, the machines lost during
the first quarter of 2008 due to Triple-DES were performing, on
average, less than 120 cash withdrawal transactions per month
during 2007, which is significantly lower than the approximately
285 cash withdrawal transactions per month that our
U.S. merchant-owned ATMs averaged
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as a whole during the same period. Excluding the impact of
Triple-DES, attrition levels significantly declined during the
first quarter. Despite this decline, we cannot predict whether
we will continue to see reduced attrition rates in the future or
whether our retention efforts will be continue to be successful.
Furthermore, because of our efforts to eliminate certain
underperforming accounts, we may continue to experience a
downward trend in our merchant-owned account base in future
periods.
Results
of Operations
The following table sets forth our statement of operations
information as a percentage of total revenues for the periods
indicated. Percentages may not add due to rounding.
|
Three Months Ended |
||||||||||||||||||||
| Years Ended December 31, | March 31, | |||||||||||||||||||
| 2005 | 2006 | 2007 | 2007 | 2008 | ||||||||||||||||
|
Revenues:
|
||||||||||||||||||||
|
ATM operating revenues
|
96.3 | % | 95.7 | % | 96.2 | % | 96.2 | % | 95.4 | % | ||||||||||
|
Vcom operating revenues
|
— | — | 0.3 | — | 1.0 | |||||||||||||||
|
ATM product sales and other revenues
|
3.7 | 4.3 | 3.4 | 3.8 | 3.5 | |||||||||||||||
|
Total revenues
|
100.0 | 100.0 | 100.0 | 100.0 | 100.0 | |||||||||||||||
|
Cost of revenues:
|
||||||||||||||||||||
|
Cost of ATM operating revenues (exclusive of depreciation,
accretion, and amortization, shown separately below)(1)
|
74.3 | 71.5 | 72.8 | 73.5 | 72.0 | |||||||||||||||
|
Cost of Vcom operating revenues
|
— | — | 1.6 | — | 1.9 | |||||||||||||||
|
Cost of ATM product sales and other revenues
|
3.6 | 3.9 | 3.2 | 3.8 | 3.5 | |||||||||||||||
|
Total cost of revenues
|
77.9 | 75.4 | 77.5 | 77.2 | 77.4 | |||||||||||||||
|
Gross profit
|
22.1 | 24.6 | 22.5 | 22.8 | 22.6 | |||||||||||||||
|
Operating expenses:
|
||||||||||||||||||||
|
Selling, general, and administrative expenses
|
6.6 | 7.4 | 7.8 | 8.6 | 7.1 | |||||||||||||||
|
Depreciation and accretion expense
|
4.8 | 6.3 | 7.1 | 8.6 | 7.5 | |||||||||||||||
|
Amortization expense(2)
|
3.3 | 4.1 | 5.0 | 3.3 | 3.7 | |||||||||||||||
|
Total operating expenses
|
14.8 | 17.8 | 19.8 | 20.6 | 18.4 | |||||||||||||||
|
Income from operations
|
7.3 | 6.8 | 2.6 | 2.2 | 4.3 | |||||||||||||||
|
Other (income) expense:
|
||||||||||||||||||||
|
Interest expense, net
|
8.3 | 8.5 | 8.2 | 8.4 | 6.8 | |||||||||||||||
|
Minority interest in subsidiary
|
— | (0.1 | ) | (0.1 | ) | (0.2 | ) | — | ||||||||||||
|
Other
|
0.4 | (1.6 | ) | 0.4 | (0.2 | ) | 0.9 | |||||||||||||
|
Total other expense
|
8.7 | 6.8 | 8.6 | 8.1 | 7.6 | |||||||||||||||
|
Loss before income taxes
|
(1.4 | ) | — | (5.9 | ) | (5.9 | ) | (3.3 | ) | |||||||||||
|
Income tax expense (benefit)
|
(0.5 | ) | 0.2 | 1.2 | (1.3 | ) | 0.5 | |||||||||||||
|
Net loss
|
(0.9 | )% | (0.2 | )% | (7.2 | )% | (4.5 | )% | (3.8 | )% | ||||||||||
| (1) | Excludes effects of depreciation, accretion, and amortization expense of $20.6 million, $29.2 million, and $43.1 million for the years ended December 31, 2005, 2006, and 2007, respectively, and $8.5 million and $12.5 million for the three months periods ended March 31, 2007 and 2008, respectively. The inclusion of this depreciation, accretion, and amortization expense in “Cost of ATM operating revenues” would |
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| have increased our Cost of ATM operating revenues as a percentage of total revenues by 7.7%, 9.9%, and 11.4% for the years ended December 31, 2005, 2006, and 2007, respectively, and 10.3% and 11.4% for the three months ended March 31, 2008 and 2007, respectively. | ||
| (2) | Includes pretax impairment charges of $1.2 million, $2.8 million, and $5.7 million for the years ended December 31, 2005, 2006, and 2007, respectively, and $0.1 million during the three months ended March 31, 2007. |
Key
Operating Metrics
We rely on certain key measures to gauge our operating
performance, including total transactions, total cash withdrawal
transactions, ATM operating revenues per ATM per month, and ATM
operating gross profit margin. The following table sets forth
information regarding certain of these key measures for the
periods indicated.
|
Three Months Ended |
||||||||||||||||||||
| Years Ended December 31, | March 31 | |||||||||||||||||||
| 2005 | 2006 | 2007 | 2007 | 2008 | ||||||||||||||||
|
Average number of transacting ATMs:
|
||||||||||||||||||||
|
United States: Company-owned
|
10,521 | 11,265 | 11,563 | 11,542 | 12,182 | |||||||||||||||
|
United States: Merchant-owned
|
14,604 | 13,016 | 11,632 | 11,843 | 10,947 | |||||||||||||||
|
United States: 7-Eleven Financial Services Business(1)
|
— | — | 2,585 | — | 5,672 | |||||||||||||||
|
United Kingdom
|
1,039 | 1,194 | 1,718 | 1,419 | 2,252 | |||||||||||||||
|
Mexico
|
— | 303 | 784 | 424 | 1,422 | |||||||||||||||
|
Total average number of transacting ATMs
|
26,164 | 25,778 | 28,282 | 25,228 | 32,475 | |||||||||||||||
|
Total transactions (in thousands)
|
156,851 | 172,808 | 246,595 | 44,449 | 83,037 | |||||||||||||||
|
Total cash withdrawal transactions (in thousands)
|
118,960 | 125,078 | 166,248 | 31,180 | 53,890 | |||||||||||||||
|
Average monthly cash withdrawal transactions per average
transacting ATM
|
379 | 404 | 490 | 412 | 553 | |||||||||||||||
|
Per ATM per month:
|
||||||||||||||||||||
|
ATM operating revenues
|
$ | 825 | $ | 908 | $ | 1,073 | $ | 947 | $ | 1,181 | ||||||||||
|
Cost of ATM operating revenues (exclusive of depreciation,
accretion, and amortization)(2)
|
636 | 678 | 811 | 723 | 891 | |||||||||||||||
|
ATM operating gross profit(2)(3)
|
$ | 189 | $ | 230 | $ | 262 | $ | 224 | $ | 290 | ||||||||||
|
ATM operating gross profit margin (exclusive of depreciation,
accretion, and amortization)(4)
|
22.9 | % | 25.3 | % | 24.4 | % | 23.6 | % | 24.5 | % | ||||||||||
|
ATM operating gross profit margin (inclusive of depreciation,
accretion, and amortization)(5)
|
14.9 | % | 14.9 | % | 12.5 | % | 11.7 | % | 13.7 | % | ||||||||||
| (1) | The 2007 year-to-date average for the 7-Eleven Financial Services Business represents the 12-month average of ATMs and Vcom terminals under Cardtronics’ ownership. The low figure is due to the fact that Cardtronics did not acquire the portfolio until July 20, 2007. The actual average number of transacting ATMs from the acquisition date to December 31, 2007 was 5,602. | |
| (2) | Excludes effects of depreciation, accretion, and amortization expense of $20.6 million, $29.2 million, and $43.1 million for the years ended December 31, 2005, 2006, and 2007, respectively, and $8.5 million and $12.5 million for the three months ended March 31, 2007 and 2008, respectively. The inclusion of this depreciation, accretion, and amortization expense in “Cost of ATM operating revenues” would have increased our cost of ATM operating revenues per ATM per month and decreased our ATM operating gross profit per ATM per month by $66, $94, and $127 for the years ended December 31, 2005, 2006, and 2007, respectively, and $112 and $128 for the three months ended March 31, 2007 and 2008, respectively. | |
| (3) | ATM operating gross profit is a measure of profitability that uses only the revenue and expenses that related to operating the ATMs. The revenue and expenses from ATM equipment sales, Vcom Services, and other ATM-related services are not included. | |
| (4) | The increase in ATM operating gross profit margin (exclusive of depreciation, accretion, and amortization) in 2006 when compared to 2005 is due to the increases in revenues associated with the Company’s bank and network branding initiatives, increased surcharge rates in selected merchant retail locations, and higher gross profit margins associated with our United Kingdom portfolio of ATMs (which was acquired in May 2005). The decrease in ATM operating gross profit margin (exclusive of depreciation, accretion, and amortization) in 2007 when compared to 2006 is primarily the result of higher vault cash costs and costs incurred in connection with |
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| our Triple-DES upgrade and in-house EFT processing conversion costs. The increase in ATM operating gross profit margin (exclusive of depreciation, accretion, and amortization) for the three months ended March 31, 2008 when compared to three months ended March 31, 2007 is primarily the result of the 7-Eleven ATM Transaction, as the acquired ATM operations earned higher gross margin percentages than our pre-existing operations during the quarter. | ||
| (5) | The decrease in ATM operating gross profit margin (inclusive of depreciation, accretion, and amortization) in 2007 when compared to 2006 and 2005 is primarily due to higher vault cash costs, the incremental costs incurred in connection with our Triple-DES upgrade and in-house EFT processing conversion efforts, higher depreciation and accretion expense associated with recent ATM deployments in the United Kingdom and Mexico, which have yet to achieve the higher consistent recurring transaction levels seen in our more mature ATMs, and $5.7 million of incremental amortization expense related to intangible asset impairments recorded in 2007. The increase in ATM operating gross profit margin (inclusive of depreciation, accretion, and amortization) for the three months ended March 31, 2008 when compared to three months ended March 31, 2007 is primarily the result of the 7-Eleven ATM Transaction, as the acquired ATM operations earned higher gross margin percentages than our pre-existing operations during the quarter. |
Three
Months Ended March 31, 2007 and 2008
Revenues
|
Three Months Ended |
||||||||||||
| March 31, | ||||||||||||
| 2007 | 2008 | % Change | ||||||||||
| (in thousands) | ||||||||||||
|
ATM operating revenues
|
$ | 71,656 | $ | 115,062 | 60.6 | % | ||||||
|
Vcom operating revenues
|
— | 1,235 | — | |||||||||
|
ATM product sales and other revenues
|
2,862 | 4,278 | 49.5 | % | ||||||||
|
Total revenues
|
$ | 74,518 | $ | 120,575 | 61.8 | % | ||||||
ATM operating revenues. ATM operating revenues
generated during the three months ended March 31, 2008
increased $43.4 million over the three months ended
March 31, 2007. Below is a detail, by geographic segment,
of changes in the various components of ATM operating revenues:
| 2007 to 2008 Variance | ||||||||||||||||
| U.S. | U.K. | Mexico | Total | |||||||||||||
| (in thousands) | ||||||||||||||||
|
Surcharge revenue
|
$ | 15,977 | $ | 2,226 | $ | 1,130 | $ | 19,333 | ||||||||
|
Interchange revenue
|
13,086 | 2,469 | 626 | 16,181 | ||||||||||||
|
Branding and surcharge-free network revenue
|
7,874 | — | 1 | 7,875 | ||||||||||||
|
Other
|
16 | 1 | — | 17 | ||||||||||||
|
Total increase in ATM operating revenues
|
$ | 36,953 | $ | 4,696 | $ | 1,757 | $ | 43,406 | ||||||||
United States. During the three months ended
March 31, 2008, our United States operations experienced a
$37.0 million, or 63.5%, increase in ATM operating revenues
over the same period in 2007. The majority of this increase was
attributable to the 7-Eleven ATM Transaction, as the acquired
7-Eleven Financial Services Business generated
$19.3 million of surcharge revenue, $12.7 million of
interchange revenue, and $4.1 million of branding and
surcharge-free network revenue during the first quarter of 2008.
Also contributing to the increase in ATM operating revenues were
the branding activities of our pre-existing domestic operations,
which generated $3.8 million in incremental bank branding
and surcharge-free network fees in 2008 when compared to 2007.
These incremental revenues were a result of additional branding
and surcharge-free network agreements entered into with
financial institutions during 2007.
The overall increase in ATM operating revenues from the acquired
7-Eleven Financial Services Business and our pre-existing
domestic branding and surcharge-free network operations were
partially offset by lower surcharge and interchange revenues
associated with our pre-existing domestic operations. During the
first quarter of 2008, our merchant-owned base experienced a
$2.8 million decline in surcharge revenues and a
$0.6 million decline in interchange revenue when compared
to the same period in 2007. These declines were
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primarily a result of the decline in the average number of
transacting merchant-owned ATMs in the United States, as
discussed in “Recent Events — Merchant-owned
Account Attrition” above. Additionally, surcharge revenues
from our Company-owned base declined by $0.6 million during
2007, primarily as a result of a shift in revenues from
surcharge-based fees to surcharge-free branding and network fees
due to the additional branding and surcharge-free network
arrangements entered into with financial institutions during
2007.
United Kingdom. Our United Kingdom operations
also contributed to the higher ATM operating revenues for the
three months ended March 31, 2008, as the surcharge and
interchange revenues earned in this segment during 2008
increased by 21.2% and 100.6%, respectively, over the same
period in 2007. These incremental revenues were primarily driven
by the increase in the average number of transacting ATMs in the
United Kingdom, which increased from 1,419 ATMs during the first
quarter of 2007 to 2,252 ATMs during the first quarter of 2008,
due to additional ATM deployments. However, the increase in
revenues was lower than originally anticipated due to lower than
expected surcharge transaction levels during the first quarter
of 2008. The primary factor contributing to this decline was
certain service-related issues associated with one of our
third-party armored cash providers. As a result of certain
issues stemming from the merger-integration of two of our
third-party armored cash providers in late 2007, our ATMs in the
United Kingdom experienced a higher percentage of downtime due
to cash outages during the fourth quarter of 2007 and the first
quarter of 2008. Although we have recently seen a decline in the
number of resulting cash outages and expect that the
service-related issues will be resolved during the latter half
of 2008, it is likely that such issues will continue to somewhat
negatively impact the operating results of our United Kingdom
operations in the near term. Additionally, it should be noted
that we have taken a number of steps to help mitigate the
negative impact of these third-party service issues on our
ongoing operations. In particular, we are in the process of
establishing our own in-house armored courier operation, which
we expect will formally commence operations in the third quarter
of 2008. Such operation will initially service the cash needs of
approximately 300 of our ATMs located throughout the London
metropolitan area. While this operation is not expected to
provide significant initial cost savings, we do anticipate that
it will alleviate some of the aforementioned third-party armored
cash service-related issues.
Despite the above factors that are negatively impacting
transaction levels of our United Kingdom ATMs, overall
transaction-based revenues have increased as transaction levels
at recently-deployed ATMs continue to mature and reach
consistent monthly transaction levels.
Mexico. Our Mexico operations further
contributed to the increase in ATM operating revenues as a
result of the increase in the average number of transacting ATMs
associated with these operations, which rose from 424 during the
first quarter of 2007 to 1,422 during the first quarter of 2008
as a result of additional ATM deployments throughout 2007 and in
the first quarter of 2008.
Vcom operating revenues. We acquired our
advanced-functionality (or Vcom) operations as a part of the
7-Eleven ATM Transaction in July 2007. The Vcom operating
revenues generated during the first quarter of 2008 were
primarily comprised of check cashing fees. Although the revenues
generated by our Vcom operations during the most recent quarter
were nominal, we expect that revenues from these operations will
increase in the future as we continue our efforts to restructure
these operations. We have undertaken a relocation project to
concentrate our Vcom terminals in 13 selected markets within the
U.S. Such relocations, which we expect to complete in the
third quarter of 2008, will allow us to advertise the
availability of the advanced-functionality services to consumers
within those markets to increase awareness, which we expect will
result in an increased number of advanced-functionality
transactions being conducted on those machines.
ATM product sales and other revenues. ATM
product sales and other revenues for the three months ended
March 31, 2008 were higher than those generated during the
same period in 2007 due to higher VAR program sales, higher
equipment sales, and higher service call income resulting from
Triple-DES security upgrades performed in the United States.
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Cost of
Revenues
|
Three Months Ended |
||||||||||||
| March 31, | ||||||||||||
| 2007 | 2008 | % Change | ||||||||||
| (in thousands) | ||||||||||||
|
Cost of ATM operating revenues (exclusive of depreciation,
accretion, and amortization)
|
$ | 54,736 | $ | 86,832 | 58.6 | % | ||||||
|
Cost of Vcom operating revenues
|
— | 2,269 | — | |||||||||
|
Cost of ATM product sales and other revenues
|
2,797 | 4,164 | 48.9 | % | ||||||||
|
Total cost of revenues (exclusive of depreciation, accretion,
and amortization)
|
$ | 57,533 | $ | 93,265 | 62.1 | % | ||||||
Cost of ATM operating revenues (exclusive of depreciation,
accretion, and amortization). The cost of ATM
operating revenues (exclusive of depreciation, accretion, and
amortization) incurred during the three months ended
March 31, 2008 increased $32.1 million over the same
period in 2007. Below is a detail, by geographic segment, of
changes in the various components of the cost of ATM operating
revenues (exclusive of depreciation, accretion, and
amortization):
| 2007 to 2008 Variance | ||||||||||||||||
| U.S. | U.K. | Mexico | Total | |||||||||||||
| (in thousands) | ||||||||||||||||
|
Merchant commissions
|
$ | 10,344 | $ | 1,873 | $ | 565 | $ | 12,782 | ||||||||
|
Cost of cash
|
7,641 | 1,997 | 440 | 10,078 | ||||||||||||
|
Repairs and maintenance
|
3,713 | 111 | 138 | 3,962 | ||||||||||||
|
Direct operations
|
1,784 | 420 | 89 | 2,293 | ||||||||||||
|
Communications
|
1,227 | 445 | 81 | 1,753 | ||||||||||||
|
Processing fees
|
592 | 453 | 183 | 1,228 | ||||||||||||
|
Total increase in cost of ATM operating revenues
|
$ | 25,301 | $ | 5,299 | $ | 1,496 | $ | 32,096 | ||||||||
United States. During the three months ended
March 31, 2008, the cost of ATM operating revenues
(exclusive of depreciation, accretion, and amortization)
incurred by our United States operations increased
$25.3 million over the cost incurred during the same period
in 2007. This increase was primarily the result of the 7-Eleven
ATM Transaction, as the ATM operations of the acquired 7-Eleven
Financial Services Business incurred $25.7 million of
expenses during the first quarter of 2008, including
$12.8 million of merchant fees, $6.8 million in costs
of cash, $3.0 million of repairs and maintenance costs,
$1.1 million in communication costs, and $1.1 million
of processing fees. The $25.7 million of incremental
expenses generated by the ATM operations of the acquired
7-Eleven Financial Services Business is net of $2.0 million
of amortization expense related to the liabilities we recorded
in connection with the acquisition to value certain unfavorable
operating leases and an operating contract assumed as a part of
the 7-Eleven ATM Transaction. For additional details related to
these liabilities, see Note 2 to our consolidated
financial statements included elsewhere in this .
Our pre-existing United States operations also contributed to
the higher cost of ATM operating revenues (exclusive of
depreciation, accretion, and amortization), including
(i) $1.5 million of additional employee-related costs
directly allocable to our pre-existing domestic operations as a
result of our decision to hire additional personnel during 2007
to focus on our initiatives, and (ii) $0.8 million of
higher costs of cash due to higher armored courier costs as a
result of the increase in the number of Company-owned machines.
Offsetting these increases in costs were lower merchant fees
associated with our pre-existing domestic operations, which
decreased $2.5 million when compared to the same period in
2007 primarily due to the year-over-year decline in the number
of domestic merchant-owned ATMs (further discussed in
“Recent Events — Merchant-owned Account
Attrition” above) and the related surcharge revenues.
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United Kingdom. During the three months ended
March 31, 2008, our United Kingdom operations contributed
to the increase in the cost of ATM operating revenues with such
costs increasing $5.3 million over the same period in 2007.
These increases were primarily due to higher costs of cash and
merchant payments, which resulted from the increased number of
ATMs operating in the United Kingdom during the first quarter of
2008 compared to the same period in 2007. Additionally, due to
the aforementioned third-party armored cash service-related
issues, we maintained higher cash balances in our ATMs within
the United Kingdom during the first quarter of 2008 in an effort
to minimize the amount of downtime caused by such service
disruptions, thus contributing to the overall year-over-year
increase in our cost of cash amounts.
Mexico. Our Mexico operations further
contributed to the increase in the cost of ATM operating
revenues as a result of the increase in the average number of
transacting ATMs associated with our Mexico operations and the
increased number of transactions conducted on our machines
during the first quarter of 2008 compared to the first quarter
of 2007.
Cost of Vcom operating revenues. The cost of
Vcom operating revenues incurred during the first quarter of
2008 was primarily related to costs of cash as well as
communication and maintenance expense related to the Vcom
Services provided by our advanced-functionality operations.
Cost of ATM product sales and other
revenues. The cost of ATM product sales and other
revenues increased by $1.4 million during the three months
ended March 31, 2008 compared to the same period in 2007.
On a percentage basis, this 48.9% increase is consistent with
the 49.5% increase in ATM product sales and other revenues
during the period. As noted in
“— Revenues — ATM product sales and
other revenues” above, we had higher VAR program sales,
higher equipment sales, and higher service call income resulting
from Triple-DES security upgrades performed in the United States
during the first quarter of 2008 compared to the same period in
2007.
Gross
Profit Margin
| 2007 | 2008 | |||||||
|
ATM operating gross profit margin:
|
||||||||
|
Exclusive of depreciation, accretion, and amortization
|
23.6 | % | 24.5 | % | ||||
|
Inclusive of depreciation, accretion, and amortization
|
11.7 | % | 13.7 | % | ||||
|
Vcom operating gross profit margin
|
— | (83.7 | )% | |||||
|
ATM product sales and other revenues gross profit margin
|
2.3 | % | 2.7 | % | ||||
|
Total gross profit margin:
|
||||||||
|
Exclusive of depreciation, accretion, and amortization
|
22.8 | % | 22.6 | % | ||||
|
Inclusive of depreciation, accretion, and amortization
|
11.4 | % | 12.3 | % | ||||
ATM operating gross profit margin. For the
three months ended March 31, 2008, ATM operating gross
profit margin exclusive of depreciation, accretion, and
amortization increased 0.9% and ATM operating gross profit
margin inclusive of depreciation, accretion, and amortization
increased 2.0% when compared to the same period in 2007. Such
increases were primarily the result of the 7-Eleven ATM
Transaction, as the acquired ATM operations earned higher gross
margin percentages than our pre-existing operations during the
quarter. Partially offsetting the positive impact of the
7-Eleven ATM Transaction were our United Kingdom operations,
which experienced lower gross margins due to the significant
number of ATM deployments that occurred in our United Kingdom
operations during the latter half of 2007, as many of those ATMs
are still in the process of achieving consistent recurring
monthly transaction levels. Furthermore, our gross profit margin
continued to be negatively impacted by a higher percentage of
downtime experienced by our ATMs in the United Kingdom as a
result of the previously discussed third-party armored cash
service-related issues. While we expect such service-related
issues to be resolved during the latter half of 2008, it is
likely that such issues will continue to negatively impact the
operating results of our United Kingdom operations in the
near-term.
ATM product sales and other revenues gross profit
margin. For the three months ended March 31,
2008, our ATM product sales and other revenues gross profit
margin increased by 0.4%, primarily as a result of the
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substantial completion of our Triple-DES upgrade efforts.
Because all ATMs operating on the EFT networks were required to
be Triple-DES compliant by the end of 2007 and early 2008, we
saw an increase during 2007 in the number of ATM sales
associated with the Triple-DES upgrade process. However, in
certain circumstances, we sold the machines at little or, in
some cases, negative margins in exchange for renewals of the
underlying ATM operating agreements. As a result, gross margins
associated with our ATM product sales and other activities were
negatively impacted during 2007 and the early part of 2008.
However, we expect such margins to improve slightly during the
remainder of 2008 now that the Triple-DES compliance upgrade
process has been completed.
Selling,
General, and Administrative Expenses
|
Three Months Ended |
||||||||||||
| March 31, | ||||||||||||
| 2007 | 2008 | % Change | ||||||||||
| (in thousands) | ||||||||||||
|
Selling, general, and administrative expenses
|
$ | 6,238 | $ | 8,350 | 33.9 | % | ||||||
|
Stock-based compensation
|
206 | 201 | (2.4 | )% | ||||||||
|
Total selling, general, and administrative expenses
|
$ | 6,444 | $ | 8,551 | 32.7 | % | ||||||
|
Percentage of total revenues:
|
||||||||||||
|
Selling, general, and administrative expenses
|
8.4 | % | 6.9 | % | ||||||||
|
Stock-based compensation
|
0.3 | % | 0.2 | % | ||||||||
|
Total selling, general, and administrative expenses
|
8.6 | % | 7.1 | % | ||||||||
Selling, general, and administrative expenses
(“SG&A expenses”), excluding stock-based
compensation. For the three months ended
March 31, 2008, SG&A expenses, excluding stock-based
compensation, increased $2.1 million over the same period
in 2007. This increase was attributable to our United States
operations, which experienced an increase of $2.2 million,
or 44.2%, in the first quarter of 2008 when compared to the same
period in 2007, including a $1.2 million increase in
employee-related costs, primarily on the sales and marketing
side of our business and the employees assumed in connection
with the 7-Eleven ATM Transaction, and a $0.4 million
increase in professional fees, primarily as a result of our
ongoing compliance efforts with the Sarbanes-Oxley Act of 2002
(“Sarbanes-Oxley”).
While our SG&A expenses are expected to continue to
increase on an absolute basis as a result of our future growth
initiatives, we expect that such costs will remain relatively
consistent, as a percentage of total revenues, with the levels
seen during the first quarter of 2008.
Depreciation
and Accretion Expense
| Three Months Ended March 31, | ||||||||||||
| 2007 | 2008 | % Change | ||||||||||
| (in thousands) | ||||||||||||
|
Depreciation expense
|
$ | 6,172 | $ | 8,687 | 40.7 | % | ||||||
|
Accretion expense
|
226 | 395 | 74.8 | % | ||||||||
|
Depreciation and accretion expense
|
$ | 6,398 | $ | 9,082 | 42.0 | % | ||||||
|
Percentage of total revenues:
|
||||||||||||
|
Depreciation expense
|
8.3 | % | 7.2 | % | ||||||||
|
Accretion expense
|
0.3 | % | 0.3 | % | ||||||||
|
Total depreciation and accretion expense
|
8.6 | % | 7.5 | % | ||||||||
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Depreciation expense. For the three months
ended March 31, 2008, depreciation expense increased by
$2.5 million over the same period in 2007. This increase
was primarily attributable to the 7-Eleven ATM Transaction,
which resulted in an additional $1.6 million of
depreciation related to the acquired ATMs, Vcom terminals, and
other assets. Included within the $1.6 million is the
amortization of assets associated with the capital leases
assumed in the acquisition. Also contributing to the
year-over-year increase was our United Kingdom and Mexico
operations, which recognized additional depreciation of
$1.3 million and $0.3 million, respectively, during
the first quarter of 2008 due to the deployment of additional
ATMs under Company-owned arrangements. Partially offsetting
these increases was lower depreciation related to the ATMs
associated with our pre-existing domestic operations, as we
recognized $1.6 million in accelerated depreciation expense
during the first quarter of 2007 related to certain ATMs that
were to be deinstalled early as a result of contract
terminations and our Triple-DES security compliance efforts.
Accretion expense. We account for our asset
retirement obligations in accordance with Statement of Financial
Accounting Standard (“SFAS”) No. 143,
Accounting for Asset Retirement Obligations, which
requires that we estimate the fair value of future retirement
obligations associated with our ATMs, including the anticipated
costs to deinstall, and in some cases refurbish, certain
merchant locations. Accretion expense represents the increase of
this liability from the original discounted net present value to
the amount we ultimately expect to incur. Accretion expense for
the three months ended March 31, 2008 increased over the
same period in 2007 due to the increase in the number of
machines deployed under Company-owned arrangements.
In the future, we expect that our depreciation and accretion
expense will continue to grow in proportion to the increase in
the number of ATMs we own and deploy throughout our
Company-owned portfolio.
Amortization
Expense
| Three Months Ended March 31, | ||||||||||||
| 2007 | 2008 | % Change | ||||||||||
| (in thousands) | ||||||||||||
|
Amortization expense
|
$ | 2,486 | $ | 4,503 | 81.1 | % | ||||||
|
Percentage of total revenues
|
3.3 | % | 3.7 | % | ||||||||
For the three months ended March 31, 2008, amortization
expense, which is primarily comprised of amortization of
intangible merchant and branding contracts/relationships
associated with our past acquisitions, increased by 81.1% when
compared to the same period in 2007. This increase in
amortization was the result of our acquisition of the 7-Eleven
Financial Services Business, which resulted in an additional
$2.0 million in incremental amortization expense during the
period associated with the intangible assets recorded in
connection with the acquisition.
Interest
Expense, Net
| Three Months Ended March 31, | ||||||||||||
| 2007 | 2008 | % Change | ||||||||||
| (in thousands) | ||||||||||||
|
Interest expense, net
|
$ | 5,892 | $ | 7,632 | 29.5 | % | ||||||
|
Amortization of deferred financing costs and bond discounts
|
356 | 508 | 42.7 | % | ||||||||
|
Total interest expense, net
|
$ | 6,248 | $ | 8,140 | 30.3 | % | ||||||
|
Percentage of revenues
|
8.4 | % | 6.8 | % | ||||||||
Interest expense, net. Interest expense,
excluding the amortization of deferred financing costs and bond
discounts, increased by $1.7 million during the three
months ended March 31, 2008 when compared to the same
period in 2007. The majority of the increase was due to our
issuance of $100.0 million in Series B Notes
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Table of Contents
in July 2007 to partially finance the 7-Eleven ATM Transaction.
This issuance resulted in $2.3 million of additional
interest expense during the first quarter of 2008, excluding the
amortization of the related discount and deferred financing
costs. Partially offsetting the incremental interest associated
with our Series B Notes were lower average outstanding
balances under our revolving credit facility for the first
quarter of 2008 compared to the first quarter of 2007. Also
contributing to the year-over-year decrease in interest expense
was the overall decrease in the level of floating interest rates
under our revolving credit facility.
Amortization of deferred financing costs and bond
discounts. The increase in the amortization of
deferred financing costs and bond discounts during the first
quarter of 2008 was a result of the additional financing costs
incurred in connection with the Series B Notes and
amendments made to our revolving credit facility in May 2007 to
modify the interest rate spreads on outstanding borrowings and
other pricing terms and in July 2007 as part of the 7-Eleven ATM
Transaction.
Other
Expense (Income)
|
Three Months Ended |
||||||||||||
| March 31, | ||||||||||||
| 2007 | 2008 | % Change | ||||||||||
| (in thousands) | ||||||||||||
|
Minority interest
|
$ | (112 | ) | $ | — | (100.0 | )% | |||||
|
Other expense (income)
|
(119 | ) | 1,061 | (991.6 | )% | |||||||
|
Total other expense (income)
|
$ | (231 | ) | $ | 1,061 | (559.3 | )% | |||||
|
Percentage of revenues
|
(0.3 | )% | 0.9 | % | ||||||||
Other expense for the three months ended March 31, 2008 was
primarily comprised of losses on the disposal of fixed assets
that were incurred in conjunction with the deinstallation of
ATMs during the period. For the three month period ended
March 31, 2007, the $0.2 million of other income was
primarily attributable to the sale of the equity securities
awarded to the Company in 2006 pursuant to the bankruptcy plan
of reorganization for Winn-Dixie Stores, Inc., one of the
Company’s merchant customers, which resulted in total gains
of $0.6 million, and minority interest income, which
represents the portion of Cardtronics Mexico’s losses
allocable to the minority interest shareholders. This income was
partially offset by $0.5 million in losses on the disposal
of fixed assets during the period. The $0.2 million in
other expense for the period ended March 31, 2006, was
primarily attributable to losses on the disposal of fixed assets.
Income
Tax Expense (Benefit)
|
Three Months Ended |
||||||||||||
| March 31, | ||||||||||||
| 2007 | 2008 | % Change | ||||||||||
| (in thousands) | ||||||||||||
|
Income tax expense (benefit)
|
$ | (973 | ) | $ | 565 | (158.1 | )% | |||||
|
Effective tax rate
|
22.3 | % | (14.0 | )% | ||||||||
Our income tax expense increased by $1.5 million during the
three months ended March 31, 2008 when compared to the same
period in 2007. The increase was primarily driven by the
establishment of valuation allowances of $1.2 million, net
of amounts provided for current year benefits, associated with
various domestic deferred tax assets due to uncertainties
surrounding our ability to utilize the related tax benefits in
future periods. Additionally, we do not expect to record any
additional domestic federal or state income tax benefits in our
financial statements until it is more likely than not that such
benefits will be utilized. Finally, due to the exclusion of
certain deferred tax liability amounts from our ongoing analysis
of our domestic net deferred tax asset position, we will likely
continue to record additional valuation allowances for our
domestic operations throughout the remainder of the year.
Accordingly, our overall effective tax rate will continue to be
negative until we begin to report positive pre-tax book income
on a consolidated basis.
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Table of Contents
During the three months ended March 31, 2007, the lower
effective tax rate was due to the relative mix of pre-tax income
and loss amounts in the our foreign and domestic jurisdictions
and the fact that we were not (and continue to not) recognize
any tax benefits associated with our Mexico operations.
Furthermore, we were in a taxable income position with respect
to our domestic state income taxes but in a taxable loss
position with respect to our domestic federal income taxes,
which further contributed to the lower overall effective tax
rate for the three months ended March 31, 2007.
Years
Ended December 31, 2005, 2006, and 2007
Revenues
| For the Years Ended December 31, | ||||||||||||||||||||
|
% Change |
% Change |
|||||||||||||||||||
| 2005 | 2006 | 2005 to 2006 | 2007 | 2006 to 2007 | ||||||||||||||||
| (in thousands, excluding percentages) | ||||||||||||||||||||
|
ATM operating revenues
|
$ | 258,979 | $ | 280,985 | 8.5 | % | $ | 364,071 | 29.6 | % | ||||||||||
|
Vcom operating revenues
|
— | — | — | 1,251 | — | |||||||||||||||
|
ATM product sales and other revenues
|
9,986 | 12,620 | 26.4 | % | 12,976 | 2.8 | % | |||||||||||||
|
Total revenues
|
$ | 268,965 | $ | 293,605 | 9.2 | % | $ | 378,298 | 28.8 | % | ||||||||||
ATM operating revenues. ATM operating revenues
generated during the years ended December 31, 2007 and 2006
increased $83.1 million and $22.0 million,
respectively, over the immediately preceding year. Below is a
detail, by segment, of changes in the various components of ATM
operating revenues for the periods indicated:
| 2005 to 2006 Variance | 2006 to 2007 Variance | |||||||||||||||||||||||||||||||
| U.S. | U.K. | Mexico | Total | U.S. | U.K. | Mexico | Total | |||||||||||||||||||||||||
|
increase (decrease) |
increase (decrease) |
|||||||||||||||||||||||||||||||
| (in thousands) | (in thousands) | |||||||||||||||||||||||||||||||
|
Surcharge revenue
|
$ | (7,281 | ) | $ | 15,510 | $ | 398 | $ | 8,627 | $ | 19,813 | $ | 14,115 | $ | 1,921 | $ | 35,849 | |||||||||||||||
|
Interchange revenue
|
(2,863 | ) | 4,815 | 388 | 2,340 | 20,206 | 7,180 | 1,442 | 28,828 | |||||||||||||||||||||||
|
Branding and surcharge-free network revenue
|
9,987 | — | 6 | 9,993 | 18,579 | — | 2 | 18,581 | ||||||||||||||||||||||||
|
Other
|
986 | 60 | — | 1,046 | (176 | ) | 4 | — | (172 | ) | ||||||||||||||||||||||
|
Total increase
|
$ | 829 | $ | 20,385 | $ | 792 | $ | 22,006 | $ | 58,422 | $ | 21,299 | $ | 3,365 | $ | 83,086 | ||||||||||||||||
Year
ended December 31, 2007 compared to year ended
December 31, 2006
United States. During the year ended
December 31, 2007, our United States operations experienced
a $58.4 million, or 24.5%, increase in ATM operating
revenues over 2006. The majority of this increase was
attributable to the 7-Eleven ATM Transaction, as the acquired
7-Eleven Financial Services Business generated
$35.5 million, $22.7 million, and $6.9 million in
incremental surcharge, interchange, and bank branding and
surcharge-free network fees, respectively, in the five and a
half months during which we owned these operations. Also
contributing to the increase in ATM operating revenues were the
branding activities of our pre-existing domestic operations,
which generated $11.7 million in incremental bank branding
and surcharge-free network fees in 2007 when compared to 2006.
These incremental revenues were a result of additional branding
and surcharge-free network agreements entered into with
financial institutions during 2006 and 2007.
The overall increase in ATM operating revenues from the acquired
7-Eleven Financial Services Business and our pre-existing
domestic branding and surcharge-free network operations were
partially offset by lower surcharge and interchange revenues
associated with our pre-existing domestic operations. During
2007, surcharge and interchange revenues from our merchant-owned
base declined $11.6 million and $2.5 million,
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respectively, compared to 2006, primarily as a result of the
decline in the average number of transacting merchant-owned ATMs
in the United States, as discussed in “— Recent
Events — Merchant-owned Account Attrition” above.
Additionally, surcharge revenues from our Company-owned base
declined by $4.1 million during 2007, primarily as a result
of a shift in revenues from surcharge-based fees to
surcharge-free branding and network fees due to the additional
branding and surcharge-free network arrangements entered into
with financial institutions during 2006 and 2007.
United Kingdom. Our United Kingdom operations
also contributed to the higher ATM operating revenues for 2007,
as the surcharge and interchange revenues earned in this segment
during 2007 increased by 39.7% and 112.1%, respectively, over
2006. These incremental revenues were primarily driven by the
increase in the average number of transacting ATMs in the United
Kingdom, which increased from 1,194 ATMs in 2006 to 1,718 ATMs
in 2007, due to additional ATM deployments. However, such
incremental revenues were slightly lower than originally
anticipated due to certain third-party service-related issues
experienced by our United Kingdom operations during the fourth
quarter of 2007. Such issues, which were caused by the merger of
two of our third-party service providers, resulted in a higher
percentage of downtime experienced by our ATMs in this market
during the fourth quarter of 2007. Although we expect such
service-related issues to be resolved during 2008, it is likely
that such issues will continue to negatively impact the
operating results of our United Kingdom operations in the
near-term. Despite this fact, we expect to continue to see an
increase in transaction-based revenues from our United Kingdom
operations as transaction levels at recently-deployed ATMs
continue to mature and reach consistent monthly transaction
levels. Finally, foreign currency exchange rates also favorably
impacted the revenues from our United Kingdom operations. Of the
$21.3 million increase in ATM operating revenues,
$5.0 million resulted from favorable exchange rate
movements in 2007 when compared to 2006.
Mexico. Our Mexico operations further
contributed to the increase in ATM operating revenues as a
result of the increase in the average number of transacting ATMs
associated with these operations, which rose from 303 during
2006 to 784 during 2007.
Year
ended December 31, 2006 compared to year ended
December 31, 2005
United States. During the year ended
December 31, 2006, our United States operations experienced
a $0.8 million increase in ATM operating revenues over
2005. This increase was the result of the branding activities of
our pre-existing domestic operations, which generated
$10.0 million in incremental bank branding and
surcharge-free network revenues in 2006 when compared to 2005.
These incremental branding revenues were a result of additional
agreements entered into with financial institutions during 2006.
Also contributing to the increase in ATM operating revenues were
higher surcharge and interchange revenues from our pre-existing
domestic Company-owned operations, which increased
$2.3 million and $1.4 million, respectively, during
2006. The increased revenues from our bank branding,
surcharge-free networks, and Company-owned ATM base were offset
by lower surcharge and interchange revenues associated with our
pre-existing domestic merchant-owned operations. During 2006,
surcharge and interchange revenues from our merchant-owned base
declined roughly $9.6 million and $4.3 million,
respectively, compared to 2005, primarily as a result of the
decline in the average number of transacting ATMs, as previously
discussed.
United Kingdom. During 2006, our United
Kingdom operations contributed $20.4 million in incremental
revenues over 2005, primarily due to the fact that the results
for 2005 only reflected eight months’ worth of operating
results from the acquired Bank Machine, Ltd. (“Bank
Machine”) operations. Also contributing to the higher
revenues was the increase in the average number of transacting
ATMs, which grew from 1,039 ATMs in 2005 to 1,194 ATMs in 2006.
Foreign currency exchange rates also favorably impacted the
revenues from our Bank Machine operations during 2006. Of the
$20.4 million increase in ATM operating revenues,
$1.6 million resulted from favorable exchange rate
movements in 2006 when compared to 2005.
Mexico. During 2006, our Mexico operations
contributed $0.8 million in incremental revenues as a
result of our acquisition of a 51% interest in Cardtronics
Mexico in February 2006.
Vcom operating revenues. We acquired our Vcom
operations as a part of the 7-Eleven ATM Transaction in July
2007. The Vcom operating revenues generated during 2007 were
primarily comprised of check cashing fees and certain placement
fee revenues associated with agreements 7-Eleven had previously
entered into with Vcom
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Table of Contents
Services providers. Although the revenues generated by our Vcom
operations during 2007 were nominal, we expect that revenues
from these operations will increase significantly as we continue
with our efforts to restructure these operations. We are
currently in the middle of a relocation project to concentrate
our Vcom terminals in 13 selected markets within the
U.S. Such concentrations will allow us to advertise the
availability of the advanced-functionality services to consumers
within those markets to increase awareness, which we expect will
result in an increased number of advanced-functionality
transactions being conducted on those machines.
ATM product sales and other revenues. ATM
product sales and other revenues for the year ended
December 31, 2007 were slightly higher than those generated
during 2006 due to higher VAR program sales. During 2006, ATM
product sales and other revenues were significantly higher (on a
percentage basis) than those generated during 2005 due to higher
service call income resulting from Triple-DES security upgrades
performed in the United States, higher year-over-year equipment
and VAR program sales, and higher non-transaction based fees
associated with our domestic network branding program.
Cost of
Revenues
| For the Years Ended December 31, | ||||||||||||||||||||
|
% Change |
% Change |
|||||||||||||||||||
| 2005 | 2006 | 2005 to 2006 | 2007 | 2006 to 2007 | ||||||||||||||||
| (in thousands, excluding percentages) | ||||||||||||||||||||
|
Cost of ATM operating revenues (exclusive of depreciation,
accretion, and amortization)
|
$ | 199,767 | $ | 209,850 | 5.0 | % | $ | 275,286 | 31.2 | % | ||||||||||
|
Cost of Vcom operating revenues
|
— | — | — | 6,065 | — | |||||||||||||||
|
Cost of ATM product sales and other revenues
|
9,681 | 11,443 | 18.2 | % | 11,942 | 4.4 | % | |||||||||||||
|
Total cost of revenues (exclusive of depreciation, accretion,
and amortization)
|
$ | 209,448 | $ | 221,293 | 5.7 | % | $ | 293,293 | 32.5 | % | ||||||||||
Cost of ATM operating revenues (exclusive of depreciation,
accretion, and amortization). The cost of ATM
operating revenues (exclusive of depreciation, accretion, and
amortization) incurred during the years ended December 31,
2007 and 2006 increased $65.4 million and
$10.1 million, respectively, over the immediately preceding
year. Below is a detail, by segment, of changes in the various
components of the cost of ATM operating revenues (exclusive of
depreciation, accretion, and amortization) for the periods
indicated:
| 2005 to 2006 Variance | 2006 to 2007 Variance | |||||||||||||||||||||||||||||||
| U.S. | U.K. | Mexico | Total | U.S. | U.K. | Mexico | Total | |||||||||||||||||||||||||
|
increase (decrease) |
increase (decrease) |
|||||||||||||||||||||||||||||||
| (in thousands) | (in thousands) | |||||||||||||||||||||||||||||||
|
Cost of cash
|
$ | 1,582 | $ | 2,172 | $ | 88 | $ | 3,842 | $ | 17,582 | $ | 6,734 | $ | 826 | $ | 25,142 | ||||||||||||||||
|
Merchant commissions
|
(6,185 | ) | 7,194 | 52 | 1,061 | 12,167 | 6,112 | 1,036 | 19,315 | |||||||||||||||||||||||
|
Repairs and maintenance
|
(638 | ) | 199 | 46 | (393 | ) | 6,702 | 413 | 450 | 7,565 | ||||||||||||||||||||||
|
Direct operations
|
1,343 | 2,430 | 177 | 3,950 | 2,946 | 2,088 | 106 | 5,140 | ||||||||||||||||||||||||
|
Communications
|
1,094 | (276 | ) | 1 | 819 | 3,051 | 935 | 108 | 4,094 | |||||||||||||||||||||||
|
In-house processing conversion
|
— | — | — | — | 2,419 | — | — | 2,419 | ||||||||||||||||||||||||
|
Processing fees
|
(791 | ) | 1,021 | 192 | 422 | 195 | 1,183 | 332 | 1,710 | |||||||||||||||||||||||
|
Other
|
170 | 210 | 2 | 382 | (302 | ) | 303 | 50 | 51 | |||||||||||||||||||||||
|
Total increase (decrease)
|
$ | (3,425 | ) | $ | 12,950 | $ | 558 | $ | 10,083 | $ | 44,760 | $ | 17,768 | $ | 2,908 | $ | 65,436 | |||||||||||||||
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Year
ended December 31, 2007 compared to year ended
December 31, 2006
United States. During 2007, the cost of ATM
operating revenues (exclusive of depreciation, accretion, and
amortization) incurred by our United States operations increased
$44.8 million over the cost incurred during 2006. This
increase was primarily the result of the 7-Eleven ATM
Transaction, as the acquired 7-Eleven Financial Services
Business incurred $47.3 million of incremental expenses in
the five and a half months during which we owned these
operations during 2007, including $24.0 million of merchant
fees, $12.6 million in costs of cash, $5.4 million of
repairs and maintenance costs, $2.2 million in
communication costs, $1.6 million of processing fees, and
$0.6 million in additional employee-related costs directly
allocable to these operations. The $47.3 million of
incremental expenses generated by the ATM operations of the
acquired 7-Eleven Financial Services Business is net of
$3.7 million of amortization expense related to the
liabilities recorded to value certain unfavorable operating
leases and an operating contract assumed as a part of the
7-Eleven ATM Transaction. For additional details related to these liabilities, see Note 2 to our unaudited interim consolidated financial statements included elsewhere within this prospectus.
7-Eleven ATM Transaction. For additional details related to these liabilities, see Note 2 to our unaudited interim consolidated financial statements included elsewhere within this prospectus.
Also contributing to the increase were our pre-existing United
States operations, which experienced (i) $5.0 million
of higher vault cash costs when compared to the same period in
2006 as a result of the higher average per-transaction cash
withdrawal amounts and higher overall vault cash balances in our
bank-branded ATMs, (ii) $2.4 million in incremental
costs associated with our efforts to convert our ATMs to our
in-house transaction processing platform, and
(iii) $2.3 million of additional employee-related
costs directly allocable to our pre-existing domestic operations
as a result of our decision to hire additional personnel to
focus on our initiatives. Partially offsetting these increases
in costs were lower merchant fees associated with our
pre-existing domestic operations, which decreased
$11.8 million when compared to the same period in 2006 due
to the year-over-year decline in the number of domestic
merchant-owned ATMs (as discussed in “— Recent
Events — Merchant-owned Account Attrition” above)
and the related surcharge revenues, and lower processing costs
as a result of our conversion to our in-house processing
platform.
United Kingdom. During the year ended
December 31, 2007, our United Kingdom operations
contributed to the increase in the cost of ATM operating
revenues with such costs increasing $17.8 million over
2006. These increases were due to higher costs of cash and
merchant payments, as well as increased communications and
processing costs, which resulted from the increased number of
ATMs operating in the United Kingdom during 2007 when compared
to the same period in 2006. We anticipate that these costs as a
percentage of revenues will decline as the transaction levels
for recently-deployed ATMs continue to mature and reach
consistent monthly recurring transaction levels. Additionally,
foreign currency exchange rates increased our cost of ATM
operating revenues from our United Kingdom operations,
accounting for approximately $3.6 million of the total
$17.8 million increase in these costs during 2007.
Mexico. Our Mexico operations further
contributed to the increase in the cost of ATM operating
revenues as a result of the increase in the average number of
transacting ATMs associated with our Mexico operations and the
increased number of transactions conducted on our machines
during 2007 compared to 2006.
Year
ended December 31, 2006 compared to year ended
December 31, 2005
United States. During the year ended
December 31, 2006, our United States segment experienced a
$3.4 million decline in the cost of ATM operating revenues
compared to 2005. This reduction in costs was primarily due to
the $9.3 million decline in merchant fees attributable to
our merchant-owned base, which was a result of the reduction in
the number of average transacting merchant-owned ATMs in our
portfolio and consistent with the decline in surcharge revenues.
Partially offsetting this decline was a $3.1 million
increase in merchant fees attributable to our Company-owned
base, which was a result of the increase in the number of
Company-owned ATMs and consistent with the increase in surcharge
revenues.
United Kingdom. During 2006, our Bank Machine
operations experienced a $13.0 million increase in the cost
of ATM operating revenues compared to 2005. Such increase was
partially attributable to the fact that our 2005 results only
reflected eight months’ worth of operating results from the
acquired Bank Machine operations. Also contributing to the
increase was the higher average number of transacting ATMs in
2006,
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which increased from 1,039 ATMs in 2005 to 1,194 ATMs in 2006,
and resulted in higher merchant payments and an increased cost
of cash. Foreign currency exchange rates also impacted the
expenses incurred by our Bank Machine operations during 2006. Of
the $13.0 million increase in cost of ATM operating
revenues during 2006, $1.0 million resulted from higher
exchange rates during 2006 compared to 2005.
Mexico. During 2006, we incurred
$0.6 million in incremental cost of ATM operating revenues
as a result of our acquisition of a 51% interest in Cardtronics
Mexico in February 2006.
Cost of Vcom operating revenues. The cost of
Vcom operating revenues incurred during 2007 was primarily
related to maintenance costs and the cost of cash related to the
Vcom Services provided by our advanced-functionality operations.
We also incurred approximately $1.4 million in direct
marketing expenses during 2007 associated with certain
promotional efforts to increase awareness of the Vcom Services,
which negatively impacted our 2007 results. Although we will
continue to incur direct marketing expenses during 2008
associated with our promotional efforts, we anticipate that the
total costs associated with the provision of the Vcom Services
will decrease in 2008, as we completed most of our cost
reduction efforts during the latter part of 2007. Such cost
reductions are due to a combination of contract renegotiations
and bringing a number of previously-outsourced functions
in-house, which we estimate will produce over $6.0 million
in annual cost savings.
Cost of ATM product sales and other
revenue. The cost of ATM product sales and other
revenues increased by 4.4% during 2007. This increase was
primarily due to higher year-over-year costs associated with
equipment sold under our VAR program with NCR, but was partially
offset by lower costs associated with ATM sales that resulted
from a decline in equipment sales to independent merchants in
2007 as compared to 2006. During 2006, cost of ATM product sales
and other revenues were significantly higher (on a percentage
basis) than those generated for the year ended December 31,
2005 due to higher service call levels associated with
Triple-DES security upgrades performed in the United States,
higher year-over-year equipment and VAR program sales, and
higher non-transaction based fees associated with our domestic
network branding program.
Gross
Profit Margin
| For the Years Ended December 31, | ||||||||||||
| 2005 | 2006 | 2007 | ||||||||||
|
ATM operating gross profit margin:
|
||||||||||||
|
Exclusive of depreciation, accretion, and amortization
|
22.9 | % | 25.3 | % | 24.4 | % | ||||||
|
Inclusive of depreciation, accretion, and amortization
|
14.9 | % | 14.9 | % | 12.5 | % | ||||||
|
Vcom operating gross profit margin
|
— | — | (384.8 | )% | ||||||||
|
ATM product sales and other revenues gross profit margin
|
3.1 | % | 9.3 | % | 8.0 | % | ||||||
|
Total gross profit margin:
|
||||||||||||
|
Exclusive of depreciation, accretion, and amortization
|
22.1 | % | 24.6 | % | 22.5 | % | ||||||
|
Inclusive of depreciation, accretion, and amortization
|
14.5 | % | 14.7 | % | 11.1 | % | ||||||
ATM
operating gross profit margin
ATM operating gross profit margin (exclusive of depreciation,
accretion, and amortization). For the year ended
December 31, 2007, ATM operating gross profit margin
(exclusive of depreciation, accretion, and amortization)
decreased 0.9% when compared to 2006. Such decline was primarily
due to the $2.4 million in additional costs incurred in
2007 associated with our efforts to transition our domestic ATMs
onto our in-house transaction processing platform. While these
costs are not expected to continue subsequent to the completion
of our conversion efforts, we anticipate that our gross margin
(exclusive of depreciation, accretion, and amortization) will
continue to be negatively impacted by these costs during 2008 as
we convert the remainder of our Company-owned and merchant-owned
ATMs to our processing platform. Our ATM operating gross profit
margins (exclusive of depreciation, accretion, and amortization)
were further impacted by
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Table of Contents
$0.5 million in inventory reserves related to our
Triple-DES upgrade efforts. As we have substantially completed
our Triple-DES upgrade efforts, we do not anticipate that we
will incur similar costs in 2008. Additionally, our 2007 ATM
operating gross profit margins (exclusive of depreciation,
accretion, and amortization) were negatively impacted by the
significant number of ATM deployments that occurred in our
United Kingdom operations during the latter half of 2007, as
many of those ATMs were still in the process of achieving
consistent recurring monthly transaction levels during 2007.
Furthermore, during the fourth quarter of 2007, our ATM
operating gross profit margins were negatively impacted by a
higher percentage of downtime experienced by our ATMs in the
United Kingdom as a result of certain third-party
service-related issues. While we expect such service-related
issues to be resolved during the 2008, it is likely that such
issues will continue to negatively impact the operating results
of our United Kingdom operations in the near-term.
During 2006, ATM operating gross profit margin (exclusive of
depreciation, accretion, and amortization) increased 2.4%
compared to the gross margin earned in 2005. Such increase was
primarily due to a greater percentage of our gross profit being
generated by our United Kingdom operations, which typically earn
higher overall ATM operating margins than our United States ATM
operations. Additionally, our 2006 results reflect a full
year’s worth of operating results from our United Kingdom
operations compared to only eight months of operating results
reflected in 2005. Furthermore, the year-over-year increase in
branding and surcharge-free network revenues in the United
States also contributed to the higher gross margin figure in
2006.
ATM operating gross profit margin (inclusive of depreciation,
accretion, and amortization). During 2007, ATM
operating gross profit margin (inclusive of depreciation,
accretion, and amortization) decreased 2.4% compared to 2006.
Such decline was the result of transition costs associated with
our in-house processing operations, inventory reserves related
to our Triple-DES upgrade efforts, and the temporary decline in
margins associated with our United Kingdom operations, each of
which are discussed in further detail above. Also contributing
to the declines in gross margins (inclusive of depreciation,
accretion, and amortization) were (i) the higher
depreciation and accretion expense associated with recent ATM
deployments, primarily in the United Kingdom and Mexico, which
have yet to achieve the higher consistent recurring transaction
levels seen in our more mature ATMs, (ii) the incremental
depreciation, accretion, and amortization expense recorded as a
result of our July 2007 acquisition of the 7-Eleven Financial
Services Business, and (iii) the incremental amortization
expense related to certain intangible asset impairments recorded
in 2007. See — Depreciation and Accretion Expense
and — Amortization Expense below for
additional discussions of the increases in depreciation and
accretion expense and amortization expense, respectively.
ATM product sales and other revenues gross profit
margin. For the year ended December 31,
2007, our ATM product sales and other revenues gross profit
margin decreased 1.3%, primarily as a result of our Triple-DES
upgrade efforts. Because all ATMs operating on the EFT networks
were required to be Triple-DES compliant by the end of 2007, we
have seen an increase in the number of ATM sales associated with
the Triple-DES upgrade process. However, in certain
circumstances, we have sold the machines at little or, in some
cases, negative margins in exchange for renewals of the
underlying ATM operating agreements. As a result, gross margins
associated with our ATM product sales and other activities were
negatively impacted during 2007. However, we anticipate that
such margins will improve in 2008 now that the Triple-DES
compliance upgrade process is substantially completed.
For the year ended December 31, 2006, our ATM product sales
and other gross margins were higher than for the year ended
December 31, 2005 due to certain non-transaction based
services that are now being provided as part of our network
branding operations as well as higher equipment and VAR program
sales.
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Table of Contents
Selling,
General, and Administrative Expenses
| For The Years Ended December 31, | ||||||||||||||||||||
|
% Change |
% Change |
|||||||||||||||||||
| 2005 | 2006 | 2005 to 2006 | 2007 | 2006 to 2007 | ||||||||||||||||
| (in thousands, excluding percentages) | ||||||||||||||||||||
|
Selling, general, and administrative expenses, excluding
stock-based compensation
|
$ | 15,664 | $ | 20,839 | 33.0 | % | $ | 28,394 | 36.3 | % | ||||||||||
|
Stock-based compensation expense
|
2,201 | 828 | (62.4 | )% | 963 | 16.3 | % | |||||||||||||
|
Total selling, general, and administrative expenses
|
$ | 17,865 | $ | 21,667 | 21.3 | % | $ | 29,357 | 35.5 | % | ||||||||||
|
Percentage of revenues:
|
||||||||||||||||||||
|
Selling, general, and administrative expenses, excluding
stock-based compensation
|
5.8 | % | 7.1 | % | 7.5 | % | ||||||||||||||
|
Stock-based compensation expense
|
0.8 | % | 0.3 | % | 0.3 | % | ||||||||||||||
|
Total selling, general, and administrative expenses
|
6.6 | % | 7.4 | % | 7.8 | % | ||||||||||||||
Selling, general, and administrative expenses
(“SG&A expenses”), excluding stock-based
compensation. For the year ended
December 31, 2007, SG&A expenses, excluding
stock-based compensation, increased $7.6 million over 2006.
This increase was primarily attributable to our United States
operations, which experienced an increase of $5.6 million,
or 33.0%, in 2007 when compared to the same period in 2006,
primarily as a result of (i) a $3.0 million increase
in employee-related costs, primarily on the sales and marketing
side of our business and the employees assumed in connection
with the 7-Eleven ATM Transaction, (ii) a $1.4 million
increase in professional fees associated with our Sarbanes-Oxley
compliance efforts, and (iii) $0.7 million in
increased legal costs associated with our National Federation of
the Blind and CGI, Inc. litigation settlements. Additionally,
our United Kingdom and Mexico operations had higher SG&A
expenses during 2007, primarily due to additional
employee-related costs to support growth of these segments’
operations and, in the case of our United Kingdom operations,
changes in foreign currency exchange rates, which contributed
approximately $0.4 million of this segment’s total
$1.3 million increase in SG&A expense, excluding
stock-based compensation, over 2006.
During 2006, our SG&A expenses, excluding stock-based
compensation, increased by 33.0% when compared to 2005. Such
increase was attributable to higher costs associated with our
United States operations, which increased $3.7 million, or
27.6%, primarily due to higher employee-related costs as well as
higher accounting, legal, and professional fees resulting from
our past growth. In the United Kingdom, our SG&A expenses
increased $0.9 million when compared to the prior year due
to the fact that the 2005 results included only eight months of
operating results from Bank Machine. However, such increases
were somewhat offset by certain cost savings measures that were
implemented subsequent to the May 2005 acquisition date.
Finally, our Mexico operations, which were acquired in February
2006, contributed approximately $0.6 million to the
year-over-year variance.
While our SG&A expenses are expected to continue to
increase on an absolute basis as a result of our future growth
initiatives and our acquisition of the 7-Eleven Financial
Services Business, we expect that such costs will begin to
decrease as a percentage of our total revenues.
Stock-based compensation. Stock-based
compensation expense for the year ended December 31, 2007
was slightly higher than for the year ended December 31,
2006 as a result of the additional option awards that were
granted during 2007. Stock-based compensation for 2006 decreased
by 62.4% when compared to 2005, primarily due to an additional
$1.7 million in stock-based compensation recognized during
2005 related to the
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Table of Contents
repurchase of shares underlying certain employee stock options
in connection with our Series B redeemable convertible
preferred stock financing transaction. Additionally, during the
year ended December 31, 2006, we adopted
SFAS No. 123R, which requires us to record the grant
date fair value of stock-based compensation arrangements as
compensation expense on a straight-line basis over the
underlying service period of the related award.
Depreciation
and Accretion Expense
| For The Years Ended December 31, | ||||||||||||||||||||
|
% Change |
% Change |
|||||||||||||||||||
| 2005 | 2006 | 2005 to 2006 | 2007 | 2006 to 2007 | ||||||||||||||||
| (in thousands, excluding percentages) | ||||||||||||||||||||
|
Depreciation expense
|
$ | 11,949 | $ | 18,323 | 53.3 | % | $ | 25,737 | 40.5 | % | ||||||||||
|
Accretion expense
|
1,002 | 272 | (72.9 | )% | 1,122 | 312.5 | % | |||||||||||||
|
Depreciation and accretion expense
|
$ | 12,951 | $ | 18,595 | 43.6 | % | $ | 26,859 | 44.4 | % | ||||||||||
|
Percentage of Revenues:
|
||||||||||||||||||||
|
Depreciation expense
|
4.4 | % | 6.2 | % | 6.8 | % | ||||||||||||||
|
Accretion expense
|
0.4 | % | 0.1 | % | 0.3 | % | ||||||||||||||
|
Total depreciation and accretion expense
|
4.8 | % | 6.3 | % | 7.1 | % | ||||||||||||||
Depreciation expense. For the year ended
December 31, 2007, depreciation expense increased by 40.5%
over 2006. This increase was primarily attributable to our
United States operations, which recognized an additional
$4.1 million of depreciation during 2007, $2.8 million
of which related to the ATMs, Vcom terminals, and other assets
acquired in the 7-Eleven ATM Transaction. Included within the
$2.8 million is the amortization of assets associated with
the capital leases assumed in the 7-Eleven ATM Transaction. Also
contributing to the year-over-year increase was our United
Kingdom and Mexico operations, which recognized additional
depreciation of $2.9 million and $0.4 million,
respectively, during 2007 due to the deployment of additional
ATMs under Company-owned arrangements.
The 53.3% increase in depreciation in 2006 was primarily
comprised of $4.1 million of incremental depreciation
related to our United States operations and $2.3 million of
incremental depreciation related to our United Kingdom
operations. The increase in the United States was primarily due
to the deployment of additional ATMs under Company-owned
arrangements during the latter part of 2005 and throughout 2006,
the majority of which were associated with our bank branding
efforts. Additionally, the results for our U.S. operations
reflected the acceleration of depreciation for certain ATMs that
were deinstalled early as a result of contract terminations and
certain ATMs that were expected to be replaced sooner than
originally anticipated as part of our Triple-DES security
upgrade process. The year-over-year increase in the United
Kingdom was driven by the 300 additional ATM deployments and the
fact that the 2005 results only reflect eight months’ worth
of results from the acquired Bank Machine operations.
Accretion expense. We account for our asset
retirement obligations in accordance with
SFAS No. 143, Accounting for Asset Retirement
Obligations, which requires that we estimate the fair value
of future retirement obligations associated with our ATMs,
including the anticipated costs to deinstall, and in some cases
refurbish, certain merchant locations. Accretion expense
represents the increase of this liability from the original
discounted net present value to the amount we ultimately expect
to incur.
The $0.9 million increase in accretion expense in 2007 when
compared to 2006 and the $0.7 million decrease in accretion
expense in 2006 when compared to 2005 was primarily the result
of $0.5 million of excess accretion expense that was
erroneously recorded in 2005. This amount was subsequently
reversed in 2006, at which time we determined that the impact of
recording the $0.5 million out-of-period adjustment in 2006
(as opposed to reducing the reported 2005 accretion expense
amount) was immaterial to both reporting periods pursuant to the
provisions contained in SEC Staff Accounting Bulletin
(“SAB”) No. 99, Materiality, and
SAB No. 108, Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in
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Table of Contents
Current Year Financial Statements. In forming this
opinion, we considered the nature of the adjustment (non-cash
versus cash) and the relative size of the adjustment to certain
financial statement line items, including revenues, gross
profits, and pre-tax income (or loss) amounts for each period,
including the interim periods contained within both years.
Furthermore, we considered the impact of recording this
adjustment in 2006 on our previously reported earnings and
losses for such periods and concluded that such adjustment did
not impact the trend of our previously reported earnings and
losses.
Excluding the $0.5 million adjustment (discussed above),
the increase in accretion expense in 2007 when compared to 2006
was the result of the 5,500 ATMs and Vcom terminals acquired in
the 7-Eleven ATM Transaction and the deployment of approximately
1,800 additional ATMs by our United Kingdom and Mexico
operations during 2007. Additionally, excluding the
$0.5 million adjustment, accretion expense in 2006
increased when compared to 2005, which primarily resulted from
the 300 additional ATMs deployed in the United Kingdom during
2006.
In the future, we expect that our depreciation and accretion
expense will grow to reflect the increase in the number of ATMs
we own and deploy throughout our Company-owned portfolio. To
that end, our depreciation and accretion expense amount is
expected to increase substantially as a result of the recently
completed 7-Eleven ATM Transaction.
Amortization
Expense
| For the Years Ended December 31, | ||||||||||||||||||||
|
% Change |
% Change |
|||||||||||||||||||
| 2005 | 2006 | 2005 to 2006 | 2007 | 2006 to 2007 | ||||||||||||||||
| (in thousands, excluding percentages) | ||||||||||||||||||||
|
Amortization expense
|
$ | 8,980 | $ | 11,983 | 33.4 | % | $ | 18,870 | 57.5 | % | ||||||||||
|
Percentage of revenues
|
3.3 | % | 4.1 | % | 5.0 | % | ||||||||||||||
Amortization expense is primarily comprised of the amortization
of intangible merchant contracts and relationships associated
with our past acquisitions. During the year ended
December 31, 2007, amortization expense increased by
$6.9 million when compared to the same period in 2006,
primarily due to $5.7 million of impairment charges
recorded during 2007, of which $5.1 million related to the
unamortized intangible asset value associated with our merchant
contract with Target that we acquired in 2004. We had been in
discussions with Target regarding additional services that could
be offered under the existing contract to increase the number of
transactions conducted on, and cash flows generated by, the
underlying ATMs. However, we were unable to make any meaningful
progress in this regard during the first nine months of 2007,
and, based on discussions that had been held with Target,
concluded that the likelihood of being able to provide such
additional services had decreased considerably. Furthermore,
average monthly transaction volumes associated with this
particular contract continued to decrease in 2007. Accordingly,
we concluded that the impairment charge was warranted during the
third quarter of 2007. The impairment charge recorded served to
write-off the remaining unamortized intangible asset associated
with this merchant contract. Despite the above, we are
continuing to work with Target to restructure the terms of the
existing contract in an effort to improve the underlying cash
flows associated with such contract and to offer the additional
services noted above, which we believe could significantly
increase the future cash flows earned under this contract.
Our acquisition of the 7-Eleven Financial Services Business
further contributed to the increased amortization, as we
recognized $3.7 million in incremental amortization expense
during the 2007 associated with the intangible assets recorded
as a part of our purchase price allocation. Excluding the asset
impairments recorded in 2007 (discussed above) and 2006
(discussed below) and the incremental amortization expense
recognized as a result of the 7-Eleven ATM Transaction,
amortization expense for year ended December 31, 2007 was
relatively consistent with the amount recorded in 2006.
For the year ended December 31, 2006, amortization expense
increased by 33.4% when compared to 2005. Such increase was
primarily driven by a $2.8 million impairment charge
recorded during the first quarter of 2006 related to the BAS
Communications, Inc. (“BASC”) ATM portfolio, which
resulted from a
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reduction in anticipated future cash flows resulting primarily
from a higher than planned attrition rate associated with this
acquired portfolio. Also contributing to the increase in 2006
was the fact that the 2005 amount only reflects eight
months’ worth of amortization expense from the Bank Machine
acquisition, and only seven and five months’ worth of
amortization expense, respectively, related to the BASC and Neo
Concepts, Inc. acquisitions.
We expect that our future amortization expense will be
substantially higher than our historical amounts, as the
$78.0 million of amortizable intangible assets acquired in
the 7-Eleven ATM Transaction will be amortized over the
remaining terms of the underlying contracts at a rate of
approximately $8.1 million per year.
Interest
Expense, net
| For the Years Ended December 31, | ||||||||||||||||||||
|
% Change |
% Change |
|||||||||||||||||||
| 2005 | 2006 | 2005 to 2006 | 2007 | 2006 to 2007 | ||||||||||||||||
| (in thousands, excluding percentages) | ||||||||||||||||||||
|
Interest expense, net
|
$ | 15,485 | $ | 23,143 | 49.5 | % | $ | 29,523 | 27.6 | % | ||||||||||
|
Amortization and write-off of financing costs and bond discounts
|
6,941 | 1,929 | (72.2 | )% | 1,641 | (14.9 | )% | |||||||||||||
|
Total interest expense, net
|
$ | 22,426 | $ | 25,072 | 11.8 | % | $ | 31,164 | 24.3 | % | ||||||||||
|
Percentage of revenues
|
8.3 | % | 8.5 | % | 8.2 | % | ||||||||||||||
Interest expense, net. During 2007, interest
expense, excluding the amortization and write-off of financing
costs and bond discount, increased by $6.4 million when
compared to the same period in 2006. The majority of the
increase was due to our issuance of $100.0 million in
Series B Notes in July 2007 to partially finance the
7-Eleven ATM Transaction. This issuance resulted in
$4.1 million of additional interest expense during 2007,
excluding the amortization of the related discount and deferred
financing costs. Further contributing to the year-over-year
increases were higher average outstanding balances under our
revolving credit facility for the majority of 2007 when compared
to 2006. While our borrowings under our revolving credit
facility were only $4.0 million as of December 31,
2007, this balance reflects the reduction in our borrowings
following our initial public offering in December 2007. The
incremental borrowings under the facility throughout 2007 were
utilized to fund the remaining portion of the acquisition costs
associated with the 7-Eleven ATM Transaction as well as to fund
certain working capital needs. Also contributing to the
year-over-year increase in interest expense was the overall
increase in the level of floating interest rates paid under our
revolving credit facility.
For the year ended December 31, 2006, interest expense,
excluding the amortization and write-off of financing costs and
bond discount, increased by $7.7 million when compared to
2005. Such increase was due to (i) the additional
borrowings made under our bank credit facilities in May 2005 to
finance the Bank Machine acquisition, and (ii) the
incremental interest expense associated with our Series A
Notes, which were issued in August 2005. Further contributing to
the increase in interest expense in 2006 was the increase in the
annual interest rate on the Series A Notes from 9.25% to
9.50% in June 2006, and from 9.50% to 9.75% in September 2006,
before reverting back to the stated rate of 9.25% in October
2006 upon the successful completion of our exchange offer.
Finally, the increase in interest expense for 2006 was also
impacted by an overall increase in the floating interest rates
paid under our revolving credit facility.
Amortization and write-off of financing costs and bond
discounts. During 2007 and 2006, expenses related
to the amortization and write-off of financing costs and bond
discounts decreased $0.3 million and $5.0 million,
respectively, when compared to the expense amounts recorded in
the immediately preceding year. Such decreases were the result
of approximately $0.5 million and $5.0 million of
deferred financing costs that were written off in 2006 and 2005,
respectively, as a result of amendments made to our bank credit
facility in February 2006 and May 2005, as well as the repayment
of our term loans in August 2005. Excluding the
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write-off taken in 2006, the amortization of financing costs and
bond discounts during 2007 increased slightly as a result of the
additional financing costs incurred in connection with the
Series B Notes and amendments made to our revolving credit
facility in July 2007 as part of the 7-Eleven ATM Transaction.
In May 2007, we amended our revolving credit facility to, among
other things, provide for a reduced spread on the interest rate
charged on amounts outstanding under the facility and to
increase the amount of capital expenditures that we can incur on
an annual basis. Furthermore, as noted above, we utilized the
net proceeds received from our initial public offering to repay
substantially all of our borrowings that were previously
outstanding under our revolving credit facility in December
2007. Despite this repayment and the modification of the
interest spread (which will serve to reduce slightly the amount
of interest charged on amounts outstanding under the facility),
we expect that our overall interest expense amounts in 2008 will
be relatively consistent with that incurred during 2007 as a
result of the issuance of the Series B Notes, which will
result in an additional $9.3 million in interest expense on
an annual basis, in addition to the amortization of the related
discount and deferred financing costs. For additional
information on our financing facilities and anticipated capital
expenditure needs, see “— Liquidity and Capital
Resources” below.
Other
(Income) Expense
| For the Years Ended December 31, | ||||||||||||||||||||||||
|
% Change |
% Change |
|||||||||||||||||||||||
| 2005 | 2006 | 2005 to 2006 | 2007 | 2006 to 2007 | ||||||||||||||||||||
| (in thousands, excluding percentages) | ||||||||||||||||||||||||
|
Minority interest
|
$ | 15 | $ | (225 | ) | (1,600.0 | )% | $ | (376 | ) | 67.1 | % | ||||||||||||
|
Other (income) expense
|
968 | (4,761 | ) | (591.8 | )% | 1,585 | (133.3 | )% | ||||||||||||||||
|
Total other (income) expense
|
$ | 983 | $ | (4,986 | ) | (607.2 | )% | $ | 1,209 | (124.2 | )% | |||||||||||||
|
Percentage of revenues
|
0.4 | % | (1.7 | )% | 0.3 | % | ||||||||||||||||||
For the year ended December 31, 2007, total other expense
consisted primarily of $2.2 million in losses on the
disposal of fixed assets that were incurred in conjunction with
the deinstallation of ATMs during the period. These losses were
partially offset by $0.6 million in gains on the sale of
equity securities awarded to us pursuant to the bankruptcy plan
of reorganization of Winn-Dixie Stores, Inc., one of our
merchant customers.
During the year ended December 31, 2006, we recorded
approximately $4.8 million in other income, which was
primarily attributable to the recognition of $4.8 million
in other income primarily related to settlement proceeds
received from Winn-Dixie as part of that company’s
successful emergence from bankruptcy. Also contributing to the
increase in 2006 was a $1.1 million contract termination
payment that was received from one of our customers in May 2006
and a $0.5 million payment received in August 2006 from one
of our customers related to the sale of a number of its stores
to another party. The above amounts were partially offset by
$1.6 million of losses related to the disposal of a number
of ATMs.
Income
Tax Expense (Benefit)
| For the Years Ended December 31, | ||||||||||||||||||||
|
% Change |
% Change |
|||||||||||||||||||
| 2005 | 2006 | 2005 to 2006 | 2007 | 2006 to 2007 | ||||||||||||||||
| (in thousands, excluding percentages) | ||||||||||||||||||||
|
Income tax expense (benefit)
|
$ | (1,270 | ) | $ | 512 | 140.3 | % | $ | 4,636 | 805.5 | % | |||||||||
|
Effective tax rate
|
34.4 | % | (2,694.7 | )% | (20.6 | )% | ||||||||||||||
Our income tax expense increased by $4.1 million during
2007 when compared to 2006. The increase was primarily driven by
the establishment of valuation allowances of $4.8 million,
net of amounts provided for current year benefits, associated
with various domestic deferred tax assets due to uncertainties
surrounding our
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Table of Contents
ability to utilize the related tax benefits in future periods.
Additionally, we do not expect to record any additional domestic
federal or state income tax benefits in our financial statements
until it is more likely than not that such benefits will be
utilized. Finally, due to the exclusion of certain deferred tax
liability amounts from our ongoing analysis of our domestic net
deferred tax asset position, we will likely continue to record
additional valuation allowances for our domestic operations
during 2008. Accordingly, our overall effective tax rate will
continue to be negative until we begin to report positive
pre-tax book income on a consolidated basis.
In addition, the Company recorded a $0.2 million deferred
tax benefit during 2007 related to a reduction in the United
Kingdom corporate statutory income tax rate from 30% to 28%.
Such rate reduction, which will become effective in 2008, was
formally enacted in July 2007.
For the year ended December 31, 2006, we had income tax
expense of $0.5 million compared to an income tax benefit
of $1.3 million in 2005. In 2006, our effective tax rate
was unusually high due to our consolidated breakeven results,
certain non-deductible expenses, a contingent tax liability that
was recorded in 2006 related to our United Kingdom operations,
and the fact that we are providing a full valuation allowance on
all tax benefits associated with our Mexico operations.
Liquidity
and Capital Resources
Overview
As of March 31, 2008 and December 31, 2007, we had
approximately $8.9 million and $13.4 million,
respectively, in cash and cash equivalents on hand and
approximately $345.9 million and $310.7 million,
respectively, in outstanding long-term debt and capital lease
obligations.
Prior to December 2007, we had historically funded our
operations primarily through cash flows from operations,
borrowings under our credit facilities, private placements of
equity securities, and the sale of bonds. However, in December
2007, we completed our initial public offering of
12,000,000 shares of our common stock. Furthermore, we have
historically used cash to invest in additional operating ATMs,
either through the acquisition of ATM networks or through
organically generated growth. We have also used cash to fund
increases in working capital and to pay interest and principal
amounts outstanding under our borrowings. Because we typically
collect our cash on a daily basis but pay our vendors on
30 day terms and are not required to pay certain of our
merchants until 20 days after the end of each calendar
month, we are able to utilize the excess upfront cash flow to
pay down borrowings made under our revolving credit facility and
to fund our ongoing capital expenditure program. Accordingly, we
will typically reflect a working capital deficit position and
carry a small cash balance on our books.
We believe that our cash on hand and our current bank credit
facilities will be sufficient to meet our working capital
requirements and contractual commitments for the next
12 months. We expect to fund our working capital needs from
revenues generated from our operations and borrowings under our
revolving credit facility, to the extent needed.
Operating
Activities
Three
Months Ended March 31, 2007 and 2008
Net cash used in operating activities totaled $10.3 million
for the three months ended March 31, 2008 compared to net
cash provided by operating activities of $2.6 million
during the same period in 2007. The year-over-year decrease was
primarily attributable to the timing of changes in our working
capital balances. Specifically, we paid approximately
$8.9 million more of accounts payables and accrued
liabilities during the first quarter of 2008 compared to the
first quarter of 2007, including approximately $5.3 million
in additional cash interest in 2008 related to our Series B
Notes, which were issued in July 2007. Additionally, we
collected approximately $5.0 million less in accounts and
notes receivable during the three months ended March 31,
2008.
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Years
Ended December 31, 2005, 2006, and 2007
Net cash provided by operating activities was
$55.5 million, $25.4 million, and $33.2 million
for the years ended December 31, 2007, 2006, and 2005,
respectively. The increase in 2007, when compared to 2006, was
primarily attributable to the timing of changes in our working
capital balances. Specifically, we settled approximately
$32.5 million less of payables and accrued liabilities
during 2007 compared to 2006. The decrease in 2006, when
compared to 2005, was primarily attributable to the payment of
approximately $18.7 million in additional interest costs in
2006 related to our senior subordinated notes, which were issued
in August 2005, offset somewhat by the incremental operating
cash flows generated by our United Kingdom operations as well as
our domestic bank and network branding arrangements.
Investing
Activities
Three
Months Ended March 31, 2007 and 2008
Net cash used in investing activities totaled $26.1 million
for the three months ended March 31, 2008, compared to
$9.3 million for the same period in 2007. The
year-over-year increase was driven by incremental ATM purchases,
primarily in our United States and United Kingdom segments.
Additionally, during 2007, we received $4.0 million in
proceeds from the sale of our Winn-Dixie equity securities
during 2007 and $0.9 million of proceeds out of an escrow
account associated with a previous acquisition, which served to
offset our capital expenditures.
Years
Ended December 31, 2005, 2006, and 2007
Net cash used in investing activities totaled
$202.9 million, $36.0 million, and $140.0 million
for the years ended December 31, 2007, 2006, and 2005,
respectively. The year-over-year increase was primarily driven
by our acquisition of the 7-Eleven Financial Services Business
in July 2007 for $137.3 million. Also contributing to the
increase were additional ATM purchases, primarily in our United
Kingdom and Mexico segments, offset slightly by the receipt of
$4.0 million in proceeds from the sale of our
U.S. segment’s Winn-Dixie equity securities during
2007. Finally, although not reflected in our 2007 statement
of cash flows, we received the benefit of the disbursement of
approximately $5.7 million of funds under five financing
facilities entered into by our majority-owned Mexican
subsidiary, Cardtronics Mexico, for the purchase of ATMs. Such
funds are not reflected in our consolidated statement of cash
flows as they were not remitted by Cardtronics Mexico but rather
remitted by the finance company, on our behalf, directly to our
vendors.
The significant year-over-year decrease from 2005 to 2006 was
driven by the $105.8 million in cash that was expended to
fund the Bank Machine, BASC, and Neo Concepts, Inc. acquisitions
during 2005. Such cash was utilized to make capital expenditures
related to those acquisitions, to install additional ATMs in
connection with acquired merchant relationships, and to deploy
ATMs in additional locations of merchants with which we had
existing relationships.
Total capital expenditures, including exclusive license payments
and site acquisition costs and purchases of equipment to be
leased, were $71.9 million, $36.1 million, and
$31.9 million for the years ended December 31, 2007,
2006, and 2005, respectively.
Anticipated Future Capital Expenditures. We
currently anticipate that the majority of our capital
expenditures for the foreseeable future will be driven by
organic growth projects, including the purchasing of ATMs for
existing as well as new ATM management agreements, as opposed to
acquisitions. However, we will continue to pursue selected
acquisition opportunities that complement our existing ATM
network, some of which could be material, such as the 7-Eleven
ATM Transaction that we completed in July 2007. We believe that
significant expansion opportunities continue to exist in all of
our current markets, as well as in other international markets,
and we will continue to pursue those opportunities as they
arise. Such acquisition opportunities, either individually or in
the aggregate, could be material.
We currently expect that our capital expenditures for the
remaining nine months of 2008 will total approximately
$24.0 million, net of minority interest, the majority of
which will be utilized to purchase additional ATMs for our
Company-owned accounts. We expect such expenditures to be funded
with cash
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generated from our operations, supplemented by borrowings under
our revolving credit facility. To that end, we recently amended
our revolving credit facility in March 2008 to increase the
amount of capital expenditures that we can incur on a rolling
12-month
basis to $90.0 million. This modification should provide us
with the ability to incur the level of capital expenditures that
we currently deem necessary to support our ongoing operations
and future growth initiatives.
As a result of the 7-Eleven ATM Transaction, we assumed
responsibility for certain ATM operating lease contracts that
will expire at various times during the next three years, the
majority of which will expire in 2009. Accordingly, at that
time, we will be required to renew such lease contracts, enter
into new lease contracts, or purchase new or used ATMs to
replace the leased equipment. If we decide to purchase new ATMs
and terminate the existing lease contracts at that time, we
currently anticipate that we will incur between $13.0 and
$16.0 million in related capital expenditures. However, in
the event we decide to purchase the leased equipment at the end
of the lease term rather than purchasing new ATMs, our
expenditures would be substantially less than the above
estimated amounts. Additionally, we currently have
$7.2 million in letters of credit posted under our
revolving credit facility in favor of the lessors under these
leases. These letters of credit will expire at the end of the
lease terms. See Note 8 to our consolidated
financial statements for the three months ended March 31,
2008 included elsewhere in this prospectus for additional
details on these letters of credit.
Financing
Activities
Three
Months Ended March 31, 2007 and 2008
Net cash provided by financing activities totaled
$31.9 million for the three months ended March 31,
2008 compared to $5.7 million for the same period in 2007.
The higher amount in 2008 was primarily due to incremental
borrowings under our revolving credit facility to fund the
increase in capital expenditures discussed in
“— Investing Activities” above. Although the
amount outstanding under our revolving credit facility may
fluctuate over the course of the year, we currently expect that
the overall level of our senior debt, absent any acquisitions or
unanticipated changes in our working capital and capital
expenditure levels, will trend downward over the remainder of
the year.
Years
Ended December 31, 2005, 2006, and 2007
Net cash provided by financing activities was
$158.2 million, $11.2 million, and $107.2 million
for the years ended December 31, 2007, 2006, and 2005,
respectively. The increase in 2007 was primarily attributable to
our issuance of $100.0 million in senior subordinated debt
due 2013 (the Series B Notes) and $42.7 million of
additional borrowings under our revolving credit facility in
July 2007 to finance the 7-Eleven ATM Transactions.
Additionally, in December 2007, we completed our initial public
offering of 12,000,000 shares of common stock, which
generated net proceeds of approximately $110.1 million that
were used to pay down debt previously outstanding under our
revolving credit facility. Finally, although not reflected in
our 2007 statement of cash flows, we received the benefit
of the disbursement of $5.7 million of funds under five
financings facilities entered into by our Mexican operations.
The $5.7 million is not reflected in our consolidated
statement of cash flows as the funds were not received by
Cardtronics Mexico but rather were remitted directly to our
vendors by the finance company. The remittance of such funds
served to purchase ATMs.
In 2005, the majority of our cash provided by financing
activities resulted from issuances of additional long-term debt,
offset somewhat in each period by our repayments of other
long-term debt and capital leases. Such borrowings were
primarily made in connection with the previously discussed ATM
portfolio acquisitions, including the Bank Machine acquisition
in 2005. Additionally, in 2005 we issued $75.0 million
worth of Series B redeemable convertible preferred stock to
a new investor, TA Associates. The net proceeds from such
offering were utilized to redeem our existing Series A
preferred stock, including all accrued and unpaid dividends
related thereto, and to redeem approximately 24% of our
outstanding common stock and vested options.
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Financing
Facilities
As of March 31, 2008, we had approximately
$345.9 million in outstanding long-term debt and capital
lease obligations, which was comprised of
(i) $296.2 million (net of discount of
$3.8 million) of our Series A and Series B senior
subordinated notes, (ii) $39.5 million in borrowings
under our revolving credit facility,
(iii) $8.5 million in notes payable outstanding under
equipment financing lines of our Mexico subsidiary, and
(iv) $1.7 million in capital lease obligations. As of
December 31, 2007, we had approximately $310.7 million
in outstanding long-term debt and capital lease obligations,
which was comprised of (i) approximately
$296.1 million (net of discount of $3.9 million) of
our Series A and Series B senior subordinated notes,
(ii) approximately $4.0 million in borrowings under
our revolving credit facility, (iii) approximately
$8.5 million in notes payable, the majority of which was
outstanding under equipment financing lines of our Mexico
subsidiary, and (iv) approximately $2.1 million in
capital lease obligations.
Revolving credit facility. Borrowings under
our revolving credit facility bear interest at a variable rate
based upon LIBOR, or prime rate, at our option. Additionally, we
pay a commitment fee of 0.25% per annum on the unused portion of
the revolving credit facility. Substantially all of our assets,
including the stock of our wholly-owned domestic subsidiaries
and 66% of the stock of our foreign subsidiaries, are pledged to
secure borrowings made under the revolving credit facility.
Furthermore, each of our domestic subsidiaries has guaranteed
our obligations under such facility. There are currently no
restrictions on the ability of our wholly-owned subsidiaries to
declare and pay dividends directly to us.
In March 2008, we amended our facility such that we may incur up
to $90 million in capital expenditures on a rolling
12-month
basis. As a result of this amendment, the primary restrictive
covenants within the facility include (i) limitations on
the amount of senior debt that we can have outstanding at any
given point in time, (ii) the maintenance of a set ratio of
earnings to fixed charges, as computed on a rolling
12-month
basis, (iii) limitations on the amounts of restricted
payments that can be made in any given year, and
(iv) limitations on the amount of capital expenditures that
we can incur on a rolling
12-month
basis. Additionally, we are currently prohibited from making any
cash dividends pursuant to the terms of the facility.
As of March 31, 2008 and December 31, 2007, we were in
compliance with all covenants contained within the facility and
had the ability to borrow an additional $128.3 million and
$163.5 million, respectively, under the facility based on
such covenants.
Other
borrowing facilities
Bank Machine overdraft facility. In addition
to the above revolving credit facility, Bank Machine has a
£2.0 million unsecured overdraft facility that expires
in July 2008. Such facility, which bears interest at 1.75% over
the bank’s base rate (currently 5.00%), is utilized for
general corporate purposes for our United Kingdom operations. As
of March 31, 2008, approximately £1.0 million
($2.0 million) of this facility had been utilized to help
fund certain working capital commitments. As of
December 31, 2007, the full amount of this overdraft
facility had been utilized to help fund certain working capital
commitments and to post a £275,000 bond. Amounts
outstanding under the overdraft facility, other than those
amounts utilized for posting bonds, are reflected in accounts
payable in our consolidated balance sheet, as such amounts are
automatically repaid once cash deposits are made to the
underlying bank accounts.
Cardtronics Mexico equipment financing
agreements. During 2006 and 2007, Cardtronics
Mexico entered into six separate five-year equipment financing
agreements with a single lender. Such agreements, which are
denominated in Mexican pesos and bear interest at an average
fixed rate of 10.96%, were utilized for the purchase of
additional ATMs to support our Mexico operations. As of
March 31, 2008, $90.4 million pesos ($8.5 million
U.S.) were outstanding under the agreements in place at the
time, with future borrowings to be individually negotiated
between the lender and Cardtronics. Pursuant to the terms of the
loan agreement, we have issued a guaranty for 51.0% of the
obligations under this agreement (consistent with our ownership
percentage in Cardtronics Mexico.) As of March 31, 2008,
the total amount of the guaranty was $46.1 million pesos
($4.3 million U.S.). As of December 31, 2007,
$91.2 million pesos ($8.4 million U.S.) were
outstanding under the agreements and, the total amount of the
guaranty was $46.5 million pesos ($4.3 million U.S.).
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Capital lease agreements. In connection with
the 7-Eleven ATM Transaction, we assumed certain capital and
operating lease obligations for approximately 2,000 ATMs. As of
March 31, 2008 and December 31, 2007, the principal
balance of our capital lease obligations totaled
$1.7 million and $2.1 million, respectively.
Additionally, we had $7.2 million and $7.5 million of
letters of credit posted as of March 31, 2008 and
December 31, 2007, respectively, in favor of the lessors
under these assumed capital and operating equipment leases,
which reduce the available borrowing capacity under our
revolving credit facility.
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 tangible and
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 expenses, such as those for
employee compensation and telecommunications, which may not be
readily recoverable in the price of services offered by us.
Contractual
Obligations
The following table and discussion reflect our significant
contractual obligations and other commercial commitments as of
December 31, 2007. With the exception of the increase in
the amount outstanding under our revolving credit facility from
$4.0 million as of December 31, 2007 to
$39.5 million as of March 31, 2008, there have been no
material changes in our contractual obligations since
December 31, 2007.
| Payment Due by Period | ||||||||||||||||||||||||||||
| 2008 | 2009 | 2010 | 2011 | 2012 | Thereafter | Total | ||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||
|
Long-term financings:
|
||||||||||||||||||||||||||||
|
Principal(1)
|
$ | 882 | $ | 1,735 | $ | 2,147 | $ | 2,372 | $ | 5,391 | $ | 300,000 | $ | 312,527 | ||||||||||||||
|
Interest(2)
|
28,969 | 28,840 | 28,622 | 28,375 | 37,943 | 27,750 | 170,499 | |||||||||||||||||||||
|
Operating leases
|
5,559 | 5,430 | 1,332 | 828 | 766 | 3,161 | 17,076 | |||||||||||||||||||||
|
Merchant space leases
|
4,644 | 2,261 | 1,425 | 1,369 | 1,272 | 1,101 | 12,072 | |||||||||||||||||||||
|
Capital leases(3)
|
1,268 | 799 | 240 | — | — | — | 2,307 | |||||||||||||||||||||
|
Total contractual obligations
|
$ | 41,322 | $ | 39,065 | $ | 33,766 | $ | 32,944 | $ | 35,372 | $ | 332,012 | $ | 514,481 | ||||||||||||||
| (1) | Represents the $300.0 million face value of our Series A and Series B Notes, $4.0 million outstanding under our revolving credit facility, and $8.4 million outstanding under our Mexico equipment financing facilities. | |
| (2) | Represents the estimated interest payments associated with our long-term debt outstanding as of December 31, 2007. | |
| (3) | Includes interest related to the capital lease obligations. |
Critical
Accounting Policies and Estimates
Our unaudited interim consolidated financial statements and our
audited consolidated financial statements included elsewhere
within this prospectus have been prepared in accordance with
accounting principles generally accepted in the United States,
which require that management make numerous estimates and
assumptions. Actual results could differ from those estimates
and assumptions, thus impacting our reported results of
operations and financial position. The critical accounting
policies and estimates described in this section are those that
are most important to the depiction of our financial condition
and results of operations and the application of which requires
management’s most subjective judgments in making estimates
about the effect of matters that are inherently uncertain. We
describe our significant accounting policies more fully in
Note 1 to our audited consolidated financial statements
included elsewhere within this prospectus.
Goodwill and Intangible Assets. We have
accounted for the 7-Eleven ATM Transaction, as well as the
E*TRADE Access, Bank Machine, and ATM National, Inc.
acquisitions as business combinations pursuant to
SFAS No. 141, Business Combinations.
Additionally, we have applied the concepts of
SFAS No. 141 to our purchase of a majority interest in
CCS Mexico (i.e., Cardtronics Mexico). Accordingly, the amounts
paid for such acquisitions have been allocated to the assets
acquired and liabilities assumed based on their respective
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fair values as of each acquisition date. Intangible assets that
met the criteria established by SFAS No. 141 for
recognition apart from goodwill included the acquired ATM
operating agreements and related customer relationships, a
branding agreement acquired in the 7-Eleven ATM Transaction, the
Bank Machine and Allpoint (via the ATM National, Inc.
acquisition) trade names, and the non-compete agreements entered
into in connection with the CCS Mexico acquisition.
The excess of the cost of the aforementioned acquisitions over
the net of the amounts assigned to the tangible and intangible
assets acquired and liabilities assumed has been reflected as
goodwill in our consolidated financial statements. As of
March 31, 2008, our goodwill balance totaled
$234.4 million, $62.2 million of which related to our
acquisition of the 7-Eleven Financial Services Business,
$84.5 million of which related to our acquisition of
E*TRADE Access, and $83.2 million of which related to our
acquisition of Bank Machine. The remaining balance is comprised
of goodwill related to our acquisition of ATM National Inc. and
our purchase of a majority interest in CCS Mexico. Intangible
assets, net, totaled $126.2 million as of March 31,
2008, and included the intangible assets described above, as
well as deferred financing costs, exclusive license agreements,
and upfront merchant site acquisition costs.
SFAS No. 142, Goodwill and Other Intangible
Assets, provides that goodwill and other intangible assets
that have indefinite useful lives will not be amortized, but
instead must be tested at least annually for impairment, and
intangible assets that have finite useful lives should be
amortized over their estimated useful lives.
SFAS No. 142 also provides specific guidance for
testing goodwill and other
non-amortized
intangible assets for impairment. SFAS No. 142
requires management to make certain estimates and assumptions in
order to allocate goodwill to reporting units and to determine
the fair value of a reporting unit’s net assets and
liabilities, including, among other things, an assessment of
market condition, projected cash flows, interest rates, and
growth rates, which could significantly impact the reported
value of goodwill and other intangible assets. Furthermore,
SFAS No. 142 exposes us to the possibility that
changes in market conditions could result in potentially
significant impairment charges in the future.
We evaluate the recoverability of our goodwill and
non-amortized
intangible assets by estimating the future discounted cash flows
of the reporting units to which the goodwill and
non-amortized
intangible assets relate. We use discount rates corresponding to
our cost of capital, risk adjusted as appropriate, to determine
such discounted cash flows, and consider current and anticipated
business trends, prospects, and other market and economic
conditions when performing our evaluations. Such evaluations are
performed at minimum on an annual basis, or more frequently
based on the occurrence of events that might indicate a
potential impairment. Such events include, but are not limited
to, items such as the loss of a significant contract or a
material change in the terms or conditions of a significant
contract.
Valuation of Long-lived Assets. We place
significant value on the installed ATMs that we own and manage
in merchant locations and the related acquired merchant
contracts/relationships. In accordance with
SFAS No. 144, Accounting for Impairment or Disposal
of Long-Lived Assets, long-lived assets, such as property
and equipment and purchased contract intangibles subject to
amortization, are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of
such assets may not be recoverable. We test our acquired
merchant contract/relationship intangible assets for impairment,
along with the related ATMs, on an individual
contract/relationship basis for our significant acquired
contracts/relationships, and on a pooled or portfolio basis (by
acquisition) for all other acquired contracts/relationships. In
determining whether a particular merchant contract/relationship
is significant enough to warrant a separate identifiable
intangible asset, we analyze a number of relevant factors,
including (i) estimates of the historical cash flows
generated by such contract/relationship prior to its
acquisition, (ii) estimates regarding our ability to
increase the contract/relationship’s cash flows subsequent
to the acquisition through a combination of lower operating
costs, the deployment of additional ATMs, and the generation of
incremental revenues from increased surcharges
and/or new
branding arrangements, and (iii) estimates regarding our
ability to renew such contract/relationship beyond its
originally scheduled termination date. An individual
contract/relationship, and the related ATMs, could be impaired
if the contract/relationship is terminated sooner than
originally anticipated, or if there is a decline in the number
of transactions related to such contract/relationship without a
corresponding increase in the amount of revenue collected per
transaction. A portfolio of purchased contract intangibles,
including the related ATMs, could be impaired if the contract
attrition rate is materially more than
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the rate used to estimate the portfolio’s initial value, or
if there is a decline in the number of transactions associated
with such portfolio without a corresponding increase in the
revenue collected per transaction. Whenever events or changes in
circumstances indicate that a merchant contract/relationship
intangible asset may be impaired, we evaluate the recoverability
of the intangible asset, and the related ATMs, by measuring the
related carrying amounts against the estimated undiscounted
future cash flows associated with the related contract or
portfolio of contracts. Should the sum of the expected future
net cash flows be less than the carrying values of the tangible
and intangible assets being evaluated, an impairment loss would
be recognized. The impairment loss would be calculated as the
amount by which the carrying values of the ATMs and intangible
assets exceeded the calculated fair value. We recorded no
impairments during the three months ended March 31, 2008.
During the years ended December 31, 2007, 2006, and 2005,
we recorded approximately $5.7 million, $2.8 million,
and $1.2 million, respectively, in additional amortization
expense related to the impairment of certain previously acquired
merchant contract/relationship intangible assets associated with
our U.S. reporting segment.
Income Taxes. Income tax provisions are based
on taxes payable or refundable for the current year and deferred
taxes on temporary differences between the amount of taxable
income and income before income taxes and between the tax basis
of assets and liabilities and their reported amounts in our
financial statements. We include deferred tax assets and
liabilities in our financial statements at currently enacted
income tax rates. As changes in tax laws or rates are enacted,
we adjust our deferred tax assets and liabilities through income
tax provisions.
In assessing the realizability of deferred tax assets, we
consider whether it is more likely than not that some portion or
all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent on the
generation of future taxable income during the periods in which
those temporary differences become deductible. We consider the
scheduled reversal of deferred tax liabilities, projected future
taxable income, and tax planning strategies in making this
assessment. In the event we do not believe we will be able to
utilize the related tax benefits associated with deferred tax
assets, we record valuation allowances to reserve for the
assets. During the three months ended March 31, 2008 and
the year ended December 31, 2007, we recorded
$1.2 million and $4.8 million in valuation allowances
to reserve for various deferred tax assets associated with our
domestic operations, resulting in an overall income tax expense
of $4.6 million. Such adjustments were based, in part, on
the expectation of increased pre-tax book losses during the
latter half of 2007, primarily as a result of the additional
interest expense amounts associated with the 7-Eleven ATM
Transaction and the anticipated losses associated with the
acquired Vcom operations.
Asset Retirement Obligations. We account for
our asset retirement obligations in accordance with
SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 requires that we
estimate the fair value of future retirement obligations
associated with our ATMs, including costs associated with
deinstalling the ATMs and, in some cases, refurbishing the
related merchant locations. Such estimates are based on a number
of assumptions, including (i) the types of ATMs that are
installed, (ii) the relative mix where those ATMs are
installed (i.e., whether such ATMs are located in
single-merchant locations or in locations associated with large,
geographically dispersed retail chains), and (iii) whether
we will ultimately be required to refurbish the merchant store
locations upon the removal of the related ATMs. Additionally, we
are required to make estimates regarding the timing of when such
retirement obligations will be incurred.
The fair value of a liability for an asset retirement obligation
is recognized in the period in which it is incurred and can be
reasonably estimated. Such asset retirement costs are
capitalized as part of the carrying amount of the related
long-lived asset and depreciated over the asset’s estimated
useful life. Fair value estimates of liabilities for asset
retirement obligations generally involve discounted future cash
flows. Periodic accretion of such liabilities due to the passage
of time is recorded as an operating expense in the accompanying
consolidated financial statements. Upon settlement of the
liability, we recognize a gain or loss for any difference
between the settlement amount and the liability recorded.
Share-based Compensation. We account for our
share-based payments in accordance with SFAS No. 123R,
Share-based Payments, which requires that we record
compensation expense for all share-based awards based on the
grant-date fair value of those awards. In determining the fair
value of our share-
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based awards, we are required to make certain assumptions and
estimates, including (i) the number of awards that may
ultimately be forfeited by the recipients, (ii) the
expected term of the underlying awards, and (iii) the
future volatility associated with the price of our common stock.
Such estimates, and the basis for our conclusions regarding such
estimates for the year ended December 31, 2007, are
outlined in detail in Note 3 of the notes to our audited
consolidated financial statements included elsewhere is this
prospectus.
New
Accounting Pronouncements
Fair Value Measurement. In September 2006, the
Financial Accounting Standards Board (the “FASB”)
issued SFAS No. 157, Fair Value Measurements,
which provides guidance on measuring the fair value of assets
and liabilities in the financial statements. In summary,
SFAS No. 157 does the following:
| 1. | Defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, and establishes a framework for measuring fair value; | |
| 2. | Establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date; | |
| 3. | Eliminates large position discounts for financial instruments quoted in active markets and requires consideration of the Company’s creditworthiness when valuing liabilities; and | |
| 4. | Expands disclosures about instruments measured at fair value. |
In addition, SFAS No. 157 establishes a valuation
hierarchy for disclosure of the inputs to valuation used to
measure fair value. This hierarchy prioritizes the inputs into
three broad levels as follows. “Level 1” inputs
are quoted prices (unadjusted) in active markets for identical
assets or liabilities. “Level 2” inputs are
quoted prices for similar assets and liabilities in active
markets or inputs that are observable for the asset or
liability, either directly or indirectly through market
corroboration, for substantially the full term of the financial
instrument. “Level 3” inputs are unobservable
inputs based on assumptions used to measure assets and
liabilities at fair value. A financial asset or liability’s
classification within the hierarchy is determined based on the
lowest level input that is significant to the fair value
measurement.
We adopted SFAS No. 157 as of January 1, 2008,
with the exception of the application of the statement to
non-recurring non-financial assets and non-financial
liabilities. Non-recurring non-financial assets and
non-financial liabilities for which we have not applied the
provisions of SFAS No. 157 include those measured at
fair value for impairment testing, including goodwill, other
intangible assets, and property and equipment. As a result of
our adoption of SFAS No. 157, we recorded a
$1.6 million reduction of the unrealized loss associated
with our interest rate swaps, which served to decrease our
derivative liability and reduce our other comprehensive loss.
Such adjustment reflects the consideration of nonperformance
risk by our Company for interest rate swaps that were in a net
liability position as of March 31, 2008, and the
nonperformance risk of our counterparties for interest rate
swaps that were in a net asset position as of March 31,
2008, as measured by the use of applicable credit default
spreads. For additional information on our adoption of this
standard, see Note 15 to our consolidated financial
statements.
Fair Value Option. In February 2007, the FASB
issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities, which provides
allows companies the option to measure certain financial
instruments and other items at fair value. We have elected not
to adopt the fair value option provisions of this statement.
Issued
But Not Yet Adopted
As of March 31, 2008, the following accounting standards
and interpretations had not yet been adopted by the Company:
Business Combinations. In December 2007, the
FASB issued SFAS No. 141R, Business
Combinations, which provides revised guidance on the
accounting for acquisitions of businesses. This standard changes
the current guidance to require that all acquired assets,
liabilities, minority interest, and certain contingencies,
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including contingent consideration, be measured at fair value,
and certain other acquisition-related costs, including costs of
a plan to exit an activity or terminate and relocate employees,
be expensed rather than capitalized. SFAS No. 141R
will apply to acquisitions that are effective after
December 31, 2008, and application of the standard to
acquisitions prior to that date is not permitted. We will adopt
the provisions of SFAS No. 141R on January 1,
2009 and apply the requirements of the statement to business
combinations that occur subsequent to its adoption.
Noncontrolling Interests. In December 2007,
the FASB issued SFAS No. 160, Noncontrolling
Interests in Consolidated Financial
Statements — an amendment of ARB No. 51,
which provides guidance on the presentation of minority interest
in the financial statements and the accounting for and reporting
of transactions between the reporting entity and the holders of
such noncontrolling interest. This standard requires that
minority interest be presented as a separate component of equity
rather than as a “mezzanine” item between liabilities
and equity and requires that minority interest be presented as a
separate caption in the income statement. In addition, this
standard requires all transactions with minority interest
holders, including the issuance and repurchase of minority
interests, be accounted for as equity transactions unless a
change in control of the subsidiary occurs. The provisions of
SFAS No. 160 are to be applied prospectively with the
exception of reclassifying noncontrolling interests to equity
and recasting consolidated net income (loss) to include net
income (loss) attributable to both the controlling and
noncontrolling interests, which are required to be adopted
retrospectively. We will adopt the provisions of
SFAS No. 160 on January 1, 2009 and are currently
assessing the impact its adoption will have on our financial
position and results of operations.
Disclosures about Derivatives and Hedging
Activities. In March 2008, the FASB issued
SFAS No. 161, Disclosures about Derivatives and
Hedging Activities — an amendment of
SFAS No. 133, which changes the disclosure
requirements for derivative instruments and hedging activities.
This standard requires a company to provide enhanced disclosures
about (a) how and why the company uses derivative
instruments, (b) how derivative instruments and related
hedged items are accounted for under Statement 133, and
(c) how derivative instruments and related hedged items
affect the company’s financial position, financial
performance, and cash flows. We will adopt the provisions of
SFAS No. 161 on January 1, 2009 and apply the
disclosure requirements to disclosures made subsequent to our
adoption.
Useful Life of Intangible Assets. In April
2008, the FASB issued FSP
FAS 142-3,
Determination of the Useful Life of Intangible Assets,
which amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful
life of a recognized intangible asset under
SFAS No. 142, Goodwill and Other Intangible Assets
(“SFAS No. 142”). The intent of FSP
FAS 142-3
is to improve the consistency between the useful life of a
recognized intangible asset under SFAS No. 142 and the
period of expected cash flows used to measure the fair value of
the asset under SFAS 141R (discussed above) and other
applicable accounting literature. We will adopt the provision of
FSP
FAS 142-3
on January 1, 2009 and are currently assessing the impact
our adoption will have on our financial position and results of
operations.
Disclosure
about Market Risk
Interest
Rate Risk
Vault cash rental expense. Because our ATM
cash rental expense is based on market rates of interest, it is
sensitive to changes in the general level of interest rates in
the United States, the United Kingdom, and Mexico. In the United
States, we pay a monthly fee to our vault cash providers on the
average amount of vault cash outstanding under a formula based
either on LIBOR or the federal funds effective rate, depending
on the vault cash provider. In the United Kingdom, we pay a
monthly fee to our vault cash provider under a formula based on
LIBOR. In Mexico, we pay a monthly fee to our vault cash
provider under a formula based on the Mexican Interbank Rate.
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As a result of the significant sensitivity surrounding the vault
cash interest expense for our U.S. operations, we have
entered into a number of interest rate swaps to fix the rate of
interest we pay on a portion of our current and anticipated
outstanding domestic vault cash balances. The swaps in place as
of March 31, 2008 serve to fix the interest rate paid on
the following notional amounts for the periods identified:
|
Weighted Average |
||||||||
|
Notional Amount
|
Fixed Rate | Period | ||||||
| (in thousands) | ||||||||
|
$550,000
|
4.61 | % | April 1, 2008 — December 31, 2008 | |||||
|
$550,000
|
4.30 | % | January 1, 2009 — December 31, 2009 | |||||
|
$550,000
|
4.11 | % | January 1, 2010 — December 31, 2010 | |||||
|
$400,000
|
3.72 | % | January 1, 2011 — December 31, 2011 | |||||
|
$200,000
|
3.96 | % | January 1, 2012 — December 31, 2012 | |||||
The following table presents a hypothetical sensitivity analysis
of our vault cash interest expense based on our outstanding
vault cash balances as of March 31, 2008 and assuming a
100 basis point increase in interest rates:
|
Additional Interest Incurred |
Additional Interest Incurred |
||||||||||||||||||||
|
on 100 Basis Point Increase |
on 100 Basis Point Increase |
||||||||||||||||||||
|
Vault Cash Balance as of |
(Excluding Impact of |
(Including Impact of |
|||||||||||||||||||
| March 31, 2008 | Interest Rate Swaps) | Interest Rate Swaps) | |||||||||||||||||||
| (functional currency) | (U.S. dollars) | (functional currency) | (U.S. dollars) | (functional currency) | (U.S. dollars) | ||||||||||||||||
| (in millions) | (in millions) | (in millions) | |||||||||||||||||||
|
United States
|
$747.3 | $ | 747.3 | $7.5 | $ | 7.5 | $2.0 | $ | 2.0 | ||||||||||||
|
United Kingdom
|
£ 82.8 | 164.5 | £0.8 | 1.6 | £0.8 | 1.6 | |||||||||||||||
|
Mexico
|
p$ | 152.7 | 14.3 | p$ | 1.5 | 0.1 | p$ | 1.5 | 0.1 | ||||||||||||
|
Total
|
$ | 926.1 | $ | 9.2 | $ | 3.7 | |||||||||||||||
As of March 31, 2008 and December 31, 2007, we had a
liability of $27.1 million and $13.6 million,
respectively, recorded in our balance sheet related to our
interest rate swaps, which represented the fair value liability
of such agreements based on third-party quotes for similar
instruments with the same terms and conditions, as such
instruments are required to be carried at fair value. These
swaps have been classified as cash flow hedges pursuant to
SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, as amended. Accordingly, changes in
the fair values of such swaps have been reported in accumulated
other comprehensive income (loss) in the accompanying
consolidated balance sheets. As a result of our overall net loss
position for tax purposes, we have not recorded any deferred
taxes on the loss amount related to these interest rate hedges,
as we do not currently believe that we will be able to realize
such benefits.
Net amounts paid or received under such swaps are recorded as
adjustments to our cost of ATM operating revenues in the
accompanying consolidated statements of operations. During the
three month periods ended March 31, 2008 and 2007 and the
years ended December 31, 2007, 2006, and 2005, the gains or
losses as a result of ineffectiveness associated with our
existing interest rate swaps were immaterial.
We have not currently entered into any derivative financial
instruments to hedge our variable interest rate exposure in the
United Kingdom or Mexico.
Interest expense. Our interest expense is also
sensitive to changes in the general level of interest rates in
the United States, as our borrowings under our domestic
revolving credit facility accrue interest at floating rates.
Based on the $39.5 million outstanding under the facility
as of March 31, 2008, for every interest rate increase of
100 basis points, we would incur an additional
$0.4 million of interest expense on an annualized basis.
Outlook. We anticipate that the recent
reductions in short-term interest rates in the United States
will serve to reduce the interest expense we incur under our
bank credit facilities and our vault cash rental expense.
Although we currently hedge a substantial portion of our vault
cash interest rate risk through 2010, as noted
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above, we may not be able to enter into similar arrangements for
similar amounts in the future, and any significant increase in
interest rates in the future could have an adverse impact on our
business, financial condition and results of operations by
increasing our operating costs and expenses.
Other. While the carrying amount of our cash
and cash equivalents and other current assets and liabilities
approximates fair value due to the relatively short maturities
of these instruments, we are exposed to changes in market values
of our investments and long-term debt. As discussed above, the
carrying amount of our interest rate swaps approximates fair
value as of March 31, 2008. In addition, the
$39.5 million carrying amount of borrowings outstanding
under our revolving credit facility approximates fair value due
to the fact that such borrowings are subject to floating market
interest rates. Conversely, the carrying amount of the
Company’s $300.0 million, fixed-rate, senior
subordinated notes was $296.2 million as of March 31,
2008, compared to a market value of $282.0 million. The
fair value of the Company’s senior subordinated notes as of
March 31, 2008 was based on the quoted market price for
such notes.
Foreign
Currency Exchange Risk
Due to our acquisition of Bank Machine in 2005 and our
acquisition of a majority interest in Cardtronics Mexico in
2006, we are exposed to market risk from changes in foreign
currency exchange rates, specifically with changes in the
U.S. dollar relative to the British pound and Mexican peso.
Our United Kingdom and Mexico subsidiaries are consolidated into
our financial results and are subject to risks typical of
international businesses including, but not limited to,
differing economic conditions, changes in political climate,
differing tax structures, other regulations and restrictions,
and foreign exchange rate volatility. Furthermore, we are
required to translate the financial condition and results of
operations of Bank Machine and Cardtronics Mexico into
U.S. dollars, with any corresponding translation gains or
losses being recorded in other comprehensive income (loss) in
our consolidated financial statements. As of March 31,
2008, such translation gain totaled approximately
$7.7 million compared to approximately $9.1 million as
of December 31, 2007.
Although changes in foreign currency rates did not materially
impact our results of operations during the three months ended
March 31, 2008, our operating results were materially
impacted by increases in the value of the British pound relative
to the U.S. dollar during 2007. (See
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Results of
Operations” for additional details on the impact of changes
in the foreign exchange rate between the U.S. dollar and
the British pound during the year ended December 31, 2007.)
Additionally, as our Mexico operations expand, our future
results could be materially impacted by changes in the value of
the Mexican peso relative to the U.S. dollar. A sensitivity
analysis indicates that, if the U.S. dollar uniformly
strengthened or weakened 10% against the British pound, the
effect upon Bank Machine’s operating income for the three
months ended March 31, 2008 would have been an unfavorable
or favorable adjustment, respectively, of approximately
$0.1 million. A similar sensitivity analysis would have
resulted in a negligible adjustment to Cardtronics Mexico’s
financial results for the three months ended March 31,
2008. At this time, we have not deemed it to be cost effective
to engage in a program of hedging the effect of foreign currency
fluctuations on our operating results using derivative financial
instruments.
We do not hold derivative commodity instruments and all of our
cash and cash equivalents are held in money market and checking
funds.
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THE ATM
INDUSTRY
A Typical
ATM Transaction
A typical ATM transaction involves the withdrawal of cash from
an ATM. The cardholder presents an ATM card, issued by his or
her financial institution, at an ATM that may or may not be
owned by the same financial institution. The cardholder then
enters a personal identification number, or PIN, to verify
identity, the cardholder’s account is checked for adequate
funds and, if everything is satisfactory, cash is dispensed. All
of these communications are routed across one or more EFT
networks that electronically connect ATMs and financial
institutions and allow transactions to appear seamless and
nearly instantaneous.
In the United States and Mexico, when a cardholder withdraws
cash from an ATM that is not owned by the cardholder’s
financial institution, there are typically two charges applied.
The first charge is the surcharge fee paid by the cardholder for
using the ATM. The second charge is an interchange fee that the
cardholder’s financial institution pays to the ATM operator
and the EFT network over which the transaction is routed. Often,
the cardholder’s financial institution also charges the
cardholder a fee called a foreign fee for using an ATM not owned
by that financial institution. This charge helps the financial
institution defray the cost of the interchange fee it pays.
Conversely, in the United Kingdom, when a cardholder withdraws
cash from an ATM that is not owned by the cardholder’s
financial institution, either a surcharge fee or an interchange
fee is charged, but not both. If a pay-to-use ATM is used, the
cardholder is charged a surcharge fee. If a free-to-use ATM is
used (i.e., a surcharge-free ATM), an interchange fee is
charged. In the U.K., interchange fees are earned on all ATM
transactions other than surcharge-bearing cash withdrawals.
History
of the U.S. ATM Industry
The first ATMs in the United States were installed in the early
1970s, and by 1980, approximately 18,500 ATMs were in use
throughout the nation. These ATMs initially were located at
financial institution branches. According to ATM&Debit
News, there were estimated to be approximately 415,000 ATMs
in the United States in March 2007, the majority of which are
located at non-bank locations. A non-bank location is one that
is not located within a federal or state chartered bank, savings
and loan, credit union or other financial institution.
Early in the development of the ATM industry, regional and
national electronic authorization data networks, or EFT
networks, connected ATMs to financial institutions that were
members of a particular EFT network. Regional EFT networks in
different parts of the United States were not electronically
connected to each other. For example, customers of a bank in New
York could not travel to Los Angeles and access their cash at an
ATM because the networks serving New York and Los Angeles were
not connected. During the 1990s, many regional EFT networks
merged or entered into reciprocal processing agreements with
other networks, which helped to increase ATM usage and spur
consumer demand for ATM services.
Although ATMs were originally located only at financial
institution branches, they soon began to appear in a variety of
off-premise locations, such as convenience stores, supermarkets,
drug stores, shopping malls, hotels, casinos, and airports.
These locations offer a convenient alternative to obtaining cash
from bank tellers, branch ATMs, or drive-through facilities.
Both merchants and their customers benefit from the presence of
an ATM in a store. Merchants benefit from increased consumer
traffic, merchant fees received from the ATM operator, and
reduced check-writing and credit card processing fees, while
cardholders benefit from increased access to their cash.
Deployment of off-premise ATMs, however, was impeded by the
prevailing strategy among financial institutions not to charge
their cardholders surcharge fees for the convenience of
accessing their financial institution accounts at non-financial
institution locations. Until 1996, most EFT networks did not
allow surcharge fees for ATM transactions that were routed over
their networks. However, beginning in that year, the two largest
EFT networks, Cirrus and Plus, began to allow surcharge fees and
other networks followed.
Recent
Trends in the U.S. ATM Industry
The introduction of surcharge revenue in the ATM market made the
deployment of off-premise ATMs economically feasible and
attractive for non-financial institutions. Following this shift,
according to
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ATM&Debit News, the number of off-premise ATMs in
the United States grew at a rapid pace, increasing in number
from approximately 84,000 in 1998 to an estimated 236,000
off-premise ATMs in 2007. Additionally, this period of expansion
in the off-premise business model saw a notable shift in the
relative prevalence of on - and off-premise ATMs. As per
ATM&Debit News, off-premise ATMs represented
approximately 45% of total ATMs in the United States in 1998. By
2007, the market share of off-premise ATMs had grown to
approximately 57%. Despite this long-term growth trend, the
annual growth rate for off-premise ATMs has slowed considerably
since 2003. Furthermore, the number of off-premise ATMs declined
since 2005, indicating the continued maturation of the domestic
off-premise ATM market.
The maturation of the domestic ATM market has seen an increase
in the average surcharge rates charged by ATM operators.
According to Dove Consulting, average surcharge rates on
off-premise ATM transactions have increased by 21% from 2001 to
2006, rising from $1.48 to $1.79, respectively. On-premise ATMs
have exhibited a similar trend, with average surcharge rates
growing 20% over the same time period.
| Source: | © Dove Consulting, 2006 ATM Deployer Study. Reprinted with Permission. |
Additionally, despite the fact that electronic payment
alternatives such as debit and prepaid cards have gained
popularity in recent years, overall cash usage trends in the
United States have remained stable. The overall level of
domestic cash usage from 2001 to 2005 remained stable at
approximately one-third of total transaction spending,
maintaining a strong demand for convenient access for cash and
ATM transactions.
| Source: | ©2005 American Bankers Association and Dove Consulting, a division of Hitachi Consulting. Reprinted with Permission. All Rights Reserved. |
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Developing
Trends in the ATM Industry
Increase in Surcharge-Free Offerings. Many
U.S. banks serving the market for consumer banking services
are aggressively competing for market share, and part of their
competitive strategy is to increase their number of customer
touch points, including the establishment of an ATM network to
provide convenient, surcharge-free access to cash for their
customers. While a large owned-ATM network would be a key
strategic asset for a bank, we believe it would be uneconomical
for all but the largest banks to build and operate an extensive
U.S. ATM network. Bank branding of ATMs and participation
in surcharge-free networks allows financial institutions to
rapidly increase surcharge-free ATM access for their customers
at substantially less cost than building their own ATM networks.
These factors have led to an increase in bank branding and
participation in surcharge-free networks, and we believe that
there will be continued growth in such arrangements.
Growth in International Markets. In most
regions of the world, ATMs are less common than in the United
States. We believe the ATM industry will grow faster in
international markets than in the U.S., as the number of ATMs
per capita in those markets increases and begins to approach the
U.S. level. In addition, there has been a trend towards
growth of off-premise ATMs in several international markets,
including the United Kingdom and Mexico.
| • | United Kingdom. The U.K. is the largest ATM market in Europe. Until the late 1990s, most U.K. ATMs were installed at bank and building society branches. Non-bank operators began to deploy ATMs in the United Kingdom in December 1998 when LINK (which connects the ATM networks of all U.K. ATM operators) allowed them entry into its network via arrangements between non-bank operators and U.K. financial institutions. We believe that non-bank ATM operators have benefited in recent years from customer demand for more conveniently located cash machines, the emergence of internet banking with no established point of presence, and the closure of bank branches due to consolidation. According to LINK, a total of approximately 63,000 ATMs were deployed in the United Kingdom as of January 2008, of which approximately 26,000 were operated by non-banks. This has grown from approximately 36,700 total ATMs in the U.K. in 2001, with less than 7,000 operated by non-banks. The following table shows the compound annual growth rate (“CAGR”) for ATMs deployed in the United Kingdom from 2000 to 2006. |
| Source: | APACS’ U.K. Payment Statistics 2007 |
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Similar to the U.S., electronic payment alternatives have gained
popularity in the U.K. in recent years. However, cash is still
the primary payment method preferred by consumers, representing
nearly two-thirds of total transaction spending.
| Source: | APACS’ U.K. Payment Statistics 2007 |
Furthermore, annual ATM cash withdrawal transactions continue to
remain strong in the U.K., reflecting consumers’ preference
to utilize cash for their transaction spending.
| Source: | APACS’ U.K. Payment Statistics 2007. |
| • | Mexico. Historically, surcharge fees were not allowed pursuant to Mexican law. However, in July 2005, the Mexican government approved a measure that now allows ATM operators to charge a fee to individuals withdrawing cash from their ATMs. As a result of the Mexican government allowing surcharging and the relatively low level of penetration of ATMs in Mexico, we believe that there will be significant growth in the number of ATMs owned in Mexico by non-banks. According to the Central Bank of Mexico, as of March 2008, Mexico had approximately 30,000 ATMs operating throughout the country, substantially all of which are owned by national and regional banks. |
Growth of Advanced-Functionality
Services. Approximately 75% of all ATM
transactions in the United States are cash withdrawals, with the
remainder representing other basic banking functions such as
balance inquiries, transfers, and deposits. We believe that
there are significant opportunities for a large non-bank ATM
operator to provide additional advanced-functionality services
to customers, such as check cashing, remote deposit capture,
money transfer, and bill payment services, through self-service
kiosks. These additional
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services would result in additional revenues streams for a
company and could ultimately result in increased profitability.
Outsourcing by Banks and Other Financial
Institutions. While many banks and other
financial institutions own significant networks of ATMs that
serve as extensions of their branch networks and increase the
level of service offered to their customers, large ATM networks
are costly to operate and typically do not provide significant
revenue for banks and other financial institutions. We believe
there is an opportunity for large non-bank ATM operators with
lower costs and an established operating history to contract
with financial institutions to manage their ATM networks. Such
an outsourcing arrangement could reduce a financial
institution’s operational costs while extending their
customer service.
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BUSINESS
Company
Overview
Cardtronics, Inc. is a single-source provider of ATM solutions.
We provide ATM management and equipment-related services
(typically under multi-year contracts with initial terms
generally of five to seven years) to large, nationally-known
retail merchants as well as smaller retailers and operators of
facilities such as shopping malls and airports. As of
March 31, 2008, we operated over 32,600 ATMs throughout the
United States, the United Kingdom, and Mexico, making us the
operator of the world’s largest network of ATMs. Our
high-traffic retail locations and national footprint make us an
attractive partner for regional and national financial
institutions that are seeking to increase their market
penetration. Additionally, as of March 31, 2008, over
10,000 of our Company-owned ATMs are under contract with
well-known banks to place their logos on those machines, thus
providing convenient surcharge-free access to their customers.
We also operate the Allpoint network, the largest surcharge-free
ATM network within the United States based on the number of
participating ATMs. Allpoint provides surcharge-free ATM access
to customers of participating financial institutions that lack a
significant ATM network. We believe that Allpoint is the largest
surcharge-free network of ATMs in the United States based on the
number of participating ATMs.
7-Eleven
ATM Transaction
On July 20, 2007, we purchased substantially all of the
assets of the 7-Eleven Financial Services Business for
approximately $137.3 million in cash. That amount included
a $1.3 million payment for estimated acquired working
capital and approximately $1.0 million in other related
closing costs. We financed the 7-Eleven ATM Transaction,
including related fees and expenses, through the issuance of
$100.0 million in 9.25% senior subordinated notes due
2013 — Series B and borrowings under our amended
revolving credit facility.
At the time of our acquisition, the 7-Eleven Financial Services
Business operated approximately 5,500 ATMs, including
approximately 2,000 Vcom terminals, which, in addition to
standard ATM services, offer the Vcom Services. Because of the
significance of this acquisition, our historical operating
results are not expected to be indicative of our future
operating results. See “Unaudited Pro Forma Condensed
Consolidated Financial Statements” and
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” included elsewhere in
this prospectus for additional information. In connection with
the 7-Eleven ATM Transaction, we entered into a placement
agreement that will provide us, subject to certain conditions,
with a ten-year exclusive right to operate all ATMs and Vcom
terminals in 7-Eleven locations throughout the U.S., including
any new stores opened or acquired by 7-Eleven.
For the three month period ended March 31, 2008 and the
years ended December 31, 2007 and 2006, the 7-Eleven
Financial Services Business generated revenues of
$37.2 million, $153.8 million, and
$163.7 million, respectively. The 2007 and 2006 revenue
amounts include approximately $5.2 million and
$18.7 million, respectively, of upfront placement fees
received by 7-Eleven related to the development of its
advanced-functionality services, approximately $4.2 million
and $18.0 million of which are related to arrangements that
ended prior to our acquisition of the 7-Eleven Financial
Services Business, and thus will not continue in the future.
While we believe we will continue to earn some placement fee
revenues related to the acquired
7-Eleven
Financial Services Business, we expect those amounts to be
substantially less than those earned historically.
The Vcom Services component of the 7-Eleven Financial Services
Business generated an operating loss of $1.3 million during
the three months ended March 31, 2008. For the years ended
December 31, 2007 and 2006, we have estimated that they
generated an operating loss of $6.4 million for the year
ended December 31, 2007 and an operating profit of
$11.4 million for the year ended December 31, 2006.
However, excluding the portion of the upfront placement fees
that are not expected to continue in the future, the Vcom
Services generated operating losses, based upon our analysis, of
$10.6 million and $6.6 million for the years ended
December 31, 2007 and 2006, respectively. For the period
from our acquisition (July 20, 2007) through
December 31, 2007, the Vcom Services generated an operating
loss of $5.0 million. It is our expectation that the
acquired Vcom operations will continue to generate operating
losses subsequent to the 7-Eleven ATM
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Transaction. However, we believe that the right mix of services
and locations, coupled with effective targeted marketing
strategies, could lead to improved financial results for this
portion of the acquired business, and we are, therefore,
currently working to restructure that portion of the acquired
business. See “Risk Factors — Risks Related to
Our Business — In connection with the 7-Eleven ATM
Transaction, we acquired advanced-functionality Vcom machines
with significant potential for providing new services. Failure
to achieve market acceptance among users could lead to continued
losses from the Vcom Services, which could adversely affect our
operating results.”
We believe that the 7-Eleven ATM Transaction portfolio provides
us with substantial benefits and opportunities, including the
following:
Additional High-Volume, Prime Retail
Locations. The ATMs we acquired in the 7-Eleven
ATM Transaction averaged over 1,100 cash withdrawal transactions
per month during the three months ended March 31, 2008,
which compares favorably to the average of 367 cash withdrawal
transactions per month for our existing domestic ATM portfolio
during the same period.
Internal Growth Opportunities. We agreed to a
ten-year ATM placement agreement that will give us, subject to
certain conditions, the exclusive right to operate all ATMs and
Vcom terminals in existing and future 7-Eleven store locations
in the U.S. during the term of the agreement. Additionally,
with 7-Eleven being the largest convenience store operator in
the world (with over 34,200 locations worldwide), we believe
that our relationship with 7-Eleven may afford us the
opportunity to further expand internationally.
Bank Branding and Outsourcing
Opportunities. When combined with our existing
portfolio of ATMs, the approximately 5,500 ATM and Vcom
terminals located in 7-Eleven store locations, which are
currently branded with the Citibank brand, bring the total
number of our Company-owned ATMs under bank branding
arrangements to approximately 10,000. We believe that the
combined bank branded portfolio, which is the largest of its
kind in the industry, will lead to future branding opportunities
for many of the unbranded retail locations remaining within our
portfolio of Company-owned ATMs.
Surcharge-Free Offering Opportunities. The
7-Eleven ATM portfolio currently participates in two
surcharge-free networks, the CO-OP network, the nation’s
largest surcharge-free network devoted exclusively to credit
unions, and Financial Services Center Cooperative
(“FSCC”), a cooperative service organization providing
shared branching services for credit unions. We also believe the
7-Eleven ATM Transaction provides opportunities to expand our
surcharge-free network offerings.
Advanced-Functionality Opportunities. The
7-Eleven ATM Transaction provides us with a unique opportunity
to participate in the advanced kiosk-based financial services
market within the U.S. through the Vcom Services. Such
services may provide for additional growth opportunities as
additional merchants and financial institutions seek to take
advantage of these services.
Operational Synergies. We expect our extensive
industry experience and operational expertise as a low cost
provider to allow us to take advantage of certain operational
synergies that may be realized from the
7-Eleven ATM
Transaction, as existing contracts with service providers begin
to expire at the end of 2009. Furthermore, because of the nature
of such contracts, the initial integration of the acquired
7-Eleven Financial Services Business is not expected to
negatively impact our ongoing operations.
Other
Acquisitions
In addition to the 7-Eleven ATM Transaction, we have made 14
other acquisitions in prior years both in the United States and
internationally. These acquisitions included:
| • | In February 2006, we acquired a 51.0% ownership stake in CCS Mexico, an independent ATM operator located in Mexico, for approximately $1.0 million in cash consideration and the assumption of approximately $0.4 million in additional liabilities. At the time of the acquisition, CCS Mexico operated approximately 300 ATMs. |
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| • | In December 2005, we acquired all of the outstanding shares of ATM National, Inc., the owner and operator of the Allpoint nationwide surcharge-free ATM network. The consideration for such acquisition totaled $4.8 million. | |
| • | In May 2005, we purchased 100% of the outstanding shares of Bank Machine (Acquisitions) Limited for approximately $95.0 million. At the time of the acquisition, Bank Machine (Acquisitions) Limited operated approximately 1,000 ATMs in the United Kingdom. | |
| • | In April 2005, we acquired a portfolio of 330 ATMs, primarily at BP Amoco locations throughout the midwest region, for approximately $9.0 million in cash. | |
| • | In March 2005, we acquired a portfolio of 475 ATMs located in the greater New York Metro area from BAS Communications for approximately $8.2 million in cash. | |
| • | In June 2004, we acquired the ATM business owned by E*TRADE Access, Inc. for $106.9 million in cash. At the time of the acquisition, E*TRADE Access, Inc. operated 13,155 ATMs in the United States. |
We believe that this experience and our disciplined integration
approach reduces the risks associated with acquiring additional
portfolios of ATMs. Because we do not typically assume
significant numbers of employees nor import new operating
systems in connection with our ATM portfolio or asset
acquisitions, we believe such acquisitions have relatively low
integration/migration risk when compared to business
acquisitions (such as the 7-Eleven ATM Transaction). We also
believe our acquisition risk, for both ATM portfolio
acquisitions and business acquisitions, is somewhat reduced
because the financial performance of ATMs we acquire is
relatively predictable given our access to third-party data on
the transaction history and revenues of the ATMs we acquire.
This predictability is also enhanced by the well-understood
nature of our operating costs per machine and per transaction.
The scale of our operations allows us to significantly reduce
the overhead associated with acquired ATM portfolios as well as
reduce operating costs by taking advantage of our existing
vendor contracts. In addition, we have been able to successfully
grow several of our acquired ATM portfolios and businesses by
deploying additional ATMs under the merchant contracts
associated with such acquisitions. This has resulted in improved
operating cash flow and high returns on capital for several of
our transactions. For example, the current annual EBITDA on the
ATM business acquired from E*TRADE Access, Inc. is approximately
three times the annual EBITDA at the time of acquisition.
Our
Products and Services
We typically provide our leading merchant customers with all of
the services required to operate an ATM, which include
transaction processing, cash management, maintenance, and
monitoring. We believe our merchant customers value our high
level of service, our
24-hour per
day monitoring and accessibility, and that our U.S. ATMs
are on-line and able to serve customers an average of 98.5% of
the time. In connection with the operation of our ATMs and our
customers’ ATMs, we generate revenue on a per-transaction
basis from the surcharge fees charged to cardholders for the
convenience of using our ATMs and from interchange fees charged
to such cardholders’ financial institutions for processing
the ATM transactions. The following table provides detail
relating to the number of ATMs we owned and operated under our
various arrangements as of March 31, 2008:
| Company-Owned | Merchant-Owned | Total | ||||||||||
|
Number of ATMs
|
21,500 | 11,100 | 32,600 | |||||||||
|
Percent of total ATMs
|
66.0 | % | 34.0 | % | 100.0 | % | ||||||
We generally operate our ATMs under multi-year contracts that
provide a recurring and stable source of transaction-based
revenue and typically have an initial term of five to seven
years. As of March 31, 2008, our contracts with our top 10
merchant customers had a weighted average remaining life (based
on revenues) of 7.4 years, including the
10-year
placement agreement we entered into with 7-Eleven in July 2007.
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Recently, we have entered into arrangements with financial
institutions to brand certain of our Company-owned ATMs. A
branding arrangement allows a financial institution to expand
its geographic presence for a fraction of the cost of building a
branch location and typically for less than the cost of placing
one of its own ATMs at that location. Such an arrangement allows
a financial institution to rapidly increase its number of
branded ATM sites and improve their competitive position. Under
these arrangements, the branding institution’s customers
are allowed to use the branded ATM without paying a surcharge
fee to us. In return, we receive monthly fees on a per-ATM basis
from the branding institution, while retaining our standard fee
schedule for other cardholders using the branded ATM. In
addition, we typically receive increased interchange revenue as
a result of increased usage of our ATMs by the branding
institution’s customers and others who prefer to use a bank
branded ATM. We intend to pursue additional branding
arrangements as part of our growth strategy. Prior to 2006, we
had bank branding arrangements in place on less than 1,000 of
our Company-owned ATMs. However, as a result of our increased
sales efforts, the 7-Eleven ATM Transaction, and financial
institutions realizing the significant benefits and
opportunities afforded to them through bank branding programs,
as of March 31, 2008, we had branding arrangements in place
with 24 domestic financial institutions and had placed these
institution’s brands on over 9,500 Company-owned ATMs. The
7-Eleven ATM Transaction added approximately 5,500 of these
ATMs, which are branded with the Citibank brand.
Another type of surcharge-free program we offer in addition to
branding our ATMs is through our Allpoint and MasterCard
nationwide surcharge-free ATM networks. Under the Allpoint
network, financial institutions who are members of the network
pay us a fixed monthly fee per cardholder in exchange for us
providing their cardholders with surcharge-free access to most
of our domestic owned
and/or
operated ATMs. Under the MasterCard network, we provide
surcharge-free access to most of our domestic owned
and/or
managed ATMs to cardholders of financial institutions who
participate in the network and who utilize a MasterCard debit
card. In return for providing this service, we receive a fee
from MasterCard for each surcharge-free withdrawal transaction
conducted on our network. The Allpoint and MasterCard networks
offer attractive alternatives to financial institutions that
lack their own distributed ATM network. We acquired all of the
outstanding shares of ATM National, Inc., the owner and operator
of the Allpoint network, in December 2005. In September 2006, we
implemented our surcharge-free network with MasterCard. As part
of the
7-Eleven ATM
Transaction, we assumed additional surcharge-free relationships
with CO-OP, the nation’s largest surcharge-free network for
credit unions, and FSCC, a cooperative service organization
providing shared branching services for credit unions, thus
further enhancing our surcharge-free offerings.
We have found that the primary factor affecting transaction
volumes at a given ATM is its location. Our strategy in
deploying our ATMs, particularly those placed under
Company-owned arrangements, is to identify and deploy ATMs at
locations that provide high visibility and high transaction
volume. Our experience has demonstrated that the following
locations often meet these criteria: convenience stores and
combination convenience stores and gas stations, grocery stores,
airports, and major regional and national retail outlets. The
5,500 locations that we added to our portfolio as a result of
the 7-Eleven ATM Transaction are a prime example of the types of
locations that we seek when deploying our ATMs. In addition to
the 7-Eleven locations, we have also entered into multi-year
agreements with a number of other merchants, including Chevron,
Costco, CVS/Pharmacy, Duane Reade, ExxonMobil, Hess Corporation,
Rite Aid, Safeway, Sunoco, Target, and Walgreens in the United
States; Alfred Jones, Martin McColl, McDonalds, The Noble
Organisation, Odeon Cinemas, Punch Taverns, Spar, Tates, and Vue
Cinemas in the United Kingdom; and OXXO in Mexico. We believe
that once a cardholder establishes a pattern of using a
particular ATM, the cardholder will generally continue to use
that ATM.
Merchant
Customers
In each of our markets, we typically deploy our Company-owned
ATMs under long-term contracts with major national and regional
merchants, including convenience stores, supermarkets, drug
stores, and other high-traffic locations. Merchant-owned ATMs
are typically deployed under arrangements with smaller
independent merchants.
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The terms of our merchant contracts vary as a result of
negotiations at the time of execution. In the case of
Company-owned ATMs, the contract terms vary, but typically
include the following:
| • | an initial term of five to seven years; | |
| • | exclusive deployment of ATMs at locations where we install an ATM; | |
| • | our right to increase surcharge fees; | |
| • | our right to remove ATMs at underperforming locations without having to pay a termination fee; | |
| • | in the United States, our right to terminate or remove ATMs or renegotiate the fees payable to the merchant if surcharge fees are generally reduced or eliminated by law; and | |
| • | provisions making the merchant’s fee dependent on the number of ATM transactions. |
Our contracts under merchant-owned arrangements typically
include similar terms, as well as the following additional terms:
| • | in the United States, provisions prohibiting in-store check cashing by the merchant and, in the United States and United Kingdom, the operation of any other cash-back devices; | |
| • | provisions imposing an obligation on the merchant to operate the ATMs at any time its stores are open for business; and | |
| • | provisions, when possible, that require the assumption of our contract in the event a merchant sells its stores. |
Prior to the 7-Eleven ATM Transaction, no single merchant
customer’s ATM locations generated fees that accounted for
more than 5.0% of our total revenues. As a result of the
7-Eleven ATM Transaction, 7-Eleven is now the largest merchant
customer in our portfolio, representing 30.9% of our total
revenues for the three months ended March 31, 2008 and
33.0% of our total pro forma revenues for the year ended
December 31, 2007. The underlying merchant agreement with
7-Eleven has an initial term of 10 years from the effective
date of the acquisition. In addition to 7-Eleven, our next four
largest merchant customers are CVS, Walgreens, Target and
ExxonMobil, and they collectively generated 13.8% of our total
revenues for the three months ended March 31, 2008 and
12.4% of our total pro forma revenues for the year ended
December 31, 2007.
Sales and
Marketing
Our sales and marketing team focuses principally on developing
new relationships with national and regional merchants as well
as on building and maintaining relationships with our existing
merchants. The team is organized into groups that specialize in
marketing to specific merchant industry segments, which allows
us to tailor our offering to the specific requirements of each
merchant customer. In addition to the merchant-focused sales and
marketing group, we have a sales and marketing group that is
focused on developing and managing our relationships with
financial institutions, as we look to expand the types of
services that we offer to such institutions.
In addition to targeting new business opportunities, our sales
and marketing team supports our acquisition initiatives by
building and maintaining relationships with newly acquired
merchants. We seek to identify growth opportunities within each
merchant account by analyzing the merchant’s sales at each
of its locations, foot traffic, and various demographic data to
determine the best opportunities for new ATM placements. As of
March 31, 2008, our sales and marketing team was composed
of 54 employees, of which those who are exclusively focused
on sales typically receive a combination of incentive-based
compensation and a base salary.
Technology
Our technology and operations platform consists of ATM
equipment, ATM and internal network infrastructure (including
in-house ATM transaction processing capabilities), cash
management, and customer
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service. This platform is designed to provide our merchant
customers with what we believe is a high quality suite of
services.
ATM Equipment. In the United States and
Mexico, we purchase ATMs from national manufacturers, including
NCR Corporation (“NCR”), Diebold, Incorporated
(“Diebold”), Triton Systems of Delaware, Inc.
(“Triton”), and Wincor Nixdorf AG (“Wincor
Nixdorf”), and place them in our merchant customers’
locations. The portfolio of equipment we purchased in the
7-Eleven ATM Transaction is comprised of traditional ATMs
manufactured by NCR and Diebold and advanced-functionality Vcom
terminals manufactured by NCR. The wide range of advanced
technology available from these ATM manufacturers provides our
merchant customers with advanced features and reliability
through sophisticated diagnostics and self-testing routines. The
different machine types can all perform basic functions, such as
dispensing cash and displaying account information. However,
some of our ATMs are modular and upgradeable so they can be
adapted to provide additional services in response to changing
technology and consumer demand. For example, a portion of our
ATMs can be upgraded to accept deposits through the installation
of additional hardware and software components.
We operate three basic types of ATMs in the United Kingdom:
(1) “convenience,” which are internal to a
merchant’s premises, (2) “through the wall,”
which are external to a merchant’s premises, and
(3) “pods,” a free-standing kiosk style ATM, also
located external to a merchant’s premises. The ATMs are
principally manufactured by NCR.
Transaction Processing. We place significant
emphasis on providing quality service with a high level of
security and minimal interruption. We have carefully selected
support vendors to optimize the performance of our ATM network.
In addition, our in-house EFT transaction processing operations
and our third-party transaction processors provide sophisticated
security analysis and monitoring 24 hours a day.
In late 2006, we implemented our in-house EFT processing
operation, which is based in Frisco, Texas. This initiative
enables us to monitor transactions on our ATMs and to control
the flow and content of information on the ATM screen. As of
March 31, 2008, we had converted approximately 20,300 of
our Company- and merchant-owned ATMs from third party processors
to our in-house EFT processing platform, including the ATMs in
our United Kingdom portfolio and our advanced-functionality Vcom
terminals. We currently expect this initiative to be completed
by December 31, 2008. Additionally, we are processing
transactions for 675 ATMs owned by a third party who has engaged
us to serve as the processor for a portion of its ATM portfolio.
In conjunction with the 7-Eleven ATM Transaction, we assumed a
master ATM management agreement with Fiserv under which Fiserv
currently provides a number of ATM-related services to the
7-Eleven ATMs, including transaction processing, network
hosting, network sponsorship, maintenance, cash management, and
cash replenishment.
Internal Systems. Our internal systems,
including our in-house EFT processing platform, include multiple
layers of security to help protect them from unauthorized
access. Protection from external sources is provided by the use
of hardware and software-based security features that isolate
our sensitive systems. We also use commercially-available
encryption technology to protect communications. On our internal
network, we employ user authentication and anti-virus tools at
multiple levels. These systems are protected by detailed
security rules to limit access to all critical systems. Our
systems components are directly accessible by a limited number
of employees on a need-only basis. Our gateway connections to
our EFT network service providers provide us with real-time
access to transaction details, such as cardholder verification,
authorization, and funds transfer. We have installed these
communications circuits with backup connectivity to help protect
us from telecommunications problems in any particular circuit.
We use commercially-available and custom software that
continuously monitors the performance of the ATMs in our
network, including details of transactions at each ATM and
expenses relating to that ATM, such as fees payable to the
merchant. This software permits us to generate detailed
financial information for each ATM location, allowing us to
monitor each location’s profitability. We analyze
transaction volume and profitability data to determine whether
to continue operating at a given site, how to price various
operating arrangements with merchants and branding arrangements,
and to create a profile of successful ATM locations so as to
assist us in deciding the best locations for additional ATM
deployments.
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Cash Management. We have our own internal cash
management department that utilizes data generated by our cash
providers, internally-generated data, and a proprietary
methodology to confirm daily orders, audit delivery of cash to
armored couriers and ATMs, monitor cash balances for cash
shortages, coordinate and manage emergency cash orders, and
audit costs from both armored couriers and cash providers.
Our cash management department uses commercially-available
software and proprietary analytical models to determine the
necessary fill frequency and load amount for each ATM. We
project cash requirements for each ATM on a daily basis, taking
into consideration its location, the day of the week, and timing
of holidays and events, and other factors. After receiving a
cash order from us, the cash provider forwards the request to
its vault location nearest to the applicable ATM. Personnel at
the vault location then arrange for the requested amount of cash
to be set aside and made available for the designated armored
courier to access and subsequently transport to the ATM.
Customer Service. We believe one of the
factors that differentiates us from our competitors is our
customer service responsiveness and proactive approach to
managing any ATM downtime. We use an advanced software package
that monitors the performance of our Company-owned ATMs
24 hours a day for service interruptions and notifies our
maintenance vendors for prompt dispatch of necessary service
calls. The traditional ATMs acquired in the 7-Eleven ATM
Transaction will continue to be monitored and serviced under the
Fiserv ATM management agreement. Additionally, the Vcom
terminals acquired will continue to be monitored under a
third-party service agreement.
Finally, we use a commercially-available software package to
maintain a database of transactions made on and performance
metrics for all of our ATM locations. This data is aggregated
into individual merchant customer profiles that are readily
accessible by our customer service representatives and managers.
We believe our proprietary database enables us to provide
superior quality and accessible and reliable customer support.
Primary
Vendor Relationships
To maintain an efficient and flexible operating structure, we
outsource certain aspects of our operations, including
transaction processing, cash management, and maintenance. Due to
the number of ATMs we operate, we believe we have obtained
favorable pricing terms from most of our major vendors. We
contract for the provision of the services described below in
connection with our operations.
Transaction Processing. We contract with and
pay fees to third parties who process transactions originating
from our ATMs and that are not processed directly through our
own in-house EFT processing platform. These processors
communicate with the cardholder’s financial institution
through an EFT network to obtain transaction authorization and
settle transactions. These transaction processors include Star
Systems, Fiserv, RBSLynk (“Lynk”, a subsidiary of The
Royal Bank of Scotland Group) and Elan Financial Services in the
United States, LINK and Euronet in the United Kingdom, and
PROSA-RED in Mexico. Although the Company has recently moved
towards in-house EFT processing, such processing efforts are
primarily focused on controlling the flow and content of
information on the ATM screen. As such, we expect to continue to
rely on third party service providers to handle our connections
to the EFT networks and to perform selected fund settlement and
reconciliation processes. Transactions originating on
traditional ATMs acquired in the 7-Eleven ATM Transaction will
continue to be processed under the ATM management agreement with
Fiserv, who maintains relationships with the major
U.S. networks.
EFT Network Services. Our transactions are
routed over various EFT networks to obtain authorization for
cash disbursements and to provide account balances. Such
networks include Star, Pulse, NYCE, Cirrus, and Plus in the
United States; LINK in the United Kingdom; and PROSA-RED in
Mexico. EFT networks set the interchange fees that they charge
to the financial institutions, as well as the amount paid to us.
We attempt to maximize the utility of our ATMs to cardholders by
participating in as many EFT networks as practical.
ATM Equipment. As previously noted, we
purchase substantially all of our ATMs from national
manufacturers, including NCR, Diebold, Triton Systems, and
Wincor Nixdorf. The large quantity of ATMs that we purchase from
these manufacturers enables us to receive favorable pricing and
payment terms. In addition, we maintain close working
relationships with these manufacturers in the course of our
business, allowing us to
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stay informed regarding product updates and to minimize
technical problems with purchased equipment. Under our
Company-owned arrangements, we deploy high quality,
multi-function ATMs. Under our merchant-owned arrangements, we
deploy ATMs that are cost-effective and appropriate for the
merchant.
Although we currently purchase a substantial majority of our
ATMs from NCR, we believe our relationships with our other ATM
suppliers are good and that we would be able to purchase the
ATMs we require for our Company-owned operations from other ATM
manufacturers if we were no longer able to purchase ATMs from
NCR.
ATM Maintenance. In the United States, we
typically contract with third-party service providers for the
provision of
on-site
maintenance services. We have multi-year maintenance agreements
with Diebold, NCR, and Pendum in the United States. In the
United Kingdom, maintenance services are provided by in-house
technicians. In Mexico, Diebold provides all maintenance
services for our ATMs.
In connection with the 7-Eleven ATM Transaction, we assumed a
number of multi-year, third-party service contracts previously
entered into by the 7-Eleven Financial Services Business.
Historically, Fiserv has contracted with NCR to provide
on-site
maintenance services to the acquired ATMs and Vcom terminals. We
will continue to operate under the current terms of these
agreements until such time as they are renegotiated or expire.
Cash Management. We obtain cash to fill our
Company-owned, and in some cases merchant-owned, ATMs under
arrangements with our cash providers, which consist of Bank of
America, Wells Fargo, and PDNB in the United States, ALCB in the
United Kingdom, and Bansi in Mexico. In the United States and
United Kingdom, we have generally paid a monthly fee on the
average amount outstanding to our primary vault cash providers
under a formula based on LIBOR. However, for the ATMs and Vcom
terminals acquired in the 7-Eleven ATM Transaction, we pay a
monthly fee for the vault cash utilized under a floating rate
formula based on the federal funds effective rate. In Mexico, we
pay a monthly fee for this cash under a formula based on the
Mexican Interbank Rate. At all times, the cash legally belongs
to the cash providers, and we have no access or right to the
cash. We also contract with third parties to provide us with
cash management services, which include reporting, armored
courier coordination, cash ordering, cash insurance,
reconciliation of ATM cash balances, ATM cash level monitoring,
and claims processing with armored couriers, financial
institutions, and processors.
As of March 31, 2008, we had $747.3 million in cash in
our domestic ATMs under these arrangements, of which 49.4% was
provided by Bank of America under a vault cash agreement that
runs until October 2008 and 49.9% was provided by Wells Fargo
under a vault cash agreement that runs until July. In the United
Kingdom, the balance of cash held in our ATMs as of
March 31, 2008, was approximately $164.5 million, and
in Mexico, our balance totaled approximately $14.3 million
as of March 31, 2008.
Cash Replenishment. We contract with armored
courier services to transport and transfer cash to our ATMs. We
use leading armored couriers such as Brink’s Incorporated
(“Brink’s”), Loomis, Fargo & Co., and
Pendum in the United States; and Loomis and Group 4 Securicor in
the United Kingdom. Under these arrangements, the armored
couriers pick up the cash in bulk and, using instructions
received from our cash providers, prepare the cash for delivery
to each ATM on the designated fill day. Following a
predetermined schedule, the armored couriers visit each location
on the designated fill day, load cash into each ATM by either
adding additional cash into a cassette or by swapping out the
remaining cash for a new fully loaded cassette, and then balance
the machine and provide cash reporting to the applicable cash
provider.
In Mexico, we utilize a flexible replenishment schedule, which
enables us to minimize our cash inventory by allowing the ATM to
be replenished on an “as needed” basis and not on a
fixed recurring schedule. Cash needs are forecasted in advance
and the ATMs are closely monitored on a daily basis. Once a
terminal is projected to need cash within a specified number of
days, the cash is procured and the armored vendor is scheduled
so that the terminal is loaded approximately one day prior to
the day that it is expected to run out of cash. Our primary
armored courier service providers in Mexico are Compañia
Mexicana de Servicio de Traslado de Valores (Cometra) and
Panamericano.
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In the first quarter of 2008, we announced that we are in the
process of establishing our own in-house armored courier
operation in the United Kingdom, which we expect will formally
commence operations in the third quarter of 2008. Such operation
will initially service the cash needs of approximately 300 of
our ATMs located throughout the London metropolitan area.
Seasonality
In the United States and Mexico, our overall business is
somewhat seasonal in nature with generally fewer transactions
occurring in the first quarter. We typically experience
increased transaction levels during the holiday buying season at
our ATMs located in shopping malls and lower volumes in the
months following the holiday season. Similarly, we have seen
increases in transaction volumes in the spring at our ATMs
located near popular spring-break destinations. Conversely,
transaction volumes at our ATMs located in regions affected by
strong winter weather patterns typically decline as a result of
decreases in the amount of consumer traffic through certain
locations in which we operate our ATMs. These declines, however,
have been offset somewhat by increases in the number of our ATMs
located in shopping malls and other retail locations that
benefit from increased consumer traffic during the holiday
buying season. We expect these location-specific and regional
fluctuations in transaction volumes to continue in the future.
In the United Kingdom, seasonality in transaction patterns tends
to be similar to the seasonal patterns in the general retail
market. Generally, the highest transaction volumes occur on
weekend days in each of our markets and, thus, monthly
transaction volumes will fluctuate based on the number of
weekend days in a given month. However, we, like other
independent ATM operators, experience a drop in the number of
transactions we process during the Christmas season due to
consumers’ greater tendency to shop in the vicinity of free
ATMs and our closure of some of our ATM sites over the Christmas
break. We expect these location-specific and regional
fluctuations in transaction volumes to continue in the future.
Competition
We compete with financial institutions and other independent ATM
companies for additional ATM placements, new merchant accounts,
and acquisitions. Several of our competitors, namely national
financial institutions, are larger and more established. While
these entities may have fewer ATMs than we do, they have greater
financial and other resources than us. For example, our major
domestic competitors include banks such as Bank of America,
US Bancorp, Wachovia, and PNC Corp. as well as independent
ATM operators such as ATM Express and Innovus. In the United
Kingdom, we compete with several large non-bank ATM operators,
including Cardpoint (a wholly-owned subsidiary of Payzone),
Notemachine, and Paypoint, as well as banks such as the Royal
Bank of Scotland, Barclays, and Lloyds, among others. In Mexico,
we compete primarily with national and regional financial
institutions, including Banamex, Bancomer, and HSBC. Although
the independent ATM market is still relatively undeveloped in
Mexico, we have recently seen a number of small ATM operators
initiate operations. These operators, which are typically known
by the names of their sponsoring banks, include Banco Inbursa,
Afirme, and Bajio.
Despite the level of competition we face, many of our
competitors have not historically had a singular focus on ATM
management. As a result, we believe our focus solely on ATM
management and related services gives us a significant
competitive advantage. In addition, we believe the scale of our
extensive ATM network and our focus on customer service also
provide significant competitive advantages.
Government
and Industry Regulation
United
States
Our principal business, ATM network ownership and operation, is
not subject to significant government regulation, though we are
subject to certain industry regulations. Furthermore, various
aspects of our business are subject to state regulation. Our
failure to comply with applicable laws and regulations could
result in restrictions on our ability to provide our products
and services in such states, as well as the imposition of civil
fines.
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Americans with Disabilities Act
(“ADA”). The ADA currently prescribes
provisions that ATMs be made accessible to and independently
usable by individuals who are visually-impaired. The Department
of Justice may adopt new accessibility guidelines under the ADA
that will include provisions addressing ATMs and how to make
them more accessible to the disabled. Under the proposed
guidelines that have been published for comment but not yet
adopted, ATM height and reach requirements would be shortened,
keypads would be required to be laid out in the manner of
telephone keypads, and ATMs would be required to possess speech
capabilities, among other modifications. If adopted, these new
guidelines would affect the manufacture of ATM equipment going
forward and could require us to retrofit ATMs in our network as
those ATMs are refurbished or updated for other purposes.
Additionally, proposed Accessibility Guidelines under the ADA
would require voice-enabling technology for newly installed ATMs
and for ATMs that are otherwise retrofitted or substantially
modified. We are committed to ensuring that all of our ATMs
comply with all applicable ADA laws, and, although these new
rules have not yet been adopted by the Department of Justice, we
made substantially all of our Company-owned ATMs voice-enables
in conjunction with our security upgrade efforts in 2007.
Rehabilitation Act. In November 2006, a
U.S. District Judge ruled that the United States’
currencies (as currently designed) violate the Rehabilitation
Act, a law that prohibits discrimination in government programs
on the basis of disability, as the paper currencies issued by
the U.S. are identical in size and color, regardless of
denomination. Under the ruling, the U.S. Treasury
Department has been ordered to develop ways in which to
differentiate paper currencies such that an individual who is
visually-impaired would be able to distinguish between the
different denominations. In response to the November 2006
ruling, the Justice Department filed an appeal with the
U.S. Court of Appeals for the District of Columbia Circuit,
requesting that the decision be overturned on the grounds that
varying the size of denominations could cause significant
burdens on the vending machine industry and cost the Bureau of
Engraving and Printing an initial investment of
$178.0 million and up to $50.0 million in new printing
plates. In May 2008, the U.S Court of Appeals for the District
of Columbia Circuit upheld the November 2006 ruling. While it is
still uncertain at this time whether this decision will be
appealed to the U.S Supreme Court and what the outcome of that
appeals process would be, depending on the specific remediation
efforts agreed to, participants in the ATM industry (including
us) could be forced to incur significant costs to upgrade
current machines’ hardware and software components.
Encrypting Pin Pad and Triple-Data Encryption
Standards. Data encryption makes ATMs more
tamper-resistant. Two of the more recently developed advanced
data encryption methods are commonly referred to as Encrypting
Pin Pad (“EPP”) and the Triple Data Encryption
Standard (Triple-DES). In 2005, we adopted a policy that any new
ATMs that we acquire from a manufacturer must be both EPP and
Triple-DES compliant. As of March 31, 2008, all of our ATMs
were Triple-DES compliant and all of our Company-owned ATMs were
EPP compliant.
Surcharge Regulation. The imposition of
surcharges is not currently subject to federal regulation. There
have been, however, various state and local efforts to ban or
limit surcharges, generally as a result of activities of
consumer advocacy groups that believe that surcharges are unfair
to cardholders. Generally, United States federal courts have
ruled against these efforts. We are not aware of any existing
surcharging bans or limits applicable to us in any of the
jurisdictions in which we currently do business. Nevertheless,
there can be no assurance that surcharges will not be banned or
limited in the cities and states where we operate. Such a ban or
limit would have a material adverse effect on us and other ATM
operators.
EFT Network Regulations. EFT regional networks
have adopted extensive regulations that are applicable to
various aspects of our operations and the operations of other
ATM network operators. The Electronic Fund Transfer Act,
commonly known as Regulation E, is the major source of EFT
network regulations. The regulations promulgated under
Regulation E establish the basic rights, liabilities, and
responsibilities of consumers who use electronic fund transfer
services and of financial institutions that offer these
services. The services covered include, among other services,
ATM transactions. Generally, Regulation E requires us to
provide notice of the fee to be charged the consumer, establish
limits on the consumer’s liability for unauthorized use of
his card, provide receipts to the consumer, and establish
protest procedures for the consumer. We believe that we are in
material compliance with these regulations and, if any
deficiencies were discovered, that we would be able to correct
them before they had a material adverse impact on our business.
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United
Kingdom
In the United Kingdom, MasterCard International has required
compliance with an encryption standard called Europay,
MasterCard, Visa, or “EMV”. The EMV standard provides
for the security and processing of information contained on
microchips imbedded in certain debit and credit cards, known as
“smart cards.” As of March 31, 2008, all of our
ATMs in the United Kingdom were EMV compliant, except for ATM
transactions that are originated through MasterCard branded
credit cards. We expect to achieve EMV compliance for these
cards by June 30, 2008. As a result of these compliance
standards, our liability for fraudulent transactions conducted
on our ATMs in the United Kingdom should be substantially
reduced.
Additionally, the Treasury Select Committee of the House of
Commons heard evidence in 2005 from interested parties with
respect to surcharges in the ATM industry. This committee was
formed to investigate public concerns regarding the ATM
industry, including (1) adequacy of disclosure to ATM
customers regarding surcharges, (2) whether ATM providers
should be required to provide free services in low-income areas,
and (3) whether to limit the level of surcharges. While the
committee made numerous recommendations to Parliament regarding
the ATM industry, including that ATMs should be subject to the
Banking Code (a voluntary code of practice adopted by all
financial institutions in the United Kingdom), the United
Kingdom government did not accept the committee’s
recommendations. Despite the rejection of the committee’s
recommendations, the U.K. government did sponsor an ATM task
force to look at social exclusion in relation to ATM services.
As a result of the task force’s findings, approximately 600
additional free-to-use ATMs (to be provided by multiple ATM
deployers) were required to be installed in low income areas
throughout the United Kingdom. While this is less than a two
percent increase in free-to-use ATMs through the U.K., there is
no certainty that other similar proposals will not be made and
accepted in the future.
Mexico
The ATM industry in Mexico has been historically operated by
financial institutions. The Central Bank of Mexico (“Banco
de Mexico”) supervises and regulates ATM operations of both
financial institutions and non-bank ATM deployers. Although,
Banco de Mexico’s regulations permit surcharge fees to be
charged in ATM transactions, it has not issued specific
regulations for the provision of ATM services. In addition, in
order for a non-bank ATM deployer to provide ATM services in
Mexico, the deployer must be affiliated with PROSA-RED or
E-Global,
which are credit card and debit card proprietary networks that
transmit information and settle ATM transactions between its
participants. As only financial institutions are allowed to be
participants of PROSA-RED or
E-Global,
Cardtronics Mexico entered into a joint venture with Bansi, who
is a member of PROSA-RED. As a financial institution, Bansi and
all entities in which it participates, including Cardtronics
Mexico, are regulated by the Ministry of Finance and Public
Credit (“Secretaria de Hacienda y Crédito
Público”) and supervised by the Banking and Securities
Commission (“Comisión Nacional Bancaria y de
Valores”). Additionally, Cardtronics Mexico is subject to
the provisions of the Ley del Banco de Mexico (Law of Banco de
Mexico), the Ley de Instituciones de Crédito (Mexican
Banking Law), and the Ley para la Transparencia y Ordenamiento
de los Servicios Financieros (Law for the Transparency and
Organization of Financial Services).
Legal
Proceedings
In 2006, Duane Reade, Inc. (“Customer”), one of our
merchant customers, filed a complaint in the New York State
Supreme Court alleging that we had breached an ATM operating
agreement with the Customer by failing to pay the Customer the
proper amount of fees under the agreement. The Customer is
claiming that it is owed no less than $600,000 in lost revenues,
exclusive of interests and costs, and projects that additional
damages will accrue to them at a rate of approximately $100,000
per month, exclusive of interest and costs. As the term of our
operating agreement with the Customer extends to December 2014,
the Customer’s claims could exceed $12.0 million. In
response to a motion for summary judgment filed by the Customer
and a cross-motion filed by us, the New York State Supreme Court
ruled in September 2007 that our interpretation of the ATM
operating agreement was the appropriate interpretation and
expressly rejected the Customer’s proposed interpretations.
The Customer has appealed this ruling. Notwithstanding that
appeal, we believe that the
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ultimate resolution of this dispute will not have a material
adverse impact on our financial condition or results of
operations.
We are also subject to various legal proceedings and claims
arising in the ordinary course of its business. We have provided
reserves where necessary for all claims and management does not
expect the outcome in any of these legal proceedings,
individually or collectively, to have a material adverse effect
on our financial condition or results of operations.
Employees
As of March 31, 2008, we had 418 employees. None of
our employees is represented by a union or covered by a
collective bargaining agreement. We believe that our relations
with our employees are good.
Facilities
Our principal executive offices are located at 3110 Hayes Road,
Suite 300, Houston, Texas 77082, and our telephone number
is
(281) 596-9988.
We lease approximately 26,000 square feet of space under
our Houston office lease and approximately 30,000 square
feet in warehouse space in Houston, Texas. We lease an
additional 15,000 square feet of office and warehouse space
in buildings adjacent to our principal executive offices in
Houston, Texas. Furthermore, we lease approximately
15,000 square feet in Frisco, Texas, where we mange our
in-house EFT processing operations and our Advanced
Functionality operations, and 2,500 square feet of office
space in Bethesda, Maryland, where we manage our Allpoint
surcharge-free network operations.
In addition to our domestic office space, we lease approximately
6,200 square feet of office space in Hatfield,
Hertfordshire, England and approximately 2,400 square feet
of office space in Mexico City, Mexico. Our facilities are
leased pursuant to operating leases for various terms. We
believe that our leases are at competitive or market rates and
do not anticipate any difficulty in leasing suitable additional
space upon expiration of our current lease terms.
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MANAGEMENT
Directors
and Executive Officers
Board
of Directors
Board Size. Our Board of Directors (our
“Board”) is currently composed of seven directors. Our
Third Amended and Restated Certificate of Incorporation and our
Second Amended and Restated Bylaws provide for a classified
Board consisting of three classes of directors, each serving
staggered three year terms. As a result, a portion of our Board
is elected each year. Class I directors’ terms expire
at the Annual Meeting of Stockholders to be held in June 2008,
Class II directors’ terms expire at the Annual Meeting
of Stockholders to be held in 2009, and Class III
directors’ terms expire at the Annual Meeting of
Stockholders to be held in 2010. The following table sets forth
the name and age of each of the person who was serving as a
director as of May 30, 2008:
|
Name
|
Age |
Position
|
||||
|
Fred R. Lummis
|
54 | Chairman of the Board, Class III Director | ||||
|
Jack Antonini
|
55 | Class III Director | ||||
|
Tim Arnoult
|
59 | Class II Director | ||||
|
Robert P. Barone
|
70 | Class I Director | ||||
|
Jorge M. Diaz
|
43 | Class I Director | ||||
|
Dennis F. Lynch
|
59 | Class II Director | ||||
|
Michael A.R. Wilson
|
40 | Class III Director | ||||
The Nominating & Governance Committee of our Board
considers and makes recommendations to our Board concerning the
appropriate size and needs of our Board and considers candidates
to fill new positions created by expansion or vacancies that
occur by resignation, retirement or any other reason.
The following biographies describe the business experience of
the current members of our Board of Directors:
Fred R. Lummis has served as a director and Chairman of
the Board since June 2001. In 2006, Mr. Lummis co-founded
Platform Partners, LLC and currently serves as its Chairman and
Chief Executive Officer. Prior to co-founding Platform Partners,
Mr. Lummis co-founded and served as the managing partner of
The CapStreet Group, LLC, CapStreet II, L.P. and CapStreet
Parallel II, LP. Mr. Lummis continues to serve as a senior
advisor to The CapStreet Group, LLC. From June 1998 to May 2000,
Mr. Lummis served as Chairman of the Board and Chief
Executive Officer of Advantage Outdoor Company, an outdoor
advertising company. From September 1994 to June 1998,
Mr. Lummis served as Chairman and Chief Executive Officer
of American Tower Corporation, a nationwide communication tower
owner and operator. Mr. Lummis currently serves as a
director of Amegy Bancorporation Inc. and several private
companies. Mr. Lummis holds a Bachelor of Arts degree in
economics from Vanderbilt University and a Masters of Business
Administration degree from the University of Texas at Austin.
Jack Antonini has served as our Chief Executive Officer,
President and a director since January 2003. From November 2000
to December 2002, Mr. Antonini served as a consultant for
JMA Consulting, providing consulting services to the financial
industry. During 2000, Mr. Antonini served as Chief
Executive Officer and President of Globeset, Inc., an electronic
payment products and services company. From August 1997 to
February 2000, Mr. Antonini served as Executive Vice
President of consumer banking at First Union Corporation of
Charlotte, N.C. From September 1995 to July 1997, he served as
Vice Chairman and Chief Financial Officer of First USA
Corporation, which was acquired by Bank One in June 1997. From
1985 to 1995, Mr. Antonini held various positions at
San Antonio-based USAA Federal Savings Bank, serving as
Vice Chairman, President and Chief Executive Officer from August
1991 to August 1995. He holds a Bachelor of Science degree in
business and accounting from Ferris State University in
Michigan. Mr. Antonini previously served as a director of
the Electronic Funds Transfer Association.
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Tim Arnoult was appointed as a director on
January 24, 2008. Mr. Arnoult has over 30 years
of banking and financial services experience. From 1979 to 2006,
Mr. Arnoult served in various positions at Bank of America,
including President of Global Treasury Services from
2005-2006,
President of Global Technology and Operations from
2000-2005
and President of Central U.S. Consumer and Commercial
Banking from
1996-2000.
Mr. Arnoult is also experienced in mergers and
acquisitions, having been directly involved in significant
transactions such as the mergers of NationsBank and Bank America
in 1998 and Bank of America and FleetBoston in 2004.
Mr. Arnoult has served on a variety of boards throughout
his career, including the board of Visa USA. Mr. Arnoult
holds a Bachelor of Arts degree in psychology and a Masters of
Business Administration degree from the University of Texas at
Austin.
Robert P. Barone has served as a director since September
2001. Mr. Barone has more than 40 years of sales,
marketing and executive leadership experience from the various
positions he has held at Diebold, NCR, Xerox and the Electronic
Funds Transfer Association. Since December 1999, Mr. Barone
has served as a consultant for SmartNet Associates, Inc., a
private consulting firm. Additionally, from May 1997 to November
1999, Mr. Barone served as Chairman of the Board of
PetsHealth Insurance, Inc., a pet health insurance provider.
From September 1988 to September 1994, he served as Board
Vice-Chairman, President and Chief Operating Officer at Diebold.
He holds a Bachelor of Business Administration degree from
Western Michigan University and a Masters of Business
Administration degree from Indiana University. A founder and
past Chairman of the Electronic Funds Transfer Association,
Mr. Barone is now Chairman Emeritus of the Electronic Funds
Transfer Association.
Jorge M. Diaz has served as a director since December
2004. Mr. Diaz has served as Division President and
Chief Executive Officer of Fiserv Output Solutions, a division
of Fiserv, Inc., since April 1994. Fiserv Output Solutions
provides card production services, statement processing and
electronic document distribution services. In January 1985,
Mr. Diaz co-founded National Embossing Company, a
predecessor company to Fiserv Output Solutions. Mr. Diaz
sold National Embossing Company to Fiserv in April 1994.
Dennis F. Lynch was appointed as a director on
January 24, 2008. Mr. Lynch has over 25 years
experience in the payments industry and has led the introduction
and growth of various card products and payment solutions.
Mr. Lynch currently serves as Chairman and Chief Executive
Officer of RightPath Payments Inc., a company providing
business-to-business payments via the internet. From 1994 to
2004, Mr. Lynch served in various positions of NYCE
Corporation, an electronic payments network, including serving
as President and Chief Executive Officer from 1996 to 2004 and a
director from
1992-2004.
Prior to joining NYCE, Mr. Lynch served in a variety of
information technology and product roles, ultimately managing
Fleet’s consumer payments portfolio. Mr. Lynch has
served on a number of boards, including the board of Open
Solutions, Inc., a publicly-traded company delivering core
banking products to the financial services market, from
2005-2007,
was a founding director of the New England-wide YANKEE24 Network
and served as its Chairman from 1988 to 1990. Additionally,
Mr. Lynch has served on the Executive Committee and the
board of the Electronic Funds Transfer Association.
Mr. Lynch received his Bachelors and Masters degrees from
the University of Rhode Island.
Michael A.R. Wilson has served as a director since
February 2005. Mr. Wilson is a Managing Director at TA
Associates, a private equity firm, where he focuses on growth
investments and leveraged buyouts of financial services,
business services, and consumer products companies. He currently
serves on the boards of Advisory Research, Inc., Jupiter
Investment Group, K2 Advisors LLC, and Numeric Investors.
Prior to joining TA Associates in 1992, Mr. Wilson was a
Financial Analyst in Morgan Stanley’s Telecommunications
Group. In 1994, he joined Affiliated Managers Group, a TA
Associates-backed financial services
start-up, as
Vice President and a member of the founding management team.
Mr. Wilson received a BA degree, with Honors, in Business
Administration from the University of Western Ontario and a
Masters of Business Administration degree, with Distinction,
from Harvard Business School.
Director
Independence
As required under the listing standards of The NASDAQ Stock
Market LLC (“NASDAQ”), a majority of the members of
our Board must qualify as “independent,” as
affirmatively determined by our Board. Our
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Board has delegated this responsibility to its
Nominating & Governance Committee. Pursuant to its
charter, the Nominating & Governance Committee
determines whether or not each director and each prospective
director is independent. The Nominating & Governance
Committee evaluated all relevant transactions or relationships
between each director, or any of his or her family members, and
our company, senior management and independent registered
accounting firm. Based on this evaluation, the
Nominating & Governance Committee has determined that
Messrs. Arnoult, Barone, Lummis, Lynch and Wilson are each
an independent director, as that term is defined in the NASDAQ
listing standards. Messrs. Arnoult, Barone, Lummis, Lynch
and Wilson constitute a majority of the members of our Board.
Mr. Antonini is not independent because he currently serves
as our President and Chief Executive Officer. Mr. Diaz is
not considered independent because of his employment with Fiserv
Output Solutions, a division of Fiserv, Inc. In 2007, we paid
approximately $9.9 million in fees to Fiserv for services
rendered to us.
Committees
of the Board of Directors
General
Our Board currently has three standing committees: an Audit
Committee, a Compensation Committee and a Nominating &
Governance Committee. Each committee (with the exception of the
Compensation Committee) is comprised of independent directors as
currently required under the SEC’s rules and regulations
and the NASDAQ listing standards and each committee is governed
by a written charter approved by the full Board. These charters
form an integral part of our corporate governance policies, and
a copy of each charter is available on our website at
www.cardtronics.com.
The table below provides the composition of each committee of
our Board:
|
Nominating & |
||||||||||||
|
Audit |
Compensation |
Governance |
||||||||||
|
Name
|
Committee | Committee | Committee | |||||||||
|
Fred R. Lummis
|
X | X | ||||||||||
|
Jack Antonini
|
||||||||||||
|
Tim Arnoult
|
X | X | ||||||||||
|
Robert P. Barone
|
X | |||||||||||
|
Jorge M. Diaz
|
X | |||||||||||
|
Dennis F. Lynch
|
X | X | ||||||||||
|
Michael A.R. Wilson
|
X | |||||||||||
Audit
Committee
The Audit Committee is appointed by our Board to:
| • | assist the Board in fulfilling its oversight responsibilities with respect to the conduct by our management of our financial reporting process, including the development and maintenance of a system of internal accounting and financial reporting controls; | |
| • | assist the Board in overseeing the integrity of our financial statements, qualifications and independence of our independent registered public accounting firms, their performance and the performance of the our internal audit function; | |
| • | prepare for inclusion in this proxy statement the audit committee report required by the SEC; | |
| • | recommend to our Board whether such audited financial statements should be included in our Annual Report on Form 10-K to be filed with the SEC; and | |
| • | perform such other functions as the Board may assign to the Audit Committee from time to time. |
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The Board, in its business judgment, has determined that the
Audit Committee is comprised entirely of directors who satisfy
the standards of independence established under the SEC’s
rules and regulations, NASDAQ listing standards and our
Corporate Governance Principles. In addition, the Board, in its
business judgment, has determined that each member of the
committee satisfies the financial literacy requirements of the
NASDAQ listing standards and Mr. Barone qualifies as an
“audit committee financial expert” within the meaning
of the SEC’s rules and regulations.
Pursuant to its charter, the Audit Committee has the authority,
at our expense, to retain professional advisors, including
legal, accounting or other consultants, to advise the Audit
Committee in connection with the exercise of its powers and
responsibilities. The Audit Committee may require any of our
officers or employees, our outside legal counsel or our
independent registered public accounting firm to attend a
meeting of the Audit Committee or to meet with any members of,
or consultants to, the Audit Committee. The Audit Committee is
responsible for the resolution of any disagreements between the
independent registered public accounting firms and management
regarding our financial reporting. The Audit Committee meets at
least quarterly with management and the independent registered
public accounting firm in separate executive sessions to discuss
any matter that the Audit Committee or each of these groups
believe should be discussed privately. The Audit Committee makes
regular reports to our Board. The Report of the Audit Committee
for the fiscal year ended December 31, 2007 is set forth in
our 2008 proxy statement.
Compensation
Committee
The Compensation Committee establishes salary and incentive
compensation of our executive officers and administers our
employee benefit plans. Pursuant to the NASDAQ Marketplace
Rules, a company listing its stock for trading on the NASDAQ in
connection with its initial public offering has 12 months
from the date of listing to comply with the requirement that its
Compensation Committee be comprised entirely of independent
directors. The Board, in its business judgment, has determined
that two of the three directors on the Compensation Committee
(Messrs. Lummis and Wilson) currently satisfy the standards
of independence established under the SEC’s rules and
regulations, NASDAQ listing standards and our Corporate
Governance Guidelines. Our Board has determined that
Mr. Diaz is not independent due to his relationship with
Fiserv but that his continued service as a member of the
Compensation Committee is in the best interests of our company
and stockholders pursuant to the transition rules contained in
the NASDAQ listing standards. The Report of the Compensation
Committee for the fiscal year ended December 31, 2008 is
set forth under “Compensation Committee Report” in our
2008 proxy statement.
The Compensation Committee is delegated all authority of our
Board as may be required or advisable to fulfill the purposes of
the Compensation Committee as set forth in its charter. The
Compensation Committee may form and delegate some or all of its
authority to subcommittees when it deems appropriate. Pursuant
to its charter, the purposes of the Compensation Committee are
to:
| • | oversee the responsibilities of the Board relating to compensation of our directors and executive officers; | |
| • | design, recommend and evaluate our director and executive officer compensation plans, policies and programs; | |
| • | produce the Compensation Committee Report for inclusion in the proxy statement, in accordance with applicable rules and regulations; | |
| • | otherwise discharge our Board’s responsibilities relating to compensation of our directors and executive officers; and | |
| • | perform such other functions as our Board may assign to the committee from time to time. |
In connection with these purposes, our Board has entrusted the
Compensation Committee with the overall responsibility for
establishing, implementing and monitoring the compensation for
our executive officers. In addition, the Compensation Committee
works with our executive officers, including our Chief Executive
Officer, to implement and promote our executive compensation
strategy. Please see “— Executive Officer
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Compensation — Compensation Discussion and
Analysis” for additional information on the Compensation
Committee’s processes and procedures for the consideration
and determination of executive compensation and
“— Director Compensation” for additional
information on its consideration and determination of director
compensation.
Nominating &
Governance Committee
The Nominating & Governance Committee identifies
individuals qualified to become members of our Board, makes
recommendations to our Board regarding director nominees for the
next annual meeting of stockholders and develops and recommends
corporate governance principles to our Board. The
Nominating & Governance Committee, in its business
judgment, has determined that it is comprised entirely of
directors who satisfy the standards of independence established
under NASDAQ listing standards and our Corporate Governance
Guidelines.
The Nominating & Governance Committee is delegated all
authority of our Board as may be required or advisable to
fulfill the purposes of the Nominating & Governance
Committee as set forth in its charter. More particularly, the
Nominating & Governance Committee:
| • | prepares and recommends to our Board for adoption appropriate corporate governance guidelines and modifications from time to time to those guidelines; | |
| • | establishes criteria for selecting new directors and seeks individuals qualified to become Board members for recommendation to our Board; | |
| • | seeks to implement the “independence” standards required by law, applicable listing standards, our certificate of incorporation or bylaws or our Corporate Governance Guidelines; | |
| • | determines whether or not each director and each prospective director is independent, disinterested or a non-employee director under the standards applicable to the committees on which such director is serving or may serve; | |
| • | recommends to our Board a director who serves as Chairman; | |
| • | reviews annually the advisability or need for any changes in the number and composition of our Board; | |
| • | reviews annually the advisability or need for any changes in the number, charters or titles of committees of our Board; | |
| • | recommends to our Board annually the composition of each Board committee and the individual director to serve as chairman of each committee; | |
| • | ensures that the chairman of each committee reports to our Board annually about the committee’s annual evaluation of its performance and evaluation of its charter; | |
| • | receives comments from all directors and reports to our Board annually with an assessment of our Board’s performance to be discussed with the full Board following the end of each fiscal year; | |
| • | reviews and reassesses annually the adequacy of our Corporate Governance Guidelines and recommends any proposed changes to our Board for approval; and | |
| • | makes a report to our Board annually on succession planning and works with our Board to evaluate potential successors to the principal executive officer. |
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Executive
Officers
Our executive officers are appointed by the Company’s Board
of Directors on an annual basis and serve until removed by the
Board or their successors have been duly appointed. The
following table sets forth the name, age, and the position of
each of the person who was serving as an executive officer as of
March 31, 2008:
|
Name
|
Age
|
Position
|
||||
|
Jack Antonini
|
54 | Chief Executive Officer, President, and Director | ||||
|
J. Chris Brewster
|
59 | Chief Financial Officer | ||||
|
Michael H. Clinard
|
41 | Chief Operating Officer | ||||
|
Rick Updyke
|
48 | Chief Strategy and Development Officer | ||||
|
Ronald Delnevo
|
53 | Managing Director of Bank Machine Ltd. | ||||
The following biographies describe the business experience of
our executive officers:
Jack Antonini. Mr. Antonini’s
biography is provided under the section
“— Directors” above.
J. Chris Brewster has served as our Chief Financial
Officer since February 2004. From September 2002 until February
2004, Mr. Brewster provided consulting services to various
businesses. From October 2001 until September 2002,
Mr. Brewster served as Executive Vice President and Chief
Financial Officer of Imperial Sugar Company, a Nasdaq-quoted
refiner and marketer of sugar and related products. From March
2000 to September 2001, Mr. Brewster served as Chief
Executive Officer and Chief Financial Officer of WorldOil.com, a
privately-held Internet, trade magazine, book and catalog
publishing business. From January 1997 to February 2000,
Mr. Brewster served as a partner of Bellmeade Capital
Partners, LLC, a merchant banking firm specializing in the
consolidation of fragmented industries. From March 1992 to
September 1996, he served as Chief Financial Officer of
Sanifill, Inc., a New York Stock Exchange-listed environmental
services company. From May 1984 to March 1992, he served as
Chief Financial Officer of National Convenience Stores, Inc., a
New York Stock Exchange-listed operator of 1,100 convenience
stores. Mr. Brewster holds a Bachelor of Science degree in
industrial management from the Massachusetts Institute of
Technology and a Masters of Business Administration from Harvard
Business School.
Michael H. Clinard has served as our Chief Operating
Officer since he joined us in August 1997. He holds a Bachelor
of Science degree in business management from Howard Payne
University. Mr. Clinard also serves as a director and Vice
President of the ATM Industry Association.
Rick Updyke has served as our Chief Strategy and
Development Officer since July 2007. From February 1984 to July
2007, Mr. Updyke held various positions with Dallas-based
7-Eleven, Inc., a convenience store retail company, most
recently serving as Vice President of Corporate Business
Development from February 2001 to July 2007. He holds a Bachelor
of Business Administration degree in management information
systems from Texas Tech University and a Masters of Business
Administration from Amberton University.
Ronald Delnevo has served as Managing Director of Bank
Machine since July 2000 and has been with Bank Machine (formerly
the ATM division of Euronet, a processor of financial and
payment transactions) since 1998. From May 2005 to December
2007, Mr. Delnevo served as a director on our Board. He
currently serves as Chairman of the Association of Independent
Cash Machine Operators, a director of the U.K. Payments Council,
and a member of the European Board of the ATMIA. Prior to
joining Bank Machine, Mr. Delnevo served in various
consulting roles in the retail sector. Mr. Delnevo was
educated at Heriot Watt University in Edinburgh and holds a
degree in business organization and a diploma in personnel
management.
Corporate
Governance
General
We are committed to good corporate governance. Our Board has
adopted several governance documents, which include our
Corporate Governance Principles, Code of Business Conduct and
Ethics, Financial Code of
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Ethics and charters for each standing committee of our Board.
Each of these documents is available on our website at
www.cardtronics.com.
Code of
Ethics
Our Board has adopted a Code of Business Conduct and Ethics for
our directors, officers and employees. In addition, our Board
has adopted a Financial Code of Ethics for our principal
executive officer, principal financial and accounting officer
and other accounting and finance executives. A copy of each of
code is available on our website at www.cardtronics.com. Any
change to, or waiver from, either code will be disclosed as
required by applicable securities laws.
Executive
Officer Compensation
Compensation
Discussion and Analysis
Objectives
of Executive Compensation Program
The primary objectives of our executive compensation program are
to attract, retain, and motivate qualified individuals who are
capable of leading our company to meet its business objectives
and to increase overall stockholder value. To achieve these
objectives, our Compensation Committee’s philosophy has
been to implement a compensation program that aligns the
interests of management with those of our investors and to
provide a compensation program that creates incentives for and
rewards performance of the executive officers based on our
overall success. Specifically, our compensation program provides
management with the incentive to increase our adjusted earnings
before interest, taxes, depreciation, and amortization, or
EBITDA (as defined in our credit facility). In addition, we
intend for our compensation program to both compensate our
executives on a level that is competitive with companies
comparable to us as well as maintain a level of internal
consistency and equity by paying higher amounts of compensation
to our more senior executive officers based on job role and
complexity along with individual talent and performance.
Our Compensation Committee believes that it is in the best
interests of our investors and our executive officers that our
compensation program remains relatively noncomplex and
straightforward, which should reduce the time and cost involved
in setting our compensation policies and calculating the
payments under such policies, as well as reduce the time
involved in furthering our investors’ understanding of such
policies.
Compensation
Review
Historically, our Compensation Committee has performed
(typically every other year) an informal market survey of the
competitiveness of our total compensation packages paid to our
executive officers through a review of compensation paid by
companies with whom we believe we compete for executive level
talent. During 2007, management selected, and the Compensation
Committee approved, the following comparable companies to be a
part of the committee’s review: Coinstar, Inc., Euronet
Worldwide, Inc., Global Cash Access Holdings, Inc., Global
Payments, Inc., Heartland Payment Systems, Inc., MoneyGram
International, Inc., Total Systems Services, Inc., and Wright
Express Corporation. The companies above were selected based on
the following criteria: (1) each operated in service lines
similar to those in which we operate, (2) each were
considered by the investment community (at the time of the
study) to be our peers in terms of growth rate
and/or
market capitalization, and (3) information regarding
compensation for each company was publicly available.
In our analysis, which was provided to the Compensation
Committee, we reviewed the components of executive compensation
paid by each peer company (e.g., base salary, annual cash
performance incentives, and stock option awards) as well as the
relative mix of the various components. Although the
Compensation Committee reviewed the compensation information
compiled, the committee did not target specific compensation
amounts for our executives based on such information. Rather,
the accumulated market information served as data that was
considered, but not relied upon, by the committee when making
its executive compensation decisions.
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Future Considerations. Historically, our
company has been privately held, and our compensation process
has been more subjective rather than formulaic in nature, with
compensation decisions based less on what comparative companies
are paying executives and more on what was required to attract
executives to a growing management team and retain them. We
expect that our Compensation Committee will continue to consider
both qualitative and quantitative factors in setting
compensation for our executives (including retention, which it
feels is a key factor in making compensation decisions);
however, as a result of our initial public offering in December
2007, we expect that our Compensation Committee will begin to
look at additional factors, including additional market
comparables, and begin to formalize its method of setting
compensation for executives over time. As noted above, while
informal market surveys were performed in previous years, the
information was not utilized to target specific compensation
amounts for our executives and was only used to assess our
competitiveness in the marketplace.
Components
of Executive Compensation
Our executive compensation program consists of three primary
elements: (1) base salary, (2) annual non-equity
incentive plan compensation, and (3) stock option and
restricted stock awards. In determining the level of total
compensation to be set for each compensation component, our
Compensation Committee considers a number of factors, including
informal market competitiveness analyses of our compensation
levels compared with those paid by comparable companies, our
most recent annual performance, each individual executive
officer’s performance, the desire to maintain internal
equity and consistency among our executive officers, and other
considerations that the committee deems to be relevant.
In addition to the three primary components, we provide our
executive officers with discretionary bonuses (as conditions
warrant), severance, and certain other benefits, such as
healthcare plans, that are available to all employees. While our
Compensation Committee reviews the total compensation package we
provide to each of our executive officers, our Board and the
committee view each element of our compensation program to serve
a specific purpose and to be distinct. In other words, a
significant amount of compensation paid to an executive in the
form of one element will not necessarily cause us to reduce
another element of the executive’s compensation.
Accordingly, we have not adopted any formal or informal policy
for allocating compensation between long-term and short-term,
between cash and non-cash, or among the different forms of
non-cash compensation.
Base
Salary
The base salaries for our executive officers are set at levels
believed to be sufficient to attract and retain qualified
individuals. We believe that our base salaries are an important
element of our executive compensation program because they
provide our executive officers with a steady income stream that
is not contingent upon our overall performance. Initial base
salary levels, which are typically set or approved by our
Compensation Committee, take into consideration the scope of an
individual executive’s responsibilities and experience as
well as the compensation paid by other companies with which we
believe we compete for executives. While there is no formal
weighting of these elements, the Compensation Committee
considers each in its analysis. Subsequent changes in the base
salaries of executive officers are reviewed and approved by our
Compensation Committee based on recommendations made by our
Chief Executive Officer (“CEO”), who conducts annual
performance reviews of each executive. Subsequent changes in the
base salary of the CEO are determined by our Compensation
Committee, which reviews the CEO’s performance on an annual
basis. Both the CEO’s review and the Compensation
Committee’s review include an analysis of how an individual
executive performed against his personalized goals, which are
jointly set by the executive and the CEO at the beginning of
each year, or, in the case of the CEO, by the CEO and the Board.
In terms of weighting the factors that influence decisions
related to base salaries, the individual performance of an
executive against his goals is heavily weighted and accounts for
roughly 80% of the committee’s considerations while
additional factors considered are weighted, on average, at only
20%. For a given year, additional factors may include other
achievements or accomplishments of the individual during the
year, any mitigating priorities during the year that may have
resulted in a change in the executive’s goals, market
conditions, an executive’s participation in the development
of others within our company, and whether additional
responsibilities were assumed by the
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executive during the period. Under each executive’s
employment agreement, base salary increases are targeted at 5%
per annum.
2007 Base Salaries. For 2007, the CEO proposed
and the Compensation Committee approved a 5% increase in each
named executive officer’s base salary from 2006 to 2007,
with the exception of the Chief Financial Officer
(“CFO”), as further discussed below. The increases
were consistent with the provisions of the employment agreements
with each of our named executive officers, as noted above. In
determining the base salary for our CFO for 2007, the CEO and
the Compensation Committee considered the actual performance of
the CFO compared to his goals during 2007, as well as the
additional responsibilities that he assumed as a result of the
registration of our $200 million in senior subordinated
notes in August 2006, which responsibilities included, among
others, SEC reporting, compliance with the Sarbanes-Oxley Act of
2002, and investor relations management. Additionally, the
competitive market conditions in Houston, Texas, the location of
our headquarters, for finance and accounting professionals were
also considered. Based on his additional responsibilities and
the feedback received regarding the strong market demand for
highly competent finance and accounting professionals, our CFO
was awarded a base salary increase of approximately 11% for 2007
over the base salary he earned in 2006.
2008 Base Salaries. For 2008, the CEO
proposed, and the Compensation Committee approved, base salary
increases ranging from 4% to 6% for our Chief Operating Officer,
our Chief Administrative Officer, and the Managing Director of
Bank Machine. These percentages are relatively consistent with
the 5% targeted increases outlined in their employment
agreements. Our CEO and CFO, however, received increases of 9%
and 10%, respectively, primarily due to their performance
against their goals during 2007 and the added responsibilities
assumed by them as a result of our initial public offering,
which was completed in December 2007.
Annual
Non-Equity Incentive Plan Compensation
To accomplish our goal of aligning the interests of management
with those of our investors, the Compensation Committee ties a
portion of the annual cash compensation earned by our executives
to a targeted level of financial operating results. Each year,
management proposes and the committee approves a non-equity
incentive compensation plan. Under each annual plan, each
executive officer has a target payout, which is based on a
percentage of his base salary. The determination of the ultimate
payout to an executive is primarily based on the achievement of
company-level financial objectives. Although the committee does
consider an executive’s performance against his individual
goals in determining the ultimate amount to be paid to an
executive, such goals are not specifically weighted and the
achievement of company-level objectives is the primary driver of
the payout amounts.
Our annual non-equity incentive compensation plan, as opposed to
any equity grants, is designed to more immediately reward our
executive officers for their performance during the most recent
year. We believe that the immediacy of these cash incentives, in
contrast to our equity grants, which vest over a period of time,
provides a significant incentive to our executives towards
achieving their respective individual objectives and thus our
company-level objectives on an annual basis. As such, we believe
our non-equity incentive compensation plans are a significant
motivating factor for our executive officers, and we believe
they have been a significant factor in attracting and retaining
our executive officers.
Under the terms of our non-equity incentive plan for 2007 (the
“2007 Performance Bonus Plan”), our company-level
financial objectives involved the achievement of an adjusted
EBITDA target goal for our consolidated operations (with the
exception of the Managing Director of Bank Machine, as discussed
further below). The 2007 annual incentive compensation pool was
targeted to be funded if the consolidated adjusted EBITDA
achieved was equal to at least 90% of the targeted adjusted
EBITDA amount. Starting with the
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achievement of 90% of the EBITDA target goal, the annual
incentive compensation pool would be funded on the following
basis:
|
Estimated Payout |
||||
|
Actual Adjusted EBITDA as a% of
Target EBITDA
|
as a% of Target | |||
|
90%
|
50 | % | ||
|
95%
|
75 | % | ||
|
100%
|
100 | % | ||
|
105%
|
150 | % | ||
|
110%
|
200 | % | ||
|
115%
|
250 | % | ||
|
120%
|
300 | % | ||
|
125%
|
350 | % | ||
|
130%
|
400 | % | ||
In the event actual adjusted EBITDA as a percentage of the
target EBITDA fell in between two of the percentages shown
above, interpolation would be used to determine the appropriate
pool percentage. For example, if we achieved 97.5% of the target
EBITDA, the pool would be funded at 87.5% of the target. If we
achieved 102% of target EBITDA, the pool would be funded at 120%
of the target. Furthermore, in the event our consolidated
adjusted EBITDA fell below 90% of the targeted adjusted EBITDA
amount, or if there was a violation of our bank covenants, the
Compensation Committee, in its sole and absolute discretion,
could decide whether or not to pay any amounts under the plan.
This discretion is allowed as the Compensation Committee
acknowledges that circumstances or developments that may impact
our overall performance relative to our adjusted EBITDA target
should not in all cases prohibit the payment of a bonus on a
selective basis to individual officers who met or exceeded their
performance goals, notwithstanding the Company’s failure to
meet its established target. Additionally, in the event our
consolidated adjusted EBITDA exceeded 90%, despite the payout
percentages that are outlined in the plan, the Compensation
Committee could also exercise discretion and adjust one or more
executive’s percentages as it deems appropriate based on
one or more factors, including an executive’s performance
against his individual performance goals.
Under the 2007 incentive plan, there was no formal cap on the
amount an executive may receive. Rather, as noted above, the
annual payout amounts for our executives were determined at the
sole discretion of our Compensation Committee.
Adjusted EBITDA Target for U.S. Executive
Officers. For the year ended December 31,
2007, our initial targeted adjusted EBITDA amount was
$57.0 million. The targeted adjusted EBITDA amount for a
given period is typically set within or above the adjusted
EBITDA range communicated to our investors at the beginning of
each year ($53.0 million to $57.0 million for 2007.)
During 2007, the targeted amount was set at the upper end of the
guidance as an incentive for management to not only meet but to
exceed company-level financial goals. In the event the Board
formally approves actions, such as a material acquisition, that
may affect the attainment of the originally forecasted budget
EBITDA, the budget impact is determined and presented to the
Compensation Committee for approval of a revised budgeted EBITDA
figure for bonus calculation purposes. As a result of the
acquisition of the 7-Eleven ATM and advanced self-service kiosk
business in July 2007, the 2007 targeted adjusted EBITDA amount
was subsequently increased to $62.6 million.
Adjusted EBITDA Target for U.K. Executive
Officer. The Managing Director of Bank Machine
participates in the same non-equity incentive compensation plan
as our other named executives; however, the adjusted EBITDA
target utilized to measure his performance and calculate his
non-equity incentive compensation is the adjusted EBITDA
contributed by our U.K. operations rather than the consolidated
EBITDA used for our other named executive officers. Our
Compensation Committee believes the adjusted EBITDA of our U.K.
operations is a more appropriate target to use for the Managing
Director of Bank Machine, as his actions
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more directly impact and ultimately drive the results of our
U.K. operations than our consolidated results. For 2007, the
targeted adjusted EBITDA amount for our U.K. operations was
£7.9 million.
Achievability of Adjusted EBITDA Targets. As
noted above, the annual company-level financial target set under
our incentive plan is consistent with the adjusted EBITDA range
reflected in our annual budget and communicated to investors at
the beginning of each year. The target for our U.K. operations
is also consistent with the adjusted EBITDA amount in our annual
budget for our U.K. operations. As we expect to achieve our
budgeted adjusted EBITDA amounts when they are set and the
financial targets set under our annual incentive plan are
consistent with the adjusted EBITDA range reflected in our
annual budget, we have similar expectations that the targets
under our annual incentive plan will be achieved.
2007 Payouts. For the year ended
December 31, 2007, we fell short in terms of achieving our
consolidated adjusted EBITDA target as well as the adjusted
EBITDA target for our U.K. operations. However, as a result of
other mitigating factors, the Compensation Committee chose to
exercise the discretion it is allowed under the plan in 2007 and
granted a base payout of 97% of each executive’s targeted
amount. Specifically, the Compensation Committee determined that
this level of payout was warranted due to certain significant
accomplishments achieved during the year, which included the
successful negotiation and acquisition of the 7-Eleven ATM and
advanced self-service kiosk business and related financing
transactions in July 2007, our initial public offering in
December 2007, and the year-over-year growth in the number of
deployed ATMs in the U.K. and Mexico. Additionally, the
committee considered how each executive performed with respect
to his individual performance goals and adjusted the 97% payout
threshold accordingly. For the specific awards granted to each
executive officer under the 2007 Performance Bonus Plan, see the
“Non-Equity Incentive Plan Compensation” column of our
“Summary Compensation Table” below.
2008 Non-Equity Incentive Plan. In April 2008,
our Compensation Committee formally approved our 2008 non-equity
incentive plan (the “2008 Executive Performance Bonus
Plan”). Our 2008 Executive Performance Bonus Plan involves
company-level objectives of the achievement of an adjusted
EBITDA target for our consolidated operations and compliance
with the Sarbanes-Oxley Act of 2002
(“Sarbanes-Oxley”). For 2008, the targeted adjusted
EBITDA amounts are $88.0 million for our consolidated
operations, which is in the middle of the adjusted EBITDA range
communicated to our investors in our 2008 guidance, and
£11.3 million for our U.K. operations. In the event
the adjusted EBITDA achieved for the year falls below 90% of the
targeted adjusted EBITDA amount, if, in the judgment of the
Audit Committee, Sarbanes-Oxley compliance is not achieved in
all material respects, or if there is a material violation of
our bank covenants, the pool will not be funded. However, even
if such goals are not achieved, the Compensation Committee may,
at its discretion, consider other mitigating factors and
ultimately determine that payment is warranted.
In addition to the above company-level goals, under the terms of
the 2008 Executive Performance Bonus Plan, each executive’s
2008 goals will be directly tied to achieving the 2008 adjusted
EBITDA target of $88.0 million and compliance with
Sarbanes-Oxley. To ensure proper focus on these goals, each
executive’s 2008 goals will be weighted and prioritized at
the time they are set and will include at least two goals for
which actual performance can be evaluated, using quantitative
metrics, such as revenues from new contracts signed, costs per
transaction, or other key profit drivers. In determining the
ultimate payouts under the 2008 plan, the Compensation Committee
will consider an individual executive’s performance against
his goals.
Although there has historically been no formal cap on the payout
amount an executive may receive under our previous non-equity
incentive compensation plans, our Compensation Committee
recently decided, in an effort to manage costs and maximize
shareholder return, that a formal cap should be placed on
payouts under the 2008 plan. For the same reason, the committee
also reduced the payout percentages in the 2008 from those in
the 2007 plan. As a result, the maximum amount an executive may
receive under this plan is 200% of his individual target goal.
Assuming all non-financial company goals are achieved (i.e.,
Sarbanes-Oxley
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Table of Contents
compliance and no material covenant violations), the annual
incentive compensation pool will be funded on the following
basis:
|
Estimated Payout |
||||
|
Actual Adjusted EBITDA as a% of
Target EBITDA
|
as a% of Target | |||
|
<90%
|
0 | % | ||
|
90%
|
50 | % | ||
|
95%
|
75 | % | ||
|
100%
|
100 | % | ||
|
105%
|
125 | % | ||
|
110%
|
150 | % | ||
|
115%
|
175 | % | ||
|
120%
|
200 | % | ||
|
>120%
|
200 | % | ||
Unless otherwise stated, the terms of our 2008 Executive
Performance Bonus Plan are consistent with the terms of our 2007
Performance Bonus Plan.
Long-term
Incentive Programs
Long-term Equity Incentive Plans. We have two
long-term equity incentive plans — the 2007 Stock
Incentive Plan (the “2007 Plan”) and the 2001 Stock
Incentive Plan (the “2001 Plan”). The purpose of each
of these plans is to provide directors and employees of our
company and our affiliates additional incentive and reward
opportunities designed to enhance the profitable growth of our
company and affiliates. Equity awards granted under both plans
generally vest ratably over four years based on continued
employment and expire ten years from the date of grant. This
vesting feature is designed to aid in officer retention as this
feature provides an incentive for our executive officers to
remain in our employment during the vesting period.
Currently, there is no formal policy for granting equity awards
to our executive officers, nor is there a policy in place with
respect to the allocation of grants between the various types of
equity instruments eligible to be awarded under the plans.
Rather, all grants are discretionary and are made by the
Compensation Committee, who administers the plans. As most of
our named executives have established a significant ownership
position in our stock
and/or
options, they gain significant value through the long-term
appreciation in our stock, which we believe contributes to the
alignment of their interests with those of our shareholders. In
general, this also means that those executives’ incentives
will not be substantially altered by a grant of restricted stock
or stock options. As a result, we expect issuances to our
existing executive officers under our stock incentive programs
to be somewhat episodic with the focus on situations in which
the individual executive (1) is making significant
contributions to our success and is judged to not have enough
ownership to create a sufficient long-term incentive for that
executive, or (2) has made individual contributions that
significantly exceeded our expectations of growth for the
company. In these situations, the committee may decide to
provide such executive with additional equity, thereby providing
him with additional equity value for having impacted the overall
shareholder value of the company.
In its considerations of whether or not to make equity grants to
our executive officers and, if such grants are made, in its
considerations of the size of the grants, our Compensation
Committee considers our company-level performance, the
applicable executive officer’s performance, comparative
share ownership by comparable executives of comparable
companies, the amount of equity previously awarded to the
applicable executive officer, the vesting of such awards, and
the recommendations of management. While there is no formal
weighting of these elements, the Compensation Committee
considers each in its analysis.
2007 Equity Grants. In July 2007, the
Compensation Committee awarded performance-based stock options
to the Managing Director of Bank Machine under the 2001 Plan.
These options become eligible for vesting only upon our U.K.
operations’ achievement of certain levels of adjusted
EBITDA, less an investment
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Table of Contents
charge on the capital employed to achieve such results. Such
options were awarded to further align the executive’s
interests with those of our company and to serve as an incentive
for the executive to work to enhance the profitability of our
Bank Machine operations. No other named executive officer
received any equity-based awards in 2007, as the Compensation
Committee believed that each of the other executives had
sufficient equity at the time.
Future Considerations. Historically, the
Company has granted only non-qualified options under our equity
incentive plans. However, in 2003, our CEO was granted
restricted stock, the grant of which was made outside of the
2001 Plan and was separately negotiated by the CEO as a
condition of his employment. Our Compensation Committee is
currently considering the benefits of issuing restricted stock
rather than options and, as a result, the mix of equity
instruments granted by the committee in the future could
potentially change.
Long-Term Incentive Bonus Program — U.K.
Operations. In connection with our acquisition of
Bank Machine in May 2005, we established a special long-term
incentive compensation program for the Managing Director of Bank
Machine as well as other key members of the U.K. management
team. This program was a replacement of a similar incentive plan
that the previous owner of Bank Machine had in place for its key
executives and was established to provide an incentive for the
U.K. management team to remain under the employment of
Cardtronics subsequent to our acquisition and to achieve certain
cumulative earnings objectives over a four-year period. In
particular, our program seeks to compensate these employees if
the cumulative adjusted EBITDA in the U.K., as defined under the
program, for the four years in the period ending
December 31, 2008, exceeds a benchmark adjusted EBITDA
amount for the same period (£20.5 million), less an
investment charge on the capital employed to achieve such
results. This benchmark adjusted EBITDA was based on the
projections that were provided to us by the previous owner of
Bank Machine during the acquisition process. We believed these
projections were achievable, which is supported by the fact that
these projections were the information on which we based our
acquisition price. In the event the cumulative adjusted EBITDA
exceeds the cumulative benchmark adjusted EBITDA, less the
applicable investment charge, the Managing Director of Bank
Machine will be eligible to receive a cash bonus equal to 4.0%
of such cumulative excess amount. In the event the cumulative
adjusted EBITDA is less than the cumulative benchmark adjusted
EBITDA, less the applicable investment charge, no bonus will be
earned or paid under this program. The cash bonus target of 4.0%
is less than the 5.0% target originally outlined in the bonus
agreement between us and the executive and represents a
subsequent modification to the agreement as agreed to by both
parties.
Discretionary
Bonuses
If and when it considers it appropriate, our Compensation
Committee may grant bonuses to our employees, including our
named executive officers. Examples of circumstances in which
employees may be awarded a bonus include situations in which an
employee has made significant contributions to a company
initiative or has otherwise performed at a level above what was
expected. Unlike awards under our non-equity incentive
compensation plan that named executives are eligible for on an
annual basis, bonuses are not a recurring element of our
executive compensation program. However, during 2007, our
Compensation Committee awarded discretionary bonuses to three of
our named executive officers. Specifically, our CEO and our CFO
each received a $30,000 bonus and our Chief Operating Officer
received $20,000. These bonuses were awarded to compensate these
executives for their contributions to our initial public
offering process. The amounts awarded were based on the amount
of time and effort the executive was asked to spend working and
focusing on our initial public offering efforts, over and above
their day-to-day responsibilities.
Severance
and Change of Control Arrangements
Under the terms of their employment agreements, our executive
officers are entitled to certain benefits upon the termination
of their employment. Generally, these provisions are intended to
mitigate some of the risk that our executive officers may bear
in working for a developing company like ours, including a
change in control. Additionally, the severance provisions are
intended to compensate an executive during the non-compete
period (required under the terms of each employment agreement),
which limit the executive’s ability to work for a similar
and/or
competing company for the period subsequent to his termination.
The severance benefits offered to an individual executive were
those negotiated at the time the employment agreement was
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Table of Contents
signed with that particular executive, and therefore, may differ
between executive’s contracts. For additional information
of the terms of each executive’s severance and change in
control benefits, see “— Summary Compensation
Table — Employment-Related Agreements of Named
Executive Officers” and “— Potential
Payments upon Termination or Change in Control.”
Other
Benefits
In addition to base salary, annual cash incentives, long-term
equity-based incentives, and severance benefits, we provide the
following benefits:
| • | 401(k) Savings Plan. We have a defined contribution 401(k) plan, which is designed to assist our employees in providing for their retirement and allow us to remain competitive in the market place in terms of benefits offered to employees. Each of our named executive officers is entitled to participate in this plan to the same extent that our other employees are entitled to participate. In 2007, we began matching 25% of employee contributions up to 6.0% of the employee’s salary (for a maximum matching contribution of 1.5% of the executive’s salary by us). Employees are immediately vested in their contributions while our matching contributions will vest at a rate of 20% per year. | |
| • | Health and Welfare Benefits. Our named executive officers are eligible to participate in medical, dental, vision, disability and life insurance, and flexible healthcare and dependent care spending accounts to meet their health and welfare needs under the same plans and terms as the rest of our employees. These benefits are provided so as to assure that we are able to maintain a competitive position in terms of attracting and retaining executive officers and other employees. This program is a fixed component of compensation and the benefits are provided on a non-discriminatory basis to all of our employees. | |
| • | Perquisites and Other Personal Benefits. We believe that the total mix of compensation and benefits provided to our executive officers is competitive and perquisites should generally not play a large role in our executive officers’ total compensation. As a result, the perquisites and other personal benefits we provide to our executive officers are very limited in nature. We provide our Chief Operating Officer with a car allowance, which was negotiated between the executive and the company when his employment agreement was renewed in 2001. Additionally, we provide the Managing Director of Bank Machine with a car allowance and make contributions into a personal retirement account, as such benefits were being provided to the executive prior to our acquisition of Bank Machine and we, therefore, elected to continue to provide him with such benefits as incentive to remain under our employment. |
Summary
Compensation Table
The following table summarizes, for the fiscal years ended
December 31, 2007 and 2006, the compensation paid to or
earned by our Chief Executive Officer, our Chief Financial
Officer, and three other named executive officers serving as of
December 31, 2007.
|
Non-Equity |
||||||||||||||||||||||||||||||||
|
Stock |
Option |
Incentive Plan |
All Other |
|||||||||||||||||||||||||||||
|
Executive Name & Principal Position
|
Year | Salary | Bonus(1) | Awards(2) | Awards(3) | Compensation | Compensation | Total | ||||||||||||||||||||||||
|
Jack Antonini -
|
2007 | $ | 364,651 | $ | 30,000 | $ | 11,025 | $ | — | $ | 176,856 | $ | — | $ | 582,532 | |||||||||||||||||
|
Chief Executive Officer and President
|
2006 | $ | 347,287 | — | $ | 215,894 | $ | — | $ | 223,653 | $ | — | $ | 786,834 | ||||||||||||||||||
|
J. Chris Brewster -
|
2007 | $ | 275,000 | $ | 30,000 | — | $ | 132,449 | $ | 133,375 | $ | — | $ | 570,824 | ||||||||||||||||||
|
Chief Financial Officer
|
2006 | $ | 248,063 | — | — | $ | 103,929 | $ | 209,753 | $ | — | $ | 561,745 | |||||||||||||||||||
|
Michael H. Clinard -
|
2007 | $ | 243,101 | $ | 20,000 | — | $ | 88,300 | $ | 129,694 | $ | 10,739 | (4) | $ | 491,834 | |||||||||||||||||
|
Chief Operating Officer
|
2006 | $ | 231,525 | — | — | $ | 69,286 | $ | 149,102 | $ | 9,000 | (4) | $ | 458,913 | ||||||||||||||||||
|
Thomas E. Upton -
|
2007 | $ | 231,525 | — | — | $ | 88,300 | $ | 101,060 | $ | — | $ | 420,885 | |||||||||||||||||||
|
Chief Administrative Officer
|
2006 | $ | 220,500 | — | — | $ | 69,286 | $ | 234,902 | $ | — | $ | 524,688 | |||||||||||||||||||
|
Ronald
Delnevo(5)
-
|
2007 | $ | 353,714 | — | — | $ | 47,250 | (6) | $ | 138,209 | $ | 51,188 | (7) | $ | 590,361 | |||||||||||||||||
|
Managing Director of Bank Machine
|
2006 | $ | 281,937 | — | — | $ | — | $ | 153,868 | $ | 49,180 | (7) | $ | 484,985 | ||||||||||||||||||
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| (1) | Amounts represent bonuses paid to Messrs. Antonini, Brewster, and Clinard for their contributions to our initial public offering process. For additional details on awards, see “— Compensation Discussion and Analysis — Components of Executive Compensation — Discretionary Bonuses.” | |
| (2) | Amounts represent the compensation expense recognized by our company for the years ended December 31, 2007 and 2006 related to restricted stock granted to Mr. Antonini in 2003. | |
| (3) | Represents the amount expensed in connection with stock awards under SFAS No. 123R. For purposes of this disclosure, estimates of forfeitures related to service-based vesting conditions have been omitted. Assumptions used in the calculation of these amounts are included in Note 3 to our audited consolidated financial statements included elsewhere within this prospectus. | |
| (4) | Amount presented for 2007 includes $9,750 paid to Mr. Clinard related to the car allowance provided for in his employment agreement and $989 of matching contributions under our 401(k) plan. Amount presented for 2006 represents amounts paid to Mr. Clinard related to the car allowance provided for in his employment agreement. | |
| (5) | Amounts presented for Mr. Delnevo in 2007 and 2006 were converted from pounds sterling to U.S. dollars at $2.0074 and $1.9613, respectively, which represent the exchange rates in effect as of December 31, 2007 and 2006, respectively. | |
| (6) | During 2007, the Compensation Committee granted option awards to Mr. Delnevo. For details on this grant, see “— Compensation Discussion and Analysis — Components of Executive Compensation — Long-term Incentive Programs — Long-Term Equity Incentive Plans” above. | |
| (7) | Amount presented for 2007 includes $24,088 (£12,000) related to a car allowance and $27,100 (£13,500) of monthly contributions made on behalf of Mr. Delnevo to a personal retirement account selected by Mr. Delnevo. Amount presented for 2006 includes $23,535 (£12,000) related to a car allowance and $25,645 (£13,075) of monthly contributions made on behalf of Mr. Delnevo to a personal retirement account selected by Mr. Delnevo. Both the car allowance and the personal retirement account contributions are provided for in Mr. Delnevo’s employment agreement. |
Employment-Related
Agreements of Named Executive Officers
The terms governing each of our executive’s employment are
outlined in individual employment agreements. Our agreements
with Messrs. Antonini, Brewster, Clinard, and Upton expired
on January 31, 2008; however, we are currently working with
our Compensation Committee to develop new employment agreements
to offer to these individuals. Upon the execution of the
agreements, we will disclose the terms of the new agreements in
a Current Report on
Form 8-K
filed with the SEC. Below is a description of the agreements in
place with each of our named executive officers as of
December 31, 2007.
Employment Agreement with Jack Antonini — Chief
Executive Officer and President. In January 2003,
we entered into an employment agreement with Jack Antonini.
Mr. Antonini’s January 2003 employment agreement was
last amended in February 2005. As noted above, this agreement
expired in January 2008. Under his employment agreement in place
as of December 31, 2007, Mr. Antonini received a
monthly salary in 2007 of $30,388. In addition, subject to our
achieving certain performance standards set by our Compensation
Committee, Mr. Antonini may be entitled to an annual award
under a non-equity incentive plan, with such award targeted at
50% of his base salary. However, as the ultimate payout of the
annual award is determined at the sole discretion of our
Compensation Committee, the actual amount awarded may exceed or
fall short of the targeted level. (For additional information on
the terms of our non-equity incentive compensation plan, see
“— Compensation Discussion and
Analysis — Annual Non-Equity Incentive Plan
Compensation” above.) Further, should we terminate
Mr. Antonini’s employment without cause, or should a
change in control occur, as defined in the agreement, he will be
entitled to receive severance pay equal to his base salary for
the lesser of 12 months or the number of months remaining
under his employment contract.
Employment Agreement with J. Chris Brewster — Chief
Financial Officer. In March 2004, we entered into
an employment agreement with J. Chris Brewster.
Mr. Brewster’s March 2004 employment agreement was
amended in February 2005. As noted above, this agreement expired
in January 2008. Under his employment agreement in place as of
December 31, 2007, Mr. Brewster received a monthly
base salary in 2007 of $22,917, subject, on each anniversary of
the agreement, to increases as determined by our Compensation
Committee in its sole discretion, with such increases being
targeted to be 5% of the previous year’s base salary. In
addition, subject to our achieving certain performance standards
set by our Compensation Committee, Mr. Brewster may be
entitled to an annual award under a non-equity incentive plan,
with such award targeted at 50% of his base salary. However, as
the ultimate payout of the annual award is determined at the
sole discretion of our Compensation Committee, the actual amount
awarded may exceed or fall short of the targeted level. (For
additional information on the terms of our non-equity incentive
compensation plan, see
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Table of Contents
“— Compensation Discussion and
Analysis — Annual Non-Equity Incentive Plan
Compensation” above.) Further, should we terminate
Mr. Brewster’s employment without cause, or should
Mr. Brewster terminate his employment with us for good
reason, as defined in the employment agreement, he will be
entitled to receive severance pay equal to his base salary for
12 months.
Employment Agreement with Michael H. Clinard —
Chief Operating Officer. In June 2001, we entered
into an employment agreement with Michael H. Clinard.
Mr. Clinard’s June 2001 employment agreement was
amended in February 2005. As noted above, this agreement expired
in January 2008. Under his employment agreement in place as of
December 31, 2007, Mr. Clinard received a monthly
salary in 2007 of $20,258 subject, on each anniversary of the
agreement, to increases as determined by our Compensation
Committee in its sole discretion, with such increases being
targeted to be 5% of the previous year’s base salary. In
addition, subject to our achieving certain performance standards
set by our Compensation Committee, Mr. Clinard may be
entitled to an annual award under a non-equity incentive plan,
with such award targeted at 50% of his base salary. However, as
the ultimate payout of the annual award is determined at the
sole discretion of our Compensation Committee, the actual amount
awarded may exceed or fall short of the targeted level. (For
additional information on the terms of our non-equity incentive
compensation plan, see “— Compensation Discussion
and Analysis — Annual Non-Equity Incentive Plan
Compensation” above.) Further, (a) should we terminate
Mr. Clinard’s employment without cause, or should
Mr. Clinard terminate his employment with us for good
reason, as defined in the employment agreement, then he is
entitled to receive severance pay equal to his base salary for
the lesser of twelve months or the number of months remaining
under his employment contract following his termination, and
(b) if he dies or becomes totally disabled, as defined in
the employment agreement, then he is entitled to receive the
difference between his base salary and any disability benefits
received by him under our disability benefit plans for the
lesser of 12 months or the number of months remaining under
his employment contract following his death or disability, as
applicable.
Employment Agreement with Thomas E. Upton — Chief
Administrative Officer. In June 2001, we entered
into an employment agreement with Thomas E. Upton.
Mr. Upton’s June 2001 employment agreement was amended
in February 2005. As noted above, this agreement expired in
January 2008. Under his employment agreement in place as of
December 31, 2007, Mr. Upton received a monthly salary
in 2007 of $19,294, subject to annual increases as determined by
our Compensation Committee at its sole discretion, with such
increases being targeted at 5% of the previous year’s base
salary. In addition, subject to our achieving certain
performance standards set by our Compensation Committee,
Mr. Upton may be entitled to an annual award under a
non-equity incentive plan, with such award targeted as being 50%
of his base salary. However, as the ultimate payout of the
annual award is determined at the sole discretion of our
Compensation Committee, the actual amount awarded may exceed or
fall short of the targeted level. (For additional information on
the terms of our non-equity incentive compensation plan, see
“— Compensation Discussion and
Analysis — Annual Non-Equity Incentive Plan
Compensation” above.) Further, should we have terminated
Mr. Upton’s employment without cause or if he died or
became totally disabled, as defined in the employment agreement,
then he was entitled to receive severance pay equal to his base
salary for the lesser of 12 months or the number of months
remaining under his employment following his termination.
Employment Agreement with Ronald Delnevo — Managing
Director of Bank Machine. In May 2005, we entered
into an employment agreement with Ronald Delnevo which runs
though May 17, 2009. Under the employment agreement,
Mr. Delnevo received a current monthly base salary in 2007
of £14,788 ($29,684 based on December 31, 2007
exchange rates), subject to increases as determined by our
Compensation Committee in its sole discretion, with such
increases being targeted to be 5% of the previous year’s
base salary. In addition, subject to our achieving certain
performance standards set by our Compensation Committee,
Mr. Delnevo may be entitled to an annual award under a
non-equity incentive plan, with such award targeted as being 40%
of his base salary. However, as the ultimate payout of the
annual award is determined at the sole discretion of our
Compensation Committee, the actual amount awarded may exceed or
fall short of the targeted level. (For additional information on
terms of our bonus plan, see “— Compensation
Discussion and Analysis — Annual Non-Equity Incentive
Plan Compensation” above.) Further, should we terminate
Mr. Delnevo without cause, or should Mr. Delnevo
terminate his employment with us for good reason, as
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Table of Contents
defined in the employment agreement, then he may receive payment
of an amount not to exceed 12 months of his base salary
from us.
Equity
Incentive Plans
As noted above, we have two long-term equity incentive
plans — the 2007 Stock Incentive Plan (the “2007
Plan”) and the 2001 Stock Incentive Plan (the “2001
Plan”). Below is a description of each.
2007 Plan. In August 2007, our Board and our
stockholders approved our 2007 Plan. The adoption, approval, and
effectiveness of this plan were contingent upon the successful
completion of our initial public offering, which occurred in
December 2007. The 2007 Plan provides for the granting of
incentive stock options intended to qualify under
Section 422 of the Code, options that do not constitute
incentive stock options, restricted stock awards, performance
awards, phantom stock awards, and bonus stock awards. The number
of shares of common stock that may be issued under the 2007 Plan
may not exceed 3,179,393 shares, subject to further
adjustment to reflect stock dividends, stock splits,
recapitalizations and similar changes in our capital structure.
As of December 31, 2007, no equity awards had been granted
under the 2007 Plan.
2001 Plan. In June 2001, our Board adopted our
2001 Plan. Various plan amendments have been approved since that
time, the most recent being in November 2007. The 2001 Plan
allowed for the issuance of equity-based awards in the form of
non-qualified stock options and stock appreciation rights.
However, as a result of the adoption of the 2007 Plan, at the
direction of the Board, no further awards will be granted under
our 2001 Stock Incentive Plan. As of December 31, 2007,
options to purchase an aggregate of 6,915,082 shares of
common stock (net of options cancelled) had been granted
pursuant to the 2001 Plan, all of which are classified as
non-qualified stock options, and options to purchase
1,955,041 shares of common stock had been exercised.
Grants of
Plan-based Awards
The following table sets forth certain information with respect
to the options granted during or for the year ended
December 31, 2007 to each of our named executive officers
listed in the “Summary Compensation Table”. Such table
also sets forth details regarding other plan-based awards
granted in 2007:
|
All Other |
Grant Date |
|||||||||||||||||||||||||||||||||||
|
Estimated Possible/Future |
Option Awards: |
Fair Value |
||||||||||||||||||||||||||||||||||
|
Payouts Under Non-Equity |
Number of Securities |
Exercise or Base |
of Stock |
|||||||||||||||||||||||||||||||||
|
Approval |
Incentive Plan Awards(1) |
Underlying |
Price of Option |
and Option |
||||||||||||||||||||||||||||||||
|
Executive
|
Grant Date | Date(2) | Threshold | Target | Maximum | Options | Awards(3) | Awards | ||||||||||||||||||||||||||||
|
J. Antonini
|
— | — | $ | — | $ | 182,326 | — | (4) | — | — | — | |||||||||||||||||||||||||
|
J. C. Brewster
|
— | — | $ | — | $ | 137,500 | — | (4) | — | — | — | |||||||||||||||||||||||||
|
M. H. Clinard
|
— | — | $ | — | $ | 121,551 | — | (4) | — | — | — | |||||||||||||||||||||||||
|
T. E. Upton
|
— | — | $ | — | $ | 115,763 | — | (4) | — | — | — | |||||||||||||||||||||||||
|
R.
Delnevo(5)
|
07-02-07 | 06-29-07 | — | — | — | 317,940 | $ | 11.46 | $ | 1,639,346 | ||||||||||||||||||||||||||
| — | — | $ | — | $ | 142,483 | (6) | — | (4) | — | — | — | |||||||||||||||||||||||||
| (1) | Represents the dollar value of the applicable range (threshold, target and maximum amounts) of bonuses estimated to be awarded to each named executive officer for 2007. The actual non-equity incentive plan awards paid to the named executive officers for 2007 are reflected in the “Non-Equity Incentive Plan Compensation” column of our “Summary Compensation Table.’’ | |
| (2) | Represents the date our Compensation Committee formally approved the option grant. | |
| (3) | Represents the date the compensation committee formally approved the option grants. | |
| (4) | Under the 2007 Performance Bonus Plan, there is no formal cap on the payout amounts an executive may receive. Rather, the annual payouts for our executives are determined at the sole discretion of our Compensation Committee. As a result, the actual amounts may exceed for fall short of the targeted level. As we are unable to predict the committee’s ultimate actions regarding the awards, we are unable to estimate the maximum possible grants that could potentially be made and paid out under the plan. | |
| (5) | Amounts shown for Mr. Delnevo were converted from pounds sterling to U.S. dollars at $2.0074, which represents the exchange rate in effect as of December 31, 2007. | |
| (6) | The non-equity incentive plan awards information presented for Mr. Delnevo excludes amounts that may become payable under our U.K. long-term incentive bonus program (see “— Compensation Discussion and Analysis — Components of Executive Compensation — Long-Term Incentive Programs — Long-Term Incentive Bonus Program — U.K. Operations” above). Future payouts under such program, which was established to provide a long-term incentive for Mr. Delnevo and his direct reports to achieve certain cumulative |
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| earnings objectives over a four-year period, are contingent upon the actual results exceeding the cumulative earnings benchmark, less an investment charge on the capital employed to achieve such results. Under the terms of the incentive plan, such payouts would not occur until 2009 and are dependent on cumulative earnings for future periods. As a result, we are unable to estimate at this time what the ultimate payout will be, if any. |
Salary,
Discretionary Bonuses, and Annual Non-Equity Incentive Plan
Compensation in Proportion to Total Compensation
The following table sets forth the percentage of total
compensation that we paid in the form of base salary,
discretionary bonuses, and annual non-equity incentive plan
compensation for the year 2007 to each named executive officer
listed in the “Summary Compensation Table.”
|
Percentage of |
||||
|
Executive
|
Total Compensation | |||
|
J. Antonini
|
98.1 | % | ||
|
J.C. Brewster
|
76.8 | % | ||
|
M. H. Clinard
|
79.9 | % | ||
|
T. E. Upton
|
79.0 | % | ||
|
R. Delnevo
|
83.3 | % | ||
Outstanding
Equity Awards at Fiscal 2007 Year-end
The following table sets forth information for each of our named
executive officers regarding the number of shares subject to
both exercisable and unexercisable stock options as of
December 31, 2007. None of our named executives own stock
awards that have not vested as of December 31, 2007 and, as
a result, we have omitted the “Stock Awards” section
of the below table.
| Option Awards | ||||||||||||||||||||
|
Equity Incentive |
||||||||||||||||||||
|
# of Securities |
Plan Awards: |
|||||||||||||||||||
|
# of Securities |
Underlying |
# of Securities |
||||||||||||||||||
|
Underlying |
Unexercised |
Underlying |
Option |
Option |
||||||||||||||||
|
Unexercised Options |
Options |
Unexercised |
Exercise |
Expiration |
||||||||||||||||
|
Name
|
Exercisable | Unexercisable | Unearned Options | Price | Date | |||||||||||||||
|
J. Antonini
|
— | — | — | — | — | |||||||||||||||
|
J. C. Brewster
|
357,682 | — | — | $ | 6.54 | 03-31-2014 | ||||||||||||||
| 29,807 | 89,420 | (1) | — | $ | 10.55 | 03-05-2016 | ||||||||||||||
|
M. H. Clinard
|
98,696 | — | — | $ | 0.74 | 06-03-2011 | ||||||||||||||
| 49,805 | — | — | $ | 1.48 | 03-02-2012 | |||||||||||||||
| 19,871 | 59,614 | (1) | — | $ | 10.55 | 03-05-2016 | ||||||||||||||
|
T. E. Upton
|
157,809 | — | — | $ | 0.74 | 06-03-2011 | ||||||||||||||
| 29,807 | — | — | $ | 1.48 | 03-02-2012 | |||||||||||||||
| 19,871 | 59,614 | (1) | — | $ | 10.55 | 03-05-2016 | ||||||||||||||
|
R. Delnevo
|
158,970 | 158,969 | (2) | — | $ | 10.55 | 05-16-2015 | |||||||||||||
| — | — | 317,940 | (3) | $ | 11.46 | 06-30-2017 | ||||||||||||||
| (1) | These stock options become exercisable as to 25% of the underlying option shares on each of the first four anniversaries of the grant date. 25% of the underlying option shares for the stock options granted on March 6, 2006 will become exercisable on each of March 31, 2008, March 6, 2009 and March 6, 2010. | |
| (2) | These stock options become exercisable as to 25% of the underlying option shares on each of the first four anniversaries of the grant date. 25% of the underlying option shares for the stock options granted on May 17, 2005 will become exercisable on each of May 17, 2008 and May 17, 2009. | |
| (3) | These options are performance-based options granted in July 2007 that become eligible for vesting upon the achievement of certain EBITDA targets by our U.K. operations for 2007, 2008, and 2009. As of December 31, 2007, it was uncertain as to whether the EBITDA targets would be met, including targets for 2007, and whether such options would become eligible for vesting. As a result, all options were considered unearned as of December 31, 2007. As the U.K. operations did not achieve the EBITDA targets for 2007, the 2007 options did not become eligible for vesting and were forfeited in the first quarter of 2008. In the event the 2008 and/or 2009 EBITDA targets are met, the awards will continue to remain subject to service-based vesting conditions. |
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Option
Exercises and Stock Vested during Fiscal Year 2007
During the fiscal year ended December 31, 2007, none of our
named executive officers exercised any stock options. However,
the following table presented the restricted shares that bested
during the year ended December 31, 2007:
| Stock Awards | ||||||||
|
Number of Shares |
Value Realized |
|||||||
|
Executive
|
Acquired on Vesting | on Vesting | ||||||
|
J. Antonini
|
158,970 | $ | 1,821,796 | |||||
The above shares, which were purchased by Mr. Antonini, our
Chief Executive Officer and President, in 2003 pursuant to a
restricted stock grant, vested in February 2007. The $1,821,796
amount presented above represents the value of these shares (as
determined by management) at the date of vesting.
Pension
Benefits
Currently, we do not offer, and, therefore, none of our named
executive officers participate in or have account balances in
qualified or non-qualified defined benefit plans sponsored by
us. In the future, however, the Compensation Committee may elect
to adopt qualified or non-qualified defined benefit plans if it
determines that doing so is in our company’s best interests
(e.g., in order to attract and retain employees.)
Nonqualified
Deferred Compensation
Currently, we do not offer, and, therefore, none of our named
executive officers participate in or have account balances in
qualified or non-qualified defined contribution plans or other
deferred compensation plans maintained by us. In the future,
however, the Compensation Committee may elect to provide our
officers and other employees with non-qualified defined
contribution or deferred compensation benefits if it determines
that doing so is in our best interests.
Potential
Payments upon Termination or Change in Control
We have entered into employment agreements with each of our
executive officers which contain severance and change in control
provisions. Our agreements with Messrs. Antonini, Brewster,
Clinard, and Upton expired on January 31, 2008; however, we
are currently working with our Compensation Committee to develop
new employment agreements to offer to these individuals.
Generally, the agreements in place as of December 31, 2007
contain the following definitions for each of the possible
“triggering events:”
| • | Cause. Messrs. Antonini, Brewster, Clinard and Upton may be terminated for cause if the executive: (1) engages in gross negligence or willful misconduct when performing his employment duties; (2) is indicted for a felony; (3) refuses to perform his employment duties; (4) materially breaches any of our policies or our code of conduct; (5) engages in conduct in which the executive knows would be materially injurious to us; or (6) materially breaches, and fails to cure, any provision of his employment agreement. Mr. Delnevo’s agreement states that he may be terminated without payment (without specifically deeming this for “cause”), if he: (1) commits an act of serious misconduct; (2) materially or persistently breaches the terms of his service agreement; (3) has a bankruptcy order made against him; (4) is charged with or is convicted of any criminal offence; (5) is disqualified from holding an office position with us or any other company under the Insolvency Act of 1986; (6) acts in a way in which our Board believes will discredit our company; or (7) resigns as one of our directors. | |
| • | Change in Control. Messrs. Antonini and Brewster’s agreements state that a change in control may occur upon any of the following events after the date of an IPO: |
| • | a merger or consolidation where all or substantially all of our assets are held by a third party if (1) the holders of our equity securities no longer own equity securities of the resulting entity that are entitled to 60% or more of the votes eligible to be cast in the election of directors of the resulting entity, or (2) the members of the Board immediately prior to such transaction no longer constitute at |
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Table of Contents
| least a majority of the board of directors of the resulting entity immediately after such transaction or event; |
| • | our dissolution or liquidation; | |
| • | the date any person or entity acquires or gains ownership or control of more than 50% of the combined voting power of the outstanding securities of, (1) if we have not engaged in a merger or consolidation, us or (2) if we have engaged in a merger or consolidation, the resulting entity; or | |
| • | as a result of or in connection with a contested election of directors, the members of the Board immediately before such election cease to constitute a majority of the Board. |
Messrs. Clinard, Upton and Delnevo’s agreements do not
contain severance provisions in connection with a change in
control.
| • | Good Reason. Messrs. Brewster and Clinard will have the right to terminate employment upon the occurrence of either of the following good reason events: (1) we assign the executive duties which are inconsistent with his position, or we cause there to be a significant reduction or change in either the executive’s position or his job functions; or (2) a material breach of certain compensation provisions of the employment agreement. In addition to the above events, Mr. Brewster will also have the right to terminate employment upon: (1) a Change in Control; or (2) without the executive’s prior consent, a required relocation of 100 miles from our corporate headquarters in Houston, Texas. |
Messrs. Antonini, Upton, and Delnevo’s agreements do
not contain a “good reason” concept.
| • | Totally Disabled. Each of the executives will be considered totally disabled if, by reason of his illness, incapacity or other disability, the executive fails to perform his duties or fulfill his obligations under his employment agreement, as certified by a competent physician, for 180 days in any 12 month period. | |
| • | Without Cause Termination. A termination without cause shall mean a termination of the executive’s employment other than for death, voluntary resignation, total disability, or cause. |
The table below reflects the amount of compensation payable to
our named executive officers in the event of a termination of
employment or a change in control of our company. The amount of
compensation payable to each named executive officer for each
situation is listed below based on the employment agreements in
place for the executive as of December 31, 2007. The
amounts shown assume that such termination event was effective
as of December 31, 2007 and are our best estimates as to
the amounts that each executive would receive upon that
particular termination event; however, exact amounts that any
executive would receive could only be determined upon an actual
termination of employment.
|
Termination in |
||||||||||||||||||
|
Good Reason |
Connection with |
|||||||||||||||||
|
Without Cause |
Termination |
a Change in |
Death or |
|||||||||||||||
|
Executive
|
Benefits | Termination | By Executive | Control | Disability | |||||||||||||
|
J. Antonini
|
Base salary(1) | $ | 30,388 | (2) | $ | — | $ | 30,388(3 | ) | $ | — | |||||||
| Total | $ | 30,822 | $ | — | $ | 30,388 | $ | — | ||||||||||
|
J. C. Brewster
|
Base salary(1)(4) | $ | 275,000 | $ | 275,000 | $ | 275,000 | $ | — | |||||||||
|
Post-employment health care(5) |
$ | 8,672 | $ | 8,672 | $ | 8,672 | $ | — | ||||||||||
| Total | $ | 283,672 | $ | 283,672 | $ | 283,672 | $ | — | ||||||||||
|
M. H. Clinard
|
Base salary(1) | $ | 20,258 | (2) | $ | 20,258 | (6) | $ | — | $ | 15,925 | (7) | ||||||
| Total | $ | 20,258 | $ | 20,258 | $ | — | $ | 15,925 | ||||||||||
|
T. E. Upton
|
Base salary(1) | $ | 19,294 | (2) | $ | — | $ | — | $ | 19,294 | (8) | |||||||
| Total | $ | 19,294 | $ | — | $ | — | $ | 19,294 | ||||||||||
|
R.
Delnevo(9)
|
Base salary(1) | $ | 353,714 | (2) | $ | — | $ | — | $ | 109,602 | (10) | |||||||
| Total | $ | 353,714 | $ | — | $ | — | $ | 106,602 | ||||||||||
| (1) | Upon the occurrence of any of the termination events listed, or in the event of a for-cause termination or a voluntary termination (neither of which are shown in the above table), the terminated executive would receive any base salary amount that had been earned but that had not been paid at the time of termination. We have assumed for purposes of this table that all such accrued amounts have been paid to each of the executives, thus the amounts shown above do not include accrued salary. |
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| (2) | In the event of a without cause termination, Messrs. Antonini, Clinard, and Upton would receive severance pay equal to the executive’s current base salary for the lesser of a period of 12 months or the number of months remaining under the executive’s employment agreement. The employment agreements of Messrs. Antonini, Brewster, Clinard, and Upton expired on January 31, 2008. As a result, only one month of salary is reflected in the above table for Messrs. Antonini, Clinard, and Upton. (See footnotes (4) and (5) below for information on the amount shown for Mr. Brewster in the event of an without cause termination.) Mr. Delnevo’s employment agreement provides for an amount not to exceed 12 months of salary, which for purposes of this table we assumed that we would pay the full 12 months to him. For each executive, such amount would be payable in bi-weekly installments with the exception of Mr. Delnevo, whose employment agreement calls for such amount to be paid within 14 days of receiving a notice of termination. | |
| (3) | In the event of a termination upon a change in control, Mr. Antonini would receive severance pay equal to his current base salary for the lesser of a period of 12 months or the number of months remaining under his employment agreement (i.e., one month as of December 31, 2007). There is no specified time period following a change in control in which Mr. Antonini must notify us of his intention to terminate his employment with us. | |
| (4) | Under the terms of his employment agreement, in the event of a without cause termination or a good reason termination, Mr. Brewster would receive payment in the amount of his base salary for a period of 12 months. To be eligible to receive such payments in the event of a good reason termination, Mr. Brewster must notify us within one year of the occurrence that he intends to terminate his employment with us. However, in the event he accepts another full-time employment position (defined as 20 hours per week) within one year after termination, remaining payments to be made by us would be reduced by the gross amount being earned under his new employment arrangement. | |
| (5) | If Mr. Brewster, in the event of a without cause termination or a good reason termination, elected to continue benefits coverage through our group health plan under the Consolidated Omnibus Budget Reconciliation Act of 1986 (COBRA), we would partially subsidize Mr. Brewster’s incremental healthcare premiums. We would reimburse Mr. Brewer on a monthly basis for the difference between the amount he must pay to continue such coverage and the employee contribution amount that active senior executive employees would pay for the same or similar coverage under our group health plan. Amounts shown above represent the difference in Mr. Brewster’s current insurance premiums and current COBRA rates for a similar plan. | |
| (6) | For a good reason termination, Mr. Clinard is entitled to a severance payment equal to his base salary for the lesser of 12 months or the remaining number of months in the term; assuming a termination on December 31, 2007, Mr. Clinard had one month remaining in his employment term, and thus only one month of base salary is disclosed in the table above. | |
| (7) | In the event Mr. Clinard’s employment is terminated as a result of death or disability, Mr. Clinard would be entitled to receive payments equal to the difference between his base salary and any disability benefits received by him under our disability benefits plans (under which benefits are calculated as the lesser of 60% of base salary or $52,000) for the lesser of 12 months or the number of months remaining in his contract. As his contract expired on January 31, 2008, only one month of benefits is reflected in the above table. | |
| (8) | Upon a termination for death or disability, Mr. Upton is entitled to receive an amount equal to his base salary for the lesser of 12 months or the number of months remaining on his employment agreement. Assuming a termination on December 31, 2007, Mr. Upton had one month remaining in his employment term, and thus only one month of base salary is disclosed in the table above. | |
| (9) | Amounts shown for Mr. Delnevo were converted from pounds sterling to U.S. dollars at $2.0074, which represents the exchange rate in effect as of December 31, 2007. | |
| (10) | In the event Mr. Delnevo becomes disabled, Mr. Delveno would be entitled to receive payments equal to his base salary for a maximum of 16 weeks (i.e., 80 work days). He is not entitled to a bonus for the year in which a termination for death or disability occurs. |
Messrs. Antonini, Brewster, Clinard and Upton’s
employment agreements also require the executives to sign a full
release waiving all claims against us, our subsidiaries, and our
officers, directors, employees, agents, representatives, or
stockholders before receiving any severance benefits due under
the employment agreements. Mr. Upton is also required to
promptly report any subsequent full-time employment during the
period in which he is receiving severance payments, for we are
entitled to reduce his severance payments by the amount of the
new salary he is receiving from a third party.
The employment agreements also contain non-competition and
non-solicitation provisions. Messrs. Antonini, Brewster,
Clinard and Upton have a
24-month
non-compete and non-solicitation period, in which the executives
may not: (1) directly or indirectly participate in or have
significant ownership in a competing company; (2) solicit
or advise any of our employees to leave our employment;
(3) solicit any of our customers either for his own
interest or that of a third party; or (4) call upon an
acquisition candidate of ours either for his own interest or
that of a third party. Mr. Delnevo’s non-solicitation
provisions prevent him from soliciting either our employees or
our customers for a period of 12 months following
termination, while he is subject to a non-compete provisions
lasting 8 months following his termination of employment.
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Additionally, pursuant to the terms of our 2001 Stock Incentive
Plan (the “Plan”), the Compensation Committee, at its
sole discretion, may take action related to
and/or make
changes to such options and the related options agreements upon
the occurrence of an event that qualifies as a Corporate Change
under the Plan (such definition of which is substantially
similar to the definition of Change in Control in the employment
agreements described above). Such actions
and/or
changes could include (but are not limited to)
(1) acceleration of the vesting of the outstanding,
non-vested options; (2) modifications to the number and
price of shares subject to the option agreements;
and/or
(3) the requirement for mandatory cash out of the options
(i.e., surrender by an executive of all or some of his
outstanding options, whether vested or not, in return for
consideration deemed adequate and appropriate based on the
specific change in control event). Such actions
and/or
changes, if any, may vary among plan participants. As a result
of their discretionary nature, these potential changes have not
been estimated and are not reflected in the above table.
Director
Compensation
The following table provides compensation information for each
individual who served on as a member of our Board of Directors
during the year ended December 31, 2007:
|
Fees Earned or |
||||||||
|
Name
|
Paid in Cash | Total | ||||||
|
Fred R. Lummis
|
— | — | ||||||
|
Jack Antonini
|
— | — | ||||||
|
Robert P. Barone
|
$ | 5,000 | $ | 5,000 | ||||
|
Frederick W. Brazelton
|
— | — | ||||||
|
Ralph H. Clinard
|
— | — | ||||||
|
Ronald Coben
|
— | — | ||||||
|
Ronald Delnevo
|
— | — | ||||||
|
Jorge M. Diaz
|
$ | 3,000 | $ | 3,000 | ||||
|
Roger B. Kafker
|
— | — | ||||||
|
Michael A.R. Wilson
|
— | — | ||||||
During 2007, we paid Messrs. Barone and Diaz $1,000 per
Board meeting attended in person. We also paid Mr. Barone
$1,000 per each Audit Committee meeting attended, if such
meeting was not held on the same day as a Board meeting. Our
other directors were not compensated during 2007 for Board
services due to their employment
and/or
stockholder relationships us. Additionally, Mr. Coben
received no payment for services on our Board during 2007 as a
result of his resignation from our Board in January 2007.
Mr. Coben’s resignation was not caused by any
disagreements with us relating to our operations, policies or
procedures. All of our directors are reimbursed for their
reasonable expenses in attending Board and committee meetings.
On December 13, 2007, Frederick R. Brazelton, Ralph H.
Clinard, Ronald Delnevo and Roger B. Kafker resigned from our
Board in connection with the closing of our initial public.
Messrs. Brazelton, Clinard, Delnevo, and Kafker’s
resignations were not caused by any disagreements with us
relating to our operations, policies or procedures.
Beginning in 2008, each of our non-employee directors, with the
exception of Messrs. Lummis and Wilson, will earn a $30,000
annual retainer for their services. Additionally, each
non-employee director will receive an additional $10,000 annual
retainer for each committee on which he serves during the year,
as well as $5,000 for chairing a committee of our Board. These
amounts will be paid on a monthly basis in the form of cash.
Messrs. Lummis and Wilson have waived their rights to
receive payment for services rendered as members of our Board as
each of these directors are affiliated with
and/or
employed by companies that have a significant ownership interest
in our company.
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Table of Contents
Compensation
Committee Interlocks and Insider Participation
Fred. R. Lummis, Jorge M. Diaz, and Michael A.R. Wilson served
on our Audit Committee during the fiscal year ended
December 31, 2007. During 2007, none of our executive
officers or employees (current or former) served as a member of
the Compensation Committee. Additionally, none of our executive
officers has served as a director or member of the compensation
committee of any other entity whose executive officers served as
a director or member of our Compensation Committee.
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Table of Contents
PRINCIPAL
STOCKHOLDERS
The following table sets forth information regarding the
beneficial ownership of our common stock as of April 30,
2008 for:
| • | each person known by us to beneficially own more than 5% of our common stock; | |
| • | each of our Directors; | |
| • | each of our Named Executive Officers (as such term is defined by the SEC); and | |
| • | all Directors and Named Executive Officers as a group. |
Footnote 1 below provides a brief explanation of what is meant
by the term “beneficial ownership.” The number of
shares of common stock and the percentages of beneficial
ownership are based on 41,768,644 shares of common stock,
which are comprised of 38,667,914 shares of common stock
outstanding as of April 30, 2008 and 3,100,730 shares
of common stock subject to options held by beneficial owners
that are exercisable or that will be exercisable within
60 days of April 30, 2008. Additionally, amounts
presented may not add due to rounding.
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Table of Contents
To our knowledge and except as indicated in the footnotes to
this table and subject to applicable community property laws,
the persons named in this table have the sole voting power with
respect to all shares of common stock listed as beneficially
owned by them.
|
Percent of |
||||||||
|
Amount and Nature of |
Common Stock |
|||||||
|
Name and Address of Beneficial
Owner(1)(2)
|
Beneficial Ownership | Beneficially Owned | ||||||
|
5% Stockholders:
|
||||||||
|
TA Associates,
Inc.(3)
|
12,259,286 | 29.4 | % | |||||
|
TA IX,
L.P.(4)
|
7,583,447 | 18.2 | % | |||||
|
TA/Atlantic and Pacific V
L.P.(5)
|
3,033,370 | 7.3 | % | |||||
|
TA/Atlantic and Pacific IV
L.P.(6)
|
1,307,663 | 3.1 | % | |||||
|
TA Strategic Partners Fund A
L.P.(7)
|
155,268 | * | ||||||
|
TA Investors II,
L.P.(8)
|
151,663 | * | ||||||
|
TA Strategic Partners Fund B
L.P.(9)
|
27,875 | * | ||||||
|
The CapStreet Group,
LLC(10)
|
9,041,074 | 21.6 | % | |||||
|
CapStreet II,
L.P.(11)
|
8,091,222 | 19.4 | % | |||||
|
CapStreet Parallel II,
L.P.(12)
|
949,852 | 2.3 | % | |||||
|
Ralph H.
Clinard(13)
|
2,798,990 | 6.7 | % | |||||
|
Laura
Clinard(14)
|
2,798,986 | 6.7 | % | |||||
|
Columbia Wanger Asset Management,
L.P.(15)
|
2,544,000 | 6.1 | % | |||||
|
Directors and Named Executive Officers:
|
||||||||
|
Michael A.R.
Wilson(16)
|
12,259,286 | 29.4 | % | |||||
|
Fred R.
Lummis(17)
|
9,041,074 | 21.6 | % | |||||
|
Michael H.
Clinard(18)
|
1,290,341 | 3.0 | % | |||||
|
J. Chris
Brewster(19)
|
417,296 | 1.0 | % | |||||
|
Ronald
Delnevo(20)
|
343,446 | * | ||||||
|
Thomas E.
Upton(21)
|
320,627 | * | ||||||
|
Jack Antonini
|
316,969 | * | ||||||
|
Robert P.
Barone(22)
|
34,306 | * | ||||||
|
Jorge M.
Diaz(23)
|
29,807 | * | ||||||
|
Dennis F.
Lynch(24)
|
5,000 | * | ||||||
|
Tim Arnoult
|
— | — | ||||||
|
Rick Updyke
|
— | — | ||||||
|
All Directors and Named Executive Officers as a group
(12 persons)
|
24,058,152 | 57.6 | % | |||||
| * | Less than 1.0% of the outstanding common stock | |
| (1) | “Beneficial ownership” is a term broadly defined by the SEC in Rule 13d-3 under the Exchange Act and includes more than the typical forms of stock ownership, that is, stock held in the person’s name. The term also includes what is referred to as “indirect ownership”, meaning ownership of shares as to which a person has or shares investment or voting power. For the purpose of this table, a person or group of persons is deemed to have “beneficial ownership” of any shares as of April 30, 2008, if that person or group has the right to acquire shares within 60 days after such date. | |
| (2) | The address for each Named Executive Officer and director set forth in the table, unless otherwise indicated, is c/o Cardtronics, Inc., 3110 Hayes Road, Suite 300, Houston, Texas 77082. The address of The CapStreet Group, LLC, CapStreet II, L.P., CapStreet Parallel II, L.P., and Mr. Lummis is c/o The CapStreet Group, LLC, 600 Travis Street, Suite 6110, Houston, Texas 77002. The address of TA Associates, Inc., TA IX, L.P., TA/Atlantic and Pacific V L.P., TA/Atlantic and Pacific IV L.P., TA Strategic Partners Fund A L.P., TA Investors II, L.P., TA Strategic Partners Fund B L.P., and Mr. Wilson is c/o TA Associates, John Hancock Tower, 56th Floor, 200 Clarendon Street, Boston, Massachusetts 02116. |
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| (3) | The shares owned by TA Associates, Inc. through its affiliated funds, including TA IX L.P., TA/Atlantic and Pacific IV L.P., TA/Atlantic and Pacific V L.P., TA Strategic Partners Fund A L.P., TA Strategic Partners Fund B L.P., and TA Investors II, L.P., which we collectively refer to as the TA Funds, represent common shares issued upon the conversion of Series B Convertible Preferred Stock into shares of our common stock. See “Certain Relationships and related person transactions.” | |
| (4) | As reported on Schedule 13G dated as of December 31, 2007, and filed with the SEC on February 14, 2008, TA Associates, Inc. is the general partner of TA IX, L.P., and each may be considered a beneficial owner, with sole voting and dispositive power of 7,583,447 shares. | |
| (5) | As reported on Schedule 13G dated as of December 31, 2007, and filed with the SEC on February 14, 2008, TA Associates, Inc. is the general partner of TA Atlantic and Pacific V L.P., and each may be considered a beneficial owner, with sole voting and dispositive power of 3,033,370 shares. | |
| (6) | As reported on Schedule 13G dated as of December 31, 2007, and filed with the SEC on February 14, 2008, TA Associates, Inc. is the general partner of TA/Atlantic and Pacific IV L.P., and each may be considered a beneficial owner, with sole voting and dispositive power of 1,307,663 shares. | |
| (7) | As reported on Schedule 13G dated as of December 31, 2007, and filed with the SEC on February 14, 2008, TA Associates, Inc. is the general partner of TA Strategic Partners Fund A L.P., and each may be considered a beneficial owner, with sole voting and dispositive power of 155,268 shares. | |
| (8) | As reported on Schedule 13G dated as of December 31, 2007, and filed with the SEC on February 14, 2008, TA Associates, Inc. is the general partner of TA Investors II, L.P., and each may be considered a beneficial owner, with sole voting and dispositive power of 151,663 shares. | |
| (9) | As reported on Schedule 13G dated as of December 31, 2007, and filed with the SEC on February 14, 2008, TA Associates, Inc. is the general partner of TA Strategic Partners Fund B L.P., and each may be considered a beneficial owner, with sole voting and dispositive power of 27,875 shares. | |
| (10) | The shares owned by The CapStreet Group, LLC are owned through its affiliated funds, CapStreet II, L.P. and CapStreet Parallel II, L.P. | |
| (11) | As reported on Schedule 13G dated as of December 31, 2007, and filed with the SEC on February 13, 2008, The CapStreet Group, LLC is the general partner of CapStreet GP II, L.P., which is the general partner of CapStreet II, L.P., and each may be considered a beneficial owner, with sole voting and dispositive power of 8,091,222 shares. | |
| (12) | As reported on Schedule 13G dated as of December 31, 2007, and filed with the SEC on February 13, 2008, The CapStreet Group, LLC is the general partner of CapStreet Parellel II, L.P., and each may be considered a beneficial owner, with sole voting and dispositive power of 949,852 shares. | |
| (13) | The shares indicated as being beneficially owned by Ralph H. Clinard include 1,209,290 shares owned directly by him, 541,168 shares owned by four family trusts for the benefit of his children of which Mr. Clinard is a co-trustee and has shared voting power, and 1,048,532 shares owned by Mr. Clinard’s wife (Laura Clinard) of which Mr. Clinard may be deemed to be the beneficial owner. | |
| (14) | The shares indicated as being beneficially owned by Laura Clinard include 1,048,532 shares owned directly by her, 541,164 shares owned by the Ralph Clinard Family Trust of which Mrs. Clinard is a co-trustee and has shared voting power, and 1,209,290 shares owned by Mrs. Clinard’s husband (Ralph H. Clinard) of which Mrs. Clinard may be deemed to be the beneficial owner. | |
| (15) | As reported on Schedule 13G dated as of December 31, 2007, and filed with the SEC on January 22, 2008, Columbia Wanger Asset Management, L.P. is considered a beneficial owner, with sole voting and dispositive power of 2,544,000 shares. The shares reported therein include the shares held by Columbia Acorn Trust, a Massachusetts business trust that is advised by Columbia Wanger Asset Management, L.P. Columbia Acorn Trust holds 5.99% of our shares. | |
| (16) | The shares indicated as being beneficially owned by Michael A.R. Wilson are owned directly by the TA Funds. Mr. Wilson serves as a Managing Director of TA Associates, Inc., the ultimate general partner of the TA Funds. As such, Mr. Wilson may be deemed to have a beneficial ownership of the shares owned by the TA Funds. Mr. Wilson disclaims beneficial ownership of such shares, except to the extent of his pecuniary interest therein and 22,310 shares of our common stock. | |
| (17) | The shares indicated as being beneficially owned by Fred R. Lummis are owned directly by CapStreet II, L.P. and CapStreet Parallel II, L.P. Mr. Lummis serves as a senior advisor of The CapStreet Group, LLC, the ultimate general partner of both CapStreet II, L.P. and CapStreet Parallel II, L.P. As such, Mr. Lummis may be deemed to have a beneficial ownership of the shares owned by CapStreet II, L.P. and CapStreet Parallel II, L.P. Mr. Lummis disclaims beneficial ownership of such shares. | |
| (18) | Includes 425,641 shares owned directly by Michael H. Clinard and 188,244 options that are exercisable within 60 days of April 30, 2008. Also included in the shares indicated as being beneficially owned by Mr. Clinard are 541,164 shares owned by the Ralph Clinard Family Trust and 135,292 shares owned by a trust for the benefit of Mr. Clinard, of which Mr. Clinard is a co-trustee of and has shared voting power of and of which he may be deemed to be the beneficial owner. | |
| (19) | Includes 417,296 options that are exercisable within 60 days of April 30, 2008. | |
| (20) | Includes 238,454 options that are exercisable within 60 days of April 30, 2008. | |
| (21) | Includes 227,359 options that are exercisable within 60 days of April 30, 2008. | |
| (22) | Includes 34,306 options that are exercisable within 60 days of April 30, 2008. | |
| (23) | Includes 29,807 options that are exercisable within 60 days of April 30, 2008. |
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CERTAIN
RELATIONSHIPS AND RELATED PERSON TRANSACTIONS
Preferred
Stock Private Placement
In February 2005, we issued 894,568 shares of our
Series B redeemable convertible preferred stock (the
“Series B Stock”) to investment funds controlled
by TA Associates, Inc. (the TA Funds) for a per share price of
$83.8394 resulting in aggregate gross proceeds of
$75.0 million. In connection with this offering, we also
appointed Michael A.R. Wilson and Roger B. Kafker, who were
designees of the TA Funds, to our Board. Approximately
$24.8 million of the net proceeds of this offering were
used to redeem all of the outstanding shares of our
Series A preferred stock from affiliates of The CapStreet
Group, LLC. The remaining net proceeds were used to repurchase
approximately 24% of our outstanding shares of common stock and
vested options to purchase our common stock at a price per share
of $10.5478, pursuant to an offer to purchase such shares of
stock from all of our stockholders on a pro rata basis. As part
of this transaction, we repurchased 2,812,794 shares of our
common stock from affiliates of The CapStreet Group for
$29.7 million.
In connection with obtaining the approval of TA Funds to the
July 2007 acquisition of the ATM and financial self-service
kiosk business of 7-Eleven, Inc., we modified the original
conversion ratio applicable to the TA Funds’ Series B
Stock so that the common stock issuable upon conversion thereof,
at the time of our initial public offering, would be valued at
no less than $131,250,000 (175% of the TA Funds’ original
$75 million cost of the Series B Stock). This
modification was contained in our amended Certificate of
Incorporation filed on July 19, 2007. Importantly, the
conversion price modification gave us the ability to require the
conversion of the Series B Stock to common stock in
connection with an initial public offering even if the IPO per
share price would not itself give the TA Funds common shares
with a $131,250,000 value. Our stockholders who received
Series B Stock in connection with the Bank Machine
acquisition agreed that the conversion price modification would
only apply to holders of at least 100,000 shares of
Series B Stock.
In connection with the initial public offering, the terms of the
Series B Stock held by the TA Funds was further amended so
that at an assumed initial public offering price below $12.00
per share, the TA Funds agreed to receive common shares with a
value of less than $131,250,000. Pursuant to these amendments
and based on the initial public offering price of $10.00 per
share, each share of Series B Stock held by the TA Funds
was converted into 1.7241 shares of common stock so that
the shares of common stock held by the TA Funds represented
46.1% of our pre-IPO outstanding common shares (the
“Pre-IPO Common Stock Pool”). The remaining
35,221 shares of Series B Stock not held by the TA
Funds converted into 279,955 shares of our common stock (on
a split-adjusted basis). These conversion mechanics did not
increase the number of shares of our common stock in the Pre-IPO
Common Stock Pool.
Investors
Agreement
In connection with our issuance of Series B Stock to the TA
Funds in February 2005, all our existing stockholders entered
into an investors agreement relating to several matters.
However, upon the completion of our initial public offering in
December 2007, only the registration rights provision of the
investors agreement continue to be in force. The material terms
of that agreement are set forth below.
Registration Rights. The investors agreement
grants CapStreet II, L.P. (on behalf of itself, CapStreet
Parallel II, L.P., and permitted transferees thereof) and TA
Associates the right to demand that we file a registration
statement with the SEC to register the sale of all or part of
the shares of common stock beneficially owned by them. Subject
to certain limitations, we will be obligated to register these
shares upon CapStreet II, L.P.’s or TA Associates’
demand, for which we will be required to pay the registration
expenses. In connection with any such demand registration, the
stockholders who are parties to the investors agreement may be
entitled to include their shares in that registration. In
addition, if we propose to register securities for our own
account, the stockholders who are parties to the investors
agreement may be entitled to include their shares in that
registration.
All of these registration rights are subject to conditions and
limitations, which include certain rights to limit the number of
shares included in a registration under some circumstances.
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Transactions
with our Directors and Officers
General. During 2007, we paid two of our
directors, Messrs. Barone and Diaz, $1,000 per Board
meeting attended. Other directors were not compensated during
2007 for Board services due to their employment
and/or
stockholder relationships with us. Additionally, all of our
directors are reimbursed for their reasonable expenses in
attending Board and committee meetings.
The CapStreet Group. Fred R. Lummis, the
Chairman of our Board, is a senior advisor to The CapStreet
Group, LLC, the ultimate general partner of CapStreet II, L.P.
and CapStreet Parallel II, L.P., which collectively own 23.4% of
our outstanding common stock as of March 31, 2008.
TA Associates. Michael A.R. Wilson and Roger
B. Kafker, both of whom were on our Board during 2007, are
managing directors of TA Associates, affiliates of which are
Cardtronics’ stockholders and own 31.7% of our outstanding
common stock as of March 31, 2008. On December 13,
2007, Mr. Kafker resigned from our Board in connection with
the closing of our initial public offering.
Mr. Kafker’s resignation was not caused by any
disagreements with us relating to our operations, policies or
procedures.
Jorge M. Diaz, a member of our Board, is the President
and Chief Executive Officer of Fiserv Output Solutions, a
division of Fiserv. In 2007, Fiserv provided third party
services during the normal course of business for Cardtronics.
We paid approximately $9.9 million to Fiserv in 2007, which
represented less than 3.1% of our total cost of revenues and
selling, general and administrative expenses for the year ended
December 31, 2007. Approximately 96% of these payments were
made under a contract that we assumed in the acquisition of the
ATM and advanced self-service kiosk business of 7-Eleven, Inc.
in July 2007.
Bansi, S.A. Institucion de Banca Multiple (Bansi), an
entity that owns a minority interest in our subsidiary
Cardtronics Mexico, provided various ATM management services to
Cardtronics Mexico during the normal course of business in 2007,
including serving as the vault cash provider, bank sponsor, and
the landlord for Cardtronics Mexico as well as providing other
services. We paid approximately $1.4 million to Bansi in
2007, which represented less than 0.4% of our total cost of
revenues and selling, general, and administrative expenses for
the year ended December 31, 2007.
Subscriptions Receivable. We currently have
loans outstanding with certain employees related to past
exercises of employee stock options and purchases of our common
stock, as applicable. These loans, which were initiated in 2003,
are reflected as subscriptions receivable in our consolidated
balance sheets contained in our Annual Report on
Form 10-K
for the fiscal year ended December 31, 2007. The notes,
which were due in December 2007, were extended for one
additional year. The rate of interest on each of these loans
remains at 5% per annum. In connection with the investment by TA
Associates in February 2005 and the concurrent redemption of a
portion of our common stock, approximately $0.4 million of
the outstanding loans were repaid to us. Additionally, in the
third quarter of 2006, we repurchased 121,254 shares of our
common stock held by certain of our executive officers for
approximately $1.3 million in proceeds. Such proceeds were
primarily utilized by the executive officers to repay the
majority of the above-discussed subscriptions receivable,
including all accrued and unpaid interest related thereto. Such
loans were required to be repaid pursuant to SEC rules and
regulations prohibiting registrants from having loans with
executive officers. Finally, in 2007, approximately
$0.1 million of these loans were repaid by employees. As a
result of the repayments, the total remaining amount outstanding
under such loans, including accrued interest, was approximately
$0.2 million as of December 31, 2007.
Restricted Stock Grant. In January 2003, we
sold Jack Antonini, our President and Chief Executive Officer,
635,879 shares of common stock in exchange for a promissory
note in the amount of $940,800. The agreement permitted us to
repurchase a portion of the shares prior to January 20,
2007 in certain circumstances. The agreement also contained a
provision allowing the shares to be “put” to us in an
amount sufficient to retire the entire unpaid principal balance
of the promissory note plus accrued interest. In February 2004,
we amended the agreement to remove the “put” right. We
recognized approximately $11,000, $216,000, and $491,000 in
compensation expense in the consolidated statements of
operations contained in our Annual Report on
Form 10-K
for the years ended December 31, 2007, 2006, and 2005,
respectively, associated with this restricted stock grant.
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Approval
of Related Person Transactions
In the ordinary course of business, we may enter into a related
person transaction (as such is defined by the SEC). The policies
and procedures relating to the approval of related person
transactions are not in writing. Given the relatively small size
of our organization, any material related person transactions
entered into would be discussed with management and require
approval by our Board prior to entering into the transaction.
Additionally, any material agreement related to our Mexico
operations is reviewed and approved by the board of directors of
our Mexico subsidiary.
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DESCRIPTION OF
OTHER INDEBTEDNESS
Revolving
Credit Facility
Our revolving credit facility provides for $175.0 million
in borrowings, subject to certain restrictions. Borrowings under
the facility currently bear interest at LIBOR plus a spread,
which is currently 2.25%. Additionally, we pay a commitment fee
of 0.25% per annum on the unused portion of the revolving credit
facility. Substantially all of our assets, including the stock
of our wholly-owned domestic subsidiaries and 66.0% of the stock
of its foreign subsidiaries, are pledged to secure borrowings
made under the revolving credit facility. Furthermore, each of
the our domestic subsidiaries has guaranteed our obligations
under such facility.
The primary restrictive covenants within the facility include
(i) limitations on the amount of senior debt that we can
have outstanding at any given point in time, (ii) the
maintenance of a set ratio of earnings to fixed charges, as
computed on a rolling
12-month
basis, (iii) limitations on the amounts of restricted
payments that can be made in any given year, including
dividends, and (iv) limitations on the amount of capital
expenditures that we can incur on a rolling
12-month
basis. There are currently no restrictions on the ability of our
wholly-owned subsidiaries to declare and pay dividends directly
to us. As of March 31, 2008, we were in compliance with all
applicable covenants and ratios under the facility.
As of March 31, 2008, $39.5 million of borrowings were
outstanding under the revolving credit facility. Additionally,
the Company had posted $7.2 million in letters of credit
under the facility in favor of the lessors under the ATM
equipment leases that the Company assumed in connection with the
7-Eleven ATM Transaction. These letters of credit, which the
lessors may draw upon in the event the Company fails to make
payments under the leases, further reduce the Company’s
borrowing capacity under the facility. As of March 31,
2008, the Company’s available borrowing capacity under the
amended facility, as determined under the earnings before
interest expense, income taxes, depreciation and accretion
expense, and amortization expense (“EBITDA”) and
interest expense covenants contained in the agreement, totaled
approximately $128.3 million.
Senior
Subordinated Notes
In October 2006, we completed the registration of
$200.0 million in senior subordinated notes (the
“Series A Notes”), which were originally issued
in August 2005 pursuant to Rule 144A of the Securities Act
of 1933, as amended. The Series A Notes, which are
subordinate to borrowings made under the revolving credit
facility, mature in August 2013, carry a 9.25% coupon, and were
issued with an effective yield of 9.375%. Interest under the
notes is paid semiannually in arrears on
February 15th and August 15th of each year.
The notes, which are guaranteed by our domestic subsidiaries,
contain certain covenants that, among other things, limit our
ability to incur additional indebtedness and make certain types
of restricted payments, including dividends. Under the terms of
the indenture, at any time prior to August 15, 2008, we may
redeem up to 35% of the aggregate principal amount of the
Series A Notes at a redemption price of 109.250% of the
principal amount thereof, plus any accrued and unpaid interest,
subject to certain conditions outlined in the indenture.
Additionally, at any time prior to August 15, 2009, we may
redeem all or part of the Series A Notes at a redemption
price equal to the sum of 100% of the principal amount plus an
“Applicable Premium”, as defined in the indenture,
plus any accrued and unpaid interest. On or after
August 15, 2009, we may redeem all or a part of the
Series A Notes at the redemption prices set forth by the
indenture plus any accrued and unpaid interest. As of
March 31, 2008, we were in compliance with all applicable
covenants required under the Series A Notes.
Other
Borrowing Facilities
Bank Machine overdraft facility. In addition
to the revolving credit facility, our wholly-owned United
Kingdom subsidiary, Bank Machine, has a £2.0 million
unsecured overdraft facility that expires in July 2008. This
facility, which bears interest at 1.75% over the bank’s
base rate (currently 5.00%), is utilized for general corporate
purposes for our United Kingdom operations. As of March 31,
2008, approximately £1.0 million of
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this facility had been utilized to help fund certain working
capital commitments. Amounts outstanding under the overdraft
facility are reflected in accounts payable in the accompanying
financial statements, as such amounts are automatically repaid
once cash deposits are made to the underlying bank accounts.
Cardtronics Mexico equipment financing
agreements. During 2006 and 2007, our
majority-owned subsidiary, Cardtronics Mexico, entered into six
separate five-year equipment financing agreements with a single
lender. These agreements, which are denominated in Mexican pesos
and bear interest at an average fixed rate of 10.96%, were
utilized for the purchase of additional ATMs to support the our
Mexico operations. As of March 31, 2008, $90.4 million
pesos ($8.5 million U.S.) were outstanding under the
agreements in place at the time, with future borrowings to be
individually negotiated between the lender and Cardtronics.
Pursuant to the terms of the loan agreement, we have issued a
guaranty for 51.0% of the obligations under this agreement
(consistent with our ownership percentage in Cardtronics
Mexico.) As of March 31, 2008, the total amount of the
guaranty was $46.1 million pesos ($4.3 million U.S.).
Lease agreements. In connection with the
7-Eleven ATM Transaction, we assumed certain capital and
operating lease obligations for approximately 2,000 ATMs. We
currently have $7.2 million in letters of credit posted
under our revolving credit facility in favor of the lessors
under these assumed equipment leases. These letters of credit
reduce the available borrowing capacity under our revolving
credit facility. As of March 31, 2008, the principal
balance of our capital lease obligations totaled
$1.7 million.
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DESCRIPTION OF
THE NEW NOTES
The new notes will be issued, and the outstanding notes were
issued, under an indenture dated as of July 20, 2007 (the
“Indenture”) among the Company, the Initial
Guarantors, and Wells Fargo National Bank, National Association,
as trustee (the “Trustee”). The outstanding notes were
issued in a private transaction that is not subject to the
registration requirements of the Securities Act. The terms of
the new notes include those stated in the Indenture and those
made part of the Indenture by reference to the
Trust Indenture Act of 1939, as amended (the
“Trust Indenture Act”).
The following description is a summary of the material
provisions of the Indenture. It does not restate that agreement
in its entirety. We urge you to read the Indenture because it,
and not this description, defines your rights as holders of the
new notes. The Company has filed the Indenture for an exhibit to
the registration statement of which this prospectus is a part.
You can find the definitions of certain terms used in this
description below under the caption “— Certain
Definitions.” Certain defined terms used in this
description but not defined below under the caption
“— Certain Definitions” have the meanings
assigned to them in the Indenture. In this description, the word
“Company” refers only to Cardtronics, Inc. and not to
any of its subsidiaries and the “Notes” refer equally
to the new notes and the outstanding notes.
If the exchange offer contemplated by this prospectus (the
“Exchange Offer”) is consummated, Holders of
outstanding notes who do not exchange those notes for new notes
in the Exchange Offer will vote together with Holders of new
notes for all relevant purposes under the Indenture. In that
regard, the Indenture requires that certain actions by the
Holders thereunder (including acceleration following an Event of
Default) must be taken, and certain rights must be exercised, by
specified minimum percentages of the aggregate principal amount
of the outstanding securities issued under the Indenture. In
determining whether Holders of the requisite percentage in
principal amount have given any notice, consent or waiver or
taken any other action permitted under the Indenture, any
outstanding notes that remain outstanding after the Exchange
Offer will be aggregated with the new notes, and the Holders of
such outstanding notes and the new notes will vote together as a
single series for all such purposes. Accordingly, all references
herein to specified percentages in aggregate principal amount of
the notes outstanding shall be deemed to mean, at any time after
the Exchange Offer is consummated, such percentages in aggregate
principal amount of the outstanding notes and the new notes then
outstanding.
Brief
Description of the New Notes
The new notes will be:
| • | general unsecured obligations of the Company; | |
| • | subordinated in right of payment to all existing and future Senior Debt of the Company, including the Indebtedness of the Company under the Credit Agreement; | |
| • | pari passu in right of payment with all existing and any future senior subordinated Indebtedness of the Company, including the $200.0 million aggregate principal amount of 9.250% senior subordinated notes due 2013 issued under the indenture dated as of August 12, 2005 (the “Series A Notes”); | |
| • | senior in right of payment to any future subordinated Indebtedness of the Company | |
| • | guaranteed by the Guarantors as described under “— Note Guarantees”; and | |
| • | effectively subordinated to all existing and any future Indebtedness and other liabilities of the Company’s Subsidiaries that are not Guarantors. |
As of March 31, 2008, the Company and Initial Guarantors
had $337.4 million of Indebtedness outstanding, which was
comprised of $39.5 million in Senior Debt,
$199.0 million of the Series A Notes,
$97.2 million of the outstanding notes, which are the notes
subject to the exchange offer described herein, and
$1.7 million in capital lease obligations. Additionally,
the Company’s subsidiaries that are not guaranteeing the
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new notes had approximately $8.5 million of indebtedness
and other liabilities, not including intercompany liabilities.
As of the date of this prospectus, all of our subsidiaries are
“Restricted Subsidiaries.” However, under the
circumstances described below under the caption
“— Certain Covenants — Designation of
Restricted and Unrestricted Subsidiaries,” we will be
permitted to designate certain of our subsidiaries as
“Unrestricted Subsidiaries.” Any Unrestricted
Subsidiaries will not be subject to any of the restrictive
covenants in the Indenture and will not guarantee the new notes.
Any outstanding notes that remain outstanding after the
completion of the Exchange Offer, together with the new notes
issued in connection with the Exchange Offer and any other notes
issued under the indenture then outstanding, will be treated as
a single class of securities under the Indenture.
Principal,
Maturity and Interest
The Indenture provides for the issuance by the Company of Notes
with an unlimited principal amount, of which $100.0 million
were issued on July 20, 2007. The Company may issue
additional notes (the “Additional Notes”) from time to
time. Any offering of Additional Notes is subject to all of the
covenants of the Indenture, including the covenant described
below under the caption “— Certain
Covenants — Incurrence of Indebtedness”. The
Notes and any Additional Notes subsequently issued under the
Indenture would be treated as a single class for all purposes
under the Indenture, including, without limitation, waivers,
amendments, redemptions and offers to purchase. The Company will
issue Notes in denominations of $1,000 and integral multiples of
$1,000. The Notes will mature on August 15, 2013.
Interest on the new notes will accrue at the rate of 9.250% per
annum from February 15, 2008 and will be payable
semi-annually in arrears on February 15 and August 15,
commencing on August 15, 2008. The Company will make each
interest payment to the Holders of record on the immediately
preceding February 1 and August 1. Interest will be
computed on the basis of a
360-day year
comprised of twelve
30-day
months.
Methods
of Receiving Payments on the Notes
If a Holder has given wire transfer instructions to the Company,
the Company will pay all principal, interest and premium on that
Holder’s Notes in accordance with those instructions. All
other payments on Notes will be made at the office or agency of
the Paying Agent and Registrar within The City and State of New
York unless the Company elects to make interest payments by
check mailed to the Holders at their addresses set forth in the
register of Holders.
Paying
Agent and Registrar for the Notes
The Trustee also acts as Paying Agent and Registrar. The Company
may change the Paying Agent or Registrar without prior notice to
the Holders, and the Company or any of its Subsidiaries may act
as Paying Agent or Registrar.
Transfer
and Exchange
A Holder may transfer or exchange Notes in accordance with the
Indenture. The Registrar and the Trustee may require a Holder,
among other things, to furnish appropriate endorsements and
transfer documents and the Company may require a Holder to pay
any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange
any Note selected for redemption. Also, the Company is not
required to transfer or exchange any Note for a period of
15 days before a selection of Notes to be redeemed.
The registered Holder of a Note will be treated as the owner of
it for all purposes.
Note
Guarantees
The Notes are guaranteed, jointly and severally, by the Initial
Guarantors. Each Note Guarantee:
| • | is a general unsecured obligation of that Guarantor; |
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| • | is subordinated in right of payment to all existing and future Senior Debt of that Guarantor, including the Guarantee by that Guarantor of Indebtedness under the Credit Agreement; | |
| • | is pari passu in right of payment with all existing and any future senior subordinated Indebtedness of that Guarantor, including the Guarantee by that Guarantor of the Series A notes; and | |
| • | is senior in right of payment to any future subordinated Indebtedness of that Guarantor. |
Each Note Guarantee will be subordinated to the prior payment in
full of all Senior Debt of that Guarantor. The obligations of
each Guarantor under its Note Guarantee will be limited as
necessary to prevent that Note Guarantee from constituting a
fraudulent conveyance under applicable law. See “Risk
Factors — The guarantees may not be enforceable
because of fraudulent conveyance laws.” As of
March 31, 2008, the Initial Guarantors had outstanding
Indebtedness of approximately $337.4 million, of which
$39.5 million was Guarantees of Indebtedness under the
Credit Agreement, $199.0 million was Guarantees of the
Series A Notes, $97.2 million was Guarantees of the
outstanding notes, and $1.7 million was obligations under
capital leases. Additionally, the Company’s subsidiaries
that are not guaranteeing the Notes had approximately
$8.5 million of indebtedness and other liabilities, not
including intercompany liabilities. See
“— Certain Covenants — Guarantees.”
Subordination
The payment of principal, interest and premium on the Notes is
subordinated to the prior payment in full in cash or Cash
Equivalents of all Senior Debt of the Company, including Senior
Debt of the Company Incurred after the Issue Date.
The holders of Senior Debt of the Company are entitled to
receive payment in full in cash or Cash Equivalents of all
Obligations due in respect of Senior Debt of the Company
(including interest after the commencement of any bankruptcy
proceeding at the rate specified in the documentation for the
applicable Senior Debt of the Company) before the Holders of
Notes are entitled to receive any payment with respect to the
Notes (except that Holders of Notes may receive and retain
Permitted Junior Securities and payments made from the trusts
described below under the captions “— Legal
Defeasance and Covenant Defeasance” or
“— Satisfaction and Discharge”), in the
event of any distribution to creditors of the Company in
connection with:
(1) any liquidation or dissolution of the Company;
(2) any bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Company or
its property;
(3) any assignment for the benefit of creditors; or
(4) any marshaling of the Company’s assets and
liabilities.
The Company also may not make any payment in respect of the
Notes (except in Permitted Junior Securities or from the trusts
described under the captions “— Legal Defeasance
and Covenant Defeasance”) if:
(1) a default (a “payment default”) in the
payment of principal, premium or interest on Designated Senior
Debt of the Company occurs and is continuing; or
(2) any other default (a “nonpayment default”)
occurs and is continuing on any series of Designated Senior Debt
of the Company that permits holders of that series of Designated
Senior Debt of the Company to accelerate its maturity, and the
Trustee receives a notice of such default (a “Payment
Blockage Notice”) from a representative of the holders of
such Designated Senior Debt.
Payments on the Notes may and will be resumed:
(1) in the case of a payment default on Designated Senior
Debt of the Company, upon the date on which such default is
cured or waived; and
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(2) in case of a nonpayment default on Designated Senior
Debt of the Company, the earlier of (x) the date on which
such default is cured or waived, (y) 179 days after
the date on which the applicable Payment Blockage Notice is
received and (z) the date the Trustee receives notice from
the representative for such Designated Senior Debt rescinding
the Payment Blockage Notice, unless, in each case, the maturity
of such Designated Senior Debt of the Company has been
accelerated.
No new Payment Blockage Notice may be delivered unless and until:
(1) 360 days have elapsed since the delivery of the
immediately prior Payment Blockage Notice; and
(2) all scheduled payments of principal, interest and
premium and Additional Interest, if any, on the Notes that have
come due have been paid in full in cash or Cash Equivalents.
No nonpayment default that existed or was continuing on the date
of delivery of any Payment Blockage Notice to the Trustee will
be, or be made, the basis for a subsequent Payment Blockage
Notice unless such default has been cured or waived for a period
of not less than 90 days.
If the Trustee or any Holder of the Notes receives a payment in
respect of the Notes (except in Permitted Junior Securities or
from the trusts described below under the captions
“— Legal Defeasance and Covenant
Defeasance”) when:
(1) the payment is prohibited by these subordination
provisions; and
(2) the Trustee or the Holder has actual knowledge that the
payment is prohibited (provided that such actual
knowledge will not be required in the case of any payment
default on Designated Senior Debt),
the Trustee or the Holder, as the case may be, will hold such
payment in trust for the benefit of the holders of Senior Debt
of the Company. Upon the proper written request of the holders
of Senior Debt of the Company or, if there is any payment
default on any Designated Senior Debt, the Trustee or the
Holder, as the case may be, will deliver the amounts in trust to
the holders of Senior Debt of the Company or their proper
representative.
The Company must promptly notify holders of its Senior Debt if
payment of the Notes is accelerated because of an Event of
Default.
As a result of the subordination provisions described above, in
the event of a bankruptcy, liquidation or reorganization of the
Company, Holders of Notes may recover less ratably than other
creditors of the Company.
Payments under the Note Guarantee of each Guarantor are
subordinated to the prior payment in full of all Senior Debt of
such Guarantor, including Senior Debt of such Guarantor Incurred
after the Issue Date, on the same basis as provided above with
respect to the subordination of payments on the Notes by the
Company to the prior payment in full of Senior Debt of the
Company. See “Risk Factors — Your right to
receive payments on the notes will be junior to our existing and
future senior debt, and the guarantees of the notes are junior
to all of the guarantors’ existing and future senior
debt.”
“Designated Senior Debt” means:
(1) any Indebtedness outstanding under the Credit
Agreement; and
(2) to the extent permitted under the Credit Agreement, any
other Senior Debt permitted under the Indenture the amount of
which is $25.0 million or more and that has been designated
by the Company as “Designated Senior Debt.”
“Permitted Junior Securities” means:
(1) Equity Interests in the Company or any Guarantor or any
other business entity provided for by a plan or
reorganization; and
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(2) debt securities of the Company or any Guarantor or any
other business entity provided for by a plan of reorganization
that are subordinated to all Senior Debt and any debt securities
issued in exchange for Senior Debt to the same extent as, or to
a greater extent than, the Notes and the Note Guarantees are
subordinated to Senior Debt under the Indenture.
“Senior Debt” of any Person means:
(1) all Indebtedness of such Person outstanding under the
Credit Agreement and all Hedging Obligations with respect
thereto, whether outstanding on the Issue Date or Incurred
thereafter;
(2) any other Indebtedness of such Person permitted to be
Incurred under the terms of the Indenture, unless the instrument
under which such Indebtedness is Incurred expressly provides
that it is on a parity with or is subordinated in right of
payment to the Notes or any Note Guarantee; and
(3) all Obligations with respect to the items listed in the
preceding clauses (1) and (2) (including any interest
accruing subsequent to the filing of a petition of bankruptcy at
the rate provided for in the documentation with respect thereto,
whether or not such interest is an allowed claim under
applicable law).
Notwithstanding anything to the contrary in the preceding
paragraph, Senior Debt will not include:
(1) any liability for federal, state, local or other taxes
owed or owing by the Company or any Guarantor;
(2) any Indebtedness of the Company or any Guarantor to any
of their Subsidiaries or other Affiliates;
(3) any trade payables;
(4) the portion of any Indebtedness that is Incurred in
violation of the Indenture, provided that a good faith
determination by the Board of Directors of the Company evidenced
by a Board Resolution, or a good faith determination by the
Chief Financial Officer of the Company evidenced by an
officer’s certificate, that any Indebtedness being incurred
under the Credit Agreement is permitted by the Indenture will be
conclusive;
(5) any Indebtedness of the Company or any Guarantor that,
when Incurred, was without recourse to the Company or such
Guarantor;
(6) any repurchase, redemption or other obligation in
respect of Disqualified Stock or Preferred Stock; or
(7) any Indebtedness owed to any employee of the Company or
any of its Subsidiaries.
(8) any Indebtedness of the Company or any Guarantor under
the Company’s 9.250% senior subordinated notes due
2013 issued under the indenture dated August 12, 2005.
For the avoidance of doubt, the new notes shall rank pari
passu with the Company’s 9.250% senior
subordinated notes due 2013 issued under the indenture dated
August 12, 2005 and each related Note Guarantee of a
Guarantor shall rank pari passu with that
Guarantor’s Guarantee of such notes.
Optional
Redemption
At any time prior to August 15, 2008, the Company may
redeem up to 35% of the aggregate principal amount of Notes
issued under the Indenture (including any Additional Notes) at a
redemption price of 109.250% of the principal amount thereof,
plus accrued and unpaid interest, if any, thereon to the
redemption date, with the net cash proceeds of one or more
Equity Offerings; provided that:
(1) at least 65% of the aggregate principal amount of Notes
issued under the Indenture (including any Additional Notes)
remains outstanding immediately after the occurrence of such
redemption (excluding Notes held by the Company or its
Affiliates); and
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(2) the redemption must occur within 45 days of the
date of the closing of such Equity Offering.
At any time prior to August 15, 2009, the Company may
redeem all or part of the Notes upon not less than 30 nor more
than 60 days’ prior notice at a redemption price equal
to the sum of (1) 100% of the principal amount thereof,
plus (2) the Applicable Premium as of the date of
redemption, plus accrued and unpaid interest, if any, to
the date of redemption.
Except pursuant to the preceding paragraphs, the Notes will not
be redeemable at the Company’s option prior to
August 15, 2009.
On or after August 15, 2009, at any time or from time to
time, the Company may redeem all or a part of the Notes upon not
less than 30 nor more than 60 days’ notice, at the
redemption prices (expressed as percentages of principal amount)
set forth below plus accrued and unpaid interest, if any,
thereon, to the applicable redemption date, if redeemed during
the twelve-month period beginning on August 15 of the years
indicated below:
|
Year
|
Percentage | |||
|
2009
|
104.625 | % | ||
|
2010
|
102.313 | % | ||
|
2011 and thereafter
|
100.000 | % | ||
If less than all of the Notes are to be redeemed at any time,
the Trustee will select Notes for redemption as follows:
(1) if the Notes are listed on any national securities
exchange, in compliance with the requirements of such principal
national securities exchange; or
(2) if the Notes are not so listed, on a pro rata basis, by
lot or by such method as the Trustee will deem fair and
appropriate.
No Notes of $1,000 or less will be redeemed in part. Notices of
redemption will be mailed by first class mail at least 30 but
not more than 60 days before the redemption date to each
Holder of Notes to be redeemed at its registered address.
Notices of redemption may not be conditional.
If any Note is to be redeemed in part only, the notice of
redemption that relates to that Note will state the portion of
the principal amount thereof to be redeemed. A new Note in
principal amount equal to the unredeemed portion of the original
Note will be issued in the name of the Holder thereof upon
cancellation of the original Note. Notes called for redemption
will become due on the date fixed for redemption. On and after
the redemption date, interest will cease to accrue on Notes or
portions of them called for redemption.
Mandatory
Redemption
The Company is not required to make mandatory redemption or
sinking fund payments with respect to the Notes.
Repurchase
at the Option of Holders
Change
of Control
If a Change of Control occurs, each Holder of Notes will have
the right to require the Company to repurchase all or any part
(equal to $1,000 or an integral multiple thereof) of that
Holder’s Notes pursuant to an offer (a “Change of
Control Offer”) on the terms set forth in the Indenture. In
the Change of Control Offer, the Company will offer a payment (a
“Change of Control Payment”) in cash equal to not less
than 101% of the aggregate principal amount of Notes repurchased
plus accrued and unpaid interest and Additional Interest, if
any, thereon, to the date of repurchase (the “Change of
Control Payment Date,” which date will be no earlier than
the date of such Change of Control). No later than 30 days
following any Change of Control, the Company will mail a notice
to each Holder describing the transaction or transactions that
constitute the Change of Control and offering to repurchase
Notes on the Change of Control Payment Date specified in such
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notice, which date will be no earlier than 30 days and no
later than 60 days from the date such notice is mailed,
pursuant to the procedures required by the Indenture and
described in such notice. The Company will comply with the
requirements of
Rule 14e-1
under the Exchange Act and any other securities laws and
regulations thereunder to the extent such laws and regulations
are applicable in connection with the repurchase of the Notes as
a result of a Change of Control. To the extent that the
provisions of any securities laws or regulations conflict with
the Change of Control provisions of the Indenture, the Company
will comply with the applicable securities laws and regulations
and will not be deemed to have breached its obligations under
the Change of Control provisions of the Indenture by virtue of
such compliance.
On the Change of Control Payment Date, the Company will, to the
extent lawful:
(1) accept for payment all Notes or portions thereof
properly tendered pursuant to the Change of Control Offer;
(2) deposit with the Paying Agent an amount equal to the
Change of Control Payment in respect of all Notes or portions
thereof so tendered; and
(3) deliver or cause to be delivered to the Trustee the
Notes so accepted together with an Officers’ Certificate
stating the aggregate principal amount of Notes or portions
thereof being purchased by the Company.
The Paying Agent will promptly mail or wire transfer to each
Holder of Notes so tendered the Change of Control Payment for
such Notes, and the Trustee will promptly authenticate and mail
(or cause to be transferred by book entry) to each Holder a new
Note equal in principal amount to any unpurchased portion of the
Notes surrendered, if any; provided that each such new
Note will be in a principal amount of $1,000 or an integral
multiple thereof.
Prior to complying with the provisions of this covenant, but in
any event no later than 30 days following a Change of
Control, the Company will either repay all outstanding Senior
Debt or obtain the requisite consents, if any, under all
agreements governing outstanding Senior Debt to permit the
repurchase of Notes required by this covenant. The Company will
publicly announce the results of the Change of Control Offer on
or as soon as practicable after the Change of Control Payment
Date.
The Credit Agreement currently prohibits the Company from
purchasing any Notes, and also provides that certain change of
control events with respect to the Company would constitute a
default under the Credit Agreement. Any future credit agreements
or other agreements relating to Senior Debt to which the Company
becomes a party may contain similar restrictions and provisions.
In the event a Change of Control occurs at a time when the
Company is prohibited from purchasing Notes, the Company could
seek the consent of its senior lenders to the purchase of Notes
or could attempt to refinance the borrowings that contain such
prohibition. If the Company does not obtain such consent or
repay such borrowings, the Company will remain prohibited from
purchasing Notes. In such case, the Company’s failure to
purchase tendered Notes would constitute an Event of Default
under the Indenture which would, in turn, constitute a default
under such Senior Debt. In such circumstances, the subordination
provisions in the Indenture would likely restrict payments to
the Holders of Notes.
The provisions described above that require the Company to make
a Change of Control Offer following a Change of Control will be
applicable regardless of whether any other provisions of the
Indenture are applicable. Except as described above with respect
to a Change of Control, the Indenture does not contain
provisions that permit the Holders of the Notes to require that
the Company repurchase or redeem the Notes in the event of a
takeover, recapitalization or similar transaction.
The Company will not be required to make a Change of Control
Offer upon a Change of Control if a third party makes the Change
of Control Offer in the manner, at the times and otherwise in
compliance with the requirements set forth in the Indenture
applicable to a Change of Control Offer made by the Company and
purchases all Notes validly tendered and not withdrawn under
such Change of Control Offer.
The definition of Change of Control includes a phrase relating
to the direct or indirect sale, transfer, conveyance or other
disposition of “all or substantially all” of the
properties or assets of the Company and its
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Restricted Subsidiaries taken as a whole. Although there is a
limited body of case law interpreting the phrase
“substantially all,” there is no precise established
definition of the phrase under applicable law. Accordingly, the
ability of a Holder of Notes to require the Company to
repurchase such Notes as a result of a sale, transfer,
conveyance or other disposition of less than all of the assets
of the Company and its Restricted Subsidiaries taken as a whole
to another Person or group may be uncertain.
Asset
Sales
The Company will not, and will not permit any of its Restricted
Subsidiaries to, consummate an Asset Sale unless:
(1) the Company (or the Restricted Subsidiary, as the case
may be) receives consideration at the time of such Asset Sale at
least equal to the Fair Market Value of the assets or Equity
Interests issued or sold or otherwise disposed of; and
(2) at least 75% of the consideration therefor received by
the Company or such Restricted Subsidiary is in the form of
cash, Cash Equivalents or Replacement Assets or a combination of
both. For purposes of this provision, each of the following will
be deemed to be cash:
(a) any liabilities (as shown on the Company’s or such
Restricted Subsidiary’s most recent balance sheet) of the
Company or any Restricted Subsidiary (other than contingent
liabilities, Indebtedness that is by its terms subordinated to
the Notes or any Note Guarantee and liabilities to the extent
owed to the Company or any Affiliate of the Company) that are
assumed by the transferee of any such assets or Equity Interests
pursuant to a written novation agreement that releases the
Company or such Restricted Subsidiary from further liability
therefor;
(b) any securities, notes or other obligations received by
the Company or any such Restricted Subsidiary from such
transferee that are contemporaneously (subject to ordinary
settlement periods) converted by the Company or such Restricted
Subsidiary into cash (to the extent of the cash received in that
conversion); and
(c) any Designated Non-Cash Consideration received by the
Company or any of its Restricted Subsidiaries in such Asset Sale
having an aggregated Fair Market Value, taken together with all
other Designated Non-Cash consideration received pursuant to
this clause (c) that is at that time outstanding, not to
exceed the greater of (x) 5.0% of the Company’s
Consolidated Net Assets as of the date or receipt of such
Designated Non-Cash Consideration and
(y) $15.0 million (with the Fair Market Value of each
item of Designated Non-Cash Consideration being measured at the
time received and without giving effect to subsequent changes in
value).
Within 540 days after the receipt of any Net Proceeds from
an Asset Sale, the Company may apply such Net Proceeds at its
option:
(1) to repay Senior Debt and, if the Senior Debt repaid is
revolving credit Indebtedness, to correspondingly reduce
commitments with respect thereto; or
(2) to purchase Replacement Assets (or enter into a binding
agreement to purchase such Replacement Assets; provided that
(x) such purchase is consummated within 90 days after
the date of such binding agreement and (y) if such purchase
is not consummated, within the period set forth in subclause
(x), the Net Proceeds not so applied will be deemed to be Excess
Proceeds (as defined below)).
Pending the final application of any such Net Proceeds, the
Company may temporarily reduce revolving credit borrowings or
otherwise invest such Net Proceeds in any manner that is not
prohibited by the Indenture.
On the 541st day after an Asset Sale or such earlier date,
if any, as the Company determines not to apply the Net Proceeds
relating to such Asset Sale as set forth in the preceding
paragraph (each such date being referred to as an “Excess
Proceeds Trigger Date”), such aggregate amount of Net
Proceeds that has not been applied on or before the Excess
Proceeds Trigger Date as permitted in the preceding paragraph
(“Excess Proceeds”) will be applied by the Company to
make an offer (an “Asset Sale Offer”) to all Holders
of Notes
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and all holders of other Indebtedness that ranks pari passu
in right of payment with the Notes or any Note Guarantee
containing provisions similar to those set forth in the
Indenture with respect to offers to purchase with the proceeds
of sales of assets, to purchase the maximum principal amount of
Notes and such other pari passu Indebtedness that may be
purchased using the Excess Proceeds. The offer price in any
Asset Sale Offer will be equal to 100% of the principal amount
of the Notes and such other pari passu Indebtedness plus
accrued and unpaid interest and Additional Interest, if any, to
the date of purchase, and will be payable in cash.
The Company may defer the Asset Sale Offer until there are
aggregate unutilized Excess Proceeds equal to or in excess of
$10.0 million resulting from one or more Asset Sales, at
which time the entire unutilized amount of Excess Proceeds (not
only the amount in excess of $10.0 million) will be applied
as provided in the preceding paragraph. If any Excess Proceeds
remain after consummation of an Asset Sale Offer, the Company
may use such Excess Proceeds for any purpose not otherwise
prohibited by the Indenture. If the aggregate principal amount
of Notes and such other pari passu Indebtedness tendered
into such Asset Sale Offer exceeds the amount of Excess
Proceeds, the Notes and such other pari passu
Indebtedness will be purchased on a pro rata basis based on
the principal amount of Notes and such other pari passu
Indebtedness tendered. Upon completion of each Asset Sale
Offer, Excess Proceeds subject to such Asset Sale and still held
by the Company will no longer be deemed to be Excess Proceeds.
The Company will comply with the requirements of
Rule 14e-1
under the Exchange Act and any other securities laws and
regulations thereunder to the extent such laws and regulations
are applicable in connection with each repurchase of Notes
pursuant to an Asset Sale Offer. To the extent that the
provisions of any securities laws or regulations conflict with
the Asset Sales provisions of the Indenture, the Company will
comply with the applicable securities laws and regulations and
will not be deemed to have breached its obligations under the
Asset Sale provisions of the Indenture by virtue of such
compliance.
The Credit Agreement currently prohibits the Company from
purchasing any Notes, and also provides that certain asset sale
events with respect to the Company would constitute a default
under the Credit Agreement. Any future credit agreements or
other agreements relating to Senior Debt to which the Company
becomes a party may contain similar restrictions and provisions.
In the event an Asset Sale occurs at a time when the Company is
prohibited from purchasing Notes, the Company could seek the
consent of its senior lenders to the purchase of Notes or could
attempt to refinance the borrowings that contain such
prohibition. If the Company does not obtain such a consent or
repay such borrowings, the Company will remain prohibited from
purchasing Notes. In such case, the Company’s failure to
purchase tendered Notes would constitute an Event of Default
under the Indenture which would, in turn,
constitute a default under such Senior Debt. In such
circumstances, the subordination provisions in the Indenture
would likely restrict payments to the Holders of Notes.
Certain
Covenants
Restricted
Payments
(A) The Company will not, and will not permit any of its
Restricted Subsidiaries to, directly or indirectly:
(1) declare or pay (without duplication) any dividend or
make any other payment or distribution on account of the
Company’s or any of its Restricted Subsidiaries’
Equity Interests (including, without limitation, any payment in
connection with any merger or consolidation involving the
Company or any of its Restricted Subsidiaries) or to the direct
or indirect holders of the Company’s or any of its
Restricted Subsidiaries’ Equity Interests in their capacity
as such (other than dividends, payments or distributions
(x) payable in Equity Interests (other than Disqualified
Stock) of the Company or (y) to the Company or a Restricted
Subsidiary of the Company);
(2) purchase, redeem or otherwise acquire or retire for
value (including, without limitation, in connection with any
merger or consolidation involving the Company or any of its
Restricted Subsidiaries)
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any Equity Interests of the Company, or any Restricted
Subsidiary thereof held by Persons other than the Company or any
of its Restricted Subsidiaries;
(3) make any payment on or with respect to, or purchase,
redeem, defease or otherwise acquire or retire for value any
Indebtedness that is subordinated to the Notes or any Note
Guarantees, except (a) a payment of interest or principal
at the Stated Maturity thereof or (b) the purchase,
repurchase or other acquisition of any such Indebtedness in
anticipation of satisfying a sinking fund obligation, principal
installment or final maturity, in each case due within one year
of the date of such purchase, repurchase or other
acquisition; or
(4) make any Restricted Investment (all such payments and
other actions set forth in clauses (1) through
(4) above being collectively referred to as
“Restricted Payments”),
unless, at the time of and after giving effect to such
Restricted Payment:
(1) no Default or Event of Default will have occurred and
be continuing or would occur as a consequence thereof; and
(2) the Company would, at the time of such Restricted
Payment and after giving pro forma effect thereto as if such
Restricted Payment had been made at the beginning of the
applicable four-quarter period, have been permitted to Incur at
least $1.00 of additional Indebtedness pursuant to the Fixed
Charge Coverage Ratio test set forth in the first paragraph of
the covenant described below under the caption
“— Incurrence of Indebtedness”; and
(3) such Restricted Payment, together with the aggregate
amount of all other Restricted Payments made by the Company and
its Restricted Subsidiaries after the Issue Date (excluding
Restricted Payments permitted by clauses (3), (4), (5),
(6) and (10) of the next succeeding paragraph (B)), is
less than the sum, without duplication, of:
(a) 50% of the Consolidated Net Income of the Company for
the period (taken as one accounting period) from the beginning
of the first fiscal quarter commencing after the Issue Date to
the end of the Company’s most recently ended fiscal quarter
for which internal financial statements are available at the
time of such Restricted Payment (or, if such Consolidated Net
Income for such period is a deficit, less 100% of such deficit),
plus
(b) 100% of the aggregate net cash proceeds and the Fair
Market Value of assets other than cash received by the Company
since the Issue Date as a contribution to its common equity
capital or from the issue or sale of Equity Interests (other
than Disqualified Stock) of the Company or from the Incurrence
of Indebtedness of the Company that has been converted into or
exchanged for such Equity Interests (other than Equity Interests
sold to, or Indebtedness held by, a Subsidiary of the Company),
plus
(c) with respect to Restricted Investments made by the
Company and its Restricted Subsidiaries after the Issue Date, an
amount equal to the net reduction in such Restricted Investments
in any Person resulting from repayments of loans or advances, or
other transfers of assets, in each case to the Company or any
Restricted Subsidiary or from the net cash proceeds from the
sale of any such Restricted Investment (except, in each case, to
the extent any such payment or proceeds are included in the
calculation of Consolidated Net Income), from the release of any
Guarantee (except to the extent any amounts are paid under such
Guarantee) or from redesignations of Unrestricted Subsidiaries
as Restricted Subsidiaries, not to exceed, in each case, the
amount of Restricted Investments previously made by the Company
or any Restricted Subsidiary in such Person or Unrestricted
Subsidiary after the Issue Date; plus
(d) the amount by which Indebtedness of the Company is
reduced on the Company’s most recent quarterly balance
sheet upon the conversion or exchange subsequent to the Issue
Date of any Indebtedness of the Company convertible or
exchangeable for Capital Stock (other than Disqualified Stock)
of the Company (less the amount of any cash or the Fair Market
Value of any other property distributed by the Company upon such
conversion or exchange) plus the amount of any cash received
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by the Company upon such conversion or exchange; provided,
however, that such amount may not exceed the net proceeds
received by the Company or any of its Restricted Subsidiaries
from the conversion or exchange of such Indebtedness (excluding
net proceeds from conversion or exchange by a Subsidiary of the
Company or by an employee ownership plan or by a trust
established by the Company or any of its Subsidiaries for the
benefit of their employees).
(B) The preceding provisions will not prohibit, so long as,
in the case of clauses (7) and (12) below, no Default
has occurred and is continuing or would be caused thereby:
(1) the payment of any dividend within 60 days after
the date of declaration thereof, if at said date of declaration
such payment would have complied with the provisions of the
Indenture;
(2) the payment of any dividend by a Restricted Subsidiary
of the Company to the holders of its Common Stock on a pro rata
basis;
(3) the redemption, repurchase, retirement, defeasance or
other acquisition of any subordinated Indebtedness or
Disqualified Stock of the Company or any Guarantor or of any
Equity Interests of the Company or any Restricted Subsidiary in
exchange for, or out of the net cash proceeds of a contribution
to the Equity Interests (other than Disqualified Stock) of the
Company or a substantially concurrent sale (other than to a
Subsidiary of the Company) of, Equity Interests (other than
Disqualified Stock) of the Company; provided that the
amount of any such net cash proceeds that are utilized for any
such redemption, repurchase, retirement, defeasance or other
acquisition will be excluded from clause (3)(b) of the
preceding paragraph (A);
(4) the defeasance, redemption, repurchase or other
acquisition of Indebtedness subordinated to the Notes or the
Note Guarantees with the net cash proceeds from an Incurrence of
Permitted Refinancing Indebtedness;
(5) Investments acquired as a capital contribution to, or
in exchange for, or out of the net cash proceeds of a
substantially concurrent offering of, Equity Interests (other
than Disqualified Stock) of the Company; provided that
the amount of any such net cash proceeds that are utilized for
any such acquisition or exchange will be excluded from clause
(3)(b) of the preceding paragraph (A);
(6) the repurchase of Capital Stock deemed to occur upon
the exercise of options or warrants to the extent that such
Capital Stock represents all or a portion of the exercise price
thereof;
(7) the repurchase, redemption or other acquisition or
retirement for value of any Equity Interests of the Company held
by any current or former employee or director of the Company (or
any of its Restricted Subsidiaries) pursuant to the terms of any
employee equity subscription agreement, stock option agreement
or similar agreement entered into in the ordinary course of
business; provided that the aggregate price paid for all such
repurchased, redeemed, acquired or retired Equity Interests in a
calendar year does not exceed $2.0 million (with unused
amounts in any calendar year after the Old Notes Issue Date
being carried over to succeeding calendar years (without giving
effect to the following proviso)) and does not exceed
$6.0 million in aggregate; provided further that
such amount in any calendar year may be increased by an amount
not to exceed (A) the net cash proceeds received by the
Company from the sale of Equity Interests (other than
Disqualified Stock) of the Company to members of management or
directors of the Company and its Restricted Subsidiaries that
occurs after the Old Notes Issue Date (to the extent such cash
proceeds from the sale of such Equity Interests have not
otherwise been applied to the payment of Restricted Payments)
plus (B) the net cash proceeds of key man life insurance
policies received by the Company and its Restricted Subsidiaries
after the Old Notes Issue Date, less (C) the amount of any
Restricted Payments made pursuant to clauses (A) and
(B) of this clause (7) after the Old Notes Issue Date;
(8) payments in respect of management fees to any of the
Principals pursuant to agreements in effect on the Issue Date as
described in this prospectus in an amount not to exceed an
aggregate amount of $500,000 in any calendar year;
(9) payments of dividends on Disqualified Stock otherwise
permitted under Indenture;
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(10) cash payments in lieu of the issuance of fractional
shares in connection with the exercise of warrants, options or
other securities convertible into or exchangeable for Capital
Stock of the Company;
(11) payments of dividends on the Company’s common
stock following the first bona fide underwritten public offering
of common stock of the Company after the Closing Date, of up to
6% per annum of the net cash proceeds received by the Company
from such public offering; provided however, that
(A) at the time of payment of any such dividend, no Default
will have occurred and be continuing (or result therefrom), and
(B) the aggregate amount of all dividends paid under this
clause (11) will not exceed the aggregate amount of net
proceeds received by the Company from such public
offering; and
(12) other Restricted Payments in an aggregate amount not
to exceed $10.0 million since the Old Notes Issue Date.
The amount of all Restricted Payments (other than cash) will be
the Fair Market Value on the date of the Restricted Payment of
the asset(s) or securities proposed to be transferred or issued
to or by the Company or such Subsidiary, as the case may be,
pursuant to the Restricted Payment. Not later than the date of
making any Restricted Payment, the Company will deliver to the
Trustee an Officers’ Certificate stating that such
Restricted Payment is permitted and setting forth the basis upon
which the calculations required by this “Restricted
Payments” covenant were computed, together with a copy of
any opinion or appraisal required by the Indenture.
Incurrence
of Indebtedness
The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, Incur any Indebtedness;
provided, however, that the Company or any Guarantor may
Incur Indebtedness or Disqualified Stock if the Fixed Charge
Coverage Ratio for the Company’s most recently ended four
full fiscal quarters for which internal financial statements are
available immediately preceding the date on which such
additional Indebtedness or Disqualified Stock is Incurred would
have been at least 2.0 to 1, determined on a pro forma basis
(including a pro forma application of the net proceeds
therefrom), as if the additional Indebtedness or Disqualified
Stock had been Incurred at the beginning of such four-quarter
period.
The first paragraph of this covenant will not prohibit the
Incurrence of the following items of Indebtedness (collectively,
“Permitted Debt”):
(1) the Incurrence by the Company or any Guarantor of
Indebtedness under Credit Facilities (including, without
limitation, the Incurrence by the Company and the Guarantors of
Guarantees thereof) in an aggregate amount at any one time
outstanding pursuant to this clause (1) not to exceed
$200.0 million, less the aggregate amount of all Net
Proceeds of Asset Sales applied by the Company or any Restricted
Subsidiary thereof to permanently repay any such Indebtedness
pursuant to the covenant described above under the caption
“— Repurchase at the Option of
Holders — Asset Sales”; provided that a
Restricted Subsidiary that is not a Domestic Subsidiary or a
Guarantor of Indebtedness under the Credit Facilities may incur
Indebtedness pursuant to this clause (1), together with
Indebtedness Incurred pursuant to clause (9) of this
“Incurrence of Indebtedness” covenant, in an aggregate
amount, after giving effect to such Incurrence, at any time
outstanding not to exceed the greater of
(a) $25.0 million or (b) 40% of the aggregate
Consolidated Net Assets of such Restricted Subsidiaries;
(2) the Incurrence of Existing Indebtedness;
(3) the Incurrence by the Company and the Guarantors of
Indebtedness represented by the Notes and the related Note
Guarantees issued on the Issue Date;
(4) the Incurrence by the Company or any Guarantor of
Indebtedness represented by Capital Lease Obligations, mortgage
financings, construction loans or purchase money obligations for
property acquired in the ordinary course of business, in each
case Incurred for the purpose of financing all or any part of
the purchase price or cost of construction or improvement of
property, plant or equipment used by the Company or any such
Guarantor, in an aggregate amount, including all Permitted
Refinancing
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Indebtedness Incurred to refund, refinance or replace any
Indebtedness Incurred pursuant to this clause (4), not to exceed
7.5% of the Company’s Consolidated Net Assets at any time
outstanding;
(5) the Incurrence by the Company or any Restricted
Subsidiary of the Company of Permitted Refinancing Indebtedness
in exchange for, or the net proceeds of which are used to
refund, refinance or replace Indebtedness (other than
intercompany Indebtedness) that was permitted by the Indenture
to be Incurred under the first paragraph of this covenant or
clause (2), (3), (4), (5), or (10) of this paragraph;
(6) the Incurrence by the Company or any of its Restricted
Subsidiaries of intercompany Indebtedness owing to and held by
the Company or any of its Restricted Subsidiaries; provided,
however, that:
(a) if the Company or any Guarantor is the obligor on such
Indebtedness, such Indebtedness must be unsecured and expressly
subordinated to the prior payment in full in cash of all
Obligations with respect to the Notes, in the case of the
Company, or the Note Guarantee, in the case of a Guarantor;
(b) Indebtedness owed to the Company or any Guarantor must
be evidenced by an unsubordinated promissory note, unless the
obligor under such Indebtedness is the Company or a
Guarantor; and
(c) (i) any subsequent issuance or transfer of Equity
Interests that results in any such Indebtedness being held by a
Person other than the Company or a Restricted Subsidiary thereof
and (ii) any sale or other transfer of any such
Indebtedness to a Person that is not either the Company or a
Restricted Subsidiary thereof, will be deemed, in each case, to
constitute an Incurrence of such Indebtedness by the Company or
such Restricted Subsidiary, as the case may be, that was not
permitted by this clause (6);
(7) the Guarantee by the Company or any of the Guarantors
of Indebtedness of the Company or a Restricted Subsidiary of the
Company that was permitted to be Incurred by another provision
of this covenant; or
(8) the Incurrence by the Company or any of its Restricted
Subsidiaries of Hedging Obligations that are Incurred for the
purpose of fixing, hedging or swapping interest rate, commodity
price or foreign currency exchange rate risk (or to reverse or
amend any such agreements previously made for such purposes),
and not for speculative purposes, and that do not increase the
Indebtedness of the obligor outstanding at any time other than
as a result of fluctuations in interest rates, commodity prices
or foreign currency exchange rates or by reason of fees,
indemnities and compensation payable thereunder;
(9) the Incurrence by any Restricted Subsidiary other than
a Domestic Subsidiary of Indebtedness in an aggregate amount at
any time outstanding, after giving effect to such Incurrence and
together with any Indebtedness Incurred under the proviso in
clause (1) of this “Incurrence of Indebtedness”
covenant, not to exceed the greater of (a) $25 million
or (b) 40% of the Consolidated Net Assets of any such
Restricted Subsidiaries; or
(10) the Incurrence by the Company or any Guarantor of
additional Indebtedness in an aggregate amount at any time
outstanding, including all Permitted Refinancing Indebtedness
Incurred to refund, refinance or replace any Indebtedness
Incurred pursuant to this clause (10), not to exceed the greater
of (a) $15.0 million or (b) 5% of the
Consolidated Net Assets of the Company.
For purposes of determining compliance with this covenant, in
the event that any proposed Indebtedness meets the criteria of
more than one of the categories of Permitted Debt described in
clauses (1) through (10) above, or is entitled to be
Incurred pursuant to the first paragraph of this covenant, the
Company will be permitted to classify such item of Indebtedness
at the time of its Incurrence in any manner that complies with
this covenant. In addition, any Indebtedness originally
classified as Incurred pursuant to clauses (1) through
(10) above may later be reclassified by the Company such
that it will be deemed as having been Incurred pursuant to
another of such clauses to the extent that such reclassified
Indebtedness could be incurred pursuant to such new clause at
the time of such reclassification. Notwithstanding the
foregoing, Indebtedness under the
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Credit Agreement outstanding on the Issue Date will be deemed to
have been Incurred on such date in reliance on the exception
provided by clause (1) of the definition of Permitted Debt.
Notwithstanding any other provision of this covenant, the
maximum amount of Indebtedness that may be Incurred pursuant to
this covenant will not be deemed to be exceeded with respect to
any outstanding Indebtedness due solely to the result of
fluctuations in the exchange rates of currencies.
Limitation
on Senior Subordinated Debt
The Company will not Incur any Indebtedness that is subordinate
in right of payment to any Senior Debt of the Company unless it
ranks pari passu or subordinate in right of payment to
the Notes. No Guarantor will incur any Indebtedness that is
subordinate or junior in right of payment to the Senior Debt of
such Guarantor unless it ranks pari passu or subordinate
in right of payment to such Guarantor’s Note Guarantee. For
purposes of the foregoing, no Indebtedness will be deemed to be
subordinated in right of payment to any other Indebtedness of
the Company or any Guarantor, as applicable, solely by reason of
Liens or Guarantees arising or created in respect of such other
Indebtedness of the Company or any Guarantor or by virtue of the
fact that the holders of any secured Indebtedness have entered
into intercreditor agreements giving one or more of such holders
priority over the other holders in the collateral held by them.
Liens
The Company will not, and will not permit any of its Restricted
Subsidiaries to, create, incur, assume or otherwise cause or
suffer to exist or become effective any Lien of any kind
securing Indebtedness (other than Permitted Liens) upon any of
their property or assets, now owned or hereafter acquired,
unless all payments due under the Indenture and the Notes are
secured on an equal and ratable basis with the obligations so
secured (or, in the case of Indebtedness subordinated to the
Notes or the Note Guarantees, prior or senior thereto, with the
same relative priority as the Notes will have with respect to
such subordinated Indebtedness) until such time as such
obligations are no longer secured by a Lien.
Dividend
and Other Payment Restrictions Affecting Restricted
Subsidiaries
The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create or permit to
exist or become effective any consensual encumbrance or
restriction on the ability of any Restricted Subsidiary to:
(1) pay dividends or make any other distributions on its
Capital Stock (or with respect to any other interest or
participation in, or measured by, its profits) to the Company or
any of its Restricted Subsidiaries or pay any liabilities owed
to the Company or any of its Restricted Subsidiaries;
(2) make loans or advances to the Company or any of its
Restricted Subsidiaries; or
(3) transfer any of its properties or assets to the Company
or any of its Restricted Subsidiaries.
However, the preceding restrictions will not apply to
encumbrances or restrictions:
(1) existing under, by reason of or with respect to the
Credit Agreement, Existing Indebtedness or any other agreements
in effect on the Issue Date and any amendments, modifications,
restatements, renewals, extensions, supplements, refundings,
replacements or refinancings thereof, provided that the
encumbrances and restrictions in any such amendments,
modifications, restatements, renewals, extensions, supplements,
refundings, replacement or refinancings are no more restrictive,
taken as a whole, than those contained in the Credit Agreement,
Existing Indebtedness or such other agreements, as the case may
be, as in effect on the Issue Date;
(2) set forth in the Indenture, the Notes and the Note
Guarantees;
(3) existing under, by reason of or with respect to
applicable law;
(4) with respect to any Person or the property or assets of
a Person acquired by the Company or any of its Restricted
Subsidiaries existing at the time of such acquisition and not
incurred in connection with
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or in contemplation of such acquisition, which encumbrance or
restriction is not applicable to any Person or the properties or
assets of any Person, other than the Person, or the property or
assets of the Person so acquired and any amendments,
modifications, restatements, renewals, extensions, supplements,
refundings, replacements or refinancings thereof; provided
that the encumbrances and restrictions in any such
amendments, modifications, restatements, renewals, extensions,
supplements, refundings, replacement or refinancings are no more
restrictive, taken as a whole, than those in effect on the date
of the acquisition;
(5) in the case of clause (3) of the first paragraph
of this covenant:
(a) that restrict in a customary manner the subletting,
assignment or transfer of any property or asset that is a lease,
license, conveyance or contract or similar property or asset,
(b) existing by virtue of any transfer of, agreement to
transfer, option or right with respect to, or Lien on, any
property or assets of the Company or any Restricted Subsidiary
thereof not otherwise prohibited by the Indenture;
(c) any encumbrance or restriction arising or existing by
reason of construction loans or purchase money obligations for
property acquired in the ordinary course of business and Capital
Lease Obligations, in each case to the extent permitted under
the Indenture;
(d) customary restrictions imposed on the transfer of
intellectual property in connection with licenses of such
intellectual property in the ordinary course of business;
(e) encumbrances or restrictions existing under or by
reason of provisions with respect to the disposition or
distribution of assets or property in joint venture agreements
and other similar agreements, in each case to the extent
permitted under the Indenture, so long as any such encumbrances
or restrictions are not applicable to any Person (to its
property or assets) other than such joint venture or a
Subsidiary thereof; or
(f) arising or agreed to in the ordinary course of
business, not relating to any Indebtedness, and that do not,
individually or in the aggregate, detract from the value of
property or assets of the Company or any Restricted Subsidiary
thereof in any manner material to the Company or any Restricted
Subsidiary thereof;
(6) existing under, by reason of or with respect to any
agreement for the sale or other disposition of all or
substantially all of the Capital Stock of, or property and
assets of, a Restricted Subsidiary that restrict distributions
by that Restricted Subsidiary pending such sale or other
disposition; and
(7) on cash or other deposits or net worth imposed by
customers or required by insurance, surety or bonding companies,
in each case, under contracts entered into in the ordinary
course of business.
Merger,
Consolidation or Sale of Assets
The Company will not, directly or indirectly:
(1) consolidate or merge with or into another Person
(whether or not the Company is the surviving Person) or
(2) sell, assign, transfer, convey or otherwise dispose of
all or substantially all of the properties and assets of the
Company and its Restricted Subsidiaries taken as a whole, in one
or more related transactions, to another Person, unless:
(1) either: (a) the Company is the surviving Person;
or (b) the Person formed by or surviving any such
consolidation or merger (if other than the Company) or to which
such sale, assignment, transfer, conveyance or other disposition
will have been made (i) is a Person organized or existing
under the laws of the United States, any state thereof or the
District of Columbia and (ii) assumes all the obligations
of the Company under the Notes, the Indenture and, to the extent
applicable, the Registration Rights Agreement pursuant to
agreements reasonably satisfactory to the Trustee;
(2) immediately after giving effect to such transaction no
Default or Event of Default exists;
(3) immediately after giving effect to such transaction on
a pro forma basis, the Company or the Person formed by or
surviving any such consolidation or merger (if other than the
Company), or to which
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such sale, assignment, transfer, conveyance or other disposition
will have been made, will be permitted to Incur at least $1.00
of additional Indebtedness pursuant to the Fixed Charge Coverage
Ratio test set forth in the first paragraph of the covenant
described above under the caption “— Incurrence
of Indebtedness.”
(4) each Guarantor, unless such Guarantor is the Person
with which the Company has entered into a transaction under this
covenant, will have by amendment to its Note Guarantee confirmed
that its Note Guarantee will apply to the obligations of the
Company or the surviving Person in accordance with the Notes and
the Indenture.
(5) the Company delivers to the Trustee an Officers’
Certificate (attaching the arithmetic computation to demonstrate
compliance with clause (3) above) and Opinion of Counsel,
in each case stating that such transaction and such agreement
complies with this covenant and that all conditions precedent
provided for in this covenant relating to such transaction have
been complied with.
Upon any consolidation or merger, or any sale, assignment,
transfer, conveyance or other disposition of all or
substantially all of the assets of the Company in accordance
with this covenant, the successor corporation formed by such
consolidation or into or with which the Company is merged or to
which such sale, assignment, transfer, conveyance or other
disposition is made will succeed to, and be substituted for (so
that from and after the date of such consolidation, merger,
sale, assignment, conveyance or other disposition, the
provisions of the Indenture referring to the “Company”
will refer instead to the successor corporation and not to the
Company), and may exercise every right and power of, the Company
under the Indenture with the same effect as if such successor
Person had been named as the Company in the Indenture.
In addition, the Company and its Restricted Subsidiaries may
not, directly or indirectly, lease all or substantially all the
properties or assets of the Company and its Restricted
Subsidiaries considered as one enterprise, in one or more
related transactions, to any other Person. Clause (3) above
of this covenant will not apply to any merger, consolidation or
sale, assignment, transfer, conveyance or other disposition of
assets between or among the Company and any of its Restricted
Subsidiaries.
Transactions
with Affiliates
The Company will not, and will not permit any of its Restricted
Subsidiaries to, make any payment to, or sell, lease, transfer
or otherwise dispose of any of its properties or assets to, or
purchase any property or assets from, or enter into, make,
amend, renew or extend any transaction, contract, agreement,
understanding, loan, advance or Guarantee with, or for the
benefit of, any Affiliate (each, an “Affiliate
Transaction”), unless:
(1) such Affiliate Transaction is on terms that are no less
favorable to the Company or the relevant Restricted Subsidiary
than those that would have been obtained in a comparable
arm’s-length transaction by the Company or such Restricted
Subsidiary with a Person that is not an Affiliate of the Company
or any of its Restricted Subsidiaries; and
(2) the Company delivers to the Trustee:
(a) with respect to any Affiliate Transaction or series of
related Affiliate Transactions involving aggregate consideration
in excess of $5.0 million, a Board Resolution set forth in
an Officers’ Certificate certifying that such Affiliate
Transaction or series of related Affiliate Transactions complies
with this covenant, and that such Affiliate Transaction or
series of related Affiliate Transactions has been approved by a
majority of the disinterested members of the Board of Directors
of the Company; and
(b) with respect to any Affiliate Transaction or series of
related Affiliate Transactions involving aggregate consideration
in excess of $25.0 million, an opinion as to the fairness
to the Company or such Restricted Subsidiary of such Affiliate
Transaction or series of related Affiliate Transactions from a
financial point of view issued by an independent accounting,
appraisal or investment banking firm of national standing.
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The following items will not be deemed to be Affiliate
Transactions and, therefore, will not be subject to the
provisions of the prior paragraph:
(1) transactions between or among the Company
and/or its
Restricted Subsidiaries;
(2) payment of reasonable and customary fees to, and
reasonable and customary indemnification and similar payments on
behalf of, directors of the Company;
(3) Restricted Payments that are permitted by the
provisions of the Indenture described above under the covenants
described under the caption “— Restricted
Payments” including, without limitation, payments included
in the definition of “Permitted Investments”; and
(4) any sale of Equity Interests (other than Disqualified
Stock) of the Company;
(5) the receipt by the Company of any capital contribution
from its shareholders;
(6) transactions pursuant to agreements or arrangements in
effect on the Old Notes Issue Date and described in the Old
Notes prospectus, or any amendment, modification, or supplement
thereto or replacement thereof, as long as such agreement or
arrangement, as so amended, modified or supplemented or
replaced, taken as a whole, is not more disadvantageous to the
Company and its Restricted Subsidiaries than the original
agreements or arrangements in existence on the Old Notes Issue
Date;
(7) payment by the Company of management or other similar
fees to any of the Principals pursuant to any agreement or
arrangement in an aggregate amount not to exceed $500,000 in any
calendar year; and
(8) any employment, consulting, service or termination
agreement, or reasonable and customary indemnification
arrangements, entered into by the Company or any of its
Restricted Subsidiaries with officers and employees of the
Company or any of its Restricted Subsidiaries and the payment of
compensation to officers and employees of the Company or any of
its Restricted Subsidiaries (including amounts paid pursuant to
employee benefit plans, employee stock option or similar plans),
so long as such agreement or payment has been approved by the
Board of Directors of the Company.
Designation
of Restricted and Unrestricted Subsidiaries
The Board of Directors of the Company may designate any
Restricted Subsidiary of the Company to be an Unrestricted
Subsidiary; provided that:
(1) any Guarantee by the Company or any Restricted
Subsidiary thereof of any Indebtedness of the Subsidiary being
so designated will be deemed to be an Incurrence of Indebtedness
by the Company or such Restricted Subsidiary (or both, if
applicable) at the time of such designation, and such Incurrence
of Indebtedness would be permitted under the covenant described
above under the caption “— Incurrence of
Indebtedness,” and any lien on the property of the
Restricted Subsidiary will be permitted to exist under the
covenant described above under the caption
“— Liens;”
(2) the aggregate Fair Market Value of all outstanding
Investments owned by the Company and its Restricted Subsidiaries
in the Subsidiary being so designated (including any Guarantee
by the Company or any Restricted Subsidiary of any Indebtedness
of such Subsidiary) will be deemed to be a Restricted Investment
made as of the time of such designation and that such Investment
would be permitted under the covenant described above under the
caption “— Restricted Payments”;
(3) the Subsidiary being so designated:
(a) except as permitted by the covenant described above
under the caption “— Transaction with
Affiliates,” is not party to any agreement, contract,
arrangement or understanding with the Company or any Restricted
Subsidiary of the Company unless the terms of any such
agreement, contract, arrangement or understanding are no less
favorable to the Company or such Restricted Subsidiary than
those that might be obtained at the time from Persons who are
not Affiliates of the Company;
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(b) is a Person with respect to which neither the Company
nor any of its Restricted Subsidiaries has any direct or
indirect obligation (i) to subscribe for additional Equity
Interests or (ii) to maintain or preserve such
Person’s financial condition or to cause such Person to
achieve any specified levels of operating results; and
(c) has not Guaranteed or otherwise directly or indirectly
provided credit support for any Indebtedness of the Company or
any of its Restricted Subsidiaries, except to the extent such
Guarantee or credit support would be released upon such
designation; and
(4) no Default or Event of Default would be in existence
following such designation.
Any designation of a Restricted Subsidiary of the Company as an
Unrestricted Subsidiary will be evidenced to the Trustee by
filing with the Trustee the Board Resolution giving effect to
such designation and an Officers’ Certificate certifying
that such designation complied with the preceding conditions and
was permitted by the Indenture. If, at any time, any
Unrestricted Subsidiary would fail to meet any of the preceding
requirements and such failure continues for a period of
30 days, it will thereafter cease to be an Unrestricted
Subsidiary for purposes of the Indenture and any Indebtedness,
Investments, or Liens on the property, of such Subsidiary will
be deemed to be Incurred or made by a Restricted Subsidiary of
the Company as of such date and, if such Indebtedness,
Investments or Liens are not permitted to be Incurred or made as
of such date under the Indenture, the Company will be in default
under the Indenture.
The Board of Directors of the Company may at any time designate
any Unrestricted Subsidiary to be a Restricted Subsidiary;
provided that:
(1) such designation will be deemed to be an Incurrence of
Indebtedness by a Restricted Subsidiary of the Company of any
outstanding Indebtedness of such Unrestricted Subsidiary and
such designation will only be permitted if such Indebtedness is
permitted under the covenant described under the caption
“— Incurrence of Indebtedness;”
(2) all outstanding Investments owned by such Unrestricted
Subsidiary will be deemed to be made as of the time of such
designation and such designation will only be permitted if such
Investments would be permitted under the covenant described
above under the caption “— Restricted
Payments”;
(3) all Liens upon property or assets of such Unrestricted
Subsidiary existing at the time of such designation would be
permitted under the covenant described under the caption
“— Liens”; and
(4) no Default or Event of Default would be in existence
following such designation.
Limitation
on Issuances and Sales of Preferred Stock in Restricted
Subsidiaries
The Company will not, and will not permit any Restricted
Subsidiary to, transfer, convey, sell, lease or otherwise
dispose of any Preferred Stock in any Restricted Subsidiary of
the Company that is not a Guarantor to any Person (other than
the Company or a Restricted Subsidiary of the Company), unless:
(1) such transfer, conveyance, sale, lease or other
disposition is of all the Equity Interest in such Restricted
Subsidiary owned by the Company and its Restricted
Subsidiaries; and
(2) the cash Net Proceeds from such transfer, conveyance,
sale, lease or other disposition are applied in accordance with
the covenant described above under the caption
“— Repurchase at the Option of
Holders — Asset Sales.”
In addition, the Company will not permit any Restricted
Subsidiary of the Company that is not a Guarantor to issue any
of its Preferred Stock (other than, if necessary, shares of its
Capital Stock constituting directors’ qualifying shares or
issuances of shares of Capital Stock of foreign Restricted
Subsidiaries to foreign nationals, to the extent required by
applicable law) to any Person other than to the Company or a
Restricted Subsidiary of the Company.
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Guarantees
If the Company or any of its Restricted Subsidiaries acquires or
creates another Domestic Subsidiary (other than an Immaterial
Subsidiary) on or after the Issue Date, then that newly acquired
or created Domestic Subsidiary must become a Guarantor of the
Notes and execute a supplemental indenture and deliver an
Opinion of Counsel with respect to such Guarantee. Any
Immaterial Subsidiary that no longer meets the definition of
Immaterial Subsidiary must become a Guarantor of the Notes in
accordance with the following paragraph.
The Company will not permit any Domestic Subsidiary (including
any Immaterial Subsidiary), directly or indirectly, to Guarantee
or pledge any assets to secure the payment of any other
Indebtedness of the Company or any other Restricted Subsidiary
thereof unless such Restricted Subsidiary is a Guarantor or
simultaneously executes and delivers to the Trustee an Opinion
of Counsel and a supplemental indenture providing for the
Guarantee of the payment of the Notes by such Restricted
Subsidiary, which Guarantee will be senior to, or pari passu
with, such Subsidiary’s Guarantee of such other
Indebtedness unless such other Indebtedness is Senior Debt, in
which case the Guarantee of the Notes may be subordinated to the
Guarantee of such Senior Debt to the same extent as the Notes
are subordinated to such Senior Debt.
A Guarantor may not sell or otherwise dispose of all or
substantially all of its assets to, or consolidate with or merge
with or into (whether or not such Guarantor is the surviving
Person), another Person, other than the Company or another
Guarantor, unless:
(1) immediately after giving effect to that transaction, no
Default or Event of Default exists; and
(2) either:
(a) the Person acquiring the property in any such sale or
disposition or the Person formed by or surviving any such
consolidation or merger (if other than the Guarantor) is
organized or existing under the laws of the United States, any
state thereof or the District of Columbia and assumes all the
obligations of that Guarantor under the Indenture, its Note
Guarantee and the Registration Rights Agreement pursuant to a
supplemental indenture satisfactory to the Trustee; or
(b) such sale or other disposition or consolidation or
merger complies with the covenant described above under the
caption “— Repurchase at the Option of
Holders — Asset Sales.”
The Note Guarantee of a Guarantor will be released:
(1) in connection with any sale or other disposition of all
of the Capital Stock of a Guarantor to a Person that is not
(either before or after giving effect to such transaction) a
Restricted Subsidiary of the Company, if the sale of all such
Capital Stock of that Guarantor complies with the covenant
described above under the caption “— Repurchase
at the Option of Holders — Asset Sales”;
(2) if the Company properly designates any Restricted
Subsidiary that is a Guarantor as an Unrestricted Subsidiary
under the Indenture; or
(3) solely in the case of a Note Guarantee created pursuant
to the second paragraph of this covenant, upon the release or
discharge of the Guarantee which resulted in the creation of
such Note Guarantee pursuant to this covenant, except a
discharge or release by or as a result of payment under such
Guarantee.
Business
Activities
The Company will not, and will not permit any Restricted
Subsidiary thereof to, engage in any business other than
Permitted Businesses, except to such extent as would not be
material to the Company and its Restricted Subsidiaries taken as
a whole.
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Payments
for Consent
The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, pay or cause to be paid
any consideration to or for the benefit of any Holder of Notes
for or as an inducement to any consent, waiver or amendment of
any of the terms or provisions of the Indenture or the Notes
unless such consideration is offered to be paid and is paid to
all Holders of the Notes that consent, waive or agree to amend
in the time frame set forth in the solicitation documents
relating to such consent, waiver or agreement.
Reports
The Company will furnish to the Trustee and, upon request, to
the Holders a copy of all of the information and reports
referred to in clauses (1) and (2) below, if such
information and reports are not filed electronically with the
Commission, within the time periods specified in the
Commission’s rules and regulations:
(1) all quarterly and annual financial information that
would be required to be contained in a filing with the
Commission on
Forms 10-Q
and 10-K if
the Company were required to file such Forms, including a
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and, with respect to
the annual information only, a report on the annual financial
statements by the Company’s certified independent
accountants; and
(2) all current reports that would be required to be filed
with the Commission on
Form 8-K
if the Company were required to file such reports.
After consummation of this Exchange Offer, whether or not
required by the Commission, the Company will comply with the
periodic reporting requirements of the Exchange Act and will
file the reports specified in the preceding paragraph with the
Commission within the time periods specified above unless the
Commission will not accept such a filing. The Company agrees
that it will not take any action for the purpose of causing the
Commission not to accept any such filings. If, notwithstanding
the foregoing, the Commission will not accept the Company’s
filings for any reason, the Company will post the reports
referred to in the preceding paragraph on its website within the
time periods that would apply if the Company were required to
file those reports with the Commission.
If the Company has designated any of its Subsidiaries as
Unrestricted Subsidiaries or if any of the Company’s
Subsidiaries are not Guarantors, then the Company will include a
reasonably detailed discussion of the financial condition and
results of operations of such Unrestricted Subsidiary, or if
more than one, of such Unrestricted Subsidiaries, taken as a
whole and of such non-Guarantor Subsidiaries taken as a whole,
separately in each case, in the section of the Company’s
quarterly and annual financial information required by this
covenant under the caption “Management’s Discussion
and Analysis of Financial Condition and Results of
Operations,” and further, in the case of the non-Guarantor
Subsidiaries, also include a presentation of the financial
condition and results of operations of such non-Guarantor
Subsidiaries on the face of the financial statements or in the
footnotes thereto, separate from the financial condition and
results of operations of the Company and its Restricted
Subsidiaries.
In addition, the Company and the Guarantors have agreed that,
for so long as any Notes remain outstanding, they will furnish
to the Holders and to prospective investors, upon their request,
the information required to be delivered pursuant to
Rule 144A(d)(4) under the Securities Act.
Events
of Default and Remedies
Each of the following is an Event of Default:
(1) default for 30 days in the payment when due of
interest on, or Additional Interest with respect to, the Notes
whether or not prohibited by the subordination provisions of the
Indenture;
(2) default in payment when due (whether at maturity, upon
acceleration, redemption or otherwise) of the principal of, or
premium, if any, on the Notes, whether or not prohibited by the
subordination provisions of the Indenture;
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(3) failure by the Company or any of its Restricted
Subsidiaries to consummate a purchase of the Notes when required
by the provisions described under the captions
“— Repurchase at the Option of
Holders — Change of Control,” or
“— Repurchase at the Option of
Holders — Asset Sales” or failure to comply with
“— Certain Covenants — Merger,
Consolidation or Sale of Assets”;
(4) failure by the Company or any of its Restricted
Subsidiaries for 60 days after written notice by the
Trustee or Holders representing 25% or more of the aggregate
principal amount of Notes outstanding to comply with any of the
other agreements in the Indenture;
(5) default under any mortgage, indenture or instrument
under which there may be issued or by which there may be secured
or evidenced any Indebtedness for money borrowed by the Company
or any of its Restricted Subsidiaries that is a Significant
Subsidiary (or any Restricted Subsidiaries that together would
constitute a Significant Subsidiary) (or the payment of which is
Guaranteed by the Company or any of its Restricted Subsidiaries)
whether such Indebtedness or Guarantee now exists, or is created
after the Issue Date, if that default:
(a) is caused by a failure to make any payment when due at
the final maturity of such Indebtedness (a “Payment
Default”); or
(b) results in the acceleration of such Indebtedness prior
to its express maturity, and, in each case, the principal amount
of any such Indebtedness, together with the principal amount of
any other such Indebtedness under which there has been a Payment
Default or the maturity of which has been so accelerated,
aggregates $10.0 million or more;
(6) failure by the Company or any of its Restricted
Subsidiaries that is a Significant Subsidiary (or any Restricted
Subsidiaries that together would constitute a Significant
Subsidiary) to pay final judgments (to the extent such judgments
are not paid or covered by insurance provided by a reputable
carrier that has the ability to perform and has acknowledged
coverage in writing) aggregating in excess of
$10.0 million, which judgments are not paid, discharged or
stayed for a period of 60 days;
(7) except as permitted by the Indenture, any Note
Guarantee will be held in any judicial proceeding to be
unenforceable or invalid or will cease for any reason to be in
full force and effect or any Guarantor, or any Person acting on
behalf of any Guarantor, will deny or disaffirm its obligations
under its Note Guarantee; and
(8) certain events of bankruptcy or insolvency with respect
to the Company, any Guarantor or any Restricted Subsidiary that
is a Significant Subsidiary of the Company (or any Restricted
Subsidiaries that together would constitute a Significant
Subsidiary).
In the case of an Event of Default arising from certain events
of bankruptcy or insolvency, with respect to the Company, any
Guarantor or any Restricted Subsidiary that is a Significant
Subsidiary of the Company (or any Restricted Subsidiaries that
together would constitute a Significant Subsidiary), all
outstanding Notes will become due and payable immediately
without further action or notice. If any other Event of Default
occurs and is continuing, the Trustee or the Holders of at least
25% in principal amount of the then outstanding Notes may
declare all the Notes to be due and payable immediately by
notice in writing to the Company specifying the event of
default; provided, however, that so long as any
Indebtedness permitted to be Incurred pursuant to the Credit
Agreement will be outstanding, that acceleration will not be
effective until the earlier of (1) an acceleration of
Indebtedness under the Credit Agreement; or (2) five
Business Days after receipt by the Company, and Agent under the
Credit Agreement of written notice of the acceleration of the
Notes.
In the event of a declaration or acceleration of the Notes
because an Event of Default described in clause (5) above
has occurred and is continuing, the declaration of acceleration
of the notes will be automatically annulled if the payment
default or other default triggering such Event of Default
pursuant to clause (5) above is remedied or cured by the
Company or any of its Restricted Subsidiaries or waived by the
holders of the relevant Indebtedness within 60 days after
the declaration of acceleration with respect thereto and if
(a) annulment of the acceleration of the Notes would not
conflict with any judgment or decree of a court of competent
jurisdiction and (b) all existing Events of Default, except
nonpayment of principal,
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premium or interest on the notes that became due solely because
of the acceleration of the Notes, have been cured or waived.
Holders of the Notes may not enforce the Indenture or the Notes
except as provided in the Indenture. Subject to certain
limitations, Holders of a majority in principal amount of the
then outstanding Notes may direct the Trustee in its exercise of
any trust or power. The Trustee may withhold from Holders of the
Notes notice of any Default or Event of Default (except a
Default or Event of Default relating to the payment of principal
or interest or Additional Interest) if it determines that
withholding notice is in their interest.
The Holders of a majority in aggregate principal amount of the
Notes then outstanding by notice to the Trustee may on behalf of
the Holders of all of the Notes waive any existing Default or
Event of Default and its consequences under the Indenture except
a continuing Default or Event of Default in the payment of
interest or Additional Interest on, or the principal of, the
Notes. The Holders of a majority in principal amount of the then
outstanding Notes will have the right to direct the time, method
and place of conducting any proceeding for exercising any remedy
available to the Trustee. However, the Trustee may refuse to
follow any direction that conflicts with law or the Indenture,
that may involve the Trustee in personal liability, or that the
Trustee determines in good faith may be unduly prejudicial to
the rights of Holders of Notes not joining in the giving of such
direction and may take any other action it deems proper that is
not inconsistent with any such direction received from Holders
of Notes. A Holder may not pursue any remedy with respect to the
Indenture or the Notes unless:
(1) the Holder gives the Trustee written notice of a
continuing Event of Default;
(2) the Holders of at least 25% in aggregate principal
amount of outstanding Notes make a written request to the
Trustee to pursue the remedy;
(3) such Holder or Holders offer the Trustee indemnity
satisfactory to the Trustee against any costs, liability or
expense;
(4) the Trustee does not comply with the request within
60 days after receipt of the request and the offer of
indemnity; and
(5) during such
60-day
period, the Holders of a majority in aggregate principal amount
of the outstanding Notes do not give the Trustee a direction
that is inconsistent with the request.
However, such limitations do not apply to the right of any
Holder of a Note to receive payment of the principal of, premium
or Additional Interest, if any, or interest on, such Note or to
bring suit for the enforcement of any such payment, on or after
the due date expressed in the Notes, which right will not be
impaired or affected without the consent of the Holder.
In the case of any Event of Default occurring by reason of any
willful action or inaction taken or not taken by or on behalf of
the Company with the intention of avoiding payment of the
premium that the Company would have had to pay if the Company
then had elected to redeem the Notes pursuant to the optional
redemption provisions of the Indenture, an equivalent premium
will also become and be immediately due and payable to the
extent permitted by law upon the acceleration of the Notes. If
an Event of Default occurs during any time that the Notes are
outstanding, by reason of any willful action (or inaction) taken
(or not taken) by or on behalf of the Company with the intention
of avoiding the prohibition on redemption of the Notes, then the
premium specified in the first paragraph of
“— Optional Redemption” will also become
immediately due and payable to the extent permitted by law upon
the acceleration of the Notes.
The Company is required to deliver to the Trustee annually
within 90 days after the end of each fiscal year a
statement regarding compliance with the Indenture. Upon becoming
aware of any Default or Event of Default, the Company is
required to deliver to the Trustee a statement specifying such
Default or Event of Default.
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No
Personal Liability of Directors, Officers, Employees and
Stockholders
No director, officer, employee, incorporator, stockholder,
member, manager or partner of the Company or any Guarantor, as
such, will have any liability for any obligations of the Company
or the Guarantors under the Notes, the Indenture, the Note
Guarantees or for any claim based on, in respect of, or by
reason of, such obligations or their creation. Each Holder of
Notes by accepting a Note waives and releases all such
liability. The waiver and release are part of the consideration
for issuance of the Notes. The waiver may not be effective to
waive liabilities under the federal securities laws.
Legal
Defeasance and Covenant Defeasance
The Company may, at its option and at any time, elect to have
all of its obligations discharged with respect to the
outstanding Notes and all obligations of the Guarantors
discharged with respect to their Note Guarantees (“Legal
Defeasance”) except for:
(1) the rights of Holders of outstanding Notes to receive
payments in respect of the principal of, or interest or premium
and Additional Interest, if any, on such Notes when such
payments are due from the trust referred to below;
(2) the Company’s obligations with respect to the
Notes concerning issuing temporary Notes, registration of Notes,
mutilated, destroyed, lost or stolen Notes and the maintenance
of an office or agency for payment and money for security
payments held in trust;
(3) the rights, powers, trusts, duties and immunities of
the Trustee, and the Company’s and the Guarantors’
obligations in connection therewith; and
(4) the Legal Defeasance provisions of the Indenture.
In addition, the Company may, at its option and at any time,
elect to have the obligations of the Company and the Guarantors
released with respect to certain covenants that are described in
the Indenture (“Covenant Defeasance”) and all
obligations of the Guarantors with respect to the Guarantees
discharged, and; thereafter any omission to comply with those
covenants will not constitute a Default or Event of Default with
respect to the Notes or the Guarantees. In the event Covenant
Defeasance occurs, certain events (not including non-payment,
bankruptcy, receivership, rehabilitation and insolvency events)
described under “Events of Default” will no longer
constitute Events of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant
Defeasance:
(1) the Company must irrevocably deposit with the Trustee,
in trust, for the benefit of the Holders of the Notes, cash in
U.S. dollars, non-callable Government Securities, or a
combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent
public accountants, to pay the principal of, or interest and
premium and Additional Interest, if any, on the outstanding
Notes on the Stated Maturity or on the applicable redemption
date, as the case may be, and the Company must specify whether
the Notes are being defeased to maturity or to a particular
redemption date;
(2) in the case of Legal Defeasance, the Company will have
delivered to the Trustee an Opinion of Counsel reasonably
acceptable to the Trustee confirming that (a) the Company
has received from, or there has been published by, the Internal
Revenue Service a ruling or (b) since the Issue Date, there
has been a change in the applicable federal income tax law, in
either case to the effect that, and based thereon such Opinion
of Counsel will confirm that, the Holders of the outstanding
Notes will not recognize income, gain or loss for federal income
tax purposes as a result of such Legal Defeasance and will be
subject to federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such
Legal Defeasance had not occurred;
(3) in the case of Covenant Defeasance, the Company will
have delivered to the Trustee an Opinion of Counsel reasonably
acceptable to the Trustee confirming that the Holders of the
outstanding Notes will not recognize income, gain or loss for
federal income tax purposes as a result of such Covenant
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Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have
been the case if such Covenant Defeasance had not occurred;
(4) no Default or Event of Default will have occurred and
be continuing either: (a) on the date of such deposit; or
(b) insofar as Events of Default from bankruptcy or
insolvency events are concerned, at any time in the period
ending on the 123rd day after the date of deposit (other
than a Default resulting from the borrowing of funds to be
applied to such deposit);
(5) such Legal Defeasance or Covenant Defeasance will not
result in a breach or violation of, or constitute a default
under any material agreement or instrument (other than the
Indenture) to which the Company or any of its Subsidiaries is a
party or by which the Company or any of its Subsidiaries is
bound;
(6) the Company must have delivered to the Trustee an
Opinion of Counsel to the effect that, (1) assuming no
intervening bankruptcy of the Company or any Guarantor between
the date of deposit and the 123rd day following the deposit
and assuming that no Holder or the Trustee is deemed to be an
“insider” of the Company under the United States
Bankruptcy Code and the New York Debtor and Creditor Law, and
assuming that the deposit is not otherwise deemed to be to or
for the benefit of an “insider” of the Company under
the United States Bankruptcy Code and the New York Debtor and
Creditor Law, and assuming that no Holder or the Trustee is
deemed to be an “initial transferee” or “mediate
transferee” of a “transfer” within the meaning of
Section 550 of the United States Bankruptcy Code, after the
123rd day following the deposit, the transfer of the trust
funds pursuant to such deposit will not be subject to avoidance
pursuant to Section 547 of the United States Bankruptcy
Code or Section 15 of the New York Debtor and Creditor Law
and (2) the creation of the defeasance trust does not
violate the Investment Company Act of 1940;
(7) the Company must deliver to the Trustee an
Officers’ Certificate stating that the deposit was not made
by the Company with the intent of preferring the Holders of
Notes over the other creditors of the Company with the intent of
defeating, hindering, delaying or defrauding creditors of the
Company or others; and
(8) the Company must deliver to the Trustee an
Officers’ Certificate and an Opinion of Counsel, each
stating that all conditions precedent relating to the Legal
Defeasance or the Covenant Defeasance have been complied with.
Amendment,
Supplement and Waiver
Except as provided in the next two succeeding paragraphs, the
Indenture, the Notes and the Guarantees may be amended or
supplemented with the consent of the Holders of at least a
majority in principal amount of the Notes then outstanding
(including, without limitation, consents obtained in connection
with a purchase of, or tender offer or exchange offer for,
Notes), and any existing default or compliance with any
provision of the Indenture, the Notes and the Guarantees may be
waived with the consent of the Holders of a majority in
principal amount of the then outstanding Notes (including,
without limitation, consents obtained in connection with a
purchase of, or tender offer or exchange offer for, Notes).
Without the consent of each Holder affected, an amendment or
waiver may not (with respect to any Notes held by a
non-consenting Holder):
(1) reduce the principal amount of Notes whose Holders must
consent to an amendment, supplement or waiver;
(2) reduce the principal of or change the fixed maturity of
any Note or alter the provisions, or waive any payment, with
respect to the redemption of the Notes (other than any provision
with respect to the covenant described under the caption
“Repurchase at the Options of Holders — Asset
Sales” or “Repurchase at the Option of
Holders — Change of Control” or “Merger,
Consolidation and Sale of Assets”);
(3) reduce the rate of, or change the time for payment of,
interest on any Note;
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(4) waive a Default or Event of Default in the payment of
principal of, or interest, or premium or Additional Interest, if
any, on, the Notes (except a rescission of acceleration of the
Notes by the Holders of at least a majority in aggregate
principal amount of the Notes and a waiver of the payment
default that resulted from such acceleration);
(5) make any Note payable in money other than
U.S. dollars;
(6) make any change in the provisions of the Indenture
relating to waivers of past Defaults or the rights of Holders of
Notes to receive payments of principal of, or interest or
premium or Additional Interest, if any, on, the Notes;
(7) release any Guarantor from any of its obligations under
its Note Guarantee or the Indenture, except in accordance with
the terms of the Indenture;
(8) impair the right to institute suit for the enforcement
of any payment on or with respect to the Notes or the Note
Guarantees;
(9) except as otherwise permitted under the covenants
described under the captions “— Certain
Covenants — Guarantees,” consent to the
assignment or transfer by the Company or any Guarantor of any of
their rights or obligations under the Indenture; or
(10) make any change in the preceding amendment and waiver
provisions.
In addition, any amendment to or waiver of, any of the
provisions of the Indenture or the related definitions affecting
the subordination or ranking of the Notes or any Note Guarantee
in any manner adverse to the Holders will require the consent of
the Holders of at least 75% in the aggregate amount of the Notes
then outstanding, otherwise the Company may not amend or waive
any such provisions.
Notwithstanding the preceding, without the consent of any Holder
of Notes, the Company, the Guarantors and the Trustee may amend
or supplement the Indenture or the Notes:
(1) to cure any ambiguity, defect or inconsistency;
(2) to provide for uncertificated Notes in addition to or
in place of certificated Notes;
(3) to provide for the assumption of the Company’s or
any Guarantor’s obligations to Holders of Notes in the case
of a merger or consolidation or sale of all or substantially all
of the Company’s or such Guarantor’s assets;
(4) to make any change that would provide any additional
rights or benefits to the Holders of Notes or that does not
materially adversely affect the legal rights under the Indenture
of any such Holder, including the addition of any new Note
Guarantee;
(5) to comply with requirements of the Commission in order
to effect or maintain the qualification of the Indenture under
the Trust Indenture Act;
(6) to comply with the provisions described under
“— Certain Covenants —
Guarantees,” including to reflect the release of a
Guarantee of the Notes in accordance with the Indenture;
(7) to secure the Notes
and/or
Guarantees of the Notes;
(8) to evidence and provide for the acceptance of
appointment by a successor Trustee; or
(9) to provide for the issuance of Additional Notes in
accordance with the Indenture.
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Satisfaction
and Discharge
The Indenture will be discharged and will cease to be of further
effect as to all Notes issued thereunder, when:
(1) either:
(a) all Notes that have been authenticated (except lost,
stolen or destroyed Notes that have been replaced or paid and
Notes for whose payment money has theretofore been deposited in
trust and thereafter repaid to the Company) have been delivered
to the Trustee for cancellation; or
(b) all Notes that have not been delivered to the Trustee
for cancellation have become due and payable by reason of the
mailing of a notice of redemption or otherwise or will become
due and payable within one year and the Company or any Guarantor
has irrevocably deposited or caused to be deposited with the
Trustee as trust funds in trust solely for the benefit of the
Holders, cash in U.S. dollars, non-callable Government
Securities, or a combination thereof, in such amounts as will be
sufficient without consideration of any reinvestment of
interest, to pay and discharge the entire indebtedness on the
Notes not delivered to the Trustee for cancellation for
principal, premium and Additional Interest, if any, and accrued
interest to the date of maturity or redemption;
(2) no Default or Event of Default will have occurred and
be continuing on the date of such deposit or will occur as a
result of such deposit and such deposit will not result in a
breach or violation of, or constitute a default under, any other
instrument to which the Company or any Guarantor is a party or
by which the Company or any Guarantor is bound;
(3) the Company or any Guarantor has paid or caused to be
paid all sums payable by it under the Indenture; and
(4) the Company has delivered irrevocable instructions to
the Trustee under the Indenture to apply the deposited money
toward the payment of the Notes at maturity or the redemption
date, as the case may be.
In addition, the Company must deliver an Officers’
Certificate and an Opinion of Counsel to the Trustee stating
that all conditions precedent to satisfaction and discharge have
been satisfied.
Concerning
the Trustee
If the Trustee becomes a creditor of the Company or any
Guarantor, the Indenture and the Trust Indenture Act limit
its right to obtain payment of claims in certain cases, or to
realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to
engage in other transactions; however, if it acquires any
conflicting interest it must eliminate such conflict within
90 days, apply to the Commission for permission to continue
or resign.
The Indenture provides that in case an Event of Default will
occur and be continuing, the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent
man in the conduct of his own affairs. Subject to such
provisions, the Trustee will be under no obligation to exercise
any of its rights or powers under the Indenture at the request
of any Holder of Notes, unless such Holder will have offered to
the Trustee security and indemnity satisfactory to it against
any loss, liability or expense.
Certain
Definitions
Set forth below are certain defined terms used in the Indenture.
Reference is made to the Indenture for a full disclosure of all
such terms, as well as any other capitalized terms used herein
for which no definition is provided.
“Additional Interest” means all additional
interest owing on the Notes pursuant to the Registration Rights
Agreement.
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“Affiliate” of any specified Person means
(1) any other Person directly or indirectly controlling or
controlled by or under direct or indirect common control with
such specified Person or (2) any executive officer or
director of such specified Person. For purposes of this
definition, “control,” as used with respect to any
Person, will mean the possession, directly or indirectly, of the
power to direct or cause the direction of the management or
policies of such Person, whether through the ownership of voting
securities, by agreement or otherwise; provided that
beneficial ownership of 10% or more of the Voting Stock of a
Person will be deemed to be control. For purposes of this
definition, the terms “controlling,” “controlled
by” and “under common control with” will have
correlative meanings.
“Applicable Premium” means, with respect to a
Note at any date of redemption, the greater of (1) 1.0% of
the principal amount of such Note and (2) the excess of
(A) the present value at such date of redemption of
(i) the redemption price of such Note at August 15,
2009 (such redemption price being described under
“— Optional Redemption”) plus
(ii) all remaining required interest payments due on
such Note through August 15, 2009 (excluding accrued but
unpaid interest to the date of redemption), computed using a
discount rate equal to the Treasury Rate plus 50 basis
points, over (B) the principal amount of such Note.
“Asset Sale” means:
(1) the sale, lease, conveyance or other disposition of any
assets, other than a transaction governed by the provisions of
the Indenture described above under the caption
“— Repurchase at the Option of
Holders — Change of Control”
and/or the
provisions described above under the caption
“— Certain Covenants — Merger,
Consolidation or Sale of Assets;” and
(2) the issuance of Equity Interests by any of the
Company’s Restricted Subsidiaries or the sale by the
Company or any Restricted Subsidiary thereof of Equity Interests
in any of its Subsidiaries (other than directors’
qualifying shares and shares issued to foreign nationals to the
extent required by applicable law).
Notwithstanding the preceding, the following items will be
deemed not to be Asset Sales:
(1) any single transaction or series of related
transactions that involves assets or Equity Interests having a
Fair Market Value of less than $1.0 million;
(2) a transfer of assets or Equity Interests between or
among the Company and its Restricted Subsidiaries;
(3) an issuance or sale of Equity Interests by a Restricted
Subsidiary of the Company to the Company or to another
Restricted Subsidiary;
(4) the sale or lease of equipment, inventory, accounts
receivable or other assets in the ordinary course of business;
(5) the sale or other disposition of Cash Equivalents;
(6) dispositions of accounts receivable in connection with
the compromise, settlement or collection thereof in the ordinary
course of business or in bankruptcy or similar proceedings;
(7) a Restricted Payment that is permitted by the covenant
described above under the caption “— Certain
Covenants — Restricted Payments” and any
Permitted Investments;
(8) any sale or disposition of any property or equipment
that has become damaged, worn out, or obsolete; and
(9) the creation of a Lien not prohibited by the Indenture.
“Beneficial Owner” has the meaning assigned to
such term in
Rule 13d-3
and
Rule 13d-5
under the Exchange Act, except that in calculating the
beneficial ownership of any particular “person” (as
that term is used in Section 13(d)(3) of the Exchange Act),
such “person” will be deemed to have beneficial
ownership of all securities that such “person” has the
right to acquire by conversion or exercise of other securities,
whether such right is currently exercisable or is exercisable
only upon the occurrence of a subsequent condition. The
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terms “Beneficial Owners”, “Beneficially
Owns” and “Beneficially Owned” will have a
corresponding meaning.
“Board of Directors” means:
(1) with respect to a corporation, the board of directors
of the corporation or, except in the context of the definitions
of “Change of Control” and “Continuing
Directors,” a duly authorized committee thereof;
(2) with respect to a partnership, the Board of Directors
of the general partner of the partnership; and
(3) with respect to any other Person, the board or
committee of such Person serving a similar function.
“Board Resolution” means a resolution certified
by the Secretary or an Assistant Secretary of the Company to
have been duly adopted by the Board of Directors of the Company
and to be in full force and effect on the date of such
certification.
“Business Day” means any day other than a Legal
Holiday.
“Capital Lease Obligation” means, at the time
any determination thereof is to be made, the amount of the
liability in respect of a capital lease that would at that time
be required to be capitalized on a balance sheet in accordance
with GAAP.
“Capital Stock” means:
(1) in the case of a corporation, any corporate stock;
(2) in the case of an association or business entity, any
and all shares, interests, participations, rights or other
equivalents (however designated) of corporate stock;
(3) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or
limited); and
(4) any other interest or participation that confers on a
Person the right to receive a share of the profits and losses
of, or distributions of assets of, the issuing Person.
“Cash Equivalents” means:
(1) United States dollars, or in the case of a Subsidiary
other than a Domestic Subsidiary, such local currencies held by
it in the ordinary course of business;
(2) securities issued or directly and fully guaranteed or
insured by the United States government, or any member state of
the European Union in which the Company or any Subsidiary
operates or anticipates operating within the 12 months, or
any agency or instrumentality thereof (provided that the
full faith and credit of the United States is pledged in support
thereof) maturing, unless such securities are deposited to
defease any Indebtedness, not more than one year from the date
of acquisition;
(3) certificates of deposit and eurodollar time deposits
with maturities of six months or less from the date of
acquisition, bankers’ acceptances with maturities not
exceeding one year and overnight bank deposits, in each case,
with any domestic commercial bank having capital and surplus in
excess of $500.0 million and a rating at the time of
acquisition thereof of
P-1 or
better from Moody’s Investors Service, Inc. or
A-1 or
better from Standard & Poor’s Rating Services;
(4) repurchase obligations with a term of not more than
seven days for underlying securities of the types described in
clauses (2) and (3) above entered into with any
financial institution meeting the qualifications specified in
clause (3) above;
(5) commercial paper having the highest rating obtainable
from Moody’s Investors Service, Inc. or
Standard & Poor’s Rating Services and in each
case maturing within one year after the date of acquisition;
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(6) securities issued and fully guaranteed by any state,
commonwealth or territory of the United States of America, or
any member state of the European Union in which the Company or
any Subsidiary operates or anticipates operating within the next
12 months, or by any political subdivision or taxing
authority thereof, rated at least “A” by Moody’s
Investors Service, Inc. or Standard & Poor’s
Rating Services and having maturities of not more than six
months from the date of acquisition;
(7) in the case of any Restricted subsidiary located in a
country that is outside the United States and the European Union
(in which the Company or its Restricted Subsidiary is operating
or anticipates operating within the next 12 months), any
substantially similar investment to the kinds described in
clauses (1) through (6) of this definition obtained in
the ordinary course of business and rated the lower of
(i) at least
P-1 by
Moody’s or
A-1 by
S&P or the equivalent thereof and (ii) the highest
ranking obtainable in the applicable jurisdiction; and
(8) money market funds at least 95% of the assets of which
constitute Cash Equivalents of the kinds described in
clauses (1) through (6) of this definition.
“Change of Control” means the occurrence of any
of the following:
(1) the direct or indirect sale, transfer, conveyance or
other disposition (other than by way of merger or
consolidation), in one or a series of related transactions, of
all or substantially all of the properties or assets of the
Company and its Restricted Subsidiaries, taken as a whole, to
any “person” (as that term is used in
Section 13(d)(3) of the Exchange Act), other than to any of
the Principals or Related Parties;
(2) the adoption of a plan relating to the liquidation or
dissolution of the Company;
(3) prior to the first public offering of Common Stock of
the Company, the Principals or the Related Parties cease to be
the ultimate Beneficial Owners, directly or indirectly, of a
majority in the aggregate of the total voting power of the
Voting Stock of the Company, on a fully diluted basis, whether
as a result of issuance of securities of the Company, any
merger, consolidation, liquidation or dissolution of the Company
or a Parent, or any direct of indirect transfer of securities by
the Company, or otherwise (for the avoidance of doubt, pro rata
distributions in kind of Equity Interests of the Company by any
Principal to its general
and/or
limited partners will be disregarded for this clause (3));
(4) on and following the first public offering of Common
Stock of the Company, any “person” or
“group” (as such terms are used in Sections 13(d)
and 14(d) of the Exchange Act), other than any of the Principals
or Related Parties, becomes the ultimate Beneficial Owner,
directly or indirectly, of 50% or more of the voting power of
the Voting Stock of the Company;
(5) the first day on which a majority of the members of the
Board of Directors of the Company are not Continuing
Directors; or
(6) the Company consolidates with, or merges with or into,
any Person, or any Person consolidates with, or merges with or
into, the Company, in any such event pursuant to a transaction
in which any of the outstanding Voting Stock of the Company or
such other Person is converted into or exchanged for cash,
securities or other property, other than any such transaction
where the Voting Stock of the Company outstanding immediately
prior to such transaction is converted into or exchanged for
Voting Stock (other than Disqualified Stock) of the surviving or
transferee Person constituting a majority of the outstanding
shares of such Voting Stock of such surviving or transferee
Person (immediately after giving effect to such issuance), and
any transaction where immediately after such transaction, no
“person” or “group” (as such terms are used
in Section 13(d) and 14(d) of the Exchange Act), becomes,
directly or indirectly, the ultimate Beneficial Owner of 50% or
more of the voting power of the Voting Stock of the surviving or
transferee Person.
“Closing Date” means the date of the original
issuance of the Notes under the Indenture, July 20, 2007.
“Commission” means the U.S. Securities and
Exchange Commission.
“Common Stock” means, with respect to any
Person, any Capital Stock (other than Preferred Stock) of such
Person, whether outstanding on the Issue Date or issued
thereafter.
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“Consolidated Cash Flow” means, with respect to
any specified Person for any period, the Consolidated Net Income
of such Person for such period plus:
(1) provision for taxes based on income or profits of such
Person and its Restricted Subsidiaries for such period, to the
extent that such provision for taxes was deducted in computing
such Consolidated Net Income; plus
(2) Fixed Charges of such Person and its Restricted
Subsidiaries for such period, to the extent that any such Fixed
Charges were deducted in computing such Consolidated Net Income;
plus
(3) depreciation, amortization (including amortization of
intangibles but excluding amortization of prepaid cash expenses
that were paid in a prior period) and other non-cash expenses
(excluding any such non-cash expense to the extent that it
represents an accrual of or reserve for cash expenses in any
future period or amortization of a prepaid cash expense that was
paid in a prior period) of such Person and its Restricted
Subsidiaries for such period to the extent that such
depreciation, amortization and other non-cash expenses were
deducted in computing such Consolidated Net Income; minus
(4) non-cash items increasing such Consolidated Net Income
for such period, other than the accrual of revenue consistent
with past practice;
in each case, on a consolidated basis and determined in
accordance with GAAP.
Solely for the purpose of determining the amount available for
Restricted Payments under “— Certain
Covenants — Restricted Payments,” notwithstanding
the preceding, the provision for taxes based on the income or
profits of, the Fixed Charges of and the depreciation and
amortization and other non-cash expenses of, a Restricted
Subsidiary of the Company will be added to Consolidated Net
Income to compute Consolidated Cash Flow of the Company
(A) in the same proportion that the Net Income of such
Restricted Subsidiary was added to compute such Consolidated Net
Income of the Company and (B) only to the extent that a
corresponding amount would be permitted at the date of
determination to be dividended or distributed to the Company by
such Restricted Subsidiary without prior governmental approval
(that has not been obtained), and without direct or indirect
restriction pursuant to the terms of its charter and all
agreements, instruments, judgments, decrees, orders, statutes,
rules and governmental regulations applicable to that Subsidiary
or its stockholders.
“Consolidated Net Assets” of any Person means,
as of any date, the amount which in accordance with GAAP, would
be set forth under the caption “Total Assets” (or any
like caption) on a consolidated balance sheet of such Person and
its Restricted Subsidiaries, as of the end of the most recently
ended fiscal quarter for which internal financial statements are
available, less current liabilities; provided that, for
purposes of determining Consolidated Net Assets, the principal
amount of any intercompany Indebtedness that would otherwise be
included in the definition of “current liabilities”
under GAAP, will not be so included to the extent that such
intercompany Indebtedness is expressly subordinated by its terms
to the Indebtedness evidenced by the Notes and the Guarantees.
“Consolidated Net Income” means, with respect
to any specified Person for any period, the aggregate of the Net
Income of such Person and its Subsidiaries for such period, on a
consolidated basis, determined in accordance with GAAP;
provided that:
(1) the Net Income (or loss) of any Person that is not a
Restricted Subsidiary or that is accounted for by the equity
method of accounting will be included only to the extent of the
amount of dividends or distributions or other payments that are
actually paid in cash (or to the extent converted into cash) to
the specified Person or a Restricted Subsidiary thereof;
(2) Solely for the purpose of determining the amount
available for Restricted Payments under
“— Certain Covenants — Restricted
Payments,” the Net Income of any Restricted Subsidiary will
be excluded to the extent that the declaration or payment of
dividends or similar distributions by that Restricted Subsidiary
of that Net Income is not at the date of determination permitted
without any prior governmental approval (that has not been
obtained) or, directly or indirectly, by operation of the terms
of its charter or any agreement, instrument, judgment, decree,
order, statute, rule or governmental regulation
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applicable to that Restricted Subsidiary or its equity holders,
unless such restriction has been waived: provided that
Consolidated Net Income for such Restricted Subsidiary will be
increased by the amount of dividends or distributions or other
payments that are actually paid in cash (or to the extent
converted into cash) to such Restricted Subsidiary in respect to
such period, to the extent not already included therein;
(3) the Net Income of any Person acquired during the
specified period for any period prior to the date of such
acquisition will be excluded;
(4) the cumulative effect of a change in accounting
principles will be excluded;
(5) the amortization or write off of fees and expenses
incurred in connection with the acquisition or integration of a
Permitted Business or assets used in a Permitted Business will
be excluded;
(6) any net after tax gain (or loss) realized upon the sale
or other disposition of any assets of the Company, its
Consolidated Subsidiaries or any other Person (including
pursuant to any sale-and-leaseback arrangement) which is not
sold or otherwise disposed of in the ordinary course of business
and any net after tax gain (or loss) realized upon the sale or
other disposition of any Capital Stock of any Person will be
excluded;
(7) extraordinary gains or losses will be excluded;
(8) any non-cash compensation charge or expense realized
from grants of stock, stock appreciation or similar rights,
stock option or other rights to officers, directors and
employees or the Company or any of its Restricted Subsidiaries
will be excluded; and
(9) any unusual, nonoperating or nonrecurring gain, loss,
charge or write-down of assets will be excluded.
“Continuing Directors” means, as of any date of
determination, any member of the Board of Directors of the
Company who:
(1) was a member of such Board of Directors on the Issue
Date; or
(2) was nominated for election or elected to such Board of
Directors (i) with the approval of a majority of the
Continuing Directors who were members of such Board of Directors
at the time of such nomination or election or (ii) the
nominating committee of the Board of Directors so long as it
consists of Continuing Directors appointed to serve on the
nominating committee in accordance with the First Amended and
Restated Investors Agreement dated February 10, 2005.
“Credit Agreement” means that certain Third
Amended and Restated First Lien Credit Agreement, dated as of
May 17, 2005, by and among the Company and the other
lenders named therein, as amended, by and among the Company and
the other lenders named therein, including any related notes,
Guarantees, collateral documents, instruments and agreements
executed in connection therewith, and in each case as amended,
restated, modified, renewed, refunded, replaced, restructured,
increased, supplemented or refinanced in whole or in part from
time to time, regardless of whether such amendment, restatement,
modification, renewal, refunding, replacement, restructuring,
increase, supplement or refinancing is with the same financial
institutions or otherwise.
“Credit Facilities” means, one or more debt
facilities (including, without limitation, the Credit
Agreement), commercial paper facilities, in each case with banks
or other institutional lenders, providing for revolving credit
loans, term loans, receivables financing (including through the
sale of receivables to such lenders or to special purpose
entities formed to borrow from such lenders against such
receivables), letters of credit, in each case, as amended,
restated, modified, renewed, refunded, replaced or refinanced in
whole or in part from time to time.
“Default” means any event that is, or with the
passage of time or the giving of notice or both would be, an
Event of Default.
“Designated Non-Cash Consideration” means the
Fair Market Value of non-cash consideration received by the
Company or one of its Restricted Subsidiaries in connection with
an Asset Sale that is so designated as
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Designated Non-Cash Consideration pursuant to an Officer’s
Certificate, setting forth the basis of such valuation, less the
amount of Cash Equivalents received in connection with a
subsequent sale of such Designated Non-Cash Consideration.
“Disqualified Stock” means any Capital Stock
that, by its terms (or by the terms of any security into which
it is convertible, or for which it is exchangeable, in each case
at the option of the holder thereof), or upon the happening of
any event, matures or is mandatorily redeemable, pursuant to a
sinking fund obligation or otherwise, or redeemable at the
option of the holder thereof, in whole or in part, on or prior
to the date that is 123 days after the date on which the
Notes mature. Notwithstanding the preceding sentence, any
Capital Stock that would constitute Disqualified Stock solely
because the holders thereof have the right to require the
Company to repurchase such Capital Stock upon the occurrence of
a change of control or an asset sale will not constitute
Disqualified Stock if the terms of such Capital Stock provide
that the Company may not repurchase or redeem any such Capital
Stock pursuant to such provisions unless such repurchase or
redemption complies with the covenant described above under the
caption “— Certain Covenants —
Restricted Payments.” The term “Disqualified
Stock” will also include any options, warrants or other
rights that are convertible into Disqualified Stock or that are
redeemable at the option of the holder, or required to be
redeemed, prior to the date that is one year after the date on
which the Notes mature. For the avoidance of doubt, the existing
Preferred Stock is not Disqualified Stock.
“Domestic Subsidiary” means any Restricted
Subsidiary of the Company other than a Restricted Subsidiary
that is (1) a “controlled foreign corporation”
under Section 957 of the Internal Revenue Code
(a) whose primary operating assets are located outside the
United States and (b) that is not subject to tax under
Section 882(a) of the Internal Revenue Code of the United
States because of a trade or business within the United States
or (2) a Subsidiary of an entity described in the preceding
clause (1).
“Equity Offering” means any public or private
placement of Capital Stock (other than Disqualified Stock) of
the Company (other than pursuant to a registration statement on
Form S-8
or otherwise relating to equity securities issuable under any
employee benefit plan of the Company) to any Person other than
any Subsidiary thereof.
“Equity Interests” means Capital Stock and all
warrants, options or other rights to acquire Capital Stock (but
excluding any debt security that is convertible into, or
exchangeable for, Capital Stock).
“European Union” means the European Union or
any successor thereto as constituted on the date of
determination.
“Existing Indebtedness” means the aggregate
amount of Indebtedness of the Company and its Restricted
Subsidiaries (other than Indebtedness under the Credit Agreement
or under the Notes and the related Note Guarantees) in existence
on the Issue Date after giving effect to the application of the
proceeds of (1) the Notes and (2) any borrowings made
under the Credit Agreement on the Issue Date, until such amounts
are repaid.
“Existing Preferred Stock” means the
Company’s Series B Convertible Preferred Stock.
“Fair Market Value” means the price that would
be paid in an arm’s-length transaction between an informed
and willing seller under no compulsion to sell and an informed
and willing buyer under no compulsion to buy, as determined in
good faith by the Board of Directors of the Company, whose
determination, unless otherwise specified below, will be
conclusive if evidenced by a Board Resolution. Notwithstanding
the foregoing, (1) the Board of Directors’
determination of Fair Market Value must be evidenced by a Board
Resolution attached to an Officers’ Certificate delivered
to the Trustee if the Fair Market Value exceeds
$5.0 million and (2) the Board of Directors’
determination of Fair Market Value must be based upon an opinion
or appraisal issued by an accounting, appraisal or investment
banking firm of national standing if the Fair Market Value
exceeds $25.0 million.
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“Fixed Charges” means, with respect to any
specified Person for any period, the sum, without duplication,
of:
(1) the consolidated interest expense of such Person and
its Restricted Subsidiaries for such period, whether paid or
accrued, excluding amortization of debt issuance costs and the
expensing of any financing fees, but including original issue
discount, non-cash interest payments, the interest component of
any deferred payment obligations, the interest component of all
payments associated with Capital Lease Obligations, and net of
the effect of all payments made or received pursuant to Hedging
Obligations; plus
(2) the consolidated interest of such Person and its
Restricted Subsidiaries that was capitalized during such period;
plus
(3) any interest expense on Indebtedness of another Person
that is Guaranteed by such Person or one of its Restricted
Subsidiaries or secured by a Lien on assets of such Person or
one of its Restricted Subsidiaries, whether or not such
Guarantee or Lien is called upon; plus
(4) all dividends, whether paid or accrued and whether or
not in cash, on any series of Disqualified Stock of such Person
or any of its Restricted Subsidiaries, other than dividends on
Equity Interests payable solely in Equity Interests of the
Company (other than Disqualified Stock) of the Company or to the
Company or a Restricted Subsidiary of the Company, in each case,
on a consolidated basis and in accordance with GAAP.
“Fixed Charge Coverage Ratio” means with
respect to any specified Person for any period, the ratio of the
Consolidated Cash Flow of such Person for such period to the
Fixed Charges of such Person for such period. In the event that
the specified Person or any of its Restricted Subsidiaries
Incurs, repays, repurchases or redeems any Indebtedness or
issues, repurchases or redeems Preferred Stock subsequent to the
commencement of the period for which the Fixed Charge Coverage
Ratio is being calculated and on or prior to the date on which
the event for which the calculation of the Fixed Charge Coverage
Ratio is made (the “Calculation Date”), then the Fixed
Charge Coverage Ratio will be calculated giving pro forma effect
to such Incurrence, repayment, repurchase or redemption of
Indebtedness, or such issuance, repurchase or redemption of
Preferred Stock, and the use of the proceeds therefrom as if the
same had occurred at the beginning of such period.
In addition, for purposes of calculating the Fixed Charge
Coverage Ratio:
(1) acquisitions and dispositions of business entities or
property and assets constituting a division or line of business
of any Person that have been made by the specified Person or any
of its Restricted Subsidiaries, including through mergers or
consolidations, during the four-quarter reference period or
subsequent to such reference period and on or prior to the
Calculation Date will be given pro forma effect as if they had
occurred on the first day of the four-quarter reference period
and Consolidated Cash Flow for such reference period will be
calculated on a pro forma basis, but without giving effect to
clause (3) of the proviso set forth in the definition of
Consolidated Net Income;
(2) the Consolidated Cash Flow attributable to discontinued
operations, as determined in accordance with GAAP, will be
excluded;
(3) the Fixed Charges attributable to discontinued
operations, as determined in accordance with GAAP will be
excluded, but only to the extent that the obligations giving
rise to such Fixed Charges will not be obligations of the
specified Person or any of its Restricted Subsidiaries following
the Calculation Date; and
(4) consolidated interest expense attributable to interest
on any Indebtedness (whether existing or being Incurred)
computed on a pro forma basis and bearing a floating
interest rate will be computed as if the average rate in effect
from the beginning of the applicable period to the Calculation
Date (taking into account any interest rate option, swap, cap or
similar agreement applicable to such Indebtedness if such
agreement has a remaining term in excess of 12 months or,if
shorter, at least equal to the remaining term of such
Indebtedness) had been the applicable rate for the entire
period; and
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(5) if any Indebtedness is incurred under a revolving
credit facility and is being given pro forma effect in such
calculation, the interest on such Indebtedness shall be
calculated based on the average daily balance of such
Indebtedness for the four fiscal quarters subject to the pro
forma calculation to the extent that such Indebtedness was
incurred solely for working capital purposes.
“GAAP” means generally accepted accounting
principles set forth in the opinions and pronouncements of the
Accounting Principles Board of the American Institute of
Certified Public Accountants, the opinions and pronouncements of
the Public Company Accounting Oversight Board and in the
statements and pronouncements of the Financial Accounting
Standards Board or in such other statements by such other entity
as have been approved by a significant segment of the accounting
profession, which are in effect on the Issue Date.
“Government Securities” means securities that
are direct obligations of the United States of America for the
timely payment of which its full faith and credit is pledged.
“Guarantee” means, as to any Person, a
guarantee other than by endorsement of negotiable instruments
for collection in the ordinary course of business, direct or
indirect, in any manner including, without limitation, by way of
a pledge of assets or through letters of credit or reimbursement
agreements in respect thereof, of all or any part of any
Indebtedness of another Person.
“Guarantors” means:
(1) the Initial Guarantors; and
(2) any other subsidiary that executes a Note Guarantee in
accordance with the provisions of the Indenture;
and their respective successors and assigns until released from
their obligations under their Note Guarantees and the Indenture
in accordance with the terms of the Indenture.
“Hedging Obligations” means, with respect to
any specified Person, the obligations of such Person under:
(1) interest rate swap agreements, interest rate cap
agreements, interest rate collar agreements and other agreements
or arrangements with respect to interest rates;
(2) commodity swap agreements, commodity option agreements,
forward contracts and other agreements or arrangements with
respect to commodity prices; and
(3) foreign exchange contracts, currency swap agreements
and other agreements or arrangements with respect to foreign
currency exchange rates.
“Holder” means a Person in whose name a Note is
registered.
“Immaterial Subsidiary” means, as of any date
of determination, any Restricted Subsidiary whose total assets
as of the most recently completed fiscal quarter were less than
$1.0 million and whose total revenues for the most recently
completed
12-month
fiscal period did not exceed $1.0 million; provided
that a Restricted Subsidiary will not be deemed to be an
Immaterial Subsidiary if (1) such Restricted Subsidiary
directly or indirectly guarantees any Indebtedness of the
Company or any other Subsidiary or (2) either the total
assets or total revenues of such Restricted Subsidiary exceeds
the amount set forth above.
“Incur” means, with respect to any
Indebtedness, to incur, create, issue, assume, guarantee or
otherwise become directly or indirectly liable for or with
respect to, or become responsible for, the payment of,
contingently or otherwise, such Indebtedness (and
“Incurrence” and “Incurred” will have
meanings correlative to the foregoing); provided that
(1) any Indebtedness of a Person existing at the time such
Person becomes a Restricted Subsidiary of the Company will be
deemed to be Incurred by such Restricted Subsidiary at the time
it becomes a Restricted Subsidiary of the Company and
(2) neither the accrual of interest nor the accretion of
original issue discount nor the payment of interest in the form
of additional Indebtedness with the same terms and the payment
of dividends on Disqualified Stock or Preferred Stock in the
form of additional shares of the same class of Disqualified
Stock or Preferred Stock (to the extent provided for when the
Indebtedness or Disqualified Stock or Preferred Stock on which
such interest or dividend is paid was originally issued) will be
considered an Incurrence of Indebtedness; provided that,
in each case, the amount thereof is for all other
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purposes included in the Fixed Charges and Indebtedness of the
Company or its Restricted Subsidiary as accrued.
“Indebtedness” means, with respect to any
specified Person, any indebtedness of such Person, whether or
not contingent:
(1) in respect of borrowed money;
(2) evidenced by bonds, notes, debentures or similar
instruments or letters of credit (or reimbursement agreements in
respect thereof);
(3) in respect of banker’s acceptances;
(4) in respect of Capital Lease Obligations;
(5) in respect of the balance deferred and unpaid of the
purchase price of any property or services, except any such
balance that constitutes an accrued expense or trade payable;
(6) representing Hedging Obligations;
(7) representing Disqualified Stock valued at the greater
of its voluntary or involuntary maximum fixed repurchase price
plus accrued dividends;
(8) in the case of a Subsidiary of such Person,
representing Preferred Stock valued at greater of its voluntary
or involuntary maximum fixed repurchase price plus accrued
dividends.
In addition, the term “Indebtedness” includes
(x) all Indebtedness of others secured by a Lien on any
asset of the specified Person (whether or not such Indebtedness
is assumed by the specified Person), provided that the
amount of such Indebtedness will be the lesser of (A) the
Fair Market Value of such asset at such date of determination
and (B) the amount of such Indebtedness, (y) to the
extent not otherwise included, the Guarantee by the specified
Person of any Indebtedness of any other Person, and
(z) Preferred Stock issued by any Restricted Subsidiary.
For purposes hereof, the “maximum fixed repurchase
price” of any Disqualified Stock or Preferred Stock which
does not have a fixed repurchase price will be calculated in
accordance with the terms of such Disqualified Stock or
Preferred Stock, as applicable, as if such Disqualified Stock or
Preferred Stock were repurchased on any date on which
Indebtedness will be required to be determined pursuant to the
Indenture.
The amount of any Indebtedness outstanding as of any date will
be the outstanding balance at such date of all unconditional
obligations as described above and, with respect to contingent
obligations, the maximum liability upon the occurrence of the
contingency giving rise to the obligation, and will be:
(1) the accreted value thereof, in the case of any
Indebtedness issued with original issue discount; and
(2) the principal amount thereof, together with any
interest thereon that is more than 30 days past due, in the
case of any other Indebtedness.
Notwithstanding the foregoing, the following items of
Indebtedness will be permitted:
(1) the Incurrence by the Company or any of its Restricted
Subsidiaries of Indebtedness arising from the honoring by a bank
or other financial institution of a check, draft or similar
instrument drawn against insufficient funds in the ordinary
course of business, provided, however, that such Indebtedness is
extinguished within five Business Days of its Incurrence;
(2) the Incurrence by the Company or any of its Restricted
Subsidiaries of Indebtedness constituting reimbursement
obligations with respect to letters of credit in respect of
workers’ compensation claims or self-insurance obligations
or bid, performance or surety bonds (in each case, other than
for an obligation for borrowed money);
(3) the Incurrence by the Company or any of its Restricted
Subsidiaries of Indebtedness constituting reimbursement
obligations with respect to letters of credit issued in the
ordinary course of business;
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provided that, upon the drawing of such letters of credit or in
the Incurrence of such Indebtedness, such obligations are
reimbursed within 30 days following such drawing or
Incurrence;
(4) the Incurrence by the Company of Indebtedness to the
extent that the net proceeds thereof are promptly deposited to
defease or to satisfy and discharge the Notes;
(5) any Indebtedness which has been defeased in accordance
with GAAP; and
(6) the Incurrence by the Company or any of its Restricted
Subsidiaries of Indebtedness arising from agreements providing
for indemnification, adjustment of purchase price or similar
obligations, or Guarantees or letters of credit, surety bonds or
performance bonds securing any obligations of the Company or any
of its Restricted Subsidiaries pursuant to such agreements, in
any case Incurred in connection with the disposition of any
business, assets or Restricted Subsidiary of the Company (other
than Guarantees of Indebtedness Incurred by any Person acquiring
all or any portion of such business, assets or Restricted
Subsidiary for the purpose of financing such acquisition), so
long as the amount so indemnified or otherwise Incurred does not
exceed the gross proceeds actually received by the Company or
any Restricted Subsidiary thereof in connection with such
disposition.
“Initial Guarantors” means all of the Domestic
Subsidiaries of the Company.
“Investments” means, with respect to any
Person, all direct or indirect investments by such Person in
other Persons (including Affiliates) in the form of loans or
other extensions of credit (including Guarantees), advances,
capital contributions (by means of any transfer of cash or other
property to others or any payment for property or services for
the account or use of others), purchases or other acquisitions
for consideration of Indebtedness, Equity Interests or other
securities, together with all items that are or would be
classified as investments on a balance sheet prepared in
accordance with GAAP.
If the Company or any Restricted Subsidiary of the Company sells
or otherwise disposes of any Equity Interests of any direct or
indirect Restricted Subsidiary of the Company that is a
Guarantor such that, after giving effect to any such sale or
disposition, such Person is no longer a Restricted Subsidiary of
the Company and a Guarantor, the Company will be deemed to have
made an Investment on the date of any such sale or disposition
equal to the Fair Market Value of the Investment in such
Subsidiary not sold or disposed of. The acquisition by the
Company or any Restricted Subsidiary of the Company of a Person
that holds an Investment in a third Person will be deemed to be
an Investment by the Company or such Restricted Subsidiary in
such third Person in an amount equal to the Fair Market Value of
the Investment held by the acquired Person in such third Person.
“Legal Holiday” means a Saturday, a Sunday or a
day on which banking institutions in The City of New York or at
a place of payment are authorized or required by law, regulation
or executive order to remain closed.
“Lien” means, with respect to any asset, any
mortgage, lien, pledge, charge, security interest or encumbrance
of any kind in respect of such asset, whether or not filed,
recorded or otherwise perfected under applicable law, including
any conditional sale or other title retention agreement, any
lease in the nature thereof, any option or other agreement to
sell or give a security interest in and any filing of or
agreement to give any financing statement under the Uniform
Commercial Code (or equivalent statutes) of any jurisdiction.
“Moody’s” means Moody’s Investors
Service, Inc. and any successor to its rating agency business.
“Net Income” means, with respect to any
specified Person, the net income (loss) of such Person,
determined in accordance with GAAP and before any reduction in
respect of Preferred Stock dividends, excluding, however:
(1) any gain (or loss), together with any related provision
for taxes on such gain (or loss), realized in connection with:
(a) any sale of assets outside the ordinary course of
business of such Person; or (b) the disposition of any
securities by such Person or any of its Restricted Subsidiaries
or the extinguishment of any Indebtedness of such Person or any
of its Restricted Subsidiaries; and
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(2) any extraordinary gain (or loss), together with any
related provision for taxes on such extraordinary gain (or loss).
“Net Proceeds” means the aggregate cash
proceeds, including payments in respect of deferred payment
obligations (to the extent corresponding to the principal, but
not the interest component, thereof) received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale
(including, without limitation, any cash received upon the sale
or other disposition of any non-cash consideration received in
any Asset Sale), net of
(1) the direct costs relating to such Asset Sale,
including, without limitation, legal, accounting, investment
banking and brokerage fees, and sales commissions, and any
relocation expenses incurred as a result thereof,
(2) taxes paid or payable as a result thereof, in each
case, after taking into account any available tax credits or
deductions and any tax sharing arrangements,
(3) amounts required to be applied to the repayment of
Indebtedness or other liabilities, secured by a Lien on the
asset or assets that were the subject of such Asset Sale, or is
required to be paid as a result of such sale,
(4) any reserve for adjustment in respect of the sale price
of such asset or assets established in accordance with GAAP,
(5) in the case of any Asset Sale by a Restricted
Subsidiary of the Company, payments to holders of Equity
Interests in such Restricted Subsidiary in such capacity (other
than such Equity Interests held by the Company or any Restricted
Subsidiary thereof) to the extent that such payment is required
to permit the distribution of such proceeds in respect of the
Equity Interests in such Restricted Subsidiary held by the
Company or any Restricted Subsidiary thereof; and
(6) appropriate amounts to be provided by the Company or
its Restricted Subsidiaries as a reserve against liabilities
associated with such Asset Sale, including, without limitation,
pension and other post- employment benefit liabilities,
liabilities related to environmental matters and liabilities
under any indemnification obligations associated with such Asset
Sale, all as determined in accordance with GAAP;
provided that (a) excess amounts set aside for
payment of taxes pursuant to clause (2) above remaining
after such taxes have been paid in full or the statute of
limitations therefor has expired and (b) amounts initially
held in reserve pursuant to clause (6) no longer so held,
will, in the case of each of subclause (a) and (b), at that
time become Net Proceeds.
“Note Guarantee” means a Guarantee of the Notes
pursuant to the Indenture.
“Obligations” means any principal, interest,
penalties, fees, indemnifications, reimbursements, damages and
other liabilities payable under the documentation governing any
Indebtedness.
“Officer” means, with respect to any Person,
the Chairman of the Board, the Chief Executive Officer, the
President, the Chief Operating Officer, the Chief Financial
Officer, the Treasurer, any Assistant Treasurer, the Controller,
the Secretary or any Vice-President of such Person.
“Officers’ Certificate” means a
certificate signed on behalf of the Company by at least two
Officers of the Company, one of whom must be the principal
executive officer, the principal financial officer, the
treasurer or the principal accounting officer of the Company,
that meets the requirements of the Indenture.
“Old Notes Issue Date” means August 12,
2005, the date of issuance of the Company’s
91/4% Senior
Subordinated Notes due 2013.
“Opinion of Counsel” means an opinion from
legal counsel who is reasonably acceptable to the Trustee (who
may be counsel to or an employee of the Company) that meets the
requirements of the Indenture.
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“Permitted Business” means any business
conducted or proposed to be conducted (as described in the
offering memorandum) by the Company and its Restricted
Subsidiaries on the Issue Date and other businesses reasonably
related or ancillary thereto.
“Permitted Investments” means:
(1) any Investment in the Company or in a Restricted
Subsidiary of the Company;
(2) any Investment in Cash Equivalents;
(3) any Investment by the Company or any Restricted
Subsidiary of the Company in a Person, if as a result of such
Investment:
(a) such Person becomes a Restricted Subsidiary of the
Company; or
(b) such Person is merged, consolidated or amalgamated with
or into, or transfers or conveys substantially all of its assets
to, or is liquidated into, the Company or a Restricted
Subsidiary of the Company;
(4) any Investment made as a result of the receipt of
non-cash consideration from an Asset Sale that was made pursuant
to and in compliance with the covenant described above under the
caption “— Repurchase at the Option of
Holders — Asset Sales”;
(5) Hedging Obligations that are Incurred for the purpose
of fixing, hedging or swapping interest rate, commodity price or
foreign currency exchange rate risk (or to reverse or amend any
such agreements previously made for such purposes), and not for
speculative purposes, and that do not increase the Indebtedness
of the obligor outstanding at any time other than as a result of
fluctuations in interest rates, commodity prices or foreign
currency exchange rates or by reason of fees, indemnifies and
compensation payable thereunder;
(6) stock, obligations or securities received in
satisfaction of judgments;
(7) advances to customers or suppliers in the ordinary
course of business that are, in conformity with GAAP, recorded
as accounts receivable, prepaid expenses or deposits on the
balance sheet of the Company or its Restricted Subsidiaries and
endorsements for collection or deposit arising in the ordinary
course of business;
(8) commission, payroll, travel and similar advances to
officers and employees of the Company or any of its Restricted
Subsidiaries that are expected at the time of such advance
ultimately to be recorded as an expense in conformity with GAAP;
(9) Investments in any Person received in settlement of
debts created in the ordinary course of business and owing to
the Company or any of its Subsidiaries or in satisfaction of
judgments or pursuant to any plan of reorganization or similar
arrangement upon the bankruptcy or insolvency of any debtor;
(10) Investments existing on the Issue Date;
(11) endorsements of negotiable instruments and documents
in the ordinary course of business;
(12) acquisitions of assets, Equity Interests or other
securities by the Company for consideration consisting of Equity
Interests (other than Disqualified Stock) of the Company;
(13) Investments in the Notes;
(14) Investments in a joint venture engaged in a Permitted
Business in an amount, together with any other amount under this
clause (14), not to exceed 7.5% of the Company’s
Consolidated Net Assets; and
(15) other Investments in any Person (provided that any
such Person is not an Affiliate of the Company or is an
Affiliate of the Company solely because the Company, directly or
indirectly, owns Equity Interests in, or controls, such Person)
having an aggregate Fair Market Value (measured on the date each
such Investment was made and without giving effect to subsequent
changes in value), when
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taken together with all other Investments made pursuant to this
clause (15) since the Issue Date, not to exceed
$10.0 million.
“Permitted Liens” means:
(1) Liens on the assets of the Company, any Guarantor and
any Restricted Subsidiary that is not a Domestic Subsidiary
securing Senior Debt that was permitted by the terms of the
Indenture to be Incurred;
(2) Liens in favor of the Company or any Restricted
Subsidiary that is a Guarantor;
(3) Liens on property of a Person existing at the time such
Person is merged with or into or consolidated with the Company
or any Restricted Subsidiary of the Company; provided
that such Liens were in existence prior to the contemplation
of such merger or consolidation and do not extend to any assets
other than those of the Person merged into or consolidated with
the Company or the Restricted Subsidiary;
(4) Liens on property existing at the time of acquisition
thereof by the Company or any Restricted Subsidiary of the
Company, provided that such Liens were in existence prior
to the contemplation of such acquisition and do not extend to
any property other than the property so acquired by the Company
or the Restricted Subsidiary;
(5) Liens securing the Notes and the Note Guarantees;
(6) Liens existing on the Issue Date;
(7) Liens securing Permitted Refinancing Indebtedness;
provided that such Liens do not extend to any property or
assets other than the property or assets that secure the
Indebtedness being refinanced;
(8) Liens on property or assets used to defease or to
satisfy and discharge Indebtedness; provided that
(a) the Incurrence of such Indebtedness was not prohibited
by the Indenture and (b) such defeasance or satisfaction
and discharge is not prohibited by the Indenture;
(9) Liens incurred or deposits made in the ordinary course
of business in connection with workers’ compensation,
unemployment insurance or other kinds of social security, or to
secure the payment or performance of tenders, bids, contracts
(other than contracts for the payment of Indebtedness) or leases
to which such Person is a party, statutory or regulatory
obligations, surety or appeal bonds, performance bonds or other
obligations of a like nature incurred in the ordinary course of
business (including lessee or operator obligations under
statutes, governmental regulations or instruments related to the
ownership, exploration and production of oil, gas and minerals
on state or federal lands or waters);
(10) Liens for taxes, assessments or governmental charges
or claims that are not yet delinquent or that are being
contested in good faith by appropriate proceedings promptly
instituted and diligently concluded, provided that any reserve
or other appropriate provision as shall be required in
conformity with GAAP shall have been made therefor;
(11) statutory liens of landlords, mechanics, suppliers,
vendors, warehousemen, carriers or other like Liens arising in
the ordinary course of business;
(12) prejudgment liens and judgment Liens not giving rise
to an Event of Default so long as such Lien is adequately bonded
and any appropriate legal proceeding that may have been duly
initiated for the review of such judgment has not been finally
terminated or the period within which such proceeding may be
initiated has not expired;
(13) Liens constituting survey exceptions, encumbrances,
easements, and reservations of, and rights to others for,
rights-of-way,
zoning and other restrictions as to the use of real properties,
and minor defects of title which, in the case of any of the
foregoing, do not secure the payment of borrowed money, and in
the aggregate do not materially adversely affect the value of
the assets of the Company and its Restricted Subsidiaries, taken
as a whole, or materially impair the use of such properties for
the purposes of which such properties are held by the Company or
such Subsidiaries;
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(14) Liens securing Indebtedness incurred to finance the
construction, purchase or lease of, or repairs, improvements or
additions to, property, plant or equipment of such Person;
provided, however, that the Lien may not extend to any
other property owned by such Person or any of its Restricted
Subsidiaries at the time the Lien is incurred or created (other
than assets and property affixed or appurtenant thereto), and
the Indebtedness (other than any interest thereon) secured by
the Lien may not be incurred or created more than 180 days
after the later of the date of acquisition, completion of
construction, repair, improvement, addition or commencement of
full operation of the property subject to the Lien; and
(15) Liens incurred in the ordinary course of business of
the Company or any Restricted Subsidiary of the Company with
respect to obligations that do not exceed $5.0 million at
any one time outstanding.
“Permitted Refinancing Indebtedness” means any
Indebtedness of the Company or any of its Restricted
Subsidiaries issued in exchange for, or the net proceeds of
which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Company or any of its
Restricted Subsidiaries (other than intercompany Indebtedness);
provided that:
(1) the principal amount (or accreted value or liquidation
preference, if applicable) of such Permitted Refinancing
Indebtedness does not exceed the amount (or accreted value or
liquidation preference,if applicable) the Indebtedness so
extended, refinanced, renewed, replaced, defeased or refunded
(plus all accrued and unpaid interest thereon and the amount of
any reasonably determined premium necessary to accomplish such
refinancing and such reasonable expenses incurred in connection
therewith);
(2) such Permitted Refinancing Indebtedness has a final
maturity date (or redemption date, if applicable) later than the
final maturity date (or redemption date, if applicable) of, and
has a Weighted Average Life to Maturity equal to or greater than
the Weighted Average Life to Maturity of, the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded;
(3) if the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded is subordinated in right
of payment to the Notes or the Note Guarantees, such Permitted
Refinancing Indebtedness has a final maturity date later than
the final maturity date of the Notes, and is subordinated in
right of payment to, the Notes on terms at least as favorable,
taken as a whole, to the Holders of Notes as those contained in
the documentation governing the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded;
(4) if the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded is pari passu in
right of payment with the Notes or any Note Guarantees, such
Permitted Refinancing Indebtedness is pari passu with, or
subordinated in right of payment to, the Notes or such Note
Guarantees; and
(5) such Indebtedness is Incurred by either (a) the
Restricted Subsidiary that is the obligor on the Indebtedness
being extended, refinanced, renewed, replaced, defeased or
refunded or (b) the Company; provided, however, that
a Restricted Subsidiary that is also a Guarantor may guarantee
Permitted Refinancing Indebtedness incurred by the Company,
whether or not such Restricted Subsidiary was an obligor or
guarantor of the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded.
“Person” means any individual, corporation,
partnership, joint venture, association, joint-stock company,
trust, unincorporated organization, limited liability company or
government or other entity.
“Preferred Stock” means, with respect to any
Person, any Capital Stock of such Person that has preferential
rights to any other Capital Stock of such Person with respect to
dividends or redemptions upon liquidation.
“Principals” means CapStreet II, L.P.,
CapStreet Parallel II, L.P. and TA Associates, Inc., TA IX L.P.,
TA/Atlantic and Pacific IV L.P., TA/Atlantic and Pacific V
L.P., TA Strategic Partners Fund A L.P., TA Strategic
Partners Fund B L.P., TA Investors II, L.P.
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“Rating Agency” means Standard &
Poor’s and Moody’s or if Standard &
Poor’s or Moody’s, or both will not make a rating on
any series of Notes publicly available, a nationally recognized
statistical rating agency or agencies, as the case may be,
selected by the Company (as testified by a resolution of the
Board of Directors of the Company), which agency will be
substituted for Standard & Poor’s or Moody’s
or both, as the case may be.
“Related Party” means (1) any Affiliate of
any Principal, including any controlling stockholder, partner,
member, Subsidiary or immediate family member (in the case of an
individual) of any Principal, and including any equity fund
advised by any such Person, but excluding any portfolio company
of any such Person and (2) limited partners or members of
any investment fund involved within the definition of
“Principal” with respect to Equity Interests of the
Company received as distributions in kind from such Principal;
provided that, as a result of such distribution, no such limited
partner or member will “control” the Company as such
term is defined under the definition of “Affiliate.”
“Replacement Assets” means (1) non-current
assets that will be used or useful in a Permitted Business or
(2) substantially all the assets of a Permitted Business or
a majority of the Voting Stock of any Person engaged in a
Permitted Business that will become on the date of acquisition
thereof a Restricted Subsidiary that is a Guarantor.
“Restricted Investment” means an Investment
other than a Permitted Investment.
“Restricted Subsidiary” of a Person means any
Subsidiary of such Person that is not an Unrestricted Subsidiary.
“Significant Subsidiary” means any Subsidiary
that would constitute a “significant subsidiary”
within the meaning of Article 1 of
Regulation S-X
of the Securities Act.
“Standard & Poor’s” means
Standard & Poor’s, a division of The McGraw-Hill
Companies, Inc., and any successor to its rating agency business.
“Stated Maturity” means, with respect to any
installment of interest or principal on any series of
Indebtedness, the date on which such payment of interest or
principal was scheduled to be paid in the original documentation
governing such Indebtedness, and will not include any contingent
obligations to repay, redeem or repurchase any such interest or
principal prior to the date originally scheduled for the payment
thereof.
“Subsidiary” means, with respect to any
specified Person:
(1) any corporation, association or other business entity
of which more than 50% of the total voting power of shares of
Capital Stock entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or
trustees thereof is at the time owned or controlled, directly or
indirectly, by such Person or one or more of the other
Subsidiaries of that Person (or a combination thereof); and
(2) any partnership (a) the sole general partner or
the managing general partner of which is such Person or a
Subsidiary of such Person or (b) the only general partners
of which are such Person or one or more Subsidiaries of such
Person (or any combination thereof).
“Subsidiary Guarantors” means:
(1) each direct or indirect Domestic Subsidiary of the
Company on the date of the Indenture; and
(2) any other subsidiary that executes a Note Guarantee in
accordance with the provisions of the Indenture;
“Treasury Rate” means the yield to maturity at
the time of computation of United States Treasury securities
with a constant maturity (as compiled and published in the most
recent Federal Reserve Statistical Release H.15 (519) which
has become publicly available at least two Business Days prior
to the date fixed for prepayment (or, if such Statistical
Release is no longer published, any publicly available source
for similar market data)) most nearly equal to the then
remaining term of the Notes to August 15, 2009;
provided, however, that if the then remaining term of the
Notes to August 15, 2009 is not equal to the constant
maturity
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of a United States Treasury security for which a weekly average
yield is given, the Treasury Rate shall be obtained by linear
interpolation (calculated to the nearest one-twelfth of a year)
from the weekly average yields of United States Treasury
securities for which such yields are given, except that if the
then remaining term of the Notes to August 15, 2009 is less
than one year, the weekly average yield on actually traded
United States Treasury securities adjusted to a constant
maturity of one year will be used.
“Unrestricted Subsidiary” means any Subsidiary
of the Company that is designated by the Board of Directors of
the Company as an Unrestricted Subsidiary pursuant to a Board
Resolution in compliance with the covenant described under the
caption “— Certain Covenants —
Designation of Restricted and Unrestricted Subsidiaries,”
and any Subsidiary of such Subsidiary.
“Voting Stock” of any Person as of any date
means the Capital Stock of such Person that is ordinarily
entitled to vote in the election of the Board of Directors of
such Person.
“Weighted Average Life to Maturity” means, when
applied to any Indebtedness at any date, the number of years
obtained by dividing:
(1) the sum of the products obtained by multiplying
(a) the amount of each then remaining installment, sinking
fund, serial maturity or other required payments of principal,
including payment at final maturity, in respect thereof, by
(b) the number of years (calculated to the nearest
one-twelfth) that will elapse between such date and the making
of such payment; by
(2) the then outstanding principal amount of such
Indebtedness.
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FEDERAL INCOME
TAX CONSIDERATIONS
Federal
Income Tax Considerations of the Exchange of Outstanding Notes
for New Notes
The following discussion is a description of the material
federal income tax considerations relevant to the exchange of
outstanding notes for new notes, but does not purport to be a
complete analysis of all potential tax effects. The discussion
is based upon the Internal Revenue Code of 1986, as amended,
Treasury Regulations, Internal Revenue Service rulings and
pronouncements and judicial decisions now in effect, all of
which may be subject to change at any time by legislative,
judicial or administrative action. These changes may be applied
retroactively in a manner that could adversely affect a holder
of new notes. The description does not consider the effect of
any applicable foreign, state, local or other tax laws or estate
or gift tax considerations.
We believe that the exchange of outstanding notes for new notes
should not be an exchange or otherwise a taxable event to a
holder for United States federal income tax purposes.
Accordingly, a holder should have the same adjusted issue price,
adjusted basis and holding period in the new notes as it had in
the outstanding notes immediately before the exchange.
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PLAN OF
DISTRIBUTION
Based on interpretations by the staff of the SEC in no action
letters issued to third parties, we believe that you may
transfer new notes issued under the exchange offer in exchange
for the outstanding notes if:
| • | you acquire the new notes in the ordinary course of your business; and | |
| • | you are not engaged in, and do not intend to engage in, and have no arrangement or understanding with any person to participate in, a distribution of such new notes. |
You may not participate in the exchange offer if you are:
| • | our “affiliate” within the meaning of Rule 405 under the Securities Act; or | |
| • | a broker-dealer that acquired outstanding notes directly from us. |
Each broker-dealer that receives new notes for its own account
pursuant to the exchange offer must acknowledge that it will
deliver a prospectus in connection with any resale of such new
notes. To date, the staff of the SEC has taken the position that
broker-dealers may fulfill their prospectus delivery
requirements with respect to transactions involving an exchange
of securities such as this exchange offer, other than a resale
of an unsold allotment from the original sale of the outstanding
notes, with the prospectus contained in this registration
statement. This prospectus, as it may be amended or supplemented
from time to time, may be used by a broker-dealer in connection
with resales of new notes received in exchange for outstanding
notes where such outstanding notes were acquired as a result of
market-making activities or other trading activities. We have
agreed that, for a period of up to 180 days after the
effective date of this registration statement, we will make this
prospectus, as amended or supplemented, available to any
broker-dealer for use in connection with any such resale. In
addition, until such date, all dealers effecting transactions in
new notes may be required to deliver a prospectus.
If you wish to exchange new notes for your outstanding notes in
the exchange offer, you will be required to make representations
to us as described in “Exchange Offer — Purpose
and Effect of the Exchange Offer” and
“— Procedures for Tendering — Your
Representations to Us” in this prospectus. As indicated in
the letter of transmittal, you will be deemed to have made these
representations by tendering your outstanding notes in the
exchange offer. In addition, if you are a broker-dealer who
receives new notes for your own account in exchange for
outstanding notes that were acquired by you as a result of
market-making activities or other trading activities, you will
be required to acknowledge, in the same manner, that you will
deliver a prospectus in connection with any resale by you of
such new notes.
We will not receive any proceeds from any sale of new notes by
broker-dealers. New notes received by broker-dealers for their
own account pursuant to the exchange offer may be sold from time
to time in one or more transactions in the
over-the-counter
market:
| • | in negotiated transactions; | |
| • | through the writing of options on the new notes or a combination of such methods of resale; | |
| • | at market prices prevailing at the time of resale; and | |
| • | at prices related to such prevailing market prices or negotiated prices. |
Any such resale may be made directly to purchasers or to or
through brokers or dealers who may receive compensation in the
form of commissions or concessions from any such broker-dealer
or the purchasers of any such new notes. Any broker-dealer that
resells new notes that were received by it for its own account
pursuant to the exchange offer and any broker or dealer that
participates in a distribution of such new notes may be deemed
to be an “underwriter” within the meaning of the
Securities Act. The letter of transmittal states that by
acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it
is an “underwriter” within the meaning of the
Securities Act.
For a period of 180 days after the effective date of this
registration statement, we will promptly send additional copies
of this prospectus and any amendment or supplement to this
prospectus to any broker-dealer
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that requests such documents in the letter of transmittal. We
have agreed to pay all expenses incident to the exchange offer
(including the expenses of one counsel for the holders of the
outstanding notes) other than commissions or concessions of any
broker-dealers and will indemnify the holders of the outstanding
notes (including any broker-dealers) against certain
liabilities, including liabilities under the Securities Act.
LEGAL
MATTERS
Certain legal matters in connection with the issuance of the new
notes will be passed upon for us by Vinson & Elkins
L.L.P., Houston, Texas.
EXPERTS
The consolidated financial statements of Cardtronics, Inc. as of
December 31, 2007 and 2006, and for each of the years in
the three-year period ended December 31, 2007 have been
included herein in reliance upon the report of KPMG LLP,
independent registered public accounting firm, appearing
elsewhere herein, and upon the authority of said firm as experts
in accounting and auditing. The audit report covering the
December 31, 2007 financial statements for Cardtronics,
Inc. refers to the adoption of Financial Accounting Standards
Board (FASB) Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement
No. 109, effective January 1, 2007, and Statement
of Financial Accounting Standards No. 123(R),
Share-based Payments, effective January 1, 2006.
The audited financial statements of the 7-Eleven Financial
Services Business as of December 31, 2005 and 2006, and for
each of the three years in the period ended December 31,
2006, included in this prospectus, have been audited by
PricewaterhouseCoopers LLP, independent accountants. Such
financial statements have been so included in reliance on the
report (which contains an explanatory paragraph relating to the
7-Eleven Financial Services Business restatement of its
financial statements as described in Note 1 to the
financial statements) of such independent accountants given on
the authority of such firm as experts in auditing and accounting.
176
INDEX TO
FINANCIAL STATEMENTS
|
CARDTRONICS, INC. AND SUBSIDIARIES
|
||||
|
Unaudited Interim Consolidated Financial Statements:
|
||||
| F-3 | ||||
| F-4 | ||||
| F-5 | ||||
| F-6 | ||||
|
Annual Financial Statements:
|
||||
| F-30 | ||||
| F-31 | ||||
| F-32 | ||||
| F-33 | ||||
| F-34 | ||||
| F-35 | ||||
| F-36 | ||||
|
7-ELEVEN FINANCIAL SERVICES BUSINESS
|
||||
|
Unaudited Interim Financial Statements:
|
||||
| F-87 | ||||
| F-88 | ||||
| F-89 | ||||
| F-90 | ||||
|
Annual Financial Statements:
|
||||
| F-93 | ||||
| F-94 | ||||
| F-95 | ||||
| F-96 | ||||
| F-97 | ||||
| F-98 |
F-1
Table of Contents
CARDTRONICS,
INC.
Unaudited
Interim Consolidated Financial Statements
Three Months
Ended March 31, 2008 and 2007
F-2
Table of Contents
CARDTRONICS,
INC.
(in
thousands, except share and per share amounts)
|
March 31, |
December 31, |
|||||||
| 2008 | 2007 | |||||||
| (unaudited) | ||||||||
|
Assets
|
||||||||
|
Current assets:
|
||||||||
|
Cash and cash equivalents
|
$ | 8,908 | $ | 13,439 | ||||
|
Accounts and notes receivable, net of allowance of $474 and $560
as of March 31, 2008 and December 31, 2007,
respectively
|
26,324 | 23,248 | ||||||
|
Inventory
|
3,633 | 2,355 | ||||||
|
Restricted cash, short-term
|
8,419 | 5,900 | ||||||
|
Deferred tax asset, net
|
214 | 216 | ||||||
|
Prepaid expenses, deferred costs, and other current assets
|
14,558 | 11,627 | ||||||
|
Total current assets
|
62,056 | 56,785 | ||||||
|
Restricted cash
|
321 | 317 | ||||||
|
Property and equipment, net
|
174,225 | 163,912 | ||||||
|
Intangible assets, net
|
126,227 | 130,901 | ||||||
|
Goodwill
|
234,355 | 235,185 | ||||||
|
Prepaid expenses and other assets
|
4,336 | 4,185 | ||||||
|
Total assets
|
$ | 601,520 | $ | 591,285 | ||||
| Liabilities and Stockholders’ Equity | ||||||||
|
Current liabilities:
|
||||||||
|
Current portion of long-term debt
|
$ | 980 | $ | 882 | ||||
|
Current portion of capital lease obligations
|
922 | 1,147 | ||||||
|
Current portion of other long-term liabilities
|
23,173 | 16,201 | ||||||
|
Accounts payable
|
37,044 | 34,385 | ||||||
|
Accrued liabilities
|
49,981 | 70,524 | ||||||
|
Total current liabilities
|
112,100 | 123,139 | ||||||
|
Long-term liabilities:
|
||||||||
|
Long-term debt, net of current portion and related discounts
|
343,190 | 307,733 | ||||||
|
Capital lease obligations, net of current portion
|
785 | 982 | ||||||
|
Deferred tax liability, net
|
11,884 | 11,480 | ||||||
|
Asset retirement obligations
|
18,374 | 17,448 | ||||||
|
Other long-term liabilities
|
27,413 | 23,392 | ||||||
|
Total liabilities
|
513,746 | 484,174 | ||||||
|
Stockholders’ equity:
|
||||||||
|
Common stock, $0.0001 par value; 125,000,000 shares
authorized; 43,659,816 and 43,571,956 shares issued as of
March 31, 2008 and December 31, 2007, respectively;
38,654,067 and 38,566,207 shares outstanding as of
March 31, 2008 and December 31, 2007, respectively
|
4 | 4 | ||||||
|
Subscriptions receivable (at face value)
|
(218 | ) | (229 | ) | ||||
|
Additional paid-in capital
|
190,625 | 190,508 | ||||||
|
Accumulated other comprehensive loss, net
|
(19,391 | ) | (4,518 | ) | ||||
|
Accumulated deficit
|
(35,025 | ) | (30,433 | ) | ||||
|
Treasury stock; 5,005,749 shares at cost as of
March 31, 2008 and December 31, 2007
|
(48,221 | ) | (48,221 | ) | ||||
|
Total stockholders’ equity
|
87,774 | 107,111 | ||||||
|
Total liabilities and stockholders’ equity
|
$ | 601,520 | $ | 591,285 | ||||
See accompanying notes to consolidated financial statements.
F-3
Table of Contents
CARDTRONICS,
INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
| Three Months Ended March 31, | ||||||||
| 2008 | 2007 | |||||||
| (unaudited) | ||||||||
|
Revenues:
|
||||||||
|
ATM operating revenues
|
$ | 115,062 | $ | 71,656 | ||||
|
Vcom operating revenues
|
1,235 | — | ||||||
|
ATM product sales and other revenues
|
4,278 | 2,862 | ||||||
|
Total revenues
|
120,575 | 74,518 | ||||||
|
Cost of revenues:
|
||||||||
|
Cost of ATM operating revenues (includes stock-based
compensation of $65 in 2008 and $16 in 2007. Excludes
depreciation, accretion, and amortization shown separately
below. See Note 1)
|
86,832 | 54,736 | ||||||
|
Cost of Vcom operating revenues
|
2,269 | — | ||||||
|
Cost of ATM product sales and other revenues
|
4,164 | 2,797 | ||||||
|
Total cost of revenues
|
93,265 | 57,533 | ||||||
|
Gross profit
|
27,310 | 16,985 | ||||||
|
Operating expenses:
|
||||||||
|
Selling, general, and administrative expenses (includes
stock-based compensation of $201 in 2008 and $206 in 2007)
|
8,551 | 6,444 | ||||||
|
Depreciation and accretion expense
|
9,082 | 6,398 | ||||||
|
Amortization expense
|
4,503 | 2,486 | ||||||
|
Total operating expenses
|
22,136 | 15,328 | ||||||
|
Income from operations
|
5,174 | 1,657 | ||||||
|
Other expense (income):
|
||||||||
|
Interest expense, net
|
7,632 | 5,892 | ||||||
|
Amortization of deferred financing costs and bond discounts
|
508 | 356 | ||||||
|
Minority interest in subsidiary
|
— | (112 | ) | |||||
|
Other
|
1,061 | (119 | ) | |||||
|
Total other expense
|
9,201 | 6,017 | ||||||
|
Loss before income taxes
|
(4,027 | ) | (4,360 | ) | ||||
|
Income tax expense (benefit)
|
565 | (973 | ) | |||||
|
Net loss
|
(4,592 | ) | (3,387 | ) | ||||
|
Preferred stock accretion expense
|
— | 67 | ||||||
|
Net loss available to common stockholders
|
$ | (4,592 | ) | $ | (3,454 | ) | ||
|
Net loss per common share — basic and diluted
|
$ | (0.12 | ) | $ | (0.25 | ) | ||
|
Weighted average shares outstanding — basic and diluted
|
38,589,878 | 13,965,875 | ||||||
See accompanying notes to consolidated financial statements.
F-4
Table of Contents
| Three Months Ended March 31, | ||||||||
| 2008 | 2007 | |||||||
| (unaudited) | ||||||||
|
Cash flows from operating activities:
|
||||||||
|
Net loss
|
$ | (4,592 | ) | $ | (3,387 | ) | ||
|
Adjustments to reconcile net loss to net cash provided by (used
in)
operating activities: |
||||||||
|
Depreciation, accretion, and amortization expense
|
13,585 | 8,884 | ||||||
|
Amortization of deferred financing costs and bond discounts
|
508 | 356 | ||||||
|
Stock-based compensation expense
|
266 | 222 | ||||||
|
Deferred income taxes
|
430 | (1,026 | ) | |||||
|
Gain on sale of Winn-Dixie equity securities
|
— | (569 | ) | |||||
|
Minority interest
|
— | (112 | ) | |||||
|
Loss on disposal of assets
|
1,150 | 492 | ||||||
|
Other reserves and non-cash items
|
(1,975 | ) | 443 | |||||
|
Changes in assets and liabilities, net of acquisitions:
|
||||||||
|
(Increase) decrease in accounts and notes receivable, net
|
(2,964 | ) | 2,051 | |||||
|
Increase in prepaid, deferred costs, and other current assets
|
(2,595 | ) | (499 | ) | ||||
|
Increase in inventory
|
(932 | ) | (359 | ) | ||||
|
(Increase) decrease in other assets
|
217 | (53 | ) | |||||
|
Decrease in accounts payable and accrued liabilities
|
(12,006 | ) | (3,130 | ) | ||||
|
Decrease in other liabilities
|
(1,417 | ) | (671 | ) | ||||
|
Net cash provided by (used in) operating activities
|
(10,325 | ) | 2,642 | |||||
|
Cash flows from investing activities:
|
||||||||
|
Additions to property and equipment
|
(25,799 | ) | (13,332 | ) | ||||
|
Proceeds from sale of property and equipment
|
— | 3 | ||||||
|
Payments for exclusive license agreements and site acquisition
costs
|
(298 | ) | (567 | ) | ||||
|
Additions to equipment to be leased to customers
|
— | (203 | ) | |||||
|
Principal payments received under direct financing leases
|
13 | 4 | ||||||
|
Proceeds from sale of Winn-Dixie equity securities
|
— | 3,950 | ||||||
|
Acquisition, net of cash acquired
|
— | 876 | ||||||
|
Net cash used in investing activities
|
(26,084 | ) | (9,269 | ) | ||||
|
Cash flows from financing activities:
|
||||||||
|
Proceeds from issuance of long-term debt
|
49,836 | 20,897 | ||||||
|
Repayments of long-term debt and capital leases
|
(14,995 | ) | (12,017 | ) | ||||
|
Repayments of borrowings under bank overdraft facility, net
|
(1,866 | ) | (3,222 | ) | ||||
|
Payments received on subscriptions receivable
|
11 | — | ||||||
|
Proceeds from exercises of stock options
|
123 | 46 | ||||||
|
Equity offering costs
|
(1,250 | ) | — | |||||
|
Debt issuance and modification costs
|
(4 | ) | — | |||||
|
Net cash provided by financing activities
|
31,855 | 5,704 | ||||||
|
Effect of exchange rate changes on cash
|
23 | (13 | ) | |||||
|
Net decrease in cash and cash equivalents
|
(4,531 | ) | (936 | ) | ||||
|
Cash and cash equivalents at beginning of period
|
13,439 | 2,718 | ||||||
|
Cash and cash equivalents at end of period
|
$ | 8,908 | $ | 1,782 | ||||
|
Supplemental disclosure of cash flow information:
|
||||||||
|
Cash paid for interest, including interest on capital leases
|
$ | 15,116 | $ | 10,646 | ||||
|
Cash paid for income taxes
|
$ | — | $ | 27 | ||||
|
Fixed assets financed with direct debt
|
$ | — | $ | 1,101 | ||||
See accompanying notes to consolidated financial statements.
F-5
Table of Contents
Table of Contents
CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those
estimates, and such differences could be material to the
financial statements.
Cost
of ATM Operating Revenues and Gross Profit
Presentation
The Company presents “Cost of ATM operating revenues”
and “Gross profit” within its consolidated statements
of operations exclusive of depreciation, accretion, and
amortization expenses related to ATMs and ATM-related assets.
The following table sets forth the amounts excluded from cost of
ATM operating revenues and gross profit during the three month
periods ended March 31, 2008 and 2007:
| 2008 | 2007 | |||||||
| (in thousands) | ||||||||
|
Depreciation and accretion expenses related to ATMs and
ATM-related assets
|
$ | 7,962 | $ | 6,021 | ||||
|
Amortization expense
|
4,503 | 2,486 | ||||||
|
Total depreciation, accretion, and amortization expenses
excluded from cost of ATM operating revenues and gross profit
|
$ | 12,465 | $ | 8,507 | ||||
(2) Acquisitions
Acquisition
of 7-Eleven Financial Services Business
On July 20, 2007, the Company acquired substantially all of
the assets of the financial services business of 7-Eleven, Inc.
(the “7-Eleven Financial Services Business”) for
approximately $137.3 million in cash. This acquisition (the
“7-Eleven ATM Transaction”) was made as the Company
believed the acquisition would provide it with substantial
benefits and opportunities to execute its overall strategy,
including the addition of high-volume ATMs in prime retail
locations, organic growth potential, branding and surcharge-free
network opportunities, and future outsourcing opportunities.
The 7-Eleven ATM Transaction included approximately 5,500 ATMs
located in 7-Eleven, Inc. (“7-Eleven”) stores
throughout the United States, of which approximately 2,000 were
advanced-functionality financial self-service kiosks, referred
to as “Vcom” terminals, that are capable of providing
more sophisticated financial services, such as check-cashing,
remote deposit capture (which is deposit taking at ATMs not
located on a bank’s premises using electronic imaging),
money transfer, bill payment services, and other kiosk-based
financial services (collectively, the “Vcom
Services”). The Company funded the acquisition through the
issuance of $100.0 million of 9.25% senior
subordinated notes due 2013 — Series B (the
“Series B Notes”) and additional borrowings under
its revolving credit facility, which was amended in connection
with the acquisition. See Note 8 for additional
details on these financings. The Company has included the
results of the operations of the 7-Eleven Financial Services
Business for all periods subsequent to July 19, 2007.
The Company accounted for the 7-Eleven ATM Transaction as a
business combination pursuant to Statement of Financial
Accounting Standard (“SFAS”) No. 141, Business
Combinations. Accordingly, the Company has allocated the
total purchase consideration to the assets acquired and
liabilities assumed based on
F-7
Table of Contents
CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
their respective fair values as of the acquisition date. The
following table summarizes the estimated fair values of the
assets acquired and liabilities assumed as of the acquisition
date (in thousands):
|
Cash
|
$ | 1,427 | ||
|
Trade accounts receivable, net
|
3,767 | |||
|
Surcharge and interchange receivable
|
3,769 | |||
|
Inventory
|
1,953 | |||
|
Other current assets
|
2,344 | |||
|
Property and equipment
|
18,315 | |||
|
Software
|
4,273 | |||
|
Intangible assets subject to amortization
|
78,000 | |||
|
Goodwill
|
62,191 | |||
|
Total assets acquired
|
176,039 | |||
|
Accounts payable
|
(688 | ) | ||
|
Accrued liabilities and deferred income
|
(9,749 | ) | ||
|
Current portion of capital lease obligations
|
(1,326 | ) | ||
|
Current portion of other long-term liabilities
|
(7,777 | ) | ||
|
Non-current portion of capital lease obligations
|
(1,378 | ) | ||
|
Other long-term liabilities
|
(17,809 | ) | ||
|
Total liabilities assumed
|
(38,727 | ) | ||
|
Net assets acquired
|
$ | 137,312 | ||
The purchase price allocation presented above resulted in a
goodwill balance of approximately $62.2 million, which is
deductible for tax purposes. Additionally, the purchase price
allocation resulted in approximately $78.0 million in
identifiable intangible assets subject to amortization, which
was determined by utilizing a discounted cash flow approach. Of
the total $78.0 million of intangible assets identified,
$64.3 million relates to the
10-year ATM
operating agreement that was entered into with 7-Eleven in
conjunction with the acquisition, which is being amortized on a
straight-line basis over the term of the agreement, and
$13.7 million relates to a branding contract acquired in
the transaction, which is being amortized over the remaining
life of the underlying contract (8.4 years).
In addition, the Company recorded $19.5 million of other
liabilities ($7.8 million in current portion of other
long-term liabilities and $11.7 million in other long-term
liabilities) related to certain unfavorable equipment operating
leases and an operating contract assumed as part of the 7-Eleven
ATM Transaction. These liabilities are being amortized over the
remaining terms of the underlying contracts and serve to reduce
the corresponding ATM operating expense amounts to the fair
value of these services as of the date of the acquisition.
Pro
Forma Results of Operations
The following table presents the unaudited pro forma combined
results of operations of the Company and the acquired 7-Eleven
Financial Services Business for the three months ended
March 31, 2007, after giving effect to certain pro forma
adjustments, including the effects of the issuance of the
Series B Notes and additional borrowings under its
revolving credit facility, as amended (Note 8). The
unaudited pro forma financial results assume that both the
7-Eleven ATM Transaction and the related financing transactions
occurred on January 1, 2007. This pro forma information is
presented for illustrative purposes only and is not necessarily
indicative of the actual results that would have occurred had
those transactions been consummated
F-8
Table of Contents
CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
on such date. The pro forma results include approximately
$4.2 million of placement fee revenues associated with the
Vcom operations of the 7-Eleven Financial Services Business,
which are not expected to recur in future periods. Furthermore,
such pro forma results are not necessarily indicative of the
future results to be expected for the consolidated operations.
Amounts presented are in thousands, excluding per share amounts.
|
Revenues
|
$ | 116,039 | ||
|
Income from operations
|
6,820 | |||
|
Net loss available to common shareholders
|
(2,368 | ) | ||
|
Net loss per share — basic and diluted
|
$ | (0.17 | ) |
(3) Stock-based
Compensation
The Company accounts for stock-based compensation arrangements
under SFAS No. 123 (revised 2004), Share-Based
Payment, which requires a company to record the grant date
fair value of stock-based compensation arrangements, net of
estimated forfeitures, as compensation expense on a
straight-line basis over the underlying service periods of the
related awards. The following table reflects the total
stock-based compensation expense amounts included in the
accompanying consolidated statements of operations for the three
month periods ended March 31, 2008 and 2007.
| 2008 | 2007 | |||||||
| (in thousands) | ||||||||
|
Cost of ATM operating revenues
|
$ | 65 | $ | 16 | ||||
|
Selling, general, and administrative expenses
|
201 | 206 | ||||||
|
Total stock-based compensation expense
|
$ | 266 | $ | 222 | ||||
A summary of the status of the Company’s outstanding stock
options as of March 31, 2008 and changes during the three
months ended March 31, 2008 are presented below:
|
Weighted |
||||||||
|
Number |
Average |
|||||||
| of Shares | Exercise Price | |||||||
|
Options outstanding as of January 1, 2008
|
4,960,041 | $ | 7.78 | |||||
|
Exercised
|
(87,860 | ) | $ | 1.40 | ||||
|
Forfeited
|
(130,156 | ) | $ | 11.22 | ||||
|
Options outstanding as of March 31, 2008
|
4,742,025 | $ | 7.80 | |||||
|
Options vested and exercisable as of March 31, 2008
|
2,925,802 | $ | 5.60 | |||||
(4) Earnings
per Share
The Company reports its earnings per share in accordance with
SFAS No. 128, Earnings per Share. In accordance
with SFAS No. 128, potentially dilutive securities are
excluded from the calculation of diluted earnings per share (as
well as their related income statement impacts) when their
impact on net income (loss) available to common stockholders is
anti-dilutive. For the three month periods ended March 31,
2008 and 2007, the Company incurred net losses and, accordingly,
excluded all potentially dilutive securities from the
calculation of diluted earnings per share as their impact on the
net loss available to common stockholders was anti-dilutive.
Such anti-dilutive securities included outstanding stock
options, restricted shares, and, for periods prior to their
conversion in December 2007, the Company’s Series B
redeemable convertible preferred stock.
F-9
Table of Contents
CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following is a summary of the potentially dilutive
securities that have been excluded from the computation of
diluted net loss per share for the three month periods ended
March 31, 2008 and 2007:
| 2008 | 2007 | |||||||
|
Stock options
|
1,229,145 | 1,624,519 | ||||||
|
Restricted shares
|
— | 19,789 | ||||||
|
Preferred stock
|
— | 7,390,413 | ||||||
|
Total potentially dilutive securities
|
1,229,145 | 9,034,721 | ||||||
(5) Comprehensive
Loss
SFAS No. 130, Reporting Comprehensive Income,
establishes standards for reporting comprehensive income (loss)
and its components in the financial statements. Comprehensive
loss for the three month periods ended March 31, 2008 and
2007 consisted of the following:
| 2008 | 2007 | |||||||
| (in thousands) | ||||||||
|
Net loss
|
$ | (4,592 | ) | $ | (3,387 | ) | ||
|
Unrealized losses on interest rate hedges
|
(13,465 | ) | (1,172 | ) | ||||
|
Foreign currency translation adjustments
|
(1,408 | ) | (160 | ) | ||||
|
Reclassifications of unrealized gains on
available-for-sale
securities, net of taxes
|
— | (498 | ) | |||||
|
Total comprehensive loss
|
$ | (19,465 | ) | $ | (5,217 | ) | ||
The significant increase in the total comprehensive loss figure
for the three month period ended March 31, 2008 was due to
the precipitous drop in current and forecasted interest rates
that occurred during the period, which resulted in a
corresponding decline in value associated with the
Company’s interest rate hedges. For additional information
on the Company’s interest rate hedges, see
Note 12.
Accumulated other comprehensive loss is displayed as a separate
component of stockholders’ equity in the accompanying
consolidated balance sheets and consisted of the following as of
March 31, 2008 and December 31, 2007:
|
March 31, |
December 31, |
|||||||
| 2008 | 2007 | |||||||
| (in thousands) | ||||||||
|
Unrealized losses on interest rate hedges
|
$ | (27,109 | ) | $ | (13,644 | ) | ||
|
Foreign currency translation adjustments
|
7,718 | 9,126 | ||||||
|
Total accumulated other comprehensive loss
|
$ | (19,391 | ) | $ | (4,518 | ) | ||
The Company currently believes that the unremitted earnings of
its foreign subsidiaries will be reinvested in the foreign
countries in which those subsidiaries operate for an indefinite
period of time. Accordingly, no deferred taxes have been
provided for on the differences between the Company’s book
basis and underlying tax basis in those subsidiaries or on the
foreign currency translation adjustment amounts reflected in the
tables above. As a result of the Company’s overall net loss
position for tax purposes, the Company has not recorded deferred
tax benefits on the loss amounts related to these interest rate
swaps as of March 31, 2008 or December 31, 2007, as
management does not currently believe the Company will be able
to realize the benefits associated with its net deferred tax
asset positions.
F-10
Table of Contents
CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(6) Intangible
Assets
Intangible
Assets with Indefinite Lives
The following table presents the net carrying amount of the
Company’s intangible assets with indefinite lives as of
March 31, 2008 and December 31, 2007, as well as the
changes in the net carrying amounts for the three months ended
March 31, 2008, by geographic segment:
| Goodwill | Trade Name | |||||||||||||||||||||||
| U.S. | U.K. | Mexico | U.S. | U.K. | Total | |||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||
|
Balance as of December 31, 2007
|
$ | 150,445 | $ | 84,050 | $ | 690 | $ | 200 | $ | 4,015 | $ | 239,400 | ||||||||||||
|
Purchase price adjustments
|
6 | — | — | — | — | 6 | ||||||||||||||||||
|
Foreign currency translation adjustments
|
— | (833 | ) | (3 | ) | — | (41 | ) | (877 | ) | ||||||||||||||
|
Balance as of March 31, 2008
|
$ | 150,451 | $ | 83,217 | $ | 687 | $ | 200 | $ | 3,974 | $ | 238,529 | ||||||||||||
Intangible
Assets with Definite Lives
The following is a summary of the Company’s intangible
assets that are subject to amortization as of March 31,
2008:
|
Gross Carrying |
Accumulated |
Net Carrying |
||||||||||
| Amount | Amortization | Amount | ||||||||||
| (in thousands) | ||||||||||||
|
Customer and branding contracts/relationships
|
$ | 163,095 | $ | (53,848 | ) | $ | 109,247 | |||||
|
Deferred financing costs
|
13,926 | (4,636 | ) | 9,290 | ||||||||
|
Exclusive license agreements
|
5,420 | (1,950 | ) | 3,470 | ||||||||
|
Non-compete agreements
|
101 | (55 | ) | 46 | ||||||||
|
Total
|
$ | 182,542 | $ | (60,489 | ) | $ | 122,053 | |||||
The Company’s intangible assets with definite lives are
being amortized over the assets’ estimated useful lives
utilizing the straight-line method. Estimated useful lives range
from three to twelve years for customer and branding
contracts/relationships and from four to eight years for
exclusive license agreements. The Company has also assumed an
estimated life of four years for its non-compete agreements.
Deferred financing costs are amortized through interest expense
over the contractual term of the underlying borrowings utilizing
the effective interest method. The Company periodically reviews
the estimated useful lives of its identifiable intangible
assets, taking into consideration any events or circumstances
that might result in a reduction in fair value or a revision of
those estimated useful lives.
Amortization of customer and branding contracts/relationships,
exclusive license agreements, and non-compete agreements totaled
$4.5 million and $2.5 million for the three months
ended March 31, 2008 and 2007, respectively. Included in
the 2007 amount is approximately $0.1 million in additional
amortization expense related to the impairment of an intangible
asset associated with an acquired ATM portfolio within the
Company’s U.S. reporting segment. This impairment was the
result of the anticipated non-renewal of a contract included
within a previously acquired portfolio. Amortization of deferred
financing costs and bond discounts totaled approximately
$0.5 million for the three months ended March 31, 2008
and $0.4 million for the three months ended March 31,
2007.
F-11
Table of Contents
CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Estimated amortization expense for the Company’s intangible
assets with definite lives for the remaining nine months of
2008, each of the next five years, and thereafter is as follows:
|
Customer and Branding |
Deferred |
Exclusive License |
Non-compete |
|||||||||||||||||
| Contracts/Relationships | Financing Costs | Agreements | Agreements | Total | ||||||||||||||||
| (in thousands) | ||||||||||||||||||||
|
2008
|
$ | 12,907 | $ | 1,154 | $ | 558 | $ | 19 | $ | 14,638 | ||||||||||
|
2009
|
16,785 | 1,639 | 741 | 25 | 19,190 | |||||||||||||||
|
2010
|
15,257 | 1,764 | 644 | 2 | 17,667 | |||||||||||||||
|
2011
|
13,585 | 1,903 | 531 | — | 16,019 | |||||||||||||||
|
2012
|
12,744 | 1,767 | 463 | — | 14,974 | |||||||||||||||
|
2013
|
10,723 | 1,063 | 335 | — | 12,121 | |||||||||||||||
|
Thereafter
|
27,246 | — | 198 | — | 27,444 | |||||||||||||||
|
Total
|
$ | 109,247 | $ | 9,290 | $ | 3,470 | $ | 46 | $ | 122,053 | ||||||||||
(7) Accrued
Liabilities
Accrued liabilities consisted of the following as of
March 31, 2008 and December 31, 2007:
|
March 31, |
December 31, |
|||||||
| 2008 | 2007 | |||||||
| (in thousands) | ||||||||
|
Accrued merchant fees
|
$ | 11,917 | $ | 11,486 | ||||
|
Accrued merchant settlement
|
7,294 | 4,254 | ||||||
|
Accrued interest
|
3,827 | 11,257 | ||||||
|
Accrued armored fees
|
3,779 | 5,879 | ||||||
|
Accrued cash management fees
|
3,480 | 5,574 | ||||||
|
Accrued maintenance fees
|
2,794 | 6,970 | ||||||
|
Accrued purchases
|
2,016 | 6,098 | ||||||
|
Accrued ATM telecommunications costs
|
1,727 | 1,424 | ||||||
|
Accrued compensation
|
1,569 | 3,832 | ||||||
|
Accrued processing costs
|
1,119 | 1,477 | ||||||
|
Accrued property and sales taxes
|
1,038 | 446 | ||||||
|
Accrued interest rate swap payments
|
892 | 147 | ||||||
|
Other accrued expenses
|
8,529 | 11,680 | ||||||
|
Total
|
$ | 49,981 | $ | 70,524 | ||||
F-12
Table of Contents
CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(8) Long-term
Debt
The Company’s long-term debt consisted of the following as
of March 31, 2008 and December 31, 2007:
|
March 31, |
December 31, |
|||||||
| 2008 | 2007 | |||||||
| (in thousands) | ||||||||
|
Revolving credit facility
|
$ | 39,500 | $ | 4,000 | ||||
|
Senior subordinated notes due August 2013 (net of unamortized
discounts of $3.8 million as of March 31, 2008 and
$3.9 million as of December 31, 2007)
|
296,220 | 296,088 | ||||||
|
Other
|
8,450 | 8,527 | ||||||
|
Total
|
344,170 | 308,615 | ||||||
|
Less current portion
|
980 | 882 | ||||||
|
Total excluding current portion
|
$ | 343,190 | $ | 307,733 | ||||
Credit
Facility
The Company’s revolving credit facility provides for
$175.0 million in borrowings, subject to certain
restrictions. Borrowings under the facility currently bear
interest at the London Interbank Offered Rate
(“LIBOR”) plus a spread, which is currently 2.25%.
Additionally, the Company pays a commitment fee of 0.25% per
annum on the unused portion of the revolving credit facility.
Substantially all of the Company’s assets, including the
stock of its wholly-owned domestic subsidiaries and 66.0% of the
stock of its foreign subsidiaries, are pledged to secure
borrowings made under the revolving credit facility.
Furthermore, each of the Company’s domestic subsidiaries
has guaranteed the Company’s obligations under such
facility. The primary restrictive covenants within the facility
include (i) limitations on the amount of senior debt that
the Company can have outstanding at any given point in time,
(ii) the maintenance of a set ratio of earnings to fixed
charges, as computed on a rolling
12-month
basis, (iii) limitations on the amounts of restricted
payments that can be made in any given year, including
dividends, and (iv) limitations on the amount of capital
expenditures that the Company can incur on a rolling
12-month
basis. During March 2008, the Company amended its revolving
credit facility to increase the amount of capital expenditures
that it can incur on a rolling
12-month
basis to $90.0 million. There are currently no restrictions
on the ability of the Company’s wholly-owned subsidiaries
to declare and pay dividends directly to the Company. As of
March 31, 2008, the Company was in compliance with all
applicable covenants and ratios under the facility.
As of March 31, 2008, $39.5 million of borrowings were
outstanding under the revolving credit facility. Additionally,
the Company had posted $7.2 million in letters of credit
under the facility in favor of the lessors under the ATM
equipment leases that the Company assumed in connection with the
7-Eleven ATM Transaction. These letters of credit, which the
lessors may draw upon in the event the Company fails to make
payments under the leases, further reduce the Company’s
borrowing capacity under the facility. As of March 31,
2008, the Company’s available borrowing capacity under the
amended facility, as determined under the earnings before
interest expense, income taxes, depreciation and accretion
expense, and amortization expense (“EBITDA”) and
interest expense covenants contained in the agreement, totaled
approximately $128.3 million.
Senior
Subordinated Notes
Series A Notes. In October 2006, the
Company completed the registration of $200.0 million in
senior subordinated notes (the “Series A Notes”),
which were originally issued in August 2005 pursuant to
Rule 144A of the Securities Act of 1933, as amended. The
Series A Notes, which are subordinate to borrowings made
F-13
Table of Contents
CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
under the revolving credit facility, mature in August 2013,
carry a 9.25% coupon, and were issued with an effective yield of
9.375%. Interest under the notes is paid semiannually in arrears
on February 15th and August 15th of each
year. The notes, which are guaranteed by the Company’s
domestic subsidiaries, contain certain covenants that, among
other things, limit the Company’s ability to incur
additional indebtedness and make certain types of restricted
payments, including dividends. Under the terms of the indenture,
at any time prior to August 15, 2008, the Company may
redeem up to 35% of the aggregate principal amount of the
Series A Notes at a redemption price of 109.250% of the
principal amount thereof, plus any accrued and unpaid interest,
subject to certain conditions outlined in the indenture.
Additionally, at any time prior to August 15, 2009, the
Company may redeem all or part of the Series A Notes at a
redemption price equal to the sum of 100% of the principal
amount plus an “Applicable Premium”, as defined in the
indenture, plus any accrued and unpaid interest. On or after
August 15, 2009, the Company may redeem all or a part of
the Series A Notes at the redemption prices set forth by
the indenture plus any accrued and unpaid interest.
Series B Notes. On July 20, 2007,
the Company sold $100.0 million of 9.25% senior
subordinated notes due 2013 — Series B (the
“Series B Notes”) pursuant to Rule 144A of
the Securities Act of 1933. Net proceeds from the offering,
which totaled $95.3 million, were used to fund a portion of
the 7-Eleven ATM Transaction and to pay fees and expenses
related to the acquisition. The form and terms of the
Series B Notes are substantially the same as the form and
terms of the Series A Notes, except that (i) the
Series A Notes have been registered with the SEC while the
Series B Notes remain subject to transfer restrictions
until the Company completes an exchange offer, and (ii) the
Series B Notes were issued with Original Issue Discount and
with an effective yield of 9.54%. Pursuant to the terms of the
registration rights agreement entered into in conjunction with
the offering, the Company was required to file a registration
statement with the SEC within 240 days of the issuance of
the Series B Notes with respect to an offer to exchange
each of the Series B Notes for a new issue of our debt
securities registered under the Securities Act with terms
identical to those of the Series B Notes (except for the
provisions relating to the transfer restrictions and payment of
additional interest) and use reasonable best efforts to have the
exchange offer become effective as soon as reasonably
practicable after filing but in any event no later than
360 days after the initial issuance date of the
Series B Notes. The Company completed the first step of the
registration process in February 2008 with the filing of a
registration statement on
Form S-4
with the SEC. However, if the Company fails to satisfy these
obligations, it will be required, under certain circumstances,
to pay additional interest to the holders of the Series B
Notes.
As of March 31, 2008, the Company was in compliance with
all applicable covenants required under the Series A and
Series B Notes.
Other
Facilities
Bank Machine overdraft facility. In addition
to Cardtronics, Inc.’s revolving credit facility, Bank
Machine (Acquisitions) Ltd. (“Bank Machine”) has a
£2.0 million unsecured overdraft facility that expires
in July 2008. Such facility, which bears interest at 1.75% over
the bank’s base rate (currently 5.00%), is utilized for
general corporate purposes for the Company’s United Kingdom
operations. As of March 31, 2008, approximately
£1.0 million ($2.0 million) of this facility had
been utilized to help fund certain working capital commitments.
Amounts outstanding under the overdraft facility are reflected
in accounts payable in our consolidated balance sheet, as such
amounts are automatically repaid once cash deposits are made to
the underlying bank accounts.
Cardtronics Mexico equipment financing
agreements. During 2006 and 2007, Cardtronics
Mexico entered into six separate five-year equipment financing
agreements with a single lender. Such agreements, which are
denominated in pesos and bear interest at an average fixed rate
of 10.96%, were utilized for the purchase of additional ATMs to
support our Mexico operations. As of March 31, 2008,
approximately $90.4 million pesos ($8.5 million U.S.)
were outstanding under the agreements in place at the time, with
future borrowings to be individually negotiated between the
lender and Cardtronics. Pursuant to the terms of the loan
agreement, we have issued a guaranty for 51.0% of the
obligations under this agreement (consistent with the
F-14
Table of Contents
CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Company’s ownership percentage in Cardtronics Mexico.) As
of March 31, 2008, the total amount of the guaranty was
$46.1 million pesos ($4.3 million U.S.).
(9) Asset
Retirement Obligations
The Company accounts for asset retirement obligations in
accordance with SFAS No. 143, Asset Retirement
Obligations. Asset retirement obligations consist primarily
of deinstallation costs of the ATM and the costs to restore the
ATM site to its original condition. The Company is legally
required to perform this deinstallation and restoration work. In
accordance with SFAS No. 143, for each group of ATMs,
the Company has recognized the fair value of a liability for an
asset retirement obligation and capitalized that cost as part of
the cost basis of the related asset. The related assets are
being depreciated on a straight-line basis over the estimated
useful lives of the underlying ATMs, and the related liabilities
are being accreted to their full value over the same period of
time.
The following table is a summary of the changes in
Company’s asset retirement obligation liability for the
three months ended March 31, 2008 (in thousands):
|
Asset retirement obligation as of January 1, 2008
|
$ | 17,448 | ||
|
Additional obligations
|
1,778 | |||
|
Accretion expense
|
395 | |||
|
Payments
|
(946 | ) | ||
|
Change in estimates
|
(265 | ) | ||
|
Foreign currency translation adjustments
|
(36 | ) | ||
|
Asset retirement obligation as of March 31, 2008
|
$ | 18,374 | ||
The change in estimates during the three months ended
March 31, 2008 represents the write-off of residual
liability amounts associated with a portfolio of ATMs previously
installed at one of the Company’s merchant customers’
locations. As the entire portfolio of machines was deinstalled
in conjunction with the Company’s Triple-DES security
upgrade efforts in 2007 and 2008, the Company no longer has any
further deinstallation obligations associated with the
previously-installed ATMs. The amount shown as a change in
estimates represents the difference in the costs that the
Company originally estimated it would incur to deinstall the
ATMs and the actual costs incurred on the deinstallations.
(10) Other
Long-term Liabilities
Other long-term liabilities consisted of the following as of
March 31, 2008 and December 31, 2007:
|
March 31, |
December 31, |
|||||||
| 2008 | 2007 | |||||||
| (in thousands) | ||||||||
|
Interest rate swaps
|
$ | 15,522 | $ | 9,155 | ||||
|
Obligations associated with acquired unfavorable contracts
|
5,681 | 7,626 | ||||||
|
Deferred revenue
|
3,156 | 3,380 | ||||||
|
Other long-term liabilities
|
3,054 | 3,231 | ||||||
|
Total
|
$ | 27,413 | $ | 23,392 | ||||
F-15
Table of Contents
CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(11) Commitments
and Contingencies
Legal
and Other Regulatory Matters
In 2006, Duane Reade, Inc. (“Customer”), one of the
Company’s merchant customers, filed a complaint in the New
York State Supreme Court alleging that Cardtronics had breached
its ATM operating agreement with the Customer by failing to pay
the Customer the proper amount of fees under the agreement. The
Customer is claiming that it is owed no less than $600,000 in
lost revenues, exclusive of interest and costs, and projects
that additional damages will accrue to them at a rate of
approximately $100,000 per month, exclusive of interest and
costs. As the term of the Company’s operating agreement
with the Customer extends to December 2014, the Customer’s
claims could exceed $12.0 million. In response to a motion
for summary judgment filed by the Customer and a cross-motion
filed by the Company, the New York State Supreme Court ruled in
September 2007 that the Company’s interpretation of the ATM
operating agreement was the appropriate interpretation and
expressly rejected the Customer’s proposed interpretations.
The Customer has appealed this ruling. Notwithstanding that
appeal, the Company believes that the ultimate resolution of
this dispute will not have a material adverse impact on its
financial condition or results of operations.
The Company is also subject to various legal proceedings and
claims arising in the ordinary course of its business. The
Company has provided reserves where necessary for all claims and
the Company’s management does not expect the outcome in any
of these legal proceedings, individually or collectively, to
have a material adverse effect on the Company’s financial
condition or results of operations.
Capital
and Operating Leases
Capital Lease Obligations. As a result of the
7-Eleven ATM Transaction, the Company assumed responsibility for
certain capital lease contracts that will expire at various
times through June 2010. Upon the fulfillment of certain payment
obligations related to the capital leases, ownership of the ATMs
transfers to the Company. As of March 31, 2008,
approximately $1.7 million of capital lease obligations
were included within the Company’s consolidated balance
sheet.
Operating Lease Obligations. In addition to
the capital leases assumed in conjunction the 7-Eleven ATM
Transaction, the Company also assumed certain operating leases
in connection with the acquisition. In conjunction with its
purchase price allocation related to the 7-Eleven ATM
Transaction, the Company recorded approximately
$8.7 million of other liabilities (current and long-term)
to value certain unfavorable equipment operating leases assumed
as part of the acquisition. These liabilities are being
amortized over the remaining terms of the underlying leases, the
majority of which expire in late 2009, and serve to reduce ATM
operating lease expense amounts to the fair value of these
services as of the date of the acquisition. During the three
months ended March 31, 2008, the Company recognized
approximately $0.9 million in lease expense reductions
associated with the amortization of these liabilities, and the
remaining balance as of March 31, 2008 was
$6.1 million. Upon the expiration of the operating leases,
the Company will be required to renew such lease contracts,
enter into new lease contracts, or purchase new or used ATMs to
replace the leased equipment.
Related Letters of Credit. Additionally, in
conjunction with the 7-Eleven ATM Transaction, the Company
posted $7.5 million in letters of credit related to these
operating and capital leases upon which the lessors can draw in
the event the Company fails to make schedules payments under the
leases. These letters of credit, which are reduced periodically
as payments are made under the leases, will be released upon the
expiration of the leases. As of March 31, 2008, the total
outstanding balance under these letters of credit was
$7.2 million.
F-16
Table of Contents
CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Other
Commitments
Asset retirement obligations. The
Company’s asset retirement obligations consist primarily of
deinstallation costs of the ATM and the costs to restore the ATM
site to its original condition. The Company is legally required
to perform this deinstallation and restoration work. The Company
had $18.4 million accrued for such liabilities as of
March 31, 2008. For additional information on the
Company’s asset retirement obligations, see
Note 9.
Registration payment arrangements. In
conjunction with the issuance of its Series B Notes, the
Company entered into a registration rights agreement under which
it is required to take certain steps to exchange the
Series B Notes for notes registered with the SEC within
360 days following the original issuance date
(July 19, 2007). In the event it is unable to meet the
deadlines set forth in the agreement, the Company will be
subject to higher interest rates on the Series B Notes in
subsequent periods until the exchange offer is completed.
Financial Accounting Standards Board (“FASB”) Staff
Position (“FSP”) Emerging Issues Task Force
(“EITF”)
No. 00-19-2,
Accounting for Registration Payment Arrangements,
requires that contingent obligations under registration payment
arrangements be separately recognized and measured in accordance
with SFAS No. 5, Accounting for Contingencies.
The Company completed the first step of the registration process
in February 2008 with the filing of a registration statement on
Form S-4
with the SEC, and the Company currently believes it is not
probable that incremental interest payments will be made as a
result of the provisions of the registration rights agreement.
As a result, the Company has not recognized a liability as of
March 31, 2008 related to the registration rights
agreement. In the event it becomes probable that the Company
will be unable to affect the exchange offer in a timely manner,
the Company will reevaluate the need to record a liability at
that time.
(12) Derivative
Financial Instruments
As a result of its variable-rate debt and ATM cash management
activities, the Company is exposed to changes in interest rates
(LIBOR and the federal funds effective rate in the United
States, LIBOR in the United Kingdom, and the Mexican Interbank
Rate in Mexico). It is the Company’s policy to limit the
variability of a portion of its expected future interest
payments as a result of changes in the underlying rates by
utilizing certain types of derivative financial instruments.
To meet the above objective, the Company has entered into
several LIBOR-based and federal funds effective rate-based
interest rate swaps to fix the interest rate paid on
$550.0 million of the Company’s current and
anticipated outstanding ATM cash balances in the United States.
The swaps in place as of March 31, 2008 serve to fix the
interest rate paid on the following notional amounts for the
periods identified:
|
Notional Amount
|
Weighted Average Fixed Rate | Period | ||
| (in thousands) | ||||
|
$550,000
|
4.61% | April 1, 2008 — December 31, 2008 | ||
|
$550,000
|
4.30% | January 1, 2009 — December 31, 2009 | ||
|
$550,000
|
4.11% | January 1, 2010 — December 31, 2010 | ||
|
$400,000
|
3.72% | January 1, 2011 — December 31, 2011 | ||
|
$200,000
|
3.96% | January 1, 2012 — December 31, 2012 |
As of March 31, 2008 and December 31, 2007, the
Company had a liability of $27.1 million and
$13.6 million, respectively, recorded in its consolidated
balance sheets related to the above interest rate swaps, which
represented the fair value of such agreements based on
third-party quotes for similar instruments with the same terms
and conditions, as such instruments are required to be carried
at fair value. These swaps have been classified as cash flow
hedges pursuant to SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended.
Accordingly, changes in the fair values of such swaps have been
reported in
F-17
Table of Contents
CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
accumulated other comprehensive loss in the accompanying
consolidated balance sheets. As a result of the Company’s
overall net loss position for tax purposes, the Company has not
recorded deferred tax benefits on the loss amounts related to
these interest rate swaps as of March 31, 2008 or
December 31, 2007, as management does not currently believe
that the Company will be able to realize the benefits associated
with its net deferred tax asset positions.
Net amounts paid or received under such swaps are recorded as
adjustments to the Company’s “Cost of ATM operating
revenues” in the accompanying consolidated statements of
operations. During the three months ended March 31, 2008,
gains or losses incurred as a result of ineffectiveness
associated with the Company’s interest rate swaps were
immaterial.
As of March 31, 2008, the Company has not entered into any
derivative financial instruments to hedge its variable interest
rate exposure in the United Kingdom or Mexico.
(13) Income
Taxes
Income tax expense (benefit) based on the Company’s loss
before income taxes for the three month periods ended
March 31, 2008 and 2007 was as follows:
| 2008 | 2007 | |||||||
| (in thousands) | ||||||||
|
Income tax expense (benefit)
|
$ | 565 | $ | (973 | ) | |||
|
Effective tax rate
|
(14.0 | )% | 22.3 | % | ||||
The Company computes its quarterly income tax provision amounts
under the effective tax rate method based on applying an
anticipated annual effective tax rate in each major tax
jurisdiction to the pre-tax book income or loss amounts
generated in such jurisdictions. During the three months ended
March 31, 2008, the Company increased its valuation
allowance by approximately $1.2 million. Such increase was
due to the Company’s determination that it is more likely
than not that it will not be able to realize the benefit
associated with the net deferred tax asset balance related to
its domestic operations. The negative effective tax rate during
the three months ended March 31, 2008 was due to the
aforementioned domestic valuation allowance, the relative mix of
pre-tax loss amounts in the Company’s foreign and domestic
jurisdictions, and the fact that the Company is not currently
recognizing any tax benefits associated with its Mexico
operations. Furthermore, the Company was in a taxable income
position with respect to its
domestic state income taxes but in a taxable loss position with
respect to its domestic federal income taxes, which also
contributed to the overall negative effective tax rate.
| (14) | Segment Information |
As of March 31, 2008, the Company’s operations
consisted of its United States, United Kingdom, Mexico, and
Advanced Functionality segments. While each of these segments
provides similar ATM-related services, each segment is managed
separately, as they require different marketing and business
strategies. Furthermore, the Company previously determined that
the advanced functionality services provided through the
acquired Vcom terminals exhibited different economic
characteristics than the traditional ATM services provided by
its other three segments, in large part due to the anticipated
losses associated with providing such advanced-functionality
services and the fact that these operations will be managed
separately until they can achieve break-even status.
Management uses earnings before interest expense, income taxes,
depreciation and accretion expense, and amortization expense to
assess the operating results and effectiveness of its business
segments. Management believes EBITDA is useful because it allows
them to more effectively evaluate the Company’s and its
business segments’ operating performance and compare the
results of its operations from period to period without
F-18
Table of Contents
CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
regard to its financing methods or capital structure.
Additionally, the Company excludes depreciation, accretion, and
amortization expense as these amounts can vary substantially
from company to company within its industry depending upon
accounting methods and book values of assets, capital structures
and the method by which the assets were acquired. EBITDA, as
defined by the Company, may not be comparable to similarly
titled measures employed by other companies and is not a measure
of performance calculated in accordance with accounting
principles generally accepted in the United States
(“GAAP”). Therefore, EBITDA should not be considered
in isolation or as a substitute for operating income, net
income, cash flows from operating, investing, and financing
activities or other income or cash flow statement data prepared
in accordance with GAAP. Below is a reconciliation of EBITDA to
net loss for the three month periods ended March 31, 2008
and 2007:
| 2008 | 2007 | |||||||
| (in thousands) | ||||||||
|
EBITDA
|
$ | 17,698 | $ | 10,772 | ||||
|
Depreciation and accretion expense
|
9,082 | 6,398 | ||||||
|
Amortization expense
|
4,503 | 2,486 | ||||||
|
Interest expense, net, including amortization of deferred
financing costs and bond discounts
|
8,140 | 6,248 | ||||||
|
Income tax expense (benefit)
|
565 | (973 | ) | |||||
|
Net loss
|
$ | (4,592 | ) | $ | (3,387 | ) | ||
The following tables reflect certain financial information for
each of the Company’s reporting segments for the three
month periods ended March 31, 2008 and 2007 and as of
March 31, 2008 and December 31, 2007. All intercompany
transactions between the Company’s reporting segments have
been eliminated.
| For the Three Months Ended March 31, 2008 | ||||||||||||||||||||||||
|
United |
Advanced |
|||||||||||||||||||||||
| United States | Kingdom | Mexico | Functionality | Eliminations | Total | |||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||
|
Revenue from external customers
|
$ | 99,118 | $ | 17,640 | $ | 2,582 | $ | 1,235 | $ | — | $ | 120,575 | ||||||||||||
|
Intersegment revenues
|
195 | — | — | — | (195 | ) | — | |||||||||||||||||
|
Cost of revenues
|
74,417 | 14,392 | 2,187 | 2,464 | (195 | ) | 93,265 | |||||||||||||||||
|
Selling, general, and administrative expenses
|
7,236 | 928 | 298 | 89 | — | 8,551 | ||||||||||||||||||
|
EBITDA
|
$ | 16,945 | $ | 1,944 | $ | 127 | $ | (1,318 | ) | $ | — | $ | 17,698 | |||||||||||
|
Depreciation and accretion expense
|
$ | 6,113 | $ | 2,682 | $ | 309 | $ | — | $ | (22 | ) | $ | 9,082 | |||||||||||
|
Amortization expense
|
3,953 | 538 | 12 | — | — | 4,503 | ||||||||||||||||||
|
Interest expense, net
|
6,503 | 1,456 | 181 | — | — | 8,140 | ||||||||||||||||||
|
Capital expenditures, excluding
acquisitions(1)(2)
|
$ | 15,642 | $ | 10,187 | $ | 67 | $ | 201 | $ | — | $ | 26,097 | ||||||||||||
F-19
Table of Contents
CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| For the Three Months Ended March 31, 2007 | ||||||||||||||||||||||||
|
United |
Advanced |
|||||||||||||||||||||||
| United States | Kingdom | Mexico | Functionality | Eliminations | Total | |||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||
|
Revenue from external customers
|
$ | 60,955 | $ | 12,960 | $ | 603 | $ | — | $ | — | $ | 74,518 | ||||||||||||
|
Intersegment revenue
|
93 | — | — | — | (93 | ) | — | |||||||||||||||||
|
Cost of revenues
|
47,984 | 9,070 | 540 | — | (61 | ) | 57,533 | |||||||||||||||||
|
Selling, general, and administrative expenses
|
5,147 | 987 | 310 | — | — | 6,444 | ||||||||||||||||||
|
EBITDA
|
$ | 8,236 | $ | 2,827 | $ | (259 | ) | $ | — | $ | (32 | ) | $ | 10,772 | ||||||||||
|
Depreciation and accretion expense
|
$ | 5,042 | $ | 1,358 | $ | 25 | $ | — | $ | (27 | ) | $ | 6,398 | |||||||||||
|
Amortization expense
|
2,067 | 407 | 12 | — | — | 2,486 | ||||||||||||||||||
|
Interest expense, net
|
5,233 | 991 | 24 | — | — | 6,248 | ||||||||||||||||||
|
Capital expenditures, excluding
acquisitions(1)(2)
|
$ | 8,191 | $ | 5,674 | $ | 34 | $ | — | $ | — | $ | 13,899 | ||||||||||||
|
Additions to equipment to be leased to customers
|
— | — | 203 | — | — | 203 | ||||||||||||||||||
| (1) | Capital expenditure amounts include payments made for exclusive license agreements and site acquisition costs. | |
| (2) | Capital expenditure amounts for Mexico are reflected gross of any minority interest amounts. |
Identifiable
Assets:
| March 31, 2008 | December 31, 2007 | |||||||
| (in thousands) | ||||||||
|
United States
|
$ | 412,327 | $ | 409,120 | ||||
|
United Kingdom
|
167,250 | 163,464 | ||||||
|
Mexico
|
13,915 | 12,337 | ||||||
|
Advanced Functionality
|
8,028 | 6,364 | ||||||
|
Total
|
$ | 601,520 | $ | 591,285 | ||||
| (15) | New Accounting Pronouncements |
Fair Value Measurements. In September 2006,
the FASB issued SFAS No. 157, Fair Value
Measurements, which provides guidance on measuring the fair
value of assets and liabilities in the financial statements. In
summary, SFAS No. 157 does the following:
| 1. | Defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, and establishes a framework for measuring fair value; | |
| 2. | Establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date; |
F-20
Table of Contents
CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 3. | Eliminates large position discounts for financial instruments quoted in active markets and requires consideration of the Company’s creditworthiness when valuing liabilities; and | |
| 4. | Expands disclosures about instruments measured at fair value. |
In addition, SFAS No. 157 establishes a valuation
hierarchy for disclosure of the inputs to valuation used to
measure fair value. This hierarchy prioritizes the inputs into
three broad levels as follows. “Level 1” inputs
are quoted prices (unadjusted) in active markets for identical
assets or liabilities. “Level 2” inputs are
quoted prices for similar assets and liabilities in active
markets or inputs that are observable for the asset or
liability, either directly or indirectly through market
corroboration, for substantially the full term of the financial
instrument. “Level 3” inputs are unobservable
inputs based on assumptions used to measure assets and
liabilities at fair value. A financial asset or liability’s
classification within the hierarchy is determined based on the
lowest level input that is significant to the fair value
measurement.
Subsequent to the issuance of SFAS No. 157, the FASB
issued FSP
No. 157-1
and FSP
No. 157-2.
FSP
No. 157-1
amends SFAS No. 157 to exclude SFAS No. 13,
Accounting for Leases, and its related interpretive
accounting pronouncements that address leasing transactions,
while FSP
No. 157-2
delays the effective date of the application of
SFAS No. 157 to fiscal years beginning after
November 15, 2008 for all non-financial assets and
non-financial liabilities that are recognized or disclosed at
fair value in the financial statements on a nonrecurring basis.
The Company adopted SFAS No. 157 as of January 1,
2008, with the exception of the application of the statement to
nonrecurring non-financial assets and non-financial liabilities.
Nonrecurring non-financial assets and non-financial liabilities
for which the Company has not applied the provisions of
SFAS No. 157 include those measured at fair value for
impairment testing, including goodwill, other intangible assets,
and property and equipment. As a result of the adoption of
SFAS No. 157, the Company recorded a $1.6 million
reduction of the unrealized loss associated with its interest
rate swaps, which served to decrease the Company’s
liability associated with the interest rate swaps and reduce its
other comprehensive loss. Such adjustment reflects the
consideration of nonperformance risk by the Company for interest
rate swaps that were in a net liability position as of
March 31, 2008, and the nonperformance risk of the
Company’s counterparties for interest rate swaps that were
in a net asset position as of March 31, 2008, as measured
by the use of applicable credit default spreads.
The following table provides the assets and liabilities carried
at fair value measured on a recurring basis as of March 31,
2008:
| Fair Value Measurements | ||||||||||||||||
|
Total Carrying |
||||||||||||||||
|
Value as of |
||||||||||||||||
| March 31, 2008 | Level 1 | Level 2 | Level 3 | |||||||||||||
|
Interest rate swaps
|
$ | 27,109 | $ | — | $ | 27,109 | $ | — | ||||||||
The following is a description of the Company’s valuation
methodology for assets and liabilities measured at fair value:
Cash and cash equivalents, accounts and notes receivable, net
of the allowance for doubtful accounts, other current assets,
accounts payable, accrued expenses, and other current
liabilities. These financial instruments are not
carried at fair value, but are carried at amounts that
approximate fair value due to their short-term nature and
generally negligible credit risk.
Interest rate swaps. These financial
instruments are carried at fair value, calculated as the present
value of amounts estimated to be received or paid to a
marketplace participant in a selling transaction. These
derivatives are valued using pricing models based on significant
other observable inputs (Level 2 inputs), while taking into
account the creditworthiness of the party that is in the
liability position with respect to each trade.
F-21
Table of Contents
CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The methods described above may produce a fair value calculation
that may not be indicative of net realizable value or reflective
of future fair values. Furthermore, while the Company believes
its valuation methods are appropriate and consistent with other
market participants, the use of different methodologies or
assumptions to determine the fair value of certain financial
instruments could result in a different estimate of fair value
at the reporting date.
Fair Value Option. In February 2007, the FASB
issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities, which provides
companies the option to measure certain financial instruments
and other items at fair value. The Company has elected not to
adopt the fair value option provisions of this statement.
Issued
But Not Yet Adopted
As of March 31, 2008, the following accounting standards
and interpretations had not yet been adopted by the Company:
Business Combinations. In December 2007, the
FASB issued SFAS No. 141R, Business
Combinations, which provides revised guidance on the
accounting for acquisitions of businesses. This standard changes
the current guidance to require that all acquired assets,
liabilities, minority interest, and certain contingencies,
including contingent consideration, be measured at fair value,
and certain other acquisition-related costs, including costs of
a plan to exit an activity or terminate and relocate employees,
be expensed rather than capitalized. SFAS No. 141R
will apply to acquisitions that are effective after
December 31, 2008, and application of the standard to
acquisitions prior to that date is not permitted. The Company
will adopt the provisions of SFAS No. 141R on
January 1, 2009 and apply the requirements of the statement
to business combinations that occur subsequent to its adoption.
Noncontrolling Interests. In December 2007,
the FASB issued SFAS No. 160, Noncontrolling
Interests in Consolidated Financial Statements — an
amendment of ARB No. 51, which provides guidance on the
presentation of minority interest in the financial statements
and the accounting for and reporting of transactions between the
reporting entity and the holders of such noncontrolling
interest. This standard requires that minority interest be
presented as a separate component of equity rather than as a
“mezzanine” item between liabilities and equity and
requires that minority interest be presented as a separate
caption in the income statement. In addition, this standard
requires all transactions with minority interest holders,
including the issuance and repurchase of minority interests, be
accounted for as equity transactions unless a change in control
of the subsidiary occurs. The provisions of
SFAS No. 160 are to be applied prospectively with the
exception of reclassifying noncontrolling interests to equity
and recasting consolidated net income (loss) to include net
income (loss) attributable to both the controlling and
noncontrolling interests, which are required to be adopted
retrospectively. The Company will adopt the provisions of
SFAS No. 160 on January 1, 2009 and is currently
assessing the impact its adoption will have on the
Company’s financial position and results of operations.
Disclosures about Derivatives and Hedging
Activities. In March 2008, the FASB issued
SFAS No. 161, Disclosures about Derivatives and
Hedging Activities — an amendment of
SFAS No. 133, which changes the disclosure
requirements for derivative instruments and hedging activities.
This standard requires a company to provide enhanced disclosures
about (a) how and why the company uses derivative
instruments, (b) how derivative instruments and related
hedged items are accounted for under Statement 133, and
(c) how derivative instruments and related hedged items
affect the company’s financial position, financial
performance, and cash flows. The Company will adopt the
provisions of SFAS No. 161 on January 1, 2009 and
apply the disclosure requirements to disclosures made subsequent
to its adoption.
Useful Life of Intangible Assets. In April
2008, the FASB issued FSP
FAS 142-3,
Determination of the Useful Life of Intangible Assets,
which amends the factors that should be considered in
developing renewal or
F-22
Table of Contents
CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
extension assumptions used to determine the useful life of a
recognized intangible asset under SFAS No. 142,
Goodwill and Other Intangible Assets
(“SFAS No. 142”). The intent of FSP
FAS 142-3
is to improve the consistency between the useful life of a
recognized intangible asset under SFAS No. 142 and the
period of expected cash flows used to measure the fair value of
the asset under SFAS 141R (discussed above) and other
applicable accounting literature. The Company will adopt the
provision of FSP
FAS 142-3
on January 1, 2009 and is currently assessing its impact
the adoption will have on the Company’s financial position
and results of operations.
| (16) | Supplemental Guarantor Financial Information |
The Company’s Series A and Series B Notes are
guaranteed on a full and unconditional basis by the
Company’s domestic subsidiaries. The following information
sets forth the condensed consolidating statements of operations
and cash flows for the three month periods ended March 31,
2008 and 2007 and the condensed consolidating balance sheets as
of March 31, 2008 and December 31, 2007 of
(i) Cardtronics, Inc., the parent company and issuer of the
senior subordinated notes (“Parent”); (ii) the
Company’s domestic subsidiaries on a combined basis
(collectively, the “Guarantors”); and (iii) the
Company’s international subsidiaries on a combined basis
(collectively, the “Non-Guarantors”):
Condensed
Consolidating Statements of Operations
| Three Months Ended March 31, 2008 | ||||||||||||||||||||
|
Non- |
||||||||||||||||||||
| Parent | Guarantors | Guarantors | Eliminations | Total | ||||||||||||||||
| (in thousands) | ||||||||||||||||||||
|
Revenues
|
$ | — | $ | 100,353 | $ | 20,222 | $ | — | $ | 120,575 | ||||||||||
|
Operating costs and expenses
|
17 | 94,060 | 21,346 | (22 | ) | 115,401 | ||||||||||||||
|
Operating income (loss)
|
(17 | ) | 6,293 | (1,124 | ) | 22 | 5,174 | |||||||||||||
|
Interest expense, net, including amortization of deferred
financing costs and bond discounts
|
49 | 6,454 | 1,637 | — | 8,140 | |||||||||||||||
|
Equity in (earnings) losses of subsidiaries
|
3,422 | — | — | (3,422 | ) | — | ||||||||||||||
|
Other (income) expense, net
|
(56 | ) | 771 | 346 | — | 1,061 | ||||||||||||||
|
(Loss) income before income taxes
|
(3,432 | ) | (932 | ) | (3,107 | ) | 3,444 | (4,027 | ) | |||||||||||
|
Income tax expense (benefit)
|
1,182 | 136 | (753 | ) | — | 565 | ||||||||||||||
|
Net (loss) income available to common stockholders
|
$ | (4,614 | ) | $ | (1,068 | ) | $ | (2,354 | ) | $ | 3,444 | $ | (4,592 | ) | ||||||
F-23
Table of Contents
CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| Three Months Ended March 31, 2007 | ||||||||||||||||||||
|
Non- |
||||||||||||||||||||
| Parent | Guarantors | Guarantors | Eliminations | Total | ||||||||||||||||
| (in thousands) | ||||||||||||||||||||
|
Revenues
|
$ | — | $ | 61,048 | $ | 13,563 | $ | (93 | ) | $ | 74,518 | |||||||||
|
Operating costs and expenses
|
307 | 59,933 | 12,709 | (88 | ) | 72,861 | ||||||||||||||
|
Operating income (loss)
|
(307 | ) | 1,115 | 854 | (5 | ) | 1,657 | |||||||||||||
|
Interest expense, net, including amortization of deferred
financing costs and bond discounts
|
2,201 | 3,032 | 1,015 | — | 6,248 | |||||||||||||||
|
Equity in (earnings) losses of subsidiaries
|
2,034 | — | — | (2,034 | ) | — | ||||||||||||||
|
Other (income) expense, net
|
(112 | ) | (207 | ) | 88 | — | (231 | ) | ||||||||||||
|
(Loss) income before income taxes
|
(4,430 | ) | (1,710 | ) | (249 | ) | 2,029 | (4,360 | ) | |||||||||||
|
Income tax expense (benefit)
|
(1,048 | ) | 53 | 22 | — | (973 | ) | |||||||||||||
|
Net (loss) income
|
(3,382 | ) | (1,763 | ) | (271 | ) | 2,029 | (3,387 | ) | |||||||||||
|
Preferred stock accretion expense
|
67 | — | — | — | 67 | |||||||||||||||
|
Net (loss) income available to common stockholders
|
$ | (3,449 | ) | $ | (1,763 | ) | $ | (271 | ) | $ | 2,029 | $ | (3,454 | ) | ||||||
F-24
Table of Contents
CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Condensed
Consolidating Balance Sheets
| As of March 31, 2008 | ||||||||||||||||||||
|
Non- |
||||||||||||||||||||
| Parent | Guarantors | Guarantors | Eliminations | Total | ||||||||||||||||
| (in thousands) | ||||||||||||||||||||
|
Assets:
|
||||||||||||||||||||
|
Cash and cash equivalents
|
$ | 166 | $ | 6,877 | $ | 1,865 | $ | — | $ | 8,908 | ||||||||||
|
Receivables, net
|
(204 | ) | 23,018 | 3,691 | (181 | ) | 26,324 | |||||||||||||
|
Other current assets
|
1,442 | 15,161 | 11,258 | (1,037 | ) | 26,824 | ||||||||||||||
|
Total current assets
|
1,404 | 45,056 | 16,814 | (1,218 | ) | 62,056 | ||||||||||||||
|
Property and equipment, net
|
— | 104,947 | 69,468 | (190 | ) | 174,225 | ||||||||||||||
|
Intangible assets, net
|
8,498 | 102,858 | 14,871 | — | 126,227 | |||||||||||||||
|
Goodwill
|
— | 150,451 | 83,904 | — | 234,355 | |||||||||||||||
|
Investments in and advances to subsidiaries
|
32,877 | — | — | (32,877 | ) | — | ||||||||||||||
|
Intercompany receivable
|
(2,098 | ) | 7,540 | (5,442 | ) | — | — | |||||||||||||
|
Prepaid expenses and other assets
|
395,531 | 3,107 | 1,550 | (395,531 | ) | 4,657 | ||||||||||||||
|
Total assets
|
$ | 436,212 | $ | 413,959 | $ | 181,165 | $ | (429,816 | ) | $ | 601,520 | |||||||||
|
Liabilities and Stockholders’ Equity:
|
||||||||||||||||||||
|
Current portion of long-term debt
|
$ | — | $ | — | $ | 980 | $ | — | $ | 980 | ||||||||||
|
Current portion of capital lease obligations
|
— | 922 | — | — | 922 | |||||||||||||||
|
Current portion of other long-term liabilities
|
— | 23,004 | 169 | — | 23,173 | |||||||||||||||
|
Accounts payable and accrued liabilities
|
4,149 | 59,581 | 24,507 | (1,212 | ) | 87,025 | ||||||||||||||
|
Total current liabilities
|
4,149 | 83,507 | 25,656 | (1,212 | ) | 112,100 | ||||||||||||||
|
Long-term debt, net of current portion
|
335,720 | 282,708 | 120,293 | (395,531 | ) | 343,190 | ||||||||||||||
|
Capital lease obligations, net of current portion
|
— | 785 | — | — | 785 | |||||||||||||||
|
Deferred tax liability
|
8,569 | 981 | 2,334 | — | 11,884 | |||||||||||||||
|
Asset retirement obligations
|
— | 12,750 | 5,624 | — | 18,374 | |||||||||||||||
|
Other non-current liabilities
|
— | 26,920 | 493 | — | 27,413 | |||||||||||||||
|
Total liabilities
|
348,438 | 407,651 | 154,400 | (396,743 | ) | 513,746 | ||||||||||||||
|
Stockholders’ equity
|
87,774 | 6,308 | 26,765 | (33,073 | ) | 87,774 | ||||||||||||||
|
Total liabilities and stockholders’ equity
|
$ | 436,212 | $ | 413,959 | $ | 181,165 | $ | (429,816 | ) | $ | 601,520 | |||||||||
F-25
Table of Contents
CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| As of December 31, 2007 | ||||||||||||||||||||
|
Non- |
||||||||||||||||||||
| Parent | Guarantors | Guarantors | Eliminations | Total | ||||||||||||||||
| (in thousands) | ||||||||||||||||||||
|
Assets:
|
||||||||||||||||||||
|
Cash and cash equivalents
|
$ | 76 | $ | 11,576 | $ | 1,787 | $ | — | $ | 13,439 | ||||||||||
|
Receivables, net
|
(292 | ) | 20,894 | 2,713 | (67 | ) | 23,248 | |||||||||||||
|
Other current assets
|
1,031 | 8,781 | 10,876 | (590 | ) | 20,098 | ||||||||||||||
|
Total current assets
|
815 | 41,251 | 15,376 | (657 | ) | 56,785 | ||||||||||||||
|
Property and equipment, net
|
— | 99,764 | 64,360 | (212 | ) | 163,912 | ||||||||||||||
|
Intangible assets, net
|
8,768 | 106,808 | 15,325 | — | 130,901 | |||||||||||||||
|
Goodwill
|
— | 150,445 | 84,740 | — | 235,185 | |||||||||||||||
|
Investments in and advances to subsidiaries
|
50,249 | — | — | (50,249 | ) | — | ||||||||||||||
|
Intercompany receivable
|
(863 | ) | 6,395 | (5,532 | ) | — | — | |||||||||||||
|
Prepaid expenses and other assets
|
368,424 | 2,970 | 1,532 | (368,424 | ) | 4,502 | ||||||||||||||
|
Total assets
|
$ | 427,393 | $ | 407,633 | $ | 175,801 | $ | (419,542 | ) | $ | 591,285 | |||||||||
|
Liabilities and Stockholders’ Equity:
|
||||||||||||||||||||
|
Current portion of long-term debt
|
$ | — | $ | — | $ | 882 | $ | — | $ | 882 | ||||||||||
|
Current portion of capital lease obligations
|
— | 1,147 | — | — | 1,147 | |||||||||||||||
|
Current portion of other long-term liabilities
|
— | 16,032 | 169 | — | 16,201 | |||||||||||||||
|
Accounts payable and accrued liabilities
|
12,808 | 66,726 | 26,027 | (652 | ) | 104,909 | ||||||||||||||
|
Total current liabilities
|
12,808 | 83,905 | 27,078 | (652 | ) | 123,139 | ||||||||||||||
|
Long-term debt, net of current portion
|
300,088 | 265,725 | 110,343 | (368,423 | ) | 307,733 | ||||||||||||||
|
Capital lease obligations, net of current portion
|
— | 982 | — | — | 982 | |||||||||||||||
|
Deferred tax liability
|
7,386 | 980 | 3,114 | — | 11,480 | |||||||||||||||
|
Asset retirement obligations
|
— | 12,332 | 5,116 | — | 17,448 | |||||||||||||||
|
Other non-current liabilities
|
— | 22,868 | 524 | — | 23,392 | |||||||||||||||
|
Total liabilities
|
320,282 | 386,792 | 146,175 | (369,075 | ) | 484,174 | ||||||||||||||
|
Stockholders’ equity
|
107,111 | 20,841 | 29,626 | (50,467 | ) | 107,111 | ||||||||||||||
|
Total liabilities and stockholders’ equity
|
$ | 427,393 | $ | 407,633 | $ | 175,801 | $ | (419,542 | ) | $ | 591,285 | |||||||||
F-26
Table of Contents
CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Condensed
Consolidating Statements of Cash Flows
| Three Months Ended March 31, 2008 | ||||||||||||||||||||
|
Non- |
||||||||||||||||||||
| Parent | Guarantors | Guarantors | Eliminations | Total | ||||||||||||||||
| (in thousands) | ||||||||||||||||||||
|
Net cash provided by (used in) operating activities
|
$ | (7,307 | ) | $ | (5,417 | ) | $ | 2,399 | $ | — | $ | (10,325 | ) | |||||||
|
Additions to property and equipment
|
— | (15,792 | ) | (10,007 | ) | — | (25,799 | ) | ||||||||||||
|
Payments for exclusive license agreements and site acquisition
costs
|
— | (51 | ) | (247 | ) | — | (298 | ) | ||||||||||||
|
Principal payments received under direct financing leases
|
— | — | 13 | — | 13 | |||||||||||||||
|
Net cash used in investing activities
|
— | (15,843 | ) | (10,241 | ) | — | (26,084 | ) | ||||||||||||
|
Proceeds from issuance of long-term debt
|
50,000 | 22,640 | 9,836 | (32,640 | ) | 49,836 | ||||||||||||||
|
Repayments of long-term debt
|
(14,500 | ) | (6,079 | ) | (73 | ) | 5,657 | (14,995 | ) | |||||||||||
|
Issuance of long-term notes receivable
|
(32,640 | ) | — | — | 32,640 | — | ||||||||||||||
|
Payments received on long-term notes receivable
|
5,657 | — | — | (5,657 | ) | — | ||||||||||||||
|
Repayments of borrowings under bank overdraft facility, net
|
— | — | (1,866 | ) | — | (1,866 | ) | |||||||||||||
|
Proceeds from exercises of stock options
|
123 | — | — | — | 123 | |||||||||||||||
|
Other financing activities
|
(1,243 | ) | — | — | — | (1,243 | ) | |||||||||||||
|
Net cash provided by financing activities
|
7,397 | 16,561 | 7,897 | — | 31,855 | |||||||||||||||
|
Effect of exchange rate changes on cash
|
— | — | 23 | — | 23 | |||||||||||||||
|
Net increase (decrease) in cash and cash equivalents
|
90 | (4,699 | ) | 78 | — | (4,531 | ) | |||||||||||||
|
Cash and cash equivalents at beginning of period
|
76 | 11,576 | 1,787 | — | 13,439 | |||||||||||||||
|
Cash and cash equivalents at end of period
|
$ | 166 | $ | 6,877 | $ | 1,865 | $ | — | $ | 8,908 | ||||||||||
F-27
Table of Contents
CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| Three Months Ended March 31, 2007 | ||||||||||||||||||||
|
Non- |
||||||||||||||||||||
| Parent | Guarantors | Guarantors | Eliminations | Total | ||||||||||||||||
| (in thousands) | ||||||||||||||||||||
|
Net cash provided by (used in) operating activities
|
$ | (7,588 | ) | $ | 6,786 | $ | 3,444 | $ | — | $ | 2,642 | |||||||||
|
Additions to property and equipment, net of proceeds from sale
of property and equipment
|
— | (7,988 | ) | (5,341 | ) | — | (13,329 | ) | ||||||||||||
|
Payments for exclusive license agreements and site acquisition
costs
|
(200 | ) | (367 | ) | — | (567 | ) | |||||||||||||
|
Additions to equipment to be leased to customers, net of
principal payments received under direct financing leases
|
— | — | (199 | ) | — | (199 | ) | |||||||||||||
|
Proceeds from sale of Winn-Dixie equity securities
|
— | 3,950 | — | — | 3,950 | |||||||||||||||
|
Acquisitions, net of cash acquired
|
— | 876 | — | — | 876 | |||||||||||||||
|
Net cash used in investing activities
|
— | (3,362 | ) | (5,907 | ) | — | (9,269 | ) | ||||||||||||
|
Proceeds from issuance of long-term debt
|
20,500 | 5,000 | 5,397 | (10,000 | ) | 20,897 | ||||||||||||||
|
Repayments of long-term debt
|
(12,000 | ) | (9,000 | ) | (17 | ) | 9,000 | (12,017 | ) | |||||||||||
|
Issuance of long-term notes receivable
|
(10,000 | ) | — | — | 10,000 | — | ||||||||||||||
|
Payments received on long-term notes receivable
|
9,000 | — | — | (9,000 | ) | — | ||||||||||||||
|
Repayments of borrowings under bank overdraft facility, net
|
— | — | (3,222 | ) | — | (3,222 | ) | |||||||||||||
|
Proceeds from exercises of stock options
|
46 | — | — | — | 46 | |||||||||||||||
|
Net cash provided by (used in) financing activities
|
7,546 | (4,000 | ) | 2,158 | — | 5,704 | ||||||||||||||
|
Effect of exchange rate changes on cash
|
— | — | (13 | ) | — | (13 | ) | |||||||||||||
|
Net decrease in cash and cash equivalents
|
(42 | ) | (576 | ) | (318 | ) | — | (936 | ) | |||||||||||
|
Cash and cash equivalents at beginning of period
|
97 | 1,818 | 803 | — | 2,718 | |||||||||||||||
|
Cash and cash equivalents at end of period
|
$ | 55 | $ | 1,242 | $ | 485 | $ | — | $ | 1,782 | ||||||||||
F-28
Table of Contents
CARDTRONICS,
INC.
Consolidated
Financial Statements
Years Ended
December 31, 2007, 2006 and 2005
F-29
Table of Contents
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Cardtronics, Inc.:
Cardtronics, Inc.:
We have audited the accompanying consolidated balance sheets of
Cardtronics, Inc. and subsidiaries as of December 31, 2007
and 2006, and the related consolidated statements of operations,
stockholders’ equity (deficit), comprehensive income
(loss), and cash flows for the years in the three-year period
ended December 31, 2007. These consolidated financial
statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
consolidated 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, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Cardtronics, Inc. and subsidiaries as of
December 31, 2007 and 2006, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2007, in conformity
with U.S. generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial
statements, effective January 1, 2007, the Company adopted
the provisions of Financial Accounting Standards Board (FASB)
Interpretation No. 48, “Accounting for Uncertainty
in Income Taxes, an interpretation of FASB Statement
No. 109”, and effective January 1, 2006, the
Company adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 123R, “Share-Based
Payment”.
/s/ KPMG LLP
Houston, Texas
March 28, 2008
F-30
Table of Contents
CARDTRONICS,
INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(in thousands, except share and per share amounts)
| December 31, | ||||||||
| 2007 | 2006 | |||||||
|
Assets
|
||||||||
|
Current assets:
|
||||||||
|
Cash and cash equivalents
|
$ | 13,439 | $ | 2,718 | ||||
|
Accounts and notes receivable, net of allowance of $560 and $427
as of December 31, 2007 and 2006, respectively
|
23,248 | 14,891 | ||||||
|
Inventory
|
2,355 | 4,444 | ||||||
|
Restricted cash, short-term
|
5,900 | 883 | ||||||
|
Deferred tax asset, net
|
216 | 273 | ||||||
|
Prepaid expenses, deferred costs, and other current assets
|
11,627 | 15,178 | ||||||
|
Total current assets
|
56,785 | 38,387 | ||||||
|
Restricted cash
|
317 | 34 | ||||||
|
Property and equipment, net
|
163,912 | 86,668 | ||||||
|
Intangible assets, net
|
130,901 | 67,763 | ||||||
|
Goodwill
|
235,185 | 169,563 | ||||||
|
Prepaid expenses and other assets
|
4,185 | 5,341 | ||||||
|
Total assets
|
$ | 591,285 | $ | 367,756 | ||||
| Liabilities and Stockholders’ Equity (Deficit) | ||||||||
|
Current liabilities:
|
||||||||
|
Current portion of long-term debt and notes payable
|
$ | 882 | $ | 194 | ||||
|
Current portion of capital lease obligations
|
1,147 | — | ||||||
|
Current portion of other long-term liabilities
|
16,201 | 2,501 | ||||||
|
Accounts payable
|
34,385 | 16,915 | ||||||
|
Accrued liabilities
|
70,524 | 34,341 | ||||||
|
Total current liabilities
|
123,139 | 53,951 | ||||||
|
Long-term liabilities:
|
||||||||
|
Long-term debt, net of related discount
|
307,733 | 252,701 | ||||||
|
Capital lease obligations
|
982 | — | ||||||
|
Deferred tax liability, net
|
11,480 | 7,625 | ||||||
|
Asset retirement obligations
|
17,448 | 9,989 | ||||||
|
Other long-term liabilities and minority interest in subsidiary
|
23,392 | 4,064 | ||||||
|
Total liabilities
|
484,174 | 328,330 | ||||||
|
Series B redeemable preferred stock, $0.0001 par
value; 10,000,000 shares authorized; 929,789 shares
issued and outstanding as of December 31, 2006; liquidation
value of $78,000 as of December 31, 2006
|
— | 76,594 | ||||||
|
Stockholders’ equity (deficit):
|
||||||||
|
Common stock, $0.0001 par value; 125,000,000 shares
authorized; 43,571,956 and 19,032,715 shares issued as of
December 31, 2007 and 2006; 38,566,207 and
13,995,673 shares outstanding at December 31, 2007 and
2006, respectively
|
4 | — | ||||||
|
Subscriptions receivable (at face value)
|
(229 | ) | (324 | ) | ||||
|
Additional paid-in capital
|
190,508 | 2,857 | ||||||
|
Accumulated other comprehensive income (loss), net
|
(4,518 | ) | 11,658 | |||||
|
Accumulated deficit
|
(30,433 | ) | (3,092 | ) | ||||
|
Treasury stock; 5,005,749 and 5,037,042 shares at cost at
December 31, 2007 and 2006, respectively
|
(48,221 | ) | (48,267 | ) | ||||
|
Total stockholders’ equity (deficit)
|
107,111 | (37,168 | ) | |||||
|
Total liabilities and stockholders’ equity (deficit)
|
$ | 591,285 | $ | 367,756 | ||||
See accompanying notes to consolidated financial statements.
F-31
Table of Contents
CARDTRONICS,
INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(in thousands)
| Years Ended December 31, | ||||||||||||
| 2007 | 2006 | 2005 | ||||||||||
|
Revenues:
|
||||||||||||
|
ATM operating revenues
|
$ | 364,071 | $ | 280,985 | $ | 258,979 | ||||||
|
Vcom operating revenues
|
1,251 | — | — | |||||||||
|
ATM product sales and other revenues
|
12,976 | 12,620 | 9,986 | |||||||||
|
Total revenues
|
378,298 | 293,605 | 268,965 | |||||||||
|
Cost of revenues:
|
||||||||||||
|
Cost of ATM operating revenues (includes stock-based
compensation of $87, $51, and $172 in 2007, 2006, and 2005,
respectively. Excludes depreciation, accretion, and amortization
shown separately below. See Note 1)
|
275,286 | 209,850 | 199,767 | |||||||||
|
Cost of Vcom operating revenues
|
6,065 | — | — | |||||||||
|
Cost of ATM product sales and other revenues
|
11,942 | 11,443 | 9,681 | |||||||||
|
Total cost of revenues
|
293,293 | 221,293 | 209,448 | |||||||||
|
Gross profit
|
85,005 | 72,312 | 59,517 | |||||||||
|
Operating expenses:
|
||||||||||||
|
Selling, general, and administrative expenses (includes
stock-based compensation of $963, $828, and $2,201 in 2007,
2006, and 2005, respectively)
|
29,357 | 21,667 | 17,865 | |||||||||
|
Depreciation and accretion expense
|
26,859 | 18,595 | 12,951 | |||||||||
|
Amortization expense
|
18,870 | 11,983 | 8,980 | |||||||||
|
Total operating expenses
|
75,086 | 52,245 | 39,796 | |||||||||
|
Income from operations
|
9,919 | 20,067 | 19,721 | |||||||||
|
Other (income) expense:
|
||||||||||||
|
Interest expense, net
|
29,523 | 23,143 | 15,485 | |||||||||
|
Amortization and write-off of financing costs and bond discounts
|
1,641 | 1,929 | 6,941 | |||||||||
|
Minority interest in subsidiary
|
(376 | ) | (225 | ) | 15 | |||||||
|
Other
|
1,585 | (4,761 | ) | 968 | ||||||||
|
Total other expense
|
32,373 | 20,086 | 23,409 | |||||||||
|
Loss before income taxes
|
(22,454 | ) | (19 | ) | (3,688 | ) | ||||||
|
Income tax expense (benefit)
|
4,636 | 512 | (1,270 | ) | ||||||||
|
Net loss
|
(27,090 | ) | (531 | ) | (2,418 | ) | ||||||
|
Preferred stock conversion and accretion expense
|
36,272 | 265 | 1,395 | |||||||||
|
Net loss available to common stockholders
|
$ | (63,362 | ) | $ | (796 | ) | $ | (3,813 | ) | |||
|
Net loss per common share:
|
||||||||||||
|
Basic and diluted
|
$ | (4.11 | ) | $ | (0.06 | ) | $ | (0.27 | ) | |||
|
Weighted average shares outstanding:
|
||||||||||||
|
Basic and diluted
|
15,423,744 | 13,904,505 | 14,040,353 | |||||||||
See accompanying notes to consolidated financial statements.
F-32
Table of Contents
CARDTRONICS,
INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(DEFICIT)
(in thousands)
(in thousands)
| Years Ended December 31, | ||||||||||||
| 2007 | 2006 | 2005 | ||||||||||
|
Common Stock, par value $0.0001 per share:
|
||||||||||||
|
Balance at beginning of year
|
$ | — | $ | — | $ | — | ||||||
|
Capital stock issued in initial public offering
|
1 | — | — | |||||||||
|
Capital stock issued in Series B preferred stock conversion
|
2 | — | — | |||||||||
|
Stock split in conjunction with initial public offering
|
1 | — | — | |||||||||
|
Balance at end of year
|
$ | 4 | $ | — | $ | — | ||||||
|
Subscriptions Receivable:
|
||||||||||||
|
Balance at beginning of year
|
$ | (324 | ) | $ | (1,476 | ) | $ | (1,862 | ) | |||
|
Settlement of subscriptions receivable through repurchases of
capital stock
|
— | 1,152 | — | |||||||||
|
Repayment of subscriptions
|
95 | — | 386 | |||||||||
|
Balance at end of year
|
$ | (229 | ) | $ | (324 | ) | $ | (1,476 | ) | |||
|
Additional Paid in Capital:
|
||||||||||||
|
Balance at beginning of year
|
$ | 2,857 | $ | 2,033 | $ | — | ||||||
|
Capital stock issued in initial public offering, net of offering
costs
|
109,757 | — | — | |||||||||
|
Capital stock issued in Series B preferred stock conversion
|
76,844 | — | — | |||||||||
|
Other issuance of capital stock
|
— | (55 | ) | 1,590 | ||||||||
|
Series B preferred stock conversion (see
Note 14)
|
36,021 | — | — | |||||||||
|
Series B preferred stock conversion charge (see
Note 14)
|
(36,021 | ) | — | — | ||||||||
|
Dividends on Series A preferred stock
|
— | — | (98 | ) | ||||||||
|
Stock-based compensation charges
|
1,050 | 879 | 541 | |||||||||
|
Balance at end of year
|
$ | 190,508 | $ | 2,857 | $ | 2,033 | ||||||
|
Accumulated Other Comprehensive Income (Loss):
|
||||||||||||
|
Balance at beginning of year
|
$ | 11,658 | $ | (346 | ) | $ | 886 | |||||
|
Other comprehensive income (loss)
|
(16,176 | ) | 12,004 | (1,232 | ) | |||||||
|
Balance at end of year
|
$ | (4,518 | ) | $ | 11,658 | $ | (346 | ) | ||||
|
Retained Earnings (Accumulated Deficit):
|
||||||||||||
|
Balance at beginning of year
|
$ | (3,092 | ) | $ | (2,252 | ) | $ | 1,495 | ||||
|
Dividends on preferred stock
|
— | — | (1,063 | ) | ||||||||
|
Preferred stock issuance cost accretion
|
(251 | ) | (265 | ) | (234 | ) | ||||||
|
Distributions
|
— | (44 | ) | (32 | ) | |||||||
|
Net loss
|
(27,090 | ) | (531 | ) | (2,418 | ) | ||||||
|
Balance at end of year
|
$ | (30,433 | ) | $ | (3,092 | ) | $ | (2,252 | ) | |||
|
Treasury Stock:
|
||||||||||||
|
Balance at beginning of year
|
$ | (48,267 | ) | $ | (47,043 | ) | $ | (859 | ) | |||
|
Issuance of capital stock
|
46 | 55 | 269 | |||||||||
|
Purchase of treasury stock
|
— | (1,279 | ) | (46,453 | ) | |||||||
|
Balance at end of year
|
$ | (48,221 | ) | $ | (48,267 | ) | $ | (47,043 | ) | |||
|
Total stockholders’ equity (deficit)
|
$ | 107,111 | $ | (37,168 | ) | $ | (49,084 | ) | ||||
See accompanying notes to consolidated financial statements.
F-33
Table of Contents
CARDTRONICS,
INC.
| Years Ended December 31, | ||||||||||||
| 2007 | 2006 | 2005 | ||||||||||
|
Net loss
|
$ | (27,090 | ) | $ | (531 | ) | $ | (2,418 | ) | |||
|
Foreign currency translation adjustments
|
2,415 | 12,202 | (5,491 | ) | ||||||||
|
Unrealized (losses) gains on interest rate cash flow hedges, net
of taxes of $0 in 2007, $258 in 2006, and $(2,469) in 2005
|
(18,093 | ) | (696 | ) | 4,259 | |||||||
|
Unrealized (realized) gains on available-for-sale securities,
net of taxes of $293 in 2007 and $(293) in 2006
|
(498 | ) | 498 | — | ||||||||
|
Other comprehensive income (loss)
|
(16,176 | ) | 12,004 | (1,232 | ) | |||||||
|
Total comprehensive income (loss)
|
$ | (43,266 | ) | $ | 11,473 | $ | (3,650 | ) | ||||
See accompanying notes to consolidated financial statements.
F-34
Table of Contents
CARDTRONICS,
INC.
| Years Ended December 31, | ||||||||||||
| 2007 | 2006 | 2005 | ||||||||||
|
Cash flows from operating activities:
|
||||||||||||
|
Net loss
|
$ | (27,090 | ) | $ | (531 | ) | $ | (2,418 | ) | |||
|
Adjustments to reconcile net loss to net cash provided by
operating activities:
|
||||||||||||
|
Depreciation, accretion, and amortization expense
|
45,729 | 30,578 | 21,931 | |||||||||
|
Amortization and write-off of financing costs and bond discount
|
1,641 | 1,929 | 6,941 | |||||||||
|
Stock-based compensation expense
|
1,050 | 879 | 541 | |||||||||
|
Deferred income taxes
|
4,525 | 454 | (1,270 | ) | ||||||||
|
Non-cash receipt of Winn-Dixie equity securities
|
— | (3,394 | ) | — | ||||||||
|
Gain on sale of Winn-Dixie equity securities
|
(569 | ) | — | — | ||||||||
|
Minority interest
|
(376 | ) | (225 | ) | 15 | |||||||
|
Loss on disposal of assets
|
2,235 | 1,603 | 1,036 | |||||||||
|
Other reserves and non-cash items
|
1,217 | 1,219 | 363 | |||||||||
|
Changes in assets and liabilities, net of acquisitions:
|
||||||||||||
|
(Increase) decrease in accounts receivable, net
|
(905 | ) | (4,105 | ) | 2,176 | |||||||
|
(Increase) decrease in prepaid, deferred costs, and other
current assets
|
630 | (3,783 | ) | 378 | ||||||||
|
(Increase) decrease in inventory
|
3,412 | (694 | ) | 1,060 | ||||||||
|
Decrease in notes receivable, net
|
20 | 155 | 439 | |||||||||
|
Increase in other assets
|
(19,787 | ) | (1,718 | ) | (600 | ) | ||||||
|
Increase (decrease) in accounts payable
|
15,995 | 5,436 | (1,085 | ) | ||||||||
|
Increase in accrued liabilities
|
22,726 | 813 | 7,190 | |||||||||
|
(Decrease) increase in other liabilities
|
5,009 | (3,170 | ) | (3,470 | ) | |||||||
|
Net cash provided by operating activities
|
55,462 | 25,446 | 33,227 | |||||||||
|
Cash flows from investing activities:
|
||||||||||||
|
Additions to property and equipment
|
(68,320 | ) | (32,537 | ) | (27,261 | ) | ||||||
|
Proceeds from sale of property and equipment
|
3 | 130 | 78 | |||||||||
|
Payments for exclusive license agreements and site acquisition
costs
|
(2,993 | ) | (3,357 | ) | (4,665 | ) | ||||||
|
Additions to equipment to be leased to customers
|
(548 | ) | (197 | ) | — | |||||||
|
Principal payments received under direct financing leases
|
34 | — | — | |||||||||
|
Acquisitions, net of cash acquired
|
(135,009 | ) | (12 | ) | (108,112 | ) | ||||||
|
Proceeds from sale of Winn-Dixie equity securities
|
3,950 | — | — | |||||||||
|
Net cash used in investing activities
|
(202,883 | ) | (35,973 | ) | (139,960 | ) | ||||||
|
Cash flows from financing activities:
|
||||||||||||
|
Proceeds from issuance of long-term debt
|
187,744 | 45,661 | 478,009 | |||||||||
|
Repayments of long-term debt and capital leases
|
(140,765 | ) | (37,503 | ) | (362,141 | ) | ||||||
|
Proceeds from borrowing under bank overdraft facility, net
|
642 | 3,818 | — | |||||||||
|
Redemption of Series A preferred stock
|
— | — | (24,795 | ) | ||||||||
|
Issuance of capital stock
|
111,363 | — | 89 | |||||||||
|
Purchase of treasury stock
|
— | (50 | ) | (46,453 | ) | |||||||
|
Issuance of Series B preferred stock
|
— | — | 73,297 | |||||||||
|
Minority interest shareholder capital contributions
|
547 | — | — | |||||||||
|
Repayment of subscriptions receivable
|
95 | — | 386 | |||||||||
|
Distributions
|
— | (18 | ) | (51 | ) | |||||||
|
Equity offering costs
|
(618 | ) | — | — | ||||||||
|
Debt issuance costs
|
(853 | ) | (716 | ) | (11,127 | ) | ||||||
|
Net cash provided by financing activities
|
158,155 | 11,192 | 107,214 | |||||||||
|
Effect of exchange rate changes on cash
|
(13 | ) | 354 | (194 | ) | |||||||
|
Net increase in cash and cash equivalents
|
10,721 | 1,019 | 287 | |||||||||
|
Cash and cash equivalents at beginning of period
|
2,718 | 1,699 | 1,412 | |||||||||
|
Cash and cash equivalents at end of period
|
$ | 13,439 | $ | 2,718 | $ | 1,699 | ||||||
|
Supplemental disclosure of cash flow information:
|
||||||||||||
|
Cash paid for interest, including interest on capital leases
|
$ | 26,521 | $ | 22,939 | $ | 8,359 | ||||||
|
Cash paid for income taxes
|
$ | 27 | $ | 67 | $ | 92 | ||||||
|
Fixed assets financed by direct debt
|
$ | 5,683 | $ | — | $ | — | ||||||
See accompanying notes to consolidated financial statements.
F-35
Table of Contents
CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
| (1) | Business and Summary of Significant Accounting Policies |
| (a) | Description of Business |
Cardtronics, Inc., along with its wholly- and majority-owned
subsidiaries (collectively, the “Company” or
“Cardtronics”) owns and operates over 28,800 automated
teller machines (“ATM”) in all 50 states,
approximately 2,200 ATMs located throughout the United Kingdom,
and approximately 1,300 ATMs located throughout Mexico. The
Company provides ATM management and equipment-related services
(typically under multi-year contracts) to large,
nationally-known retail merchants as well as smaller retailers
and operators of facilities such as shopping malls and airports.
Additionally, the Company operates the largest surcharge-free
network of ATMs within the United States (based on the number of
participating ATMs) and works with financial institutions to
place their logos on the Company’s ATM machines, thus
providing convenient surcharge-free access to their customers.
Since May 2001, the Company has acquired 14 networks of ATMs and
one operator of a surcharge-free ATM network. Most recently, in
July 2007, the Company acquired the financial services business
of 7-Eleven, Inc. (the “7-Eleven Financial Services
Business”), which added over 3,500 ATMs and over 2,000
advanced-functionality kiosks referred to as “Vcom”
terminals to the Company’s portfolio. Through its
acquisitions, the Company increased the number of ATMs it
operates from approximately 4,100 in May 2001 to over 32,300 as
of December 31, 2007.
| (b) | Basis of Presentation and Consolidation |
The consolidated financial statements presented include the
accounts of Cardtronics, Inc. and its wholly- and majority-owned
and controlled subsidiaries. Because the Company owns a majority
(51.0%) interest in and absorbs a majority of the losses or
returns of Cardtronics Mexico, this entity is reflected as a
consolidated subsidiary in the accompanying consolidated
financial statements, with the remaining ownership interest not
held by the Company being reflected as a minority interest.
Additionally, the accompanying consolidated financial statements
include the accounts of ATM Ventures LLC, a limited liability
company that the Company controlled through a 50.0% ownership
interest in such entity, until its dissolution in 2006. For
2005, the remaining 50.0% ownership interest of ATM Ventures has
been reflected as a minority interest. All material intercompany
accounts and transactions have been eliminated in consolidation.
Additionally, our financial statements for prior periods include
certain reclassifications that were made to conform to the
current period presentation. Those reclassifications did not
impact our reported net (loss) income or stockholders’
equity (deficit).
In addition, the Company presents “Cost of ATM operating
revenues” and “Gross profit” within its
consolidated financial statements exclusive of depreciation,
accretion, and amortization expenses. The following table sets
forth the amounts excluded from cost of ATM operating revenues
and gross profit during the years ended December 31, 2007,
2006, and 2005:
| 2007 | 2006 | 2005 | ||||||||||
| (in thousands) | ||||||||||||
|
Depreciation and accretion expenses related to ATMs and
ATM-related assets
|
$ | 24,277 | $ | 17,190 | $ | 11,639 | ||||||
|
Amortization expense
|
18,870 | 11,983 | 8,980 | |||||||||
|
Total depreciation, accretion, and amortization expenses
excluded from cost of ATM operating revenues and gross profit
|
$ | 43,147 | $ | 29,173 | $ | 20,619 | ||||||
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CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| (c) | Use of Estimates in the Preparation of Financial Statements |
The preparation of the consolidated financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period.
Significant items subject to such estimates include the carrying
amount of intangibles, goodwill, asset retirement obligations,
and valuation allowances for receivables, inventories, and
deferred income tax assets. Actual results can, and often do,
differ from those assumed in the Company’s estimates.
| (d) | Cash and Cash Equivalents |
For purposes of reporting financial condition and cash flows,
cash and cash equivalents include cash in bank and short-term
deposit sweep accounts.
We maintain cash on deposit with banks that is pledged for a
particular use or restricted to support a potential liability.
We classify these balances as restricted cash in current or
non-current assets on our consolidated balance sheet based on
when we expect this cash to be used. As of December 31,
2007 and 2006, we had $5.9 million and $0.9 million,
respectively, of restricted cash in current assets and $317,000
and $34,000, respectively, in other non-current assets. Current
restricted cash as of December 31, 2007 and 2006 was
comprised of approximately $5.7 million and
$0.7 million, respectively, in amounts collected on behalf
of, but not yet remitted to, certain of the Company’s
merchant customers, and $0.2 million and $0.2 million,
respectively, in guarantees related to certain notes issued in
connection with the Bank Machine acquisition (see
Note 2). Non-current restricted cash represents a
certificate of deposit held at one of the banks utilized to
provide cash for the Company’s ATMs and funds held at one
of the banks utilized by the Company in its provision of
advanced-functionality services through its Vcom terminals.
| (e) | ATM Cash Management Program |
The Company relies on agreements with Bank of America, N.A.
(“Bank of America”), Palm Desert National Bank
(“PDNB”), and Wells Fargo, National Association
(“Wells Fargo”) to provide the cash that it uses in
its domestic ATMs in which the related merchants do not provide
their own cash. Additionally, the Company relies on
Alliance & Leicester Commercial Bank
(“ALCB”) in the United Kingdom and Bansi, S.A.
Institución de Banca Multiple (“Bansi”) in Mexico
to provide it with its ATM cash needs. The Company pays a fee
for its usage of this cash based on the total amount of cash
outstanding at any given time, as well as fees related to the
bundling and preparation of such cash prior to it being loaded
in the ATMs. At all times during its use, the cash remains the
sole property of the cash providers, and the Company is unable
to and prohibited from obtaining access to such cash. Pursuant
to the terms of the Company’s agreements with them, Bank of
America and Wells Fargo must provide 360 days and
180 days prior written notice, respectively, prior to
terminating the agreements and remove their cash from the ATMs.
Under the other domestic agreement with PDNB and the U.K.
agreement with ALCB, both PDNB and ALCB have the right to demand
the return of all or any portion of their cash at any point in
time upon the occurrence of certain events beyond the
Company’s control. In addition, Bansi has the right to
terminate the agreement and demand the return of all or any
portion of their cash upon a breach of contract resulting from
our actions (or lack thereof) if such breach is not cured within
60 days. Based on the foregoing, such cash, and the related
obligations, are not reflected in the accompanying consolidated
financial statements. The amount of cash in the Company’s
ATMs was approximately $1.1 billion and $536.0 million
as of December 31, 2007 and 2006, respectively.
| (f) | Accounts Receivable, including Allowance for Doubtful Accounts |
Accounts receivable are primarily comprised of amounts due from
the Company’s clearing and settlement banks for ATM and
Vcom transaction revenues earned on transactions processed
during the month ending on
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CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
the balance sheet date. Trade accounts receivable are recorded
at the invoiced amount and do not bear interest. The allowance
for doubtful accounts is the Company’s best estimate of the
amount of probable credit losses in the Company’s existing
accounts receivable. The Company reviews its allowance for
doubtful accounts monthly and determines the allowance based on
an analysis of its past due accounts. All balances over
90 days past due are reviewed individually for
collectibility. Account balances are charged off against the
allowance after all means of collection have been exhausted and
the potential for recovery is considered remote. Amounts charged
to bad debt expense were nominal during each of the years ended
December 31, 2007, 2006, and 2005.
| (g) | Inventory |
Inventory consists principally of used ATMs, ATM spare parts,
and ATM supplies and is stated at the lower of cost or market.
Cost is determined using the average cost method. The following
table is a breakdown of the Company’s primary inventory
components as of December 31, 2007 and 2006:
| 2007 | 2006 | |||||||
| (in thousands) | ||||||||
|
ATMs
|
$ | 745 | $ | 2,625 | ||||
|
ATM parts and supplies
|
2,040 | 2,832 | ||||||
|
Total
|
2,785 | 5,457 | ||||||
|
Less: Inventory reserves
|
(430 | ) | (1,013 | ) | ||||
|
Net inventory
|
$ | 2,355 | $ | 4,444 | ||||
| (h) | Property and Equipment, net |
Property and equipment are stated at cost, and depreciation is
calculated using the straight-line method over estimated useful
lives ranging from three to seven years. Leasehold improvements
and property acquired under capital leases are amortized over
the useful life of the asset or the lease term, whichever is
shorter. The cost of property and equipment held under capital
leases is equal to the lower of the net present value of the
minimum lease payments or the fair value of the leased property
at the inception of the lease or the acquisition date if the
leases were assumed in an acquisition. Also included in property
and equipment are new ATMs and the associated equipment the
Company has acquired for future installation. Such ATMs are held
as “deployments in process” and are not depreciated
until actually installed. Depreciation expense for property and
equipment for the years ended December 31, 2007, 2006, and
2005 was $25.7 million, $18.3 million, and
$11.9 million, respectively. The $25.7 million in 2007
includes the amortization expense associated with the assets
associated with the capital leases assumed by the Company in its
acquisition of the 7-Eleven Financial Services Business (the
“7-Eleven ATM Transaction”). See Note 1(l)
regarding asset retirement obligations associated with the
Company’s ATMs.
Maintenance on the Company’s domestic and Mexico ATMs is
typically performed by third parties and is incurred as a fixed
fee per month per ATM. Accordingly, such amounts are expensed as
incurred. In the United Kingdom, maintenance is performed by
in-house technicians.
| (i) | Goodwill and Other Intangible Assets |
The Company’s intangible assets include merchant
contracts/relationships and a branding agreement acquired in
connection with acquisitions of ATM assets (i.e., the right to
receive future cash flows related to ATM transactions occurring
at these merchant locations), exclusive license agreements
(i.e., the right to be the exclusive ATM service provider, at
specific locations, for the time period under contract with a
merchant
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CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
customer), non-compete agreements, deferred financing costs
relating to the Company’s credit agreements
(Note 13) and the Bank Machine and Allpoint
trade names acquired. Additionally, the Company has goodwill
related to the acquisitions of E*TRADE Access, Bank Machine, ATM
National, Cardtronics Mexico, and
7-Eleven
Financial Services Business.
The estimated fair value of the merchant contracts/relationships
within each acquired portfolio is determined based on the
estimated net cash flows and useful lives of the underlying
contracts/relationships, including expected renewals. The
merchant contracts/relationships comprising each acquired
portfolio are typically homogenous in nature with respect to the
underlying contractual terms and conditions. Accordingly, the
Company pools such acquired merchant contracts/relationships
into a single intangible asset, by acquired portfolio, for
purposes of computing the related amortization expense. The
Company amortizes such intangible assets on a straight-line
basis over the estimated useful lives of the portfolios to which
the assets relate. Because the net cash flows associated with
the Company’s acquired merchant contracts/relationships
have historically increased subsequent to the acquisition date,
the use of a straight-line method of amortization effectively
results in an accelerated amortization schedule. As such, the
straight-line method of amortization most closely approximates
the pattern in which the economic benefits of the underlying
assets are expected to be realized. The estimated useful life of
each portfolio is determined based on the weighted-average lives
of the expected cash flows associated with the underlying
merchant contracts/relationships comprising the portfolio, and
takes into consideration expected renewal rates and the terms
and significance of the underlying contracts/relationships
themselves. If, subsequent to the acquisition date,
circumstances indicate that a shorter estimated useful life is
warranted for an acquired portfolio as a result of changes in
the expected future cash flows associated with the individual
contracts/relationships comprising that portfolio, then that
portfolio’s remaining estimated useful life and related
amortization expense are adjusted accordingly on a prospective
basis.
Goodwill and the acquired Bank Machine and Allpoint trade names
are not amortized, but instead are periodically tested for
impairment, at least annually, and whenever an event occurs that
indicates that an impairment may have occurred. See
Note 1(j) below for additional information on the
Company’s impairment testing of long-lived assets and
goodwill.
| (j) | Impairment of Long-Lived Assets and Goodwill |
Long-lived assets. The Company places
significant value on the installed ATMs that it owns and manages
in merchant locations as well as the related acquired merchant
contracts/relationships and the branding agreement acquired in
the 7-Eleven ATM Transaction. In accordance with Statement of
Financial Accounting Standards (“SFAS”) No. 144,
Accounting for Impairment or Disposal of Long-Lived
Assets, long-lived assets, such as property and equipment
and purchased contract intangibles subject to amortization, are
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of such assets
may not be recoverable. The Company tests its acquired merchant
contract/relationship intangible assets for impairment, along
with the related ATMs, on an individual contract/relationship
basis for the Company’s significant acquired
contracts/relationships, and on a pooled or portfolio basis (by
acquisition) for all other acquired contracts/relationships.
In determining whether a particular merchant
contract/relationship is significant enough to warrant a
separate identifiable intangible asset, the Company analyzes a
number of relevant factors, including (i) estimates of the
historical cash flows generated by such contract/relationship
prior to its acquisition, (ii) estimates regarding the
Company’s ability to increase the
contract/relationship’s cash flows subsequent to the
acquisition through a combination of lower operating costs, the
deployment of additional ATMs, and the generation of incremental
revenues from increased surcharges
and/or new
branding arrangements, and (iii) estimates regarding the
Company’s ability to renew such contract/relationship
beyond its originally scheduled termination date. An individual
contract/relationship, and the related ATMs, could be impaired
if the contract/relationship
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CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
is terminated sooner than originally anticipated, or if there is
a decline in the number of transactions related to such
contract/relationship without a corresponding increase in the
amount of revenue collected per transaction (e.g., branding
revenue). A portfolio of purchased contract intangibles,
including the related ATMs, could be impaired if the contract
attrition rate is materially more than the rate used to estimate
the portfolio’s initial value, or if there is a decline in
the number of transactions associated with such portfolio
without a corresponding increase in the revenue collected per
transaction (e.g., branding revenue). Whenever events or changes
in circumstances indicate that a merchant contract/relationship
intangible asset may be impaired, the Company evaluates the
recoverability of the intangible asset, and the related ATMs, by
measuring the related carrying amounts against the estimated
undiscounted future cash flows associated with the related
contract or portfolio of contracts. Should the sum of the
expected future net cash flows be less than the carrying values
of the tangible and intangible assets being evaluated, an
impairment loss would be recognized. The impairment loss would
be calculated as the amount by which the carrying values of the
ATMs and intangible assets exceeded the calculated fair value.
The Company recorded approximately $5.7 million,
$2.8 million, and $1.2 million in additional
amortization expense during the years ended December 31,
2007, 2006, and 2005, respectively, related to the impairments
of certain previously acquired merchant contract/relationship
intangible assets associated with our U.S. reporting
segment.
Goodwill and other indefinite lived intangible
assets. As of December 31, 2007, the Company
had $235.2 million in goodwill and $4.2 million of
indefinite lived intangible assets reflected in its consolidated
balance sheet. In accordance with SFAS No. 142,
Goodwill and Other Intangible Assets, the Company reviews
the carrying amount of its goodwill and indefinite lived
intangible assets for impairment at least annually and more
frequently if conditions warrant. Pursuant to
SFAS No. 142, goodwill and indefinite lived intangible
assets should be tested for impairment at the reporting unit
level, which in the Company’s case involves five separate
reporting units — (i) the Company’s domestic
reporting segment; (ii) the acquired Bank Machine
operations; iii) the acquired CCS Mexico (subsequently
renamed to Cardtronics Mexico) operations; (iv) the
acquired ATM National operations; and (v) the 7-Eleven
Financial Services Business (see Note 2). For each
reporting unit, the carrying amount of the net assets associated
with the applicable segment is compared to the estimated fair
value of such segment as of the testing date (i.e.,
December 31, 2007.) Based on the results of those tests,
the Company determined that no goodwill or other indefinite
lived intangible asset impairments existed as of
December 31, 2007.
| (k) | Income Taxes |
The Company accounts for income taxes pursuant to the provisions
of SFAS No. 109, Accounting for Income Taxes,
as interpreted by Financial Accounting Standards
(“FASB”) Interpretation (“FIN”) No. 48,
Accounting for Uncertainty in Income Taxes, an interpretation
of FASB Statement No. 109. Provisions for income taxes
are based on taxes payable or refundable for the current year
and deferred taxes, which are based on temporary differences
between the amount of taxable income and income before provision
for income taxes and between the tax basis of assets and
liabilities and their reported amounts in the financial
statements. Deferred tax assets and liabilities are included in
the consolidated financial statements at current income tax
rates. As changes in tax laws or rates are enacted, deferred tax
assets and liabilities are adjusted through the provision for
income taxes. See Note 1(v) for additional
information on the Company’s adoption of
FIN No. 48.
| (l) | Asset Retirement Obligations |
The Company accounts for its asset retirement obligations under
SFAS No. 143, Accounting for Asset Retirement
Obligations. Under SFAS No. 143, the Company is
required to estimate the fair value of future retirement costs
associated with its ATMs and recognize this amount as a
liability in the period in which it is incurred and can be
reasonably estimated. The Company’s estimates of fair value
involve discounted future cash flows. Subsequent to recognizing
the initial liability, the Company recognizes an ongoing expense
for
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CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
changes in such liabilities due to the passage of time (i.e.,
accretion expense), which is recorded in the depreciation and
accretion expense line in the accompanying consolidated
financial statements. Upon settlement of the liability, the
Company recognizes a gain or loss for any difference between the
settlement amount and the liability recorded. Additionally, the
Company capitalizes the initial estimated fair value amount as
part of the carrying amount of the related long-lived asset and
depreciates the amount over the asset’s estimated useful
life. Additional information regarding the Company’s asset
retirement obligations is included in Note 11.
| (m) | Revenue Recognition |
ATM operating revenues. Substantially all of
the Company’s revenues are generated from ATM operating and
transaction-based fees, which primarily include surcharge fees,
interchange fees, bank branding revenues, surcharge-free network
fees, and other revenue items, including maintenance fees. Such
amounts are reflected as “ATM operating revenues” in
the accompanying consolidated statements of operations.
Surcharge and interchange fees are recognized daily as the
underlying ATM transactions are processed. Branding fees are
generated by the Company’s bank branding arrangements,
under which financial institutions pay a fixed monthly fee per
ATM to the Company to put their brand name on selected ATMs
within the Company’s ATM portfolio. In return for such
fees, the bank’s customers can use those branded ATMs
without paying a surcharge fee. Pursuant to the SEC’s SAB,
Topic 13, Revenue Recognition, the monthly per ATM
branding fees, which are subject to escalation clauses within
the agreements, are recognized as revenues on a straight-line
basis over the term of the agreement. In addition to the monthly
branding fees, the Company also receives a one-time
set-up fee
per ATM. This
set-up fee
is separate from the recurring, monthly branding fees and is
meant to compensate Cardtronics for the burden incurred related
to the initial
set-up of a
branded ATM versus the on-going monthly services provided for
the actual branding. Pursuant to the guidance in Emerging Issues
Task Force (“EITF”) Issue
No. 00-21,
Revenue Arrangements with Multiple Deliverables, and
SAB No. 104, Revenue Recognition, the Company
has deferred these
set-up fees
(as well as the corresponding costs associated with the initial
set-up) and
is recognizing such amounts as revenue (and expense) over the
terms of the underlying bank branding agreements. With respect
to the Company’s surcharge-free networks, the Company
allows cardholders of financial institutions that participate in
the network to utilize the Company’s ATMs on a
surcharge-free basis. In return, the participating financial
institutions typically pay a fixed fee per month per cardholder
to the Company. These surcharge-free network fees are recognized
as revenues on a monthly basis as earned. Finally, with respect
to maintenance services, the Company typically charges a fixed
fee per month per ATM to its customers and outsources the
fulfillment of those maintenance services to a third-party
service provider for a corresponding fixed fee per month per
ATM. Accordingly, the Company recognizes such service agreement
revenues and the related expenses on a monthly basis, as earned.
ATM equipment sales. The Company also
generates revenues from the sale of ATMs to merchants and
certain equipment resellers. Such amounts are reflected as
“ATM product sales and other revenues” in the
accompanying consolidated statements of operations. Revenues
related to the sale of ATMs to merchants are recognized when the
equipment is delivered to the customer and the Company has
completed all required installation and
set-up
procedures. With respect to the sale of ATMs to associate
value-added resellers (“VARs”), the Company recognizes
and invoices revenues related to such sales when the equipment
is shipped from the manufacturer to the VAR. The Company
typically extends
30-day terms
and receives payment directly from the VAR irrespective of the
ultimate sale to a third party.
Merchant-owned arrangements. In connection
with the Company’s merchant-owned ATM operating/processing
arrangements, the Company typically pays the surcharge fees that
it earns to the merchant as fees for providing, placing, and
maintaining the ATM unit. Pursuant to the guidance of EITF Issue
No. 01-9,
Accounting for Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendor’s Products), the
Company has recorded such payments as a cost of the associated
revenues. In exchange for this payment, the Company receives
access to the merchants’ customers and the ability to earn
the surcharge and
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CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
interchange fees from transactions that such customers conduct
from using the ATM. The Company is able to reasonably estimate
the fair value of this benefit based on the typical surcharge
rates charged for transactions on all of its ATMs, including
those not subject to these arrangements.
Further, the Company follows the guidance in EITF Issue
99-19,
Reporting Revenue Gross as a Principal versus Net as an
Agent, for the majority of its merchant contracts.
Specifically, as the Company acts as the principal and is the
primary obligor in the ATM transactions, provides the processing
for the ATM transactions, and has the risks and rewards of
ownership, including the risk of loss for collection, the
Company recognizes the majority of its surcharge and interchange
fees gross of any of the payments made to the various merchants
and retail establishments where the ATM units are housed. As a
result, for agreements under which the Company acts as the
principal, the Company records the total amounts earned from the
underlying ATM transactions as ATM operating revenues and
records the related merchant commissions as a cost of ATM
operating revenues.
Other. In connection with certain bank
branding arrangements, the Company is required to rebate a
portion of the interchange fees it receives above certain
thresholds to the branding financial institutions, as
established in the underlying agreements. In contrast to the
gross presentation of surcharge and interchange fees remitted to
merchants, the Company recognizes all of its interchange fees
net of any such rebates. Pursuant to the guidance of EITF
No. 01-9
(referenced above), while the Company receives access to the
branding financial institution’s customers and the ability
to earn interchange fees related to such transactions conducted
by those customers, the Company is unable to reasonably estimate
the fair value of this benefit. Thus, the Company recognizes
such payments made to the branding financial institution as a
reduction of revenues versus a cost of the associated revenues.
| (n) | Stock-Based Compensation |
Effective January 1, 2006, the Company adopted
SFAS No. 123 (revised 2004), Share-Based Payment
(“SFAS No. 123R”).
SFAS No. 123R requires companies to calculate the fair
value of stock-based instruments awarded to employees on the
date of grant and to recognize the calculated fair value as
compensation cost over the requisite service period. Because the
Company historically utilized the minimum value method of
measuring equity share option values for pro forma disclosure
purposes under SFAS No. 123, Accounting for
Stock-based Compensation, it adopted the provisions of
SFAS No. 123R using the prospective transition method.
Accordingly, the Company recognizes compensation expense for the
fair value of all new awards that are granted and existing
awards that are modified subsequent to December 31, 2005.
For those awards issued and still outstanding prior to
December 31, 2005, the Company will continue to account for
such awards pursuant to Accounting Principles Board
(“APB”) Opinion No. 25 and its related
interpretive guidance. As a result of its prospective adoption,
the Company’s financial statements for all periods prior to
January 1, 2006 do not reflect any adjustments resulting
from the adoption of SFAS No. 123R, and the adoption
did not result in the recording of a cumulative effect of a
change in accounting principle.
Had compensation cost for option grants under the Company’s
stock incentive plan (see Note 3) been determined
based on the fair value method at the grant dates, as specified
in SFAS No. 123, the Company’s
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CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
net earnings would have been reduced to the following pro forma
amounts for the year ended December 31, 2005 (in thousands):
|
Net loss, as reported
|
$ | (2,418 | ) | |
|
Add: Stock-based employee compensation expense included in
reported net income, net of tax
|
1,492 | |||
|
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards, net of
tax
|
(1,694 | ) | ||
|
Net loss, as adjusted
|
(2,620 | ) | ||
|
Preferred stock dividends and accretion expense
|
1,395 | |||
|
Net loss available to common stockholders, as adjusted
|
$ | (4,015 | ) | |
|
Loss per share:
|
||||
|
Basic and diluted, as reported
|
$ | (0.27 | ) | |
|
Basic and diluted, pro forma
|
$ | (0.29 | ) | |
| (o) | Derivative Instruments |
The Company utilizes derivative financial instruments to hedge
its exposure to changing interest rates related to the
Company’s ATM cash management activities. The Company does
not enter into derivative transactions for speculative or
trading purposes.
The Company accounts for its derivative financial instruments in
accordance with SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, which
requires derivative instruments to be recorded at fair value in
a company’s balance sheet. As of December 31, 2007,
all of the Company’s derivatives were considered to be cash
flow hedges under SFAS No. 133 and, accordingly,
changes in the fair values of such derivatives have been
reflected in the accumulated other comprehensive income (loss)
account in the accompanying consolidated balance sheet. See
Note 17 for more details on the Company’s
derivative financial instrument transactions.
| (p) | Fair Value of Financial Instruments |
SFAS No. 107, Disclosures about Fair Value of
Financial Instruments, requires the disclosure of the
estimated fair value of the Company’s financial
instruments. The fair value of a financial instrument is the
amount at which the instrument could be exchanged in a current
transaction between willing parties, other than in a forced or
liquidation sale. SFAS No. 107 does not require the
disclosure of the fair value of lease financing arrangements and
non-financial instruments, including intangible assets such as
goodwill and the Company’s merchant contracts/relationships.
The carrying amount of the Company’s cash and cash
equivalents and other current assets and liabilities
approximates fair value due to the relatively short maturities
of these instruments. The carrying amount of the Company’s
interest rate swaps (see Note 17), which was a
liability of $13.6 million as of December 31, 2007,
represents the fair value of such agreements and is based on
third-party quotes for similar instruments with the same terms
and conditions. The carrying amount of the long-term debt
balance related to borrowings under the Company’s revolving
credit facility approximates fair value due to the fact that
such borrowings are subject to floating market interest rates.
As of December 31, 2007, the fair value of the
Company’s $300.0 million senior subordinated notes
(see Note 13) totaled $292.5 million. The fair
values of these financial instruments were based on the quoted
market price for such notes as of year end.
F-43
Table of Contents
CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| (q) | Foreign Currency Translation |
As a result of the Bank Machine acquisition in May 2005 and the
Cardtronics Mexico acquisition in February 2006, the Company is
exposed to foreign currency translation risk. The functional
currency for the acquired Bank Machine and Cardtronics Mexico
operations are the British pound and the Mexican peso,
respectively. Accordingly, results of operations of our U.K. and
Mexico subsidiaries are translated into U.S. dollars using
average exchange rates in effect during the periods in which
those results are generated. Furthermore, the Company’s
foreign operations’ assets and liabilities are translated
into U.S. dollars using the exchange rate in effect as of
each balance sheet reporting date. The resulting translation
adjustments have been included in accumulated other
comprehensive income (loss) in the accompanying consolidated
balance sheets.
The Company currently believes that the unremitted earnings of
its United Kingdom and Mexico subsidiaries will be reinvested in
the corresponding country of origin for an indefinite period of
time. Accordingly, no deferred taxes have been provided for on
the differences between the Company’s book basis and
underlying tax basis in those subsidiaries or on the foreign
currency translation adjustment amounts.
(r) Comprehensive
Income (Loss)
SFAS No. 130, Reporting Comprehensive Income,
establishes standards for reporting comprehensive income (loss)
and its components in the financial statements. Accumulated
other comprehensive income (loss) is displayed as a separate
component of stockholders’ equity (deficit) in the
accompanying consolidated balance sheets, and current period
activity is reflected in the accompanying consolidated
statements of comprehensive income (loss). The Company’s
comprehensive income (loss) is composed of (i) net loss;
(ii) foreign currency translation adjustments;
(iii) unrealized gains (losses) associated with the
Company’s interest rate hedging activities; and
(iv) unrealized gains on the Company’s
available-for-sale securities as of December 31, 2006.
The following table sets forth the components of accumulated
other comprehensive income (loss), net of tax where applicable,
as of December 31, 2007 and 2006:
| 2007 | 2006 | |||||||
| (in thousands) | ||||||||
|
Foreign currency translation adjustments
|
$ | 9,126 | $ | 6,711 | ||||
|
Unrealized gains (losses) on interest rate swaps, net of taxes
of $0 and $2.7 million as of December 31, 2007 and
2006, respectively
|
(13,644 | ) | 4,449 | |||||
|
Unrealized gains on available-for-sale securities, net of taxes
of $0.3 million as of December 31, 2006
|
— | 498 | ||||||
|
Total accumulated other comprehensive income (loss)
|
$ | (4,518 | ) | $ | 11,658 | |||
See Note 18 for additional information on the
Company’s deferred taxes and related valuation allowances
associated with its interest rate swaps.
| (s) | Treasury Stock |
Treasury stock is recorded at cost and carried as a component of
stockholders’ equity (deficit) until retired or reissued.
| (t) | Advertising Costs |
Advertising costs are expensed as incurred and totaled
$2.2 million, $0.8 million, and $0.9 million
during the years ended December 31, 2007, 2006, and 2005,
respectively. The increase during 2007 was primarily the
F-44
Table of Contents
CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
result of the $1.4 million in costs incurred to promote the
advanced-functionality services associated with the acquired
7-Eleven Financial Services Business. For additional details on
this acquisition, see Note 2.
| (u) | Working Capital Deficit |
The Company’s surcharge and interchange revenues are
typically collected in cash on a daily basis or within a short
period of time subsequent to the end of each month. However, the
Company typically pays its vendors on 30 day terms and is
not required to pay certain of its merchants until 20 days
after the end of each calendar month. As a result, the Company
will typically utilize the excess cash flow generated from such
timing differences to fund its capital expenditure needs or to
repay amounts outstanding under its revolving line of credit
(which is reflected as a long-term liability in the accompanying
consolidated balance sheets). Accordingly, this scenario will
typically cause the Company’s balance sheet to reflect a
working capital deficit position. The Company considers such a
presentation to be a normal part of its ongoing operations.
| (v) | New Accounting Pronouncements |
The Company adopted the following accounting standard and
interpretation effective January 1, 2007:
Accounting for Uncertainty in Income
Taxes. FIN No. 48, Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement
No. 109, clarifies the accounting for uncertainty in
income taxes recognized in an enterprise’s financial
statements in accordance with SFAS No. 109,
Accounting for Income Taxes. The interpretation
prescribes a recognition threshold and measurement attribute for
a tax position taken or expected to be taken in a tax return and
also provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods,
disclosure, and transition. The Company applied the provisions
of FIN 48 to all tax positions upon its initial adoption
effective January 1, 2007, and determined that no
cumulative effect adjustment was required as of such date. As of
December 31, 2007, the Company had a $0.2 million
reserve for uncertain tax positions recorded pursuant to
FIN 48.
Registration Payment Arrangements. FASB Staff
Position (“FSP”) Emerging Issues Task Force
(“EITF”)
No. 00-19-2,
Accounting for Registration Payment Arrangements,
addresses an issuer’s accounting for registration payment
arrangements. Registration payment arrangements typically
require the issuer of financial instruments to file a
registration statement for the resale of the financial
instruments and for the registration statement to be declared
effective by the SEC within a specified period of time, or else
the issuer is subject to penalties, which may be significant.
FSP
EITF 00-19-2
specifies that the contingent obligation to make future payments
or otherwise transfer consideration under a registration payment
arrangement, whether issued as a separate agreement or included
as a provision of a financial instrument or other agreement,
should be separately recognized and measured in accordance with
SFAS No. 5, Accounting for Contingencies. The
guidance contained in this standard amends
SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, as amended, and
SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and
Equity, as well as FIN 45, Guarantor’s
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, to include
scope exceptions for registration payment arrangements. FSP
EITF 00-19-2
is effective immediately for registration payment arrangements
and the financial instruments subject to those arrangements that
are entered into or modified subsequent to the date of issuance
of this standard. For registration payment arrangements and
financial instruments subject to those arrangements that were
entered into prior to the issuance of this standard, the
guidance in the standard is effective for financial statements
issued for fiscal years beginning after December 15, 2006,
and interim periods within those fiscal years. The
Company’s adoption of this standard on January 1, 2007
had no impact on its financial statements. The Company will
continue to evaluate the impact that the implementation of FSP
EITF 00-19-2
may have on its financial statements as it relates to the
Company’s registration requirements associated with the
$100.0 million of Series B Notes issued in July 2007.
F-45
Table of Contents
CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
As of December 31, 2007, the following accounting standards
and interpretations had not yet been adopted by the Company:
Fair Value Measurements. In September 2006,
the FASB issued SFAS No. 157, Fair Value
Measurements, which provides guidance on measuring the fair
value of assets and liabilities in the financial statements. In
February 2008, the FASB issued FSP
No. 157-2,
Effective Date of FASB Statement No. 157, which
delays the effective date for non-financial assets and
non-financial liabilities, except for items that are recognized
or disclosed at fair value in the financial statements on a
recurring basis (at least annually) to fiscal years beginning
after November 15, 2008. The Company will adopt the
provisions of SFAS No. 157 for its financial assets
and liabilities and those items for which it has recognized or
disclosed on a recurring basis effective January 1, 2008,
and does not expect that this adoption will have a material
impact on the Company’s financial statements. As provided
by FSP
No. 157-2,
the Company has elected to defer the adoption of
SFAS No. 157 for certain of its non-financial assets
and liabilities and is currently evaluating the impact, if any,
that this statement will have on its financial statements as it
relates to its nonfinancial assets and nonfinancial liabilities
that are recognized or disclosed on a non-recurring basis.
Fair Value Option. In February 2007, the FASB
issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities, which provides
allows companies the option to measure certain financial
instruments and other items at fair value. The Company will
adopt the provisions of this standard effective January 1,
2008, and does not anticipate that it will have a material
impact on its financial statements.
Business Combinations. In December 2007, the
FASB issued SFAS No. 141R, Business
Combinations, which provides revised guidance on the
accounting for acquisitions of businesses. This standard changes
the current guidance to require that all acquired assets,
liabilities, minority interest, and certain contingencies,
including contingent consideration, be measured at fair value,
and certain other acquisition-related costs, including costs of
a plan to exit an activity or terminate and relocate employees,
be expensed rather than capitalized. SFAS No. 141R
will apply to acquisitions that are effective after
December 31, 2008, and application of the standard to
acquisitions prior to that date is not permitted. The Company
will adopt the provisions of SFAS No. 141R on
January 1, 2009 and apply the requirements of the statement
to business combinations that occur subsequent to its adoption.
Noncontrolling Interests. In December 2007,
the FASB issued SFAS No. 160, Noncontrolling
Interests in Consolidated Financial Statements — an
amendment of ARB No. 51, which provides guidance on the
presentation of minority interest in the financial statements
and the accounting for and reporting of transactions between the
reporting entity and the holders of such noncontrolling
interest. This standard requires that minority interest be
presented as a separate component of equity rather than as a
“mezzanine” item between liabilities and equity and
requires that minority interest be presented as a separate
caption in the income statement. In addition, this standard
requires all transactions with minority interest holders,
including the issuance and repurchase of minority interests, be
accounted for as equity transactions unless a change in control
of the subsidiary occurs. The provisions of
SFAS No. 160 are to be applied prospectively with the
exception of reclassifying noncontrolling interests to equity
and recasting consolidated net income (loss) to include net
income (loss) attributable to both the controlling and
noncontrolling interests, which are required to be adopted
retrospectively. The Company will adopt the provisions
SFAS No. 160 on January 1, 2009 and is currently
assessing the impact its adoption will have on the
Company’s financial position and results of operations.
F-46
Table of Contents
CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| (2) | Acquisitions |
Acquisition
of 7-Eleven Financial Services Business
On July 20, 2007, the Company acquired substantially all of
the assets of the 7-Eleven Financial Services Business for
approximately $137.3 million in cash. Such acquisition was
made as the Company believed the acquisition would provide it
with substantial benefits and opportunities to execute its
overall strategy, including the addition of high-volume ATMs in
prime retail locations, organic growth potential, branding and
surcharge-free network opportunities, and future outsourcing
opportunities.
The 7-Eleven ATM Transaction included approximately 5,500 ATMs
located in 7-Eleven, Inc. stores throughout the United States,
of which approximately 2,000 were advanced-functionality
financial self-service kiosks referred to as “Vcom”
terminals that are capable of providing more sophisticated
financial services, such as check-cashing, remote deposit
capture (which is deposit taking at off-premise ATMs using
electronic imaging), money transfer, bill payment services, and
other kiosk-based financial services (collectively, the
“Vcom Services”). The Company funded the acquisition
through the issuance of $100.0 million of 9.25% senior
subordinated notes due 2013 — Series B (the
“Series B Notes”) and additional borrowings under
its revolving credit facility, which was amended in connection
with the acquisition. See Note 13 for additional
details on these financings. The accompanying consolidated
financial statements of the Company include the results of the
operations of the 7-Eleven Financial Services Business for the
period subsequent to July 19, 2007.
The Company has accounted for the 7-Eleven ATM Transaction as a
business combination pursuant to SFAS No. 141,
Business Combinations. Accordingly, the Company has
allocated the total purchase consideration to the assets
acquired and liabilities assumed based on their respective fair
values as of the acquisition date. The following table
summarizes the preliminary estimated fair values of the assets
acquired and liabilities assumed as of the acquisition date (in
thousands):
|
Cash
|
$ | 1,427 | ||
|
Trade accounts receivable, net
|
3,767 | |||
|
Surcharge and interchange receivable
|
3,769 | |||
|
Inventory
|
1,953 | |||
|
Other current assets
|
2,344 | |||
|
Property and equipment
|
18,315 | |||
|
Software
|
4,273 | |||
|
Intangible assets subject to amortization
|
78,000 | |||
|
Goodwill
|
62,185 | |||
|
Total assets acquired
|
176,033 | |||
|
Accounts payable
|
(688 | ) | ||
|
Accrued liabilities and deferred income
|
(9,743 | ) | ||
|
Current portion of capital lease obligations
|
(1,326 | ) | ||
|
Current portion of other long-term liabilities
|
(7,777 | ) | ||
|
Non-current portion of capital lease obligations
|
(1,378 | ) | ||
|
Other long-term liabilities
|
(17,809 | ) | ||
|
Total liabilities assumed
|
(38,721 | ) | ||
|
Net assets acquired
|
$ | 137,312 | ||
F-47
Table of Contents
CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The purchase price allocation presented above resulted in a
goodwill balance of approximately $62.2 million, which is
deductible for tax purposes. Additionally, the purchase price
allocation resulted in approximately $78.0 million in
identifiable intangible assets subject to amortization, which
consisted of $64.3 million associated with the ten-year ATM
operating agreement that was entered into with 7-Eleven in
conjunction with the acquisition and $13.7 million related
to a branding contract acquired in the transaction. The
$78.0 million assigned to the acquired intangible assets
was determined by utilizing a discounted cash flow approach. The
$64.3 million is being amortized on a straight-line basis
over the
10-year term
of the underlying ATM operating agreement, while the
$13.7 million is being amortized over the remaining life of
the underlying contract (8.4 years). Additionally, the
Company recorded $19.5 million of other liabilities
($7.8 million in current and $11.7 million in
long-term) related to certain unfavorable equipment operating
leases and an operating contract assumed as part of the 7-Eleven
ATM Transaction. These liabilities are being amortized over the
remaining terms of the underlying contracts and serve to reduce
the corresponding ATM operating expense amounts to the fair
value of these services as of the date of the acquisition.
Pro Forma Results of Operations. The following
table presents the unaudited pro forma combined results of
operations of the Company and the acquired 7-Eleven Financial
Services Business for the years ended December 31, 2007 and
2006, after giving effect to certain pro forma adjustments,
including the effects of the issuance of the Series B Notes
and additional borrowings under its revolving credit facility,
as amended (Note 13). The unaudited pro forma
financial results assume that both the 7-Eleven ATM Transaction
and related financing transactions occurred on January 1,
2006. This pro forma information is presented for illustrative
purposes only and is not necessarily indicative of the actual
results that would have occurred had those transactions been
consummated on such date. Furthermore, such pro forma results
are not necessarily indicative of the future results to be
expected for the consolidated operations.
| 2007 | 2006(1) | |||||||
| (In thousands, excluding per share amounts) | ||||||||
|
Revenues
|
$ | 465,808 | $ | 457,267 | ||||
|
Income from continuing operations
|
19,364 | 45,503 | ||||||
|
Net (loss) income available to common shareholders
|
(61,497 | ) | 6,233 | |||||
|
Basic (loss) earnings per share
|
$ | (3.99 | ) | $ | 0.45 | |||
|
Diluted (loss) earnings per share
|
$ | (3.99 | ) | $ | 0.27 | |||
| (1) | Pro forma results for the year ended December 31, 2006 include approximately $18.0 million of placement fee revenues associated with the Vcom operations of the 7-Eleven Financial Services Business, which are not expected to recur in future periods. |
Acquisition
of CCS Mexico
In February 2006, the Company acquired a 51.0% ownership stake
in CCS Mexico, an independent ATM operator located in Mexico,
for approximately $1.0 million in cash consideration and
the assumption of approximately $0.4 million in additional
liabilities. Additionally, the Company incurred approximately
$0.3 million in transaction costs associated with this
acquisition. CCS Mexico, which was renamed Cardtronics Mexico
upon the completion of the Company’s investment, currently
operates over 1,300 surcharging ATMs in selected retail
locations throughout Mexico, and the Company anticipates placing
additional surcharging ATMs in other retail establishments
throughout Mexico as those opportunities arise.
The Company allocated the total purchase consideration to the
assets acquired and liabilities assumed based on their
respective fair values as of the acquisition date. Such
allocation resulted in goodwill of approximately
$0.7 million. Such goodwill, which is not deductible for
tax purposes, has been assigned to a separate reporting unit
representing the acquired CCS Mexico operations. Additionally,
such allocation resulted
F-48
Table of Contents
CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
in approximately $0.4 million in identifiable intangible
assets, including $0.3 million for certain acquired
customer contracts and $0.1 million related to non-compete
agreements entered into with the minority interest shareholders
of Cardtronics Mexico.
Because the Company owns a majority interest in and absorbs a
majority of the entity’s losses or returns, Cardtronics
Mexico is reflected as a consolidated subsidiary in the
accompanying condensed consolidated financial statements, with
the remaining ownership interest not held by the Company being
reflected as a minority interest. See Note 12 for
additional information regarding this minority interest.
Acquisition
of Bank Machine (Acquisitions) Limited
On May 17, 2005, the Company purchased 100% of the
outstanding shares of Bank Machine (Acquisitions) Limited
(“Bank Machine”). Such acquisition was made to provide
the Company with an existing platform from which it can expand
its operations in the United Kingdom and other European markets.
The purchase price totaled approximately $95.0 million and
consisted of $92.0 million in cash and the issuance of
35,221 shares of the Company’s Series B
redeemable convertible preferred stock, which was valued by the
Company at approximately $3.0 million. Additionally, the
Company incurred approximately $2.2 million in transaction
costs associated with the acquisition.
Although the Bank Machine acquisition closed on May 17,
2005, the Company utilized May 1, 2005 as the effective
date of the acquisition for accounting purposes. Accordingly,
the accompanying consolidated financial statements of the
Company include Bank Machine’s results of operations for
the period subsequent to April 30, 2005. Additionally, such
results have been reduced by approximately $0.3 million,
with such amount representing the imputed interest costs
associated with the acquired Bank Machine operations for the
period from May 1, 2005 through the actual closing date of
May 17, 2005.
In connection with the acquisition, certain existing
shareholders of Bank Machine agreed to defer receipt of a
portion of their cash consideration proceeds in return for the
issuance of certain guaranteed notes payable from Cardtronics
Limited, the Company’s wholly-owned subsidiary holding
company in the United Kingdom. As part of the guarantee
arrangement, the Company initially placed approximately
$3.1 million of the cash consideration paid as part of the
acquisition in a bank account to serve as collateral for the
guarantee. The notes mature in May 2008, but may be repaid in
part or in whole at any time at the option of each individual
note holder. Approximately $3.0 million of the notes were
redeemed on March 15, 2006. The remaining cash serving as
collateral as of December 31, 2007 has been reflected in
the “Restricted cash, short-term” line item in the
accompanying consolidated balance sheet. Additionally, the
remaining obligations, which we expect to be redeemed in 2008,
have been reflected in the “Current portion of long-term
debt and notes payable” line item in the accompanying
consolidated balance sheet. Interest expense on the notes
accrues quarterly at the same floating rate as that of the
interest income associated with the related restricted cash
account.
F-49
Table of Contents
CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table summarizes the estimated fair values of the
assets acquired and liabilities assumed as of the acquisition
date (amounts in thousands). Pursuant to SFAS No. 141,
Business Combinations, the total purchase consideration
has been allocated to the assets acquired and liabilities
assumed, including identifiable intangible assets, based on
their respective fair values at the date of acquisition. Such
allocation resulted in approximately $77.3 million in
goodwill, which is not expected to be deductible for income tax
purposes. Such goodwill amount has been assigned to a reporting
unit comprised solely of the acquired Bank Machine operations.
|
Cash
|
$ | 3,400 | ||
|
Trade accounts receivable, net
|
407 | |||
|
Inventory
|
82 | |||
|
Other current assets
|
4,936 | |||
|
Property and equipment
|
12,590 | |||
|
Intangible assets subject to amortization (7 year
weighted-average life)
|
6,812 | |||
|
Intangible assets not subject to amortization
|
3,682 | |||
|
Goodwill
|
77,269 | |||
|
Total assets acquired
|
109,178 | |||
|
Accounts payable
|
(2,467 | ) | ||
|
Accrued liabilities
|
(5,307 | ) | ||
|
Current portion of notes payable
|
(3,232 | ) | ||
|
Deferred income taxes, non-current
|
(1,926 | ) | ||
|
Other long-term liabilities
|
(1,225 | ) | ||
|
Total liabilities assumed
|
(14,157 | ) | ||
|
Net assets acquired
|
$ | 95,021 | ||
Above amounts were converted from pound sterling to
U.S. dollars at $1.8410, which represents the exchange rate
in effect as of the date of the acquisition.
As indicated in the table above, approximately $6.8 million
was allocated to intangible assets subject to amortization,
which represents the estimated value associated with the
acquired merchant contracts/relationships associated with the
Bank Machine ATM portfolio. Such amount was determined by
utilizing a discounted cash flow approach and is currently being
amortized on a straight-line basis over an estimated useful life
of seven years, in accordance with the Company’s existing
policy. The $3.7 million allocated to intangible assets not
subject to amortization represents the estimated value
associated with the acquired Bank Machine trade name, and was
determined based on the relief from royalty valuation approach.
The above purchase price allocation reflects a change made
during 2006 to record certain deferred tax items related to the
acquisition. Such change had the effect of increasing the
recorded goodwill balance by approximately $0.2 million.
F-50
Table of Contents
CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Pro
Forma Results of Operations
The following table presents the unaudited pro forma combined
results of operations of the Company and the acquired Bank
Machine operations for the year ended December 31, 2005,
after giving effect to certain pro forma adjustments, including
the effects of the issuance of the Company’s senior
subordinated notes in August 2005 (the “Series A
Notes”) (Note 13) (amounts in thousands,
excluding per share amounts). Such unaudited pro forma financial
results do not reflect the impact of the smaller acquisitions
consummated by the Company in 2005. The unaudited pro forma
financial results assume that the Bank Machine acquisition and
the debt issuance occurred on January 1, 2005, and are not
necessarily indicative of the actual results that would have
occurred had those transactions been consummated on such date.
Furthermore, such pro forma results are not necessarily
indicative of the future results to be expected for the
consolidated operations.
|
Revenues
|
$ | 279,149 | ||
|
Income from continuing operations
|
21,083 | |||
|
Net loss available to common shareholders
|
(2,557 | ) | ||
|
Basic and diluted loss per share
|
$ | (0.18 | ) | |
Other
Acquisitions
On March 1, 2005, the Company acquired a portfolio of ATMs
from BAS Communications, Inc. (“BASC”) for
approximately $8.2 million in cash. Such portfolio
consisted of approximately 475 ATMs located in independent
grocery stores in and around the New York metropolitan area and
the related contracts. The purchase price was allocated
$0.6 million to ATM equipment and $7.6 million to the
acquired merchant contracts/relationships. During the first
quarter of 2006, the Company recorded a $2.8 million
impairment of the intangible asset representing the acquired
merchant contract/relationships related to this portfolio. This
impairment was triggered by a reduction in the anticipated
future cash flows resulting from a higher than anticipated
attrition rate associated with this acquired portfolio. The
Company has subsequently shortened the anticipated life
associated with this portfolio to reflect the higher attrition
rate. In 2007, the Company received approximately
$0.8 million in proceeds that were distributed from an
escrow account established upon the initial closing of this
acquisition. Such proceeds were meant to compensate the Company
for the attrition issues encountered with the BASC portfolio
subsequent to the acquisition date. The $0.8 million was
utilized to reduce the remaining carrying value of the
intangible asset amount associated with this portfolio.
On April 21, 2005, the Company acquired a portfolio of
approximately 330 ATMs and related contracts, primarily at BP
Amoco locations throughout the Midwest, for approximately
$9.0 million in cash. The purchase price was allocated
$0.2 million to ATM equipment and $8.8 million to the
acquired merchant contracts/relationships.
On December 21, 2005, the Company acquired all of the
outstanding shares of ATM National, Inc., the owner and operator
of a nationwide surcharge-free ATM network. The consideration
for such acquisition totaled $4.8 million, and was
comprised of $2.6 million in cash, 167,800 shares of
the Company’s common stock, and the assumption of
approximately $0.4 million in additional liabilities. Such
consideration has been allocated to the assets acquired and
liabilities assumed, including identifiable intangible assets,
based on their respective fair values as of the acquisition
date. Such allocation resulted in goodwill of approximately
$3.7 million, which was assigned to a separate reporting
unit representing the acquired ATM National, Inc. operations.
Such goodwill is not expected to be deductible for income tax
purposes. The following table
F-51
Table of Contents
CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
summarizes the estimated fair values of the assets acquired and
liabilities assumed as of the acquisition date (in thousands):
|
Cash
|
$ | 142 | ||
|
Trade accounts receivable, net
|
546 | |||
|
Other current assets
|
6 | |||
|
Property and equipment
|
14 | |||
|
Intangible assets subject to amortization (8 year
weighted-average life)
|
3,000 | |||
|
Intangible assets not subject to amortization
|
200 | |||
|
Other assets
|
11 | |||
|
Goodwill
|
3,684 | |||
|
Total assets acquired
|
7,603 | |||
|
Accounts payable and accrued liabilities
|
(1,710 | ) | ||
|
Deferred income taxes
|
(1,113 | ) | ||
|
Total liabilities assumed
|
(2,823 | ) | ||
|
Net assets acquired
|
$ | 4,780 | ||
As indicated in the above table, $3.0 million has been
allocated to intangible assets subject to amortization, which
represents the estimated value of the customer
contracts/relationships in place as of the date of the
acquisition. Such amount was determined by utilizing a
discounted cash flow approach and is being amortized on a
straight-line basis over an estimated useful life of eight
years, consistent with the Company’s existing policy. The
$0.2 million assigned to intangible assets not subject to
amortization represents the estimated value associated with the
acquired Allpoint surcharge-free network trade name. Such amount
was determined based on the relief from royalty valuation
approach.
| (3) | Stock-based Compensation |
As noted in Note 1(n), the Company adopted
SFAS No. 123R effective January 1, 2006. Under
SFAS No. 123R, the Company records the grant date fair
value of share-based compensation arrangements, net of estimated
forfeitures, as compensation expense on a straight-line basis
over the underlying service periods of the related awards. Prior
to the adoption of SFAS No. 123R, the Company utilized
the intrinsic value method of accounting for stock-based
compensation awards in accordance with APB No. 25, which
generally resulted in no compensation expense for employee stock
options issued with an exercise price greater than or equal to
the fair value of the Company’s common stock on the date of
grant. Furthermore, the Company historically utilized the
minimum value method of measuring equity share option values for
pro forma disclosure purposes under SFAS No. 123.
Accordingly, the Company adopted SFAS No. 123R on
January 1, 2006, utilizing the prospective application
method. Under the prospective application method, the fair value
approach outlined under SFAS No. 123R is applied only
to new awards granted subsequent to December 31, 2005, and
to existing awards only in the event that such awards are
modified, repurchased or cancelled subsequent to the
SFAS No. 123R adoption date. Accordingly, the
Company’s financial statements for all periods prior to
January 1, 2006 do not reflect any adjustments resulting
from the adoption of SFAS No. 123R. Additionally, the
adoption of SFAS No. 123R did not result in the
recording of a cumulative effect of a change in accounting
principle.
F-52
Table of Contents
CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table reflects the total stock-based compensation
expense amounts included in the accompanying consolidated
statements of operations:
| 2007 | 2006 | 2005 | ||||||||||
| (in thousands) | ||||||||||||
|
Cost of ATM operating revenues
|
$ | 87 | $ | 51 | $ | 172 | ||||||
|
Selling, general and administrative expenses
|
963 | 828 | 2,201 | |||||||||
|
Total stock-based compensation expense
|
$ | 1,050 | $ | 879 | $ | 2,373 | ||||||
Stock-Based
Compensation Plan
The Company currently has two long-term incentive
plans — the 2007 Stock Inventive Plan (the “2007
Plan”) and the 2001 Stock Incentive Plan (the “2001
Plan”). The purpose of each of these plans is to provide
Directors and employees of the Company and its affiliates
additional incentive and reward opportunities designed to
enhance the profitable growth of the Company and its affiliates.
Additionally, equity grants awarded under these plans generally
vest ratably over four years based on continued employment and
expire ten years from the date of grant.
2007 Plan. In August 2007, the Company’s
Board of Directors and the stockholders of the Company approved
the 2007 Plan. The adoption, approval, and effectiveness of this
plan was contingent upon the successful completion of the
Company’s initial public offering, which occurred in
December 2007. The 2007 Plan provides for the granting of
incentive stock options intended to qualify under
Section 422 of the Code, options that do not constitute
incentive stock options, restricted stock awards, performance
awards, phantom stock awards, and bonus stock awards. The number
of shares of common stock that may be issued under the 2007 Plan
may not exceed 3,179,393 shares, subject to further
adjustment to reflect stock dividends, stock splits,
recapitalizations and similar changes in the Company’s
capital structure. As of December 31, 2007, no options had
been granted under the 2007 Plan.
2001 Plan. In June 2001, the Company’s
Board of Directors adopted the 2001 Plan. Various plan
amendments have been approved since that time, the most recent
being in November 2007. As a result of the adoption of the 2007
Plan, at the direction of the Board of Directors, no further
awards will be granted under the Company’s 2001 Stock
Incentive Plan. As of December 31, 2007, options to
purchase an aggregate of 6,915,082 shares of common stock
(net of options cancelled) had been granted pursuant to the 2001
Plan, all of which qualified as non-qualified stock options, and
options to purchase 1,955,041 shares of common stock had
been exercised.
The Company handles stock option exercises and other stock
grants first through the issuance of treasury shares and then
through the issuance of new common shares.
Stock
Option Grants
The Company has historically used the Black-Scholes valuation
model (and the minimum value provisions) to determine the fair
value of stock options granted for pro forma reporting purposes
under SFAS No. 123. The Company’s outstanding
stock options generally vest annually over a four-year period
from the date of grant and expire 10 years after the date
of grant.
F-53
Table of Contents
CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table is a summary of the Company’s stock
option transactions for the year ended December 31, 2007:
|
Weighted Average |
Aggregate |
|||||||||||||||
|
Number of |
Weighted Average |
Contractual Term |
Intrinsic |
|||||||||||||
| Shares | Exercise Price | (in years) | Value | |||||||||||||
| (in thousands) | ||||||||||||||||
|
Options outstanding as of January 1, 2007
|
4,049,437 | $ | 6.64 | |||||||||||||
|
Granted
|
1,140,609 | $ | 12.15 | |||||||||||||
|
Exercised
|
(31,293 | ) | $ | 1.48 | ||||||||||||
|
Forfeited
|
(198,712 | ) | $ | 10.55 | ||||||||||||
|
Options outstanding as of December 31, 2007
|
4,960,041 | $ | 7.78 | 6.8 | $ | 14,636 | ||||||||||
|
Options exercisable as of December 31, 2007
|
2,654,986 | $ | 4.86 | 5.3 | $ | 14,242 | ||||||||||
Options exercised during the years ended December 31, 2007
and 2006 had a total intrinsic value of approximately
$0.3 million and $0.4 million, respectively, which
resulted in tax benefits to the Company of approximately
$0.1 million and $0.2 million, respectively. However,
because the Company is currently in a net operating loss
position, such benefits have not been reflected in the
accompanying consolidated financial statements, as required by
SFAS No. 123R. The cash received by the Company as a
result of option exercises was not material in either 2007 or
2006.
As indicated in the table above, the Company’s Board of
Directors granted an additional 1,140,609 stock options to
certain employees during the year ended December 31, 2007.
Such options were granted with a weighted-average exercise price
of $12.15 per share, which was equal to the estimated fair
market values of the Company’s common equity as of the
dates of grant, and vest ratably over a four-year service period
with a
10-year
contractual term.
Fair
Value Assumptions
In accordance with SFAS No. 123R, the Company
estimates the fair value of its options by utilizing the
Black-Scholes option pricing model. Such model requires the
input of certain subjective assumptions, including the expected
life of the options, a risk-free interest rate, a dividend rate,
and the future volatility of the Company’s common equity.
Listed below are the assumptions utilized in the fair value
calculations for options issued during 2007 and 2006:
| 2007 | 2006 | |||
|
Weighted average estimated fair value per stock option granted
|
$4.02 | $4.24 | ||
|
Valuation assumptions:
|
||||
|
Expected option term (years)
|
6.25 | 6.25 | ||
|
Expected volatility
|
31.76% - 35.30% | 34.50% - 35.90% | ||
|
Expected dividend yield
|
0.00% | 0.00% | ||
|
Risk-free interest rate
|
3.68% - 4.94% | 4.74% - 4.85% |
The expected option term of 6.25 years was determined based
on the simplified method outlined in SAB No. 107, as
issued by the SEC. Such method is based on the vesting period
and the contractual term for each grant and is calculated by
taking the average of the expiration date and the vesting period
for each
F-54
Table of Contents
CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
vesting tranche. In the future, as information regarding post
vesting termination becomes more available, the Company will
change this method of deriving the expected term. Such a change
could impact the fair value of options granted in the future.
Due to the lack of historical data regarding exercise history,
the Company will continue to utilize the simplified method
outlined in SAB No. 107, as permitted by
SAB No. 110. The estimated forfeiture rates utilized
by the Company are based on the Company’s historical option
forfeiture rates and represent the Company’s best estimate
of future forfeiture rates. In future periods, the Company will
monitor the level of actual forfeitures to determine if such
estimate should be modified prospectively, as well as adjusting
the compensation expense previously recorded.
For the majority of 2007, the Company’s common stock was
not publicly-traded and, therefore, the expected volatility
factors utilized were determined based on historical volatility
rates obtained for certain companies with publicly-traded equity
that operate in the same or related businesses as that of the
Company. The volatility factors utilized represent the simple
average of the historical daily volatility rates obtained for
each company within this designated peer group over multiple
periods of time, up to and including a period of time
commensurate with the expected option term discussed above. The
Company utilized this peer group approach, as the historical
transactions involving the Company’s private equity have
been limited and infrequent in nature. The Company believes that
the historical peer group volatility rates utilized above are
reasonable estimates of the Company’s expected future
volatility. As the Company only recently completed its initial
public offering and the Company has not granted any options
since its initial public offering, there is not adequate
historical information to utilize in determining the volatility
of its common stock. As a result, the Company will continue to
utilize the volatility factors based on its peer group until
such time as adequate historical information is available on its
own common stock.
The expected dividend yield was assumed to be zero as the
Company has not historically paid, and does not anticipate
paying, dividends with respect to its common equity. The
risk-free interest rates reflect the rates in effect as of the
grant dates for U.S. treasury securities with a term
similar to that of the expected option term referenced above.
Non-vested
Stock Options
The following table is a summary of the status of the
Company’s non-vested stock options as of December 31,
2007, and changes during the year ended December 31, 2007:
|
Number of |
Weighted |
|||||||
|
Shares Under |
Average |
|||||||
|
Outstanding |
Grant Date |
|||||||
| Options | Fair Value | |||||||
|
Non-vested options as of January 1, 2007
|
1,830,132 | $ | 2.27 | |||||
|
Granted
|
1,140,609 | $ | 4.02 | |||||
|
Vested
|
(665,686 | ) | $ | 1.76 | ||||
|
Non-vested options as of December 31, 2007
|
2,305,055 | $ | 3.28 | |||||
As of December 31, 2007, there was $4.7 million of
total unrecognized compensation cost related to non-vested
share-based compensation arrangements granted under the
Company’s stock option plan. That cost is expected to be
recognized on a straight-line basis over a remaining
weighted-average vesting period of approximately 2.9 years.
The total fair value of options vested during the year ended
December 31, 2007 was $1.2 million. Compensation
expense recognized related to stock options totaled
approximately $1.0 million and $0.6 million for the
years ended December 31, 2007 and 2006, respectively.
Additionally, the Company recognized approximately
$1.8 million of stock option-based compensation expense in
2005 related to the repurchase of shares underlying certain
employee stock options in connection with the issuance of its
Series B redeemable convertible preferred stock.
F-55
Table of Contents
CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Restricted
Stock
Pursuant to a restricted stock agreement dated January 20,
2003, the Company sold the President and Chief Executive Officer
of the Company 635,879 shares of common stock in exchange
for a promissory note in the amount of $940,800 (“Exchange
Proceeds”). Such shares vested ratably over a four-year
basis on each anniversary of the original grant date. The
underlying restricted stock agreement permitted the Company to
repurchase a portion of such shares prior to January 20,
2007, in certain circumstances. The agreement also contained a
provision allowing the shares to be “put” to the
Company in an amount sufficient to retire the entire unpaid
principal balance of the promissory note plus accrued interest.
On February 4, 2004, the Company amended the restricted
stock agreement to remove such “put” right. As a
result of this amendment, the Company determined that it would
need to recognize approximately $3.2 million in
compensation expense based on the fair value of the shares at
the date of the amendment. This expense was recognized on a
graded-basis over the four-year vesting period associated with
these restricted shares.
As of January 1, 2007, the number of non-vested shares for
the aforementioned restricted stock grant totaled
158,970 shares, and the remaining unrecognized compensation
cost to be recognized on a graded-basis was approximately
$11,000. Compensation expense associated with this restricted
stock grant totaled approximately $0.01 million,
$0.2 million, and $0.5 million, for the years ended
December 31, 2007, 2006, and 2005, respectively. No
additional restricted shares were granted or forfeited during
these periods. During the year ended December 31, 2007, the
remaining unvested shares of the restricted stock grant vested.
Other
Stock-Based Compensation
In addition to the compensation expense reflected above for the
stock options granted during the year ended December 31,
2007, the accompanying condensed consolidated financial
statements include compensation expense amounts relating to the
aforementioned restricted stock grant as well as certain
compensatory options that were granted in 2004. Because the
Company utilized the prospective method of adoption for
SFAS No. 123R, all unvested awards as of
January 1, 2006, will continue to be accounted for pursuant
to APB No. 25 and SFAS No. 123. Accordingly, the
consolidated statements of operations for the years ended
December 31, 2007, 2006, and 2005 include compensation
expense associated with such compensatory option grants. The
compensation expense amounts were not material in 2007, 2006, or
2005.
| (4) | Earnings per Share |
The Company reports its net income (loss) per share in
accordance with SFAS No. 128, Earnings per
Share. In accordance with SFAS No. 128, the
Company excludes potentially dilutive securities in its
calculation of diluted earnings per share (as well as their
related income statement impacts) when their impact on net
income (loss) available to common stockholders is anti-dilutive.
For the years ended December 31, 2007, 2006, and 2005, the
Company incurred net losses and, accordingly, excluded all
potentially dilutive securities from the calculation of diluted
earnings per share as their impact on the net loss available to
common stockholders was anti-dilutive. Such anti-dilutive
securities included outstanding stock options, restricted
shares, and, for periods prior to their conversion, the
Company’s Series B redeemable convertible preferred
stock. A summary of the following potentially dilutive
securities that have been excluded from the computation of
diluted net loss per share is as follows:
| 2007 | 2006 | 2005 | ||||||||||
|
Stock options
|
1,602,228 | 1,535,289 | 1,024,695 | |||||||||
|
Restricted shares
|
8,339 | 94,070 | 157,396 | |||||||||
|
Preferred stock
|
6,965,211 | 7,390,413 | 6,502,249 | |||||||||
|
Total potentially dilutive securities
|
8,575,778 | 9,019,772 | 7,684,340 | |||||||||
F-56
Table of Contents
CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| (5) | Related Party Transactions |
Subscriptions
Receivable
The Company currently has loans outstanding with certain
employees related to past exercises of employee stock options
and purchases of the Company’s common stock, as applicable.
Such loans, which were initiated in 2003, are reflected as
subscriptions receivable in the accompanying consolidated
balance sheet. The notes, which were due in December 2007, were
extended for one additional year. The rate of interest on each
of these loans remains at 5.0% per annum. In February 2005,
approximately $0.4 million of the outstanding loans were
repaid to the Company. In 2006, the Company repurchased
121,254 shares of the Company’s common stock held by
certain of the Company’s executive officers for
approximately $1.3 million in proceeds. Such proceeds were
primarily utilized by the executive officers to repay the
majority of the above-discussed subscriptions receivable,
including all accrued and unpaid interest related thereto. Such
loans were required to be repaid pursuant to SEC rules and
regulations prohibiting registrants from having loans with
executive officers. Finally, in 2007, approximately
$0.1 million of these loans were repaid by employees. As a
result of the repayments, the total amount outstanding under
such loans, including accrued interest, was $0.2 million
and $0.3 million as of December 31, 2007 and 2006.
Other
Related Parties
General. During 2007, the Company paid two of
its Directors, Messrs. Barone and Diaz, $1,000 per Board
meeting attended. Other Directors were not compensated during
2007 for Board services due to their employment
and/or
stockholder relationships with the Company. Additionally, all of
the Company’s Directors are reimbursed for their reasonable
expenses in attending Board and committee meetings.
The CapStreet Group. Fred R. Lummis, the
Chairman of the Company’s Board of Directors, is a senior
advisor to The CapStreet Group, LLC, the ultimate general
partner of CapStreet II and CapStreet Parallel II, which
collectively own 23.4% of the Company’s outstanding common
stock as of December 31, 2007.
Additionally, prior to December 2005, The CapStreet Group owned
a minority interest in Susser Holdings, LLC, a company for whom
the Company provided ATM management services during the normal
course of business. Amounts earned from Susser Holdings
accounted for approximately 1.5% of the Company’s total
revenues for the year ended December 31, 2005.
TA Associates. Michael Wilson and Roger
Kafker, both of whom were on the Company’s Board of
Directors during 2007, are managing directors of TA Associates,
Inc., affiliates of which are Cardtronics’ stockholders and
own 31.8% of the Company’s outstanding common stock as of
December 31, 2007. On December 13, 2007,
Mr. Kafker resigned from our Board of Directors in
connection with the closing of our initial public offering.
Mr. Kafker’s resignation was not caused by any
disagreements with us relating to our operations, policies or
procedures.
Jorge Diaz, a member of the Company’s Board of
Directors, is the President and Chief Executive Officer of
Personix, a division of Fiserv. In 2007 and 2006, both Personix
(though indirectly) and Fiserv provided third party services
during the normal course of business to Cardtronics. During the
years ended December 31, 2007 and 2006, amounts paid to
Personix and Fiserv represented less than 3.1% and 0.2%,
respectively, of the Company’s total cost of revenues and
selling, general, and administrative expenses. The increase in
2007 was the result of the 7-Eleven ATM Transaction, as the
Company assumed a master ATM management agreement in conjunction
with the acquisition under which Fiserv provides a number of
ATM-related services for the acquired 7-Eleven ATMs, including
transaction processing, network hosting, network sponsorship,
maintenance, cash management, and cash replenishment.
Bansi, S.A. Institución de Banca Multiple
(“Bansi”), an entity that owns a minority interest
in the Company’s subsidiary Cardtronics Mexico, provides
various ATM management services to Cardtronics Mexico
F-57
Table of Contents
CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
in the normal course of business, including serving as the vault
cash provider, bank sponsor, and landlord for Cardtronics Mexico
as well as providing other miscellaneous services. Amounts paid
to Bansi represented less than 0.4% and 0.1% of the
Company’s total cost of revenues and selling, general, and
administrative expenses for the years ended December 31,
2007 and 2006, respectively.
Preferred Stock Conversion. In connection with
its initial public offering in December 2007, the Company’s
Series B redeemable convertible preferred stock shares were
converted into shares of its common stock. Based on the $10.00
initial public offering price and the terms of the
Company’s shareholders agreement, the 894,568 shares
held by certain funds controlled by TA Associates, Inc. (the
“TA Funds”) converted into 12,259,286 shares of
common stock (on a split-adjusted basis). The remaining
35,221 shares of Series B redeemable convertible
preferred stock not held by the TA Funds converted into
279,955 shares of our common stock (on a split-adjusted
basis). As a result of this conversion, no shares of preferred
stock were outstanding subsequent to the initial public
offering. For additional information on the conversion of the
Series B shares controlled by the TA Funds, see
Note 14.
Restricted Stock Grant. In January 2003, the
Company sold the President and Chief Executive Officer of the
Company 635,879 shares of common stock in exchange for a
promissory note in the amount of $940,800. The agreement
permitted the Company to repurchase a portion of such shares
prior to January 20, 2007 in certain circumstances. The
agreement also contained a provision allowing the shares to be
“put” to the Company in an amount sufficient to retire
the entire unpaid principal balance of the promissory note plus
accrued interest. In February 2004, the Company amended the
restricted stock agreement to remove such “put” right.
The Company recognized approximately $0.01 million,
$0.2 million, and $0.5 million in compensation expense
in the accompanying consolidated statements of operations for
the years ended December 31, 2007, 2006, and 2005,
respectively, associated with such restricted stock grant.
(6) Prepaid
Expenses, Deferred Costs, and Other Current Assets
The following table sets forth a summary of prepaid expenses,
deferred costs, and other current assets as of December 31,
2007 and 2006:
| 2007 | 2006 | |||||||
| (in thousands) | ||||||||
|
Prepaid expenses
|
$ | 9,915 | $ | 6,519 | ||||
|
Available-for-sale securities, at market value
|
— | 4,184 | ||||||
|
Current portion of interest rate swaps
|
— | 4,079 | ||||||
|
Deferred costs and other current assets
|
1,712 | 396 | ||||||
|
Total
|
$ | 11,627 | $ | 15,178 | ||||
The overall decrease in prepaid expenses, deferred costs, and
other current assets from December 31, 2006 to
December 31, 2007 was primarily attributable to the January
2007 sale of the available-for-sale securities held as of
December 31, 2006 and the change in the market value of the
Company’s interest rate swaps. The available-for-sale
securities held as of December 31, 2006 consisted of
approximately 310,000 shares of Winn-Dixie’s
post-bankruptcy equity securities awarded to Cardtronics by the
bankruptcy court in 2006 as a part of Winn-Dixie’s plan of
reorganization. The securities had an initial cost basis of
approximately $3.4 million, and the related
$0.8 million of unrealized gains associated with these
securities was recorded in other comprehensive income, net of
taxes, as of December 31, 2006. The Company subsequently
sold these securities in January 2007 for total gross proceeds
of approximately $3.9 million. Additionally, as a result of
the decreases in domestic interest rates during the latter part
of 2007, the fair value of the Company’s interest rate
swaps declined from an asset position as of December 31,
2006 to a liability position as of December 31, 2007.
F-58
Table of Contents
CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Partially offsetting these declines were higher prepaid merchant
commissions and corporate income taxes associated with the
Company’s U.K. operations during 2007.
(7) Property
and Equipment, net
The following table sets forth a summary of property and
equipment as of December 31, 2007 and 2006:
| 2007 | 2006 | |||||||
| (in thousands) | ||||||||
|
ATM and Vcom equipment and related costs
|
$ | 199,146 | $ | 114,803 | ||||
|
Office furniture, fixtures, and other
|
18,490 | 9,299 | ||||||
|
Total
|
217,636 | 124,102 | ||||||
|
Less accumulated depreciation
|
(53,724 | ) | (37,434 | ) | ||||
|
Net property and equipment
|
$ | 163,912 | $ | 86,668 | ||||
The increase in property and equipment during 2007 was primarily
the result of the 7-Eleven ATM Transaction, as well as the
deployment of additional ATMs by the Company’s
international operations. ATMs held as deployments in process,
as discussed in Note 1(h), totaled
$11.7 million and $3.1 million as of December 31,
2007 and 2006, respectively.
| (8) | Intangible Assets |
Intangible
Assets with Indefinite Lives
The following table depicts the net carrying amount of the
Company’s intangible assets with indefinite lives as of
December 31, 2007 and 2006, as well as the changes in the
net carrying amounts for the year ended December 31, 2007
by segment:
| Goodwill | Trade Name | |||||||||||||||||||||||
| U.S. | U.K. | Mexico | U.S. | U.K. | Total | |||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||
|
Balance as of December 31, 2006
|
$ | 86,702 | $ | 82,172 | $ | 689 | $ | 200 | $ | 3,923 | $ | 173,686 | ||||||||||||
|
Acquisitions
|
62,185 | — | — | — | — | 62,185 | ||||||||||||||||||
|
Purchase price adjustments
|
1,558 | — | — | — | — | 1,558 | ||||||||||||||||||
|
Foreign currency translation adjustments
|
— | 1,878 | 1 | — | 92 | 1,971 | ||||||||||||||||||
|
Balance at December 31, 2007
|
$ | 150,445 | $ | 84,050 | $ | 690 | $ | 200 | $ | 4,015 | $ | 239,400 | ||||||||||||
The increase in goodwill for during the year-ended
December 31, 2007 was primarily the result of the
7-Eleven ATM
Transaction in July 2007 (see Note 2). Additionally,
certain adjustments related to deferred taxes were made to the
E*TRADE Access purchase price allocation during 2007. Such
adjustments had the effect of increasing the previously reported
goodwill amount for the E*TRADE Access acquisition by
$1.6 million.
F-59
Table of Contents
CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Intangible
Assets with Definite Lives
The following is a summary of the Company’s intangible
assets that are subject to amortization as of December 31,
2007 as well as the weighted average remaining amortization
period:
|
Weighted |
||||||||||||||||
|
Average |
||||||||||||||||
|
Remaining |
Gross |
Net |
||||||||||||||
|
Amortization |
Carrying |
Accumulated |
Carrying |
|||||||||||||
| Period | Amount | Amortization | Amount | |||||||||||||
| (in thousands) | ||||||||||||||||
|
Customer and branding contracts/relationships
|
8.1 | $ | 162,995 | $ | (49,574 | ) | $ | 113,421 | ||||||||
|
Deferred financing costs
|
5.4 | 13,867 | (4,260 | ) | 9,607 | |||||||||||
|
Exclusive license arrangements
|
5.6 | 5,369 | (1,763 | ) | 3,606 | |||||||||||
|
Non-compete agreements
|
2.1 | 100 | (48 | ) | 52 | |||||||||||
|
Total
|
7.8 | $ | 182,331 | $ | (55,645 | ) | $ | 126,686 | ||||||||
The Company’s intangible assets with definite lives are
being amortized over the assets’ estimated useful lives
utilizing the straight-line method. Estimated useful lives range
from three to twelve years for customer and branding
contracts/relationships and four to eight years for exclusive
license agreements. The Company has also assumed an estimated
life of four years for its non-compete agreements. Deferred
financing costs are amortized through interest expense over the
contractual term of the underlying borrowings utilizing the
effective interest method. The Company periodically reviews the
estimated useful lives of its identifiable intangible assets,
taking into consideration any events or circumstances that might
result in a reduction in fair value or a revision of those
estimated useful lives.
Amortization of customer and branding contracts/relationships,
exclusive license agreements, and non-compete agreements,
including impairment charges, totaled $18.9 million,
$12.0 million, and $9.0 million for the years ended
December 31, 2007, 2006, and 2005, respectively. The
increase in amortization during 2007 was primarily due to
$5.7 million of additional amortization expense recorded to
impair certain contract-based intangible assets. Of this amount,
approximately $5.1 million relates to the Company’s
merchant contract with Target that was acquired in 2004. The
Company had been in discussions with Target regarding additional
services that could be offered under the existing contract to
increase the number of transactions conducted on, and cash flows
generated by, the underlying ATMs. However, the Company was
unable to make any progress in this regard during 2007, and,
based on discussions that had been held with Target, concluded
that the likelihood of being able to provide such additional
services has decreased considerably. Furthermore, average
monthly transaction volumes associated with this particular
contract continued to decrease in 2007 when compared to the same
period last year. Accordingly, the Company concluded that the
above impairment charge was warranted during the third quarter
of 2007. The impairment charge recorded served to write-off the
remaining unamortized intangible asset associated with this
merchant contract. Management is currently working with Target
to restructure the terms of the existing contract in an effort
to improve the underlying cash flows associated with such
contract and to offer the additional services noted above, which
the Company believes could significantly increase the future
cash flows earned under this contract. Also, contributing to the
increase in amortization expense in 2007 was the amortization of
the contract intangible assets recorded in conjunction with the
Company’s acquisition of the 7-Eleven Financial Services
Business. See Note 2 for additional details on the
7-Eleven ATM Transaction.
Included in the 2006 year-to-date figure was approximately
$2.8 million in additional amortization expense related to
the impairment of the intangible asset associated with the
acquired BASC ATM portfolio in the Company’s
U.S. reporting segment. Such impairment relates to a
reduction in anticipated future cash flows
F-60
Table of Contents
CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
resulting from a higher than anticipated attrition rate
associated with this acquired portfolio. Additionally, the
Company recorded a $1.2 million impairment charge in 2005
related to certain other previously acquired merchant
contract/relationship intangible assets.
Amortization of deferred financing costs and bond discount
totaled $1.6 million, $1.4 million, and
$1.9 million for the years ended December 31, 2007,
2006, and 2005, respectively. During the year ended 2006, the
Company wrote-off approximately $0.5 million in deferred
financing costs in connection with certain modifications made to
the Company’s existing revolving credit facilities.
Additionally, during the year ended December 31, 2005, the
Company also wrote-off approximately $5.0 million in
deferred financing costs as a result of an amendment to its
existing bank credit facility and the repayment of its existing
term loans.
Estimated amortization expense for the Company’s intangible
assets with definite lives for each of the next five years, and
thereafter is as follows:
|
Customer |
||||||||||||||||||||
|
Contracts |
Exclusive |
|||||||||||||||||||
|
and |
Deferred |
License |
Non-compete |
|||||||||||||||||
| Relationships | Financing Costs | Agreements | Agreements | Total | ||||||||||||||||
| (in thousands) | ||||||||||||||||||||
|
2008
|
$ | 16,585 | $ | 1,517 | $ | 736 | $ | 25 | $ | 18,863 | ||||||||||
|
2009
|
16,150 | 1,630 | 731 | 25 | 18,536 | |||||||||||||||
|
2010
|
14,616 | 1,754 | 634 | 2 | 17,006 | |||||||||||||||
|
2011
|
12,944 | 1,893 | 521 | — | 15,358 | |||||||||||||||
|
2012
|
11,987 | 1,754 | 453 | — | 14,194 | |||||||||||||||
|
Thereafter
|
41,139 | 1,059 | 531 | — | 42,729 | |||||||||||||||
|
Total
|
$ | 113,421 | $ | 9,607 | $ | 3,606 | $ | 52 | $ | 126,686 | ||||||||||
| (9) | Prepaid Expenses and Other Non-current Assets |
The following table is a summary of prepaid expenses and other
non-current assets as of December 31, 2007 and 2006:
| 2007 | 2006 | |||||||
| (in thousands) | ||||||||
|
Interest rate swaps, non-current
|
$ | — | $ | 2,994 | ||||
|
Prepaid expenses
|
784 | 627 | ||||||
|
Deferred costs
|
2,218 | 1,364 | ||||||
|
Other
|
1,183 | 356 | ||||||
|
Total
|
$ | 4,185 | $ | 5,341 | ||||
The overall decrease in prepaid expenses and other non-current
assets from December 31, 2006 to December 31, 2007 was
primarily attributable to the change in the market value of the
Company’s interest rate swaps. As a result of the decreases
in interest rates during the latter part of 2007, the fair value
of the Company’s interest rate swaps declined from an asset
position as of December 31, 2006 to a liability position as
of December 31, 2007. See Note 17.
| (10) | Accrued Liabilities |
The Company’s accrued liabilities include accrued merchant
fees and other monies owned to merchants, interest payments,
maintenance costs, and cash management fees. As of
December 31, 2007, other accrued
F-61
Table of Contents
CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
expenses include marketing costs, costs associated with the
Company’s initial public offering, professional services,
and other miscellaneous charges. The following table is a
summary of the Company’s accrued liabilities as of
December 31, 2007 and 2006:
| 2007 | 2006 | |||||||
| (in thousands) | ||||||||
|
Accrued merchant fees
|
$ | 11,486 | $ | 7,915 | ||||
|
Accrued interest
|
11,257 | 7,954 | ||||||
|
Accrued maintenance
|
6,970 | 2,090 | ||||||
|
Accrued purchases
|
6,098 | 343 | ||||||
|
Accrued armored
|
5,879 | 3,242 | ||||||
|
Accrued cash management fees
|
5,574 | 2,740 | ||||||
|
Accrued merchant settlement
|
4,254 | 27 | ||||||
|
Accrued compensation
|
3,832 | 3,499 | ||||||
|
Accrued processing costs
|
1,477 | 803 | ||||||
|
Accrued ATM telecommunication fess
|
1,424 | 650 | ||||||
|
Other accrued expenses
|
12,273 | 5,078 | ||||||
|
Total
|
$ | 70,524 | $ | 34,341 | ||||
The increased accrued liabilities balance as of
December 31, 2007 was primarily the result of the
incremental expenses now being incurred related to the acquired
7-Eleven Financial Services Business. Of the $36.2 million
increase in the accrual from December 31, 2006,
$16.3 million was directly related to the acquired 7-Eleven
Financial Services Business. Additionally, as of
December 31, 2007, the Company had $5.7 million in
accrued liabilities (with an offset in restricted cash)
associated with funds collected on behalf of, but not yet
remitted to, certain of the Company’s merchant customers,
the majority of which resulted from the timing of the settlement
of funds between the Company’s third party vendors, the
Company, and its merchant customers in conjunction with the
Company’s in-house processing operations. Also contributing
to the increase was the additional accrued interest associated
with the Company’s Series B Notes issued in July 2007.
| (11) | Asset Retirement Obligations |
Asset retirement obligations consist primarily of deinstallation
costs of the ATM and the costs to restore the ATM site to its
original condition. The Company is legally required to perform
this deinstallation and restoration work. In accordance with
SFAS No. 143, for each group of ATMs, the Company
recognizes the fair value of a liability for an asset retirement
obligation and capitalizes that cost as part of the cost basis
of the related asset. The related assets are being depreciated
on a straight-line basis over the estimated useful lives of the
underlying ATMs, and the related liabilities are being accreted
to their full value over the same period of time.
F-62
Table of Contents
CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table is a summary of the changes in the
Company’s asset retirement obligation liability for the
years ended December 31, 2007 and 2006:
| 2007 | 2006 | |||||||
| (in thousands) | ||||||||
|
Asset retirement obligation as of beginning of period
|
$ | 9,989 | $ | 8,339 | ||||
|
Additional obligations
|
9,805 | 2,291 | ||||||
|
Accretion expense
|
1,122 | 272 | ||||||
|
Payments
|
(1,551 | ) | (1,079 | ) | ||||
|
Change in estimates
|
(1,974 | ) | — | |||||
|
Foreign currency translation adjustments
|
57 | 166 | ||||||
|
Asset retirement obligation as of end of period
|
$ | 17,448 | $ | 9,989 | ||||
The additional obligations amount reflected above for the year
ended December 31, 2007 reflects new ATM deployments in all
of the Company’s markets during this period as well as the
obligations assumed in connection with the 7-Eleven ATM
Transaction. The change in estimate for the year ended
December 31, 2007 represents a change in the anticipated
amount the Company will incur to deinstall and refurbish certain
merchant locations, based on actual costs incurred on recent ATM
deinstallations.
| (12) | Other Long-term Liabilities and Minority Interest in Subsidiary |
The following table is summary of the components of the
Company’s other long-term liabilities as of
December 31, 2007 and 2006:
| 2007 | 2006 | |||||||
| (in thousands) | ||||||||
|
Interest rate swaps
|
$ | 9,155 | $ | — | ||||
|
Deferred revenue
|
3,380 | 481 | ||||||
|
Obligations associated with acquired unfavorable contracts
|
7,626 | — | ||||||
|
Minority interest in subsidiary
|
— | 112 | ||||||
|
Other long-term liabilities
|
3,231 | 3,471 | ||||||
|
Total
|
$ | 23,392 | $ | 4,064 | ||||
The increase in total other long-term liabilities is primarily
due to the $11.7 million in other long-term liabilities
recorded to value certain unfavorable equipment leases and an
operating contract assumed as part of the 7-Eleven ATM
Transaction. These liabilities are being amortized over the
remaining terms of the underlying contracts and serve to reduce
the corresponding ATM operating expense amounts to fair value.
During 2007, the Company recognized approximately
$3.7 million of expense reductions associated with the
amortization of these liabilities. Also contributing to the
increase was the Company’s interest rate swaps, the fair
value of which declined from an asset position as of
December 31, 2006 to a liability position as of
December 31, 2007 as a result of the decreases in domestic
interest rates during the latter part of 2007.
The minority interest in subsidiary amount as of
December 31, 2006 represents the equity interests of the
minority shareholders of Cardtronics Mexico. As of
December 31, 2007, the cumulative losses generated by
Cardtronics Mexico and allocable to such minority interest
shareholders exceeded the underlying equity amounts of such
minority interest shareholders. Accordingly, all future losses
generated by Cardtronics Mexico will be allocated 100% to
Cardtronics until such time that Cardtronics Mexico generates a
cumulative amount of earnings sufficient to cover all excess
losses allocable to the Company, or until such time that the
minority interest shareholders contribute additional equity to
Cardtronics Mexico in an amount sufficient to cover such
F-63
Table of Contents
CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
losses. As of December 31, 2007, the cumulative amount of
excess losses allocated to Cardtronics totaled approximately
$0.2 million. Such amount is net of contributions of
$0.3 million made by the minority interest shareholders in
August and December of 2007.
| (13) | Long-term Debt |
The following is a summary of the Company’s long-term debt
and notes payable as of December 31, 2007 and 2006:
| 2007 | 2006 | |||||||
| (in thousands) | ||||||||
|
Revolving credit loan facility, including swing-line credit
facility as of December 31, 2006 (weighted-average combined
rate of 8.3% and 8.7% at December 31, 2007 and 2006,
respectively)
|
$ | 4,000 | $ | 53,100 | ||||
|
Senior subordinated notes due August 2013, net of unamortized
discount of $3.9 million and $1.2 million as of
December 31, 2007 and 2006, respectively
|
296,088 | 198,783 | ||||||
|
Other
|
8,527 | 1,012 | ||||||
|
Total
|
308,615 | 252,895 | ||||||
|
Less current portion
|
882 | 194 | ||||||
|
Total excluding current portion
|
$ | 307,733 | $ | 252,701 | ||||
Credit
Facility
The Company’s revolving credit facility provides for
$175.0 million in borrowings, subject to certain
restrictions. Borrowings under the facility currently bear
interest at the London Interbank Offered Rate
(“LIBOR”) plus a spread, which was 2.75% as of
December 31, 2007. Additionally, the Company pays a
commitment fee of 0.3% per annum on the unused portion of the
revolving credit facility. Substantially all of the
Company’s assets, including the stock of its wholly-owned
domestic subsidiaries and 66.0% of the stock of its foreign
subsidiaries, are pledged to secure borrowings made under the
revolving credit facility. Furthermore, each of the
Company’s domestic subsidiaries has guaranteed the
Company’s obligations under such facility.
The primary restrictive covenants within the facility include
(i) limitations on the amount of senior debt that the
Company can have outstanding at any given point in time,
(ii) the maintenance of a set ratio of earnings to fixed
charges, as computed on a rolling
12-month
basis, (iii) limitations on the amounts of restricted
payments that can be made in any given year, including
dividends, and (iv) limitations on the amount of capital
expenditures that the Company can incur on a rolling
12-month
basis. There are currently no restrictions on the ability of the
Company’s wholly-owned subsidiaries to declare and pay
dividends directly to the Company. As of December 31, 2007,
the Company was in compliance with all applicable covenants and
ratios under the facility.
As of December 31, 2007, $4.0 million of borrowings
were outstanding under the revolving credit facility.
Additionally, the Company had posted $7.5 million in
letters of credit under the facility in favor of the lessors
under the ATM equipment leases that the Company assumed in
connection with the 7-Eleven ATM Transaction. These letters of
credit, which the lessors may draw upon in the event the Company
fails to make payments under the leases, further reduce the
Company’s borrowing capacity under the facility. As of
December 31, 2007, the Company’s available borrowing
capacity under the amended facility, as determined under the
earnings before interest, taxes, depreciation and accretion, and
amortization (“EBITDA”) and interest expense covenants
contained in the agreement, totaled approximately
$163.5 million.
F-64
Table of Contents
CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Senior
Subordinated Notes
Series A Notes. In October 2006, the
Company completed the registration of $200.0 million in
senior subordinated notes, which were originally issued in
August 2005 pursuant to Rule 144A of the Securities Act of
1933, as amended. The Series A Notes, which are subordinate
to borrowings made under the revolving credit facility, mature
in August 2013 and carry a 9.25% coupon with an effective yield
of 9.375%. Interest under the notes is paid semiannually in
arrears on February 15th and August 15th of
each year. The notes, which are guaranteed by the Company’s
domestic subsidiaries, contain certain covenants that, among
other things, limit the Company’s ability to incur
additional indebtedness and make certain types of restricted
payments, including dividends. Under the terms of the indenture,
at any time prior to August 15, 2008, the Company may
redeem up to 35% of the aggregate principal amount of the
Series A Notes at a redemption price of 109.250% of the
principal amount thereof, plus any accrued and unpaid interest,
subject to certain conditions outlined in the indenture.
Additionally, at any time prior to August 15, 2009, the
Company may redeem all or part of the Series A Notes at a
redemption price equal to the sum of 100% of the principal
amount plus an “Applicable Premium”, as defined in the
indenture, plus any accrued and unpaid interest. On or after
August 15, 2009, the Company may redeem all or a part of
the Series A Notes at the redemption prices set forth by
the indenture plus any accrued and unpaid interest.
Series B Notes. On July 20, 2007,
the Company sold $100.0 million of 9.25% senior
subordinated notes due 2013 — Series B pursuant
to Rule 144A of the Securities Act of 1933. Net proceeds
from the offering, which totaled $95.3 million, were used
to fund a portion of the 7-Eleven ATM Transaction and to pay
fees and expenses related to the acquisition. The form and terms
of the Series B Notes are substantially the same as the
form and terms of the Series A Notes, except that
(i) the Series A Notes have been registered with the
SEC while the Series B Notes remain subject to transfer
restrictions until the Company completes an exchange offer, and
(ii) the Series B Notes were issued with Original
Issue Discount and have an effective yield of 9.54%. Pursuant to
the terms of the registration rights agreement entered into in
conjunction with the offering, the Company was required to file
a registration statement with the SEC within 240 days of
the issuance of the Series B Notes with respect to an offer
to exchange each of the Series B Notes for a new issue of
our debt securities registered under the Securities Act with
terms identical to those of the Series B Notes (except for
the provisions relating to the transfer restrictions and payment
of additional interest) and use reasonable best efforts to have
the exchange offer become effective as soon as reasonably
practicable after filing but in any event no later than
360 days after the initial issuance date of the
Series B Notes. On February 14, 2008, the Company
filed its initial registration statement on
Form S-4
with the SEC. However, if the Company fails to satisfy its
registration obligations, it will be required, under certain
circumstances, to pay additional interest to the holders of the
Series B Notes.
As of December 31, 2007, the Company was in compliance with
all applicable covenants required under the Series A and
Series B Notes.
Other
Facilities
Bank Machine overdraft facility. In addition
to Cardtronics, Inc.’s revolving credit facility, Bank
Machine has a £2.0 million unsecured overdraft
facility that expires in July 2008. Such facility, which bears
interest at 1.75% over the bank’s base rate (5.5% as of
December 31, 2007), is utilized for general corporate
purposes for the Company’s United Kingdom operations. As of
December 31, 2007, the full amount of this facility had
been utilized to help fund certain working capital commitments
and to post a £275,000 bond. Amounts outstanding under the
overdraft facility, other than those amounts utilized for
posting bonds, are reflected in accounts payable in our
consolidated balance sheet, as such amounts are automatically
repaid once cash deposits are made to the underlying bank
accounts.
Cardtronics Mexico equipment financing
agreements. During 2006 and 2007, Cardtronics
Mexico entered into six separate five-year equipment financing
agreements with a single lender. Such agreements,
F-65
Table of Contents
CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
which are denominated in pesos and bear interest at an average
fixed rate of 10.96%, were utilized for the purchase of
additional ATMs to support our Mexico operations. As of
December 31, 2007, approximately $91.2 million pesos
($8.4 million U.S.) were outstanding under the agreements
in place at the time, with future borrowings to be individually
negotiated between the lender and Cardtronics. Pursuant to the
terms of the loan agreement, we have issued a guaranty for 51.0%
of the obligations under this agreement (consistent with our
ownership percentage in Cardtronics Mexico.) As of
December 31, 2007, the total amount of the guaranty was
$46.5 million pesos ($4.3 million U.S.).
Debt
Maturities
Aggregate maturities of the principal amounts of the
Company’s long-term debt as of December 31, 2007, were
as follows (in thousands) for the years indicated:
|
2008
|
$ | 882 | ||
|
2009
|
1,735 | |||
|
2010
|
2,147 | |||
|
2011
|
2,372 | |||
|
2012
|
5,391 | |||
|
2013
|
300,000 | |||
|
Total
|
$ | 312,527 | ||
Reflected in the 2013 amount in the above table is the full face
value of the Company’s senior subordinated
notes — Series A and Series B, which have
been reflected net of unamortized discounts of approximately
$3.9 million in the accompanying consolidated balance sheet
as of December 31, 2007.
(14) Redeemable
Convertible Preferred Stock
During 2005, the Company issued 929,789 shares of its
Series B redeemable convertible preferred stock, of which
894,568 shares were issued to the TA Funds for
$75.0 million in proceeds and the remaining
35,221 shares were issued as partial consideration for the
Bank Machine acquisition. The Series B shareholders had
certain preferences to the Company’s common shareholders,
including board representation rights and the right to receive
their original issue price prior to any distributions being made
to the common shareholders as part of a liquidation, dissolution
or winding up of the Company. In addition, the Series B
shares were convertible into the same number of shares of the
Company’s common stock, as adjusted for future stock splits
and the issuance of dilutive securities. The Series B
shares had no stated dividends and were redeemable at the option
of a majority of the Series B holders at any time on or
after the earlier of (i) December 2013 and (ii) the
date that is 123 days after the first day that none of the
Company’s 9.25% senior subordinated notes remain
outstanding, but in no event earlier than February 2010.
On June 1, 2007, the Company entered into a letter
agreement with the TA Funds pursuant to which the TA Funds
agreed to (i) approve the 7-Eleven ATM Transaction and
(ii) not transfer or otherwise dispose of any of their
shares of Series B redeemable convertible preferred stock
during the period beginning on the date thereof and ending on
the earlier of the date the 7-Eleven ATM Transaction closed
(i.e., July 20, 2007) or September 1, 2007.
Pursuant to the terms of the letter agreement, the Company
amended the terms of its Series B redeemable convertible
preferred stock in order to increase, under certain
circumstances, the number of shares of common stock into which
the TA Funds’ Series B redeemable convertible
preferred stock would be convertible in the event the Company
completes an initial public offering. In December 2007, the
Company completed its initial public offering, and based on the
$10.00 per share offering price and the terms of the letter
agreement, the 894,568 shares held by the TA Funds
converted into 12,259,286 shares of common stock (on a
split-adjusted basis). Based on the $10.00 initial public
offering price, the value of the incremental shares
F-66
Table of Contents
CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
received by the TA Funds in connection with this induced
conversion totaled $36.0 million. Such amount is reflected
as an increase in the Company’s net loss available to
common stockholders for the year ended December 31, 2007.
This induced conversion charge would typically be reflected as
an increase in additional paid-in capital and a reduction of
retained earnings. However, as the Company is in an accumulated
deficit position, this reduction is recorded against additional
paid-in capital instead, resulting in offsetting charges within
additional paid-in capital.
The following table shows changes in the net carrying value of
the Company’s Series B redeemable convertible
preferred stock for the years ended December 31, 2007,
2006, and 2005:
| 2007 | 2006 | 2005 | ||||||||||
| (in thousands) | ||||||||||||
|
Balance as of January 1
|
$ | 76,594 | $ | 76,329 | $ | — | ||||||
|
Issuances, net of issuance costs of $1,858
|
— | — | 76,095 | |||||||||
|
Accretion of issuance costs
|
251 | 265 | 234 | |||||||||
|
Conversion into common stock
|
(76,845 | ) | — | — | ||||||||
|
Balance as of December 31
|
$ | — | $ | 76,594 | $ | 76,329 | ||||||
(15) Employee
Benefits
The Company offers a 401(k) plan to its employees but has not
historically made matching contributions. In 2007, the Company
began matching 25% of employee contributions up to 6.0% of the
employee’s salary (for a maximum matching contribution of
1.5% of the employee’s salary by the Company). Employees
are immediately vested in their contributions while the
Company’s matching contributions will vest at a rate of 20%
per year.
| (16) | Commitments and Contingencies |
Legal
and Other Regulatory Matters
National Federation of the Blind
(“NFB”). In connection with the
Company’s acquisition of the ATM business of E*TRADE
Access, the Company assumed E*TRADE Access’ interests and
liability for a lawsuit instituted in the United States District
Court for the District of Massachusetts (the “Court”)
by the NFB, the NFB’s Massachusetts chapter, and several
individual blind persons (collectively, the “Private
Plaintiffs”) as well as the Commonwealth of Massachusetts
with respect to claims relating to the alleged inaccessibility
of ATMs for those persons who are visually impaired. After the
acquisition of the E*TRADE Access ATM portfolio, the Private
Plaintiffs named Cardtronics as a co-defendant with E*TRADE
Access and E*TRADE Access’ parent — E*TRADE Bank,
and the scope of the lawsuit has expanded to include both
E*TRADE Access’ ATMs as well as the Company’s
pre-existing ATM portfolio.
In June 2007, the parties completed and executed a settlement
agreement, which was approved by the Court on December 4,
2007. The principal objective of the settlement is for 90% of
all transactions (as defined in the settlement agreement)
conducted on Cardtronics’ Company-owned and merchant-owned
ATMs, by July 1, 2010, to be conducted at ATMs that are
voice-guided. In an effort to accomplish such objective, the
Company is subject to numerous interim reporting requirements
and a one-time obligation to market voice-guided ATMs to a
subset of the Company’s merchants that do not currently
have voice-guided ATMs. Finally, the settlement requires the
Company to pay $900,000 in attorneys’ fees to the NFB and
to make a $100,000 contribution to the Massachusetts’ local
consumer aid fund. These amounts had been fully reserved for,
and the Company does not believe that the settlement
requirements outlined above will have a material impact on its
financial condition or results of operations.
F-67
Table of Contents
CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Other Matters. In 2006, Duane Reade, Inc.
(“Customer”), one of the Company’s merchant
customers, filed a complaint in the New York State Supreme Court
alleging that Cardtronics had breached its ATM operating
agreement with the Customer by failing to pay the Customer the
proper amount of fees under the agreement. The Customer is
claiming that it is owed no less than $600,000 in lost revenues,
exclusive of interests and costs, and projects that additional
damages will accrue to them at a rate of approximately $100,000
per month, exclusive of interest and costs. As the term of the
Company’s operating agreement with the Customer extends to
December 2014, the Customer’s claims could exceed
$12.0 million. In response to a motion for summary judgment
filed by the Customer and a cross-motion filed by the Company,
the New York State Supreme Court ruled in September 2007 that
the Company’s interpretation of the ATM operating agreement
was the appropriate interpretation and expressly rejected the
Customer’s proposed interpretations. The Customer has
appealed this ruling. Notwithstanding that appeal, we believe
that the ultimate resolution of this dispute will not have a
material adverse impact on our financial condition or results of
operations.
In March 2006, the Company filed a complaint in the United
States District Court in Portland, Oregon, against CGI, Inc.
(“Distributor”), a distributor for the E*TRADE
Access’ ATM business acquired by the Company. The complaint
alleged that the Distributor breached its agreement by directly
competing with the Company on certain merchant accounts. The
Distributor denied such violations, alleging that an oral
modification of its distributor agreement with E*TRADE Access
permitted such activities, and initiated a counter-claim for
alleged under-payments by the Company, who expressly denied the
Distributor’s allegations. On July 31, 2007, the
parties executed a settlement agreement wherein neither party
admitted any wrongdoing, all differences were resolved, and both
parties released each other from all claims made in the lawsuit.
In connection with this settlement, the distributor agreement
was reinstated in a modified form to, among other things,
clarify the Distributor’s non-compete obligations.
Additionally, the settlement provided for a nominal payment to
the Distributor relating to payments claimed under the
distributor agreement. Subsequent to the execution of the
settlement agreement, both parties have operated under the
revised distributorship agreement without any material issues or
disputes.
The Company is also subject to various legal proceedings and
claims arising in the ordinary course of its business.
Additionally, the 7-Eleven Financial Services Business that the
Company acquired is subject to various legal claims and
proceedings in the ordinary course of its business. The Company
does not expect the outcome in any of these legal proceedings,
individually or collectively, to have a material adverse effect
on our financial condition or results of operations.
Capital
and Operating Lease Obligations
Capital Lease Obligations. As a result of the
7-Eleven ATM Transaction, the Company assumed responsibility for
certain capital lease contracts that will expire at various
times during the next three years. Upon the fulfillment of
certain payment obligations related to the capital leases,
ownership of the ATMs transfers to the Company. As of
December 31, 2007, approximately $2.1 million of
capital lease obligations were included within the
Company’s consolidated balance sheet.
Future minimum lease payments under the Company’s capital
leases as of December 31, 2007 were as follows for each of
the five years indicated and in the aggregate thereafter
(amounts in thousands):
|
2008
|
$ | 1,147 | ||
|
2009
|
747 | |||
|
2010
|
235 | |||
|
Total minimum lease payments
|
$ | 2,129 | ||
Operating Lease Obligations. In addition to
the capital leases assumed in conjunction the 7-Eleven ATM
Transaction, the Company also assumed certain operating leases
in connection with the acquisition. In
F-68
Table of Contents
CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
conjunction with its purchase price allocation related to the
7-Eleven ATM Transaction, the Company recorded approximately
$8.7 million of other liabilities (current and
long-term)
to value certain unfavorable equipment operating leases assumed
as part of the acquisition. These liabilities are being
amortized over the remaining terms of the underlying leases, the
majority of which expire in late 2009, and serve to reduce ATM
operating lease expense amounts to the fair value of these
services as of the date of the acquisition. During the period
from the acquisition date (July 20, 2007) to
December 31, 2007, the Company recognized approximately
$1.7 million in lease expense reductions associated with
the amortization of these liabilities. Upon the expiration of
the operating leases, the Company will be required to renew such
lease contracts, enter into new lease contracts, or purchase new
or used ATMs to replace the leased equipment. Additionally, in
conjunction with the acquisition, the Company posted
$7.5 million in letters of credit related to these
operating and capital leases upon which the lessors can draw in
the event the Company fails to make schedules payments under the
leases. These letters of credit, which are reduced periodically
as payments are made under the leases, will be released upon the
expiration of the leases.
In addition to the ATM operating leases assumed in connection
with the 7-Eleven ATM Transaction, the Company was a party to
several operating leases as of December 31, 2007, primarily
for office space and the rental of space at certain merchant
locations. Such leases expire at various times during the next
eight years.
Total rental expense under these Company’s operating leases
was approximately $5.8 million, $7.2 million, and
$8.6 million for the year ended December 31, 2007,
2006, and 2005, respectively. The $5.8 million in 2007
includes the rental expense associated with the ATM operating
leases assumed in the 7-Eleven ATM Transaction, is presented net
of $1.7 million of amortization expense related to the
liabilities recorded to value the unfavorable operating leases.
For additional details related to these liabilities, see
Note 2.
Future minimum lease payments under the Company’s operating
and merchant space leases (with initial lease terms in excess of
one year) as of December 31, 2007 were as follows for each
of the five years indicated and in the aggregate thereafter
(amounts in thousands). Although the Company will receive the
benefit of the amortization of the liabilities associated with
the ATM operating leases assumed in the 7-Eleven ATM
Transaction, such benefit has been excluded for the purposes of
this disclosure.
|
2008
|
$ | 10,203 | ||
|
2009
|
7,691 | |||
|
2010
|
2,757 | |||
|
2011
|
2,197 | |||
|
2012
|
2,038 | |||
|
Thereafter
|
4,262 | |||
|
Total minimum lease payments
|
$ | 29,148 | ||
Other
Commitments
Asset retirement obligations. The
Company’s asset retirement obligations consist primarily of
deinstallation costs of the ATM and the costs to restore the ATM
site to its original condition. The Company is legally required
to perform this deinstallation and restoration work. The Company
had $17.4 million accrued for such liabilities as of
December 31, 2007. For additional information on the
Company’s asset retirement obligations, see
Note 11.
Registration payment arrangements. In
conjunction with the issuance of its Series B Notes, the
Company entered into a registration rights agreement under which
it is required to take certain steps to exchange the
Series B Notes for notes registered with the SEC within
360 days following the original issuance date
(July 19, 2007). In the event it is unable to meet the
deadlines set forth in agreement, the Company will be subject to
higher interest rates on the Series B Notes in subsequent
periods until the exchange offer is
F-69
Table of Contents
CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
completed. FSP EITF
No. 00-19-2,
Accounting for Registration Payment Arrangements,
requires that contingent obligations under registration payment
arrangements be separately recognized and measured in accordance
with SFAS No. 5, Accounting for Contingencies.
The Company completed the first step of the registration process
in February 2008 with the filing of a registration statement on
Form S-4
with the SEC and currently believes the exchange offer will be
complete within the allotted time. As a result, the Company
believes it is not probable that incremental interest payments
will be made as a result of the provisions of the registration
rights agreement. As a result, the Company has not recognized a
liability as of December 31, 2007 related to the
registration rights agreement. In the event is becomes probable
that the Company will be unable to affect the exchange offer in
a timely manner, the Company will reevaluate the need to record
a liability at that time.
Purchase commitments. The Company had no
material purchase commitments as of December 31, 2007.
(17) Derivative
Financial Instruments
As a result of its variable-rate debt and ATM cash management
activities, the Company is exposed to changes in interest rates
(LIBOR and the federal funds effective rate in the United
States, LIBOR in the United Kingdom, and the Mexican Interbank
Rate in Mexico). It is the Company’s policy to limit the
variability of a portion of its expected future interest
payments as a result of changes in the underlying rates by
utilizing certain types of derivative financial instruments.
To meet the above objective, the Company has entered into
several LIBOR-based and federal funds effective rate-based
interest rate swaps to fix the interest rate paid on
$550.0 million of the Company’s current and
anticipated outstanding ATM cash balances in the United States.
The effect of such swaps was to fix the interest rate paid on
the following notional amounts for the periods identified:
|
Notional Amount
|
Weighted Average Fixed Rate | Period | ||
| (in thousands) | ||||
|
$550,000
|
4.61% | January 1, 2008 — December 31, 2008 | ||
|
$450,000
|
4.68% | January 1, 2009 — December 31, 2009 | ||
|
$350,000
|
4.76% | January 1, 2010 — December 31, 2010 |
As of December 31, 2007, the Company had a liability of
$13.6 million recorded in its balance sheet related to the
above interest rate swaps, which represented the fair value of
such agreements based on third-party quotes for similar
instruments with the same terms and conditions, as such
instruments are required to be carried at fair value. These
swaps have been classified as cash flow hedges pursuant to
SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, as amended. Accordingly, changes in
the fair values of such swaps have been reported in accumulated
other comprehensive income (loss) in the accompanying
consolidated balance sheets. As a result of our overall net loss
position for tax purposes, the Company has not recorded deferred
tax benefits on the loss amount related to these interest rate
swaps as of December 31, 2007, as management does not
believe that it will be able to realize the benefits associated
with its deferred tax positions. During the year ending
December 31, 2008, the Company expects approximately
$4.5 million of the losses included in accumulated other
comprehensive income (loss) to be reclassified into cost of ATM
operating revenues as a yield adjustment to the hedged
forecasted interest payments on the Company’s expected ATM
vault cash balances. As of December 31, 2006, the net
accumulated unrealized gain on such swaps totaled approximately
$4.4 million, which was net of taxes of $2.7 million.
Net amounts paid or received under such swaps are recorded as
adjustments to the Company’s “Cost of ATM operating
revenues” in the accompanying consolidated statements of
operations. During the years ended December 31, 2007, 2006,
and 2005, gains or losses incurred as a result of
ineffectiveness associated with the Company’s interest rate
swaps were immaterial.
F-70
Table of Contents
CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
As of December 31, 2007, the Company has not entered into
any derivative financial instruments to hedge its variable
interest rate exposure in the United Kingdom or Mexico.
As a result of the recent decline in interest rates, the Company
entered into additional interest rate swaps in March 2008 to
limit its exposure to changing rates on additional amounts of
its anticipated outstanding domestic vault cash balances. The
recently-executed swaps will serve to fix the interest-based
rental rate paid on the following notional amounts at the
following weighted average rates for the periods identified:
|
Notional Amount
|
Weighted Average Fixed Rate | Period | ||
| (in thousands) | ||||
|
$100,000
|
2.58% | January 1, 2009 — December 31, 2009 | ||
|
$200,000
|
2.97% | January 1, 2010 — December 31, 2010 | ||
|
$400,000
|
3.72% | January 1, 2011 — December 31, 2011 | ||
|
$200,000
|
3.96% | January 1, 2012 — December 31, 2012 |
As is the case with the Company’s existing interest rate
swaps, the interest rate swaps executed in March 2008 have been
designated as cash flow hedges pursuant to
SFAS No. 133.
(18) Income
Taxes
Income tax expense (benefit) based on the Company’s loss
before income taxes consists of the following for the years
ended December 31, 2007, 2006, and 2005:
| 2007 | 2006 | 2005 | ||||||||||
| (in thousands) | ||||||||||||
|
Current:
|
||||||||||||
|
U.S. federal
|
$ | — | $ | — | $ | — | ||||||
|
State and local
|
111 | 28 | — | |||||||||
|
Foreign
|
— | 30 | — | |||||||||
|
Total current
|
$ | 111 | $ | 58 | $ | — | ||||||
|
Deferred:
|
||||||||||||
|
U.S. federal
|
$ | 4,963 | $ | (584 | ) | $ | (1,831 | ) | ||||
|
State and local
|
(153 | ) | 251 | 332 | ||||||||
|
Foreign
|
(285 | ) | 787 | 229 | ||||||||
|
Total deferred
|
4,525 | 454 | (1,270 | ) | ||||||||
|
Total
|
$ | 4,636 | $ | 512 | $ | (1,270 | ) | |||||
F-71
Table of Contents
CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Income tax expense (benefit) differs from amounts computed by
applying the statutory rate to loss before taxes as follows for
the years ended December 31, 2007, 2006, and 2005:
| 2007 | 2006 | 2005 | ||||||||||
| (in thousands) | ||||||||||||
|
Income tax (benefit) expense at the statutory rate of 34.0%
|
$ | (7,637 | ) | $ | (6 | ) | $ | (1,254 | ) | |||
|
State tax, net of federal benefit
|
(376 | ) | 195 | 131 | ||||||||
|
Change in United Kingdom statutory tax rate
|
(208 | ) | — | — | ||||||||
|
Non-deductible expenses
|
21 | 52 | 22 | |||||||||
|
Potential non-deductible interest of foreign subsidiary
|
— | 205 | — | |||||||||
|
Impact of foreign rate differential
|
81 | (55 | ) | (31 | ) | |||||||
|
Change in effective state tax rate
|
— | — | (72 | ) | ||||||||
|
Other
|
21 | 16 | (66 | ) | ||||||||
|
Subtotal
|
(8,098 | ) | 407 | (1,270 | ) | |||||||
|
Change in valuation allowance
|
12,734 | 105 | — | |||||||||
|
Total tax expense (benefit)
|
$ | 4,636 | $ | 512 | $ | (1,270 | ) | |||||
The net current and non-current deferred tax assets and
liabilities (by tax jurisdiction) as of December 31, 2007
and 2006 were as follows:
| United States | United Kingdom | Mexico | Consolidated | |||||||||||||||||||||||||||||
| 2007 | 2006 | 2007 | 2006 | 2007 | 2006 | 2007 | 2006 | |||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||
|
Current deferred tax asset
|
$ | 2,268 | $ | 440 | $ | 216 | $ | 149 | $ | 88 | $ | 47 | $ | 2,572 | $ | 636 | ||||||||||||||||
|
Valuation allowance
|
(1,927 | ) | — | — | — | (88 | ) | (47 | ) | (2,015 | ) | (47 | ) | |||||||||||||||||||
|
Current deferred tax liability
|
(341 | ) | (316 | ) | — | — | — | — | (341 | ) | (316 | ) | ||||||||||||||||||||
|
Net current deferred tax asset
|
— | 124 | 216 | 149 | — | — | 216 | 273 | ||||||||||||||||||||||||
|
Non-current deferred tax asset
|
22,610 | 11,740 | 137 | 248 | 463 | 187 | 23,210 | 12,175 | ||||||||||||||||||||||||
|
Valuation allowance
|
(15,442 | ) | — | — | — | (401 | ) | (101 | ) | (15,843 | ) | (101 | ) | |||||||||||||||||||
|
Non-current deferred tax liability
|
(15,534 | ) | (16,120 | ) | (3,251 | ) | (3,493 | ) | (62 | ) | (86 | ) | (18,847 | ) | (19,699 | ) | ||||||||||||||||
|
Net non-current deferred tax liability
|
(8,366 | ) | (4,380 | ) | (3,114 | ) | (3,245 | ) | — | — | (11,480 | ) | (7,625 | ) | ||||||||||||||||||
|
Net deferred tax liability
|
$ | (8,366 | ) | $ | (4,256 | ) | $ | (2,898 | ) | $ | (3,096 | ) | $ | — | $ | — | $ | (11,264 | ) | $ | (7,352 | ) | ||||||||||
F-72
Table of Contents
CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities at December 31, 2007 and 2006, were as follows:
| 2007 | 2006 | |||||||
| (in thousands) | ||||||||
|
Current deferred tax assets:
|
||||||||
|
Reserve for receivables
|
$ | 233 | $ | 98 | ||||
|
Accrued liabilities and reserves
|
1,857 | 438 | ||||||
|
Other
|
482 | 100 | ||||||
|
Subtotal
|
2,572 | 636 | ||||||
|
Valuation allowance
|
(2,015 | ) | (47 | ) | ||||
|
Current deferred tax assets
|
557 | 589 | ||||||
|
Non-current deferred tax assets:
|
||||||||
|
Net operating loss carryforward
|
16,656 | 8,827 | ||||||
|
Unrealized loss on derivative instruments
|
4,974 | — | ||||||
|
Share-based compensation
|
507 | 353 | ||||||
|
Asset retirement obligations
|
850 | 367 | ||||||
|
Deferred revenue and reserves
|
167 | 1,679 | ||||||
|
Other
|
56 | 949 | ||||||
|
Subtotal
|
23,210 | 12,175 | ||||||
|
Valuation allowance
|
(15,843 | ) | (101 | ) | ||||
|
Non-current deferred tax assets
|
7,367 | 12,074 | ||||||
|
Current deferred tax liabilities:
|
||||||||
|
Unrealized gain on marketable securities
|
— | (293 | ) | |||||
|
Other
|
(341 | ) | (23 | ) | ||||
|
Current deferred tax liabilities
|
(341 | ) | (316 | ) | ||||
|
Non-current deferred tax liabilities:
|
||||||||
|
Tangible and intangible assets
|
(13,374 | ) | (13,506 | ) | ||||
|
Deployment costs
|
(5,449 | ) | (3,569 | ) | ||||
|
Unrealized gain on derivative instruments
|
— | (2,624 | ) | |||||
|
Other
|
(24 | ) | — | |||||
|
Non-current deferred tax liabilities
|
(18,847 | ) | (19,699 | ) | ||||
|
Net deferred tax liability
|
$ | (11,264 | ) | $ | (7,352 | ) | ||
As noted in the table above, during the year ended
December 31, 2007, the Company increased its valuation
allowance by approximately $17.7 million. Such increase was
largely due to the Company’s decision to establish a
valuation allowance in 2007 for the net deferred tax asset
balance associated with its domestic operations, as the Company
determined that it is more likely than not that such benefit
will not be realized. Furthermore, the Company determined that
all future domestic tax benefits will not be recognized until it
is more likely than not that such benefits will be utilized. As
of December 31, 2007, the Company’s domestic valuation
allowance totaled approximately $17.4 million. The Company
also continues to maintain a valuation allowance on the net
deferred tax asset balance associated with its Mexico
operations. As of December 31, 2007, such valuation
allowance totaled approximately $0.5 million.
F-73
Table of Contents
CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The deferred taxes associated with the Company’s unrealized
gains on marketable securities and unrealized gains and losses
on derivative instruments have been reflected within the
accumulated other comprehensive income (loss) balance in the
accompanying consolidated balance sheet, net of any applicable
valuation allowances. Accordingly, approximately
$5.0 million of the $17.7 million change in the
Company’s valuation allowance during the year ended
December 31, 2007, has not been reflected within the
Company’s current year tax provision line item within the
accompanying consolidated statements of operations.
As of December 31, 2007, the Company had approximately
$46.0 million in United States federal net operating loss
carryforwards that will begin expiring in 2021, and
$12.4 million in state net operating loss carryforwards
that will begin expiring in 2008. The United States federal net
operating loss amount excludes approximately $0.2 million
in potential future tax benefits associated with employee stock
option exercises that occurred in 2006 and 2007. Because the
Company is currently in a net operating loss position, such
benefits have not been reflected in the Company’s
consolidated financial statements, as required by
SFAS No. 123R. As noted above, the Company has
established a valuation allowance for its net deferred tax asset
balance in the United States as of December 31, 2007, which
includes the deferred tax effects of the above net operating
loss carryforwards.
As of December 31, 2007, the Company had approximately
$1.6 million in net operating loss carryforwards in Mexico
that will begin expiring in 2009. However, as noted above, the
deferred tax benefit associated with such carryforwards has been
fully reserved for through a valuation allowance. If realized,
approximately $43,000 of such valuation allowance will be
applied to reduce the goodwill balance recorded in connection
with the Company’s acquisition of a majority stake in CCS
Mexico.
The Company currently believes that the unremitted earnings of
its United Kingdom and Mexico subsidiaries will be reinvested in
the corresponding country of origin for an indefinite period of
time. Accordingly, no deferred taxes have been provided for on
the differences between the Company’s book basis and
underlying tax basis in those subsidiaries or on the foreign
currency translation adjustment amounts related to such
operations.
(19) Concentration
Risk
Significant Supplier. The Company purchased
equipment from one supplier that accounted for 58.2% and 74.4%
of the Company’s total ATM purchases for the years ended
December 31, 2007 and 2006, respectively. As of
December 31, 2007 and 2006, accounts payable to this
supplier represented approximately 18.8% and 6.6%, respectively,
of the Company’s consolidated accounts payable balances.
Significant Customers. For the years ended
December 31, 2007 and 2006, we derived 45.4% and 46.0%,
respectively, of our total pro forma revenues from ATMs placed
at the locations of our five largest merchants. For the year
ended December 31, 2007, our top five merchants (based on
our total revenues) were 7-Eleven, CVS, Walgreens, Target, and
ExxonMobil. 7-Eleven, which represents the single largest
merchant customer in our portfolio, comprised 33.0% and 35.8% of
our total pro forma revenues for the year ended
December 31, 2007 and 2006, respectively. Accordingly, a
significant percentage of our future revenues and operating
income will be dependent upon the successful continuation of our
relationship with 7-Eleven and these other four merchants.
(20) Segment
Information
Prior to the 7-Eleven ATM Transaction, the Company’s
operations consisted of its United States, United Kingdom, and
Mexico segments. As a result of the 7-Eleven ATM Transaction,
the Company determined that the advanced-functionality Vcom
Services provided through the acquired Vcom terminals are
distinctly different than its other three segments and has
identified the Vcom operations as an additional separate segment
(“Advanced Functionality”). Accordingly, as of
December 31, 2007, the Company’s operations
F-74
Table of Contents
CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
consisted of its United States, United Kingdom, Mexico, and
Advanced Functionality segments. The Company’s United
States reporting segment now includes the traditional ATM
operations of the acquired 7- Eleven Financial Services
Business, including the traditional ATM activities conducted on
the Vcom terminals. While each of these reporting segments
provides similar kiosk-based
and/or
ATM-related services, each segment is managed separately, as
they require different marketing and business strategies.
Management uses earnings before interest expense, income taxes,
depreciation expense, accretion expense, and amortization
expense (“EBITDA”) to assess the operating results and
effectiveness of its business segments. Management believes
EBITDA is useful because it allows them to more effectively
evaluate the Company’s operating performance and compare
the results of its operations from period to period without
regard to its financing methods or capital structure.
Additionally, the Company excludes depreciation, accretion, and
amortization expense as these amounts can vary substantially
from company to company within its industry depending upon
accounting methods and book values of assets, capital structures
and the method by which the assets were acquired. EBITDA, as
defined by the Company, may not be comparable to similarly
titled measures employed by other companies and is not a measure
of performance calculated in accordance with accounting
principles generally accepted in the United States
(“GAAP”). Therefore, EBITDA should not be considered
in isolation or as a substitute for operating income, net
income, cash flows from operating, investing, and financing
activities or other income or cash flow statement data prepared
in accordance with GAAP. Below is a reconciliation of EBITDA to
net loss for the years ended December 31, 2007, 2006, and
2005:
| 2007 | 2006 | 2005 | ||||||||||
| (in thousands) | ||||||||||||
|
EBITDA
|
$ | 54,439 | $ | 55,631 | $ | 40,669 | ||||||
|
Depreciation and accretion expense
|
26,859 | 18,595 | 12,951 | |||||||||
|
Amortization expense
|
18,870 | 11,983 | 8,980 | |||||||||
|
Interest expense, net, including amortization and write-off of
financing costs and bond discounts
|
31,164 | 25,072 | 22,426 | |||||||||
|
Income tax expense (benefit)
|
4,636 | 512 | (1,270 | ) | ||||||||
|
Net loss
|
$ | (27,090 | ) | $ | (531 | ) | $ | (2,418 | ) | |||
F-75
Table of Contents
CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following tables reflect certain financial information for
each of the Company’s reporting segments for the years
ended December 31, 2007, 2006, and 2005 and as of
December 31, 2007 and 2006. All intercompany transactions
between the Company’s reporting segments have been
eliminated.
| As of or For The Year Ended December 31, 2007 | ||||||||||||||||||||||||
|
United |
Advanced |
|||||||||||||||||||||||
| United States | Kingdom | Mexico | Functionality | Eliminations | Total | |||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||
|
Revenue from external customers
|
$ | 308,827 | $ | 63,389 | $ | 4,831 | $ | 1,251 | $ | — | $ | 378,298 | ||||||||||||
|
Intersegment revenue
|
82 | — | — | — | (82 | ) | — | |||||||||||||||||
|
Cost of revenues
|
238,368 | 44,925 | 3,985 | 6,065 | (50 | ) | 293,293 | |||||||||||||||||
|
Selling, general, and administrative expenses
|
23,391 | 4,525 | 1,268 | 157 | 16 | 29,357 | ||||||||||||||||||
|
EBITDA
|
46,177 | 13,471 | (454 | ) | (4,971 | ) | 216 | 54,439 | ||||||||||||||||
|
Depreciation and accretion expense
|
19,005 | 7,456 | 421 | — | (23 | ) | 26,859 | |||||||||||||||||
|
Amortization expense
|
17,000 | 1,821 | 49 | — | — | 18,870 | ||||||||||||||||||
|
Interest expense, net
|
26,421 | 4,443 | 300 | — | — | 31,164 | ||||||||||||||||||
|
Capital expenditures, excluding acquisitions
|
$ | 31,659 | $ | 33,982 | $ | 5,446 | $ | 226 | $ | — | $ | 71,313 | ||||||||||||
|
Additions to equipment to be leased to customers
|
— | — | 548 | — | — | 548 | ||||||||||||||||||
| As of or For The Year Ended December 31, 2006(1) | ||||||||||||||||||||
|
United |
||||||||||||||||||||
| United States | Kingdom | Mexico | Eliminations | Total | ||||||||||||||||
| (in thousands) | ||||||||||||||||||||
|
Revenue from external customers
|
$ | 250,425 | $ | 42,157 | $ | 1,023 | $ | — | $ | 293,605 | ||||||||||
|
Intersegment revenue
|
340 | — | — | (340 | ) | — | ||||||||||||||
|
Cost of revenues
|
193,673 | 27,157 | 717 | (254 | ) | 221,293 | ||||||||||||||
|
Selling, general, and administrative expenses
|
17,823 | 3,206 | 641 | (3 | ) | 21,667 | ||||||||||||||
|
EBITDA
|
45,083 | 10,932 | (298 | ) | (86 | ) | 55,631 | |||||||||||||
|
Depreciation and accretion expense
|
14,155 | 4,401 | 39 | — | 18,595 | |||||||||||||||
|
Amortization expense
|
10,664 | 1,274 | 45 | — | 11,983 | |||||||||||||||
|
Interest expense, net
|
21,767 | 3,300 | 5 | — | 25,072 | |||||||||||||||
|
Capital expenditures, excluding acquisitions
|
$ | 19,384 | $ | 14,912 | $ | 1,795 | $ | — | $ | 36,901 | ||||||||||
|
Additions to equipment to be leased to customers
|
— | — | 197 | — | 197 | |||||||||||||||
F-76
Table of Contents
CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| As of or For The Year Ended December 31, 2005(1) | ||||||||||||||||
|
United |
||||||||||||||||
| United States | Kingdom | Eliminations | Total | |||||||||||||
| (in thousands) | ||||||||||||||||
|
Revenue from external customers
|
$ | 247,143 | $ | 21,822 | $ | — | $ | 268,965 | ||||||||
|
Intersegment revenue
|
358 | — | (358 | ) | — | |||||||||||
|
Cost of revenues
|
195,476 | 14,208 | (236 | ) | 209,448 | |||||||||||
|
Selling, general, and administrative expenses
|
15,543 | 2,326 | (4 | ) | 17,865 | |||||||||||
|
EBITDA
|
35,652 | 5,136 | (119 | ) | 40,669 | |||||||||||
|
Depreciation and accretion expense
|
10,865 | 2,086 | — | 12,951 | ||||||||||||
|
Amortization expense
|
8,346 | 634 | — | 8,980 | ||||||||||||
|
Interest expense, net
|
20,777 | 1,649 | — | 22,426 | ||||||||||||
|
Capital expenditures, excluding acquisitions
|
$ | 23,344 | $ | 8,582 | $ | — | $ | 31,926 | ||||||||
| (1) | No information is shown in 2005 and 2006 for the Company’s Advanced Functionality operations, as they were not acquired until 2007. Additionally, no information is shown in 2005 for the Company’s Mexico operations, as they were not acquired until 2006. |
|
December 31, |
December 31, |
|||||||
| 2007 | 2006 | |||||||
| (in thousands) | ||||||||
|
Identifiable Assets:
|
||||||||
|
United States
|
$ | 409,120 | $ | 238,127 | ||||
|
United Kingdom
|
163,464 | 126,070 | ||||||
|
Mexico
|
12,337 | 3,559 | ||||||
|
Advanced Functionality
|
6,364 | — | ||||||
|
Total
|
$ | 591,285 | $ | 367,756 | ||||
During the years ended December 31, 2006, and 2005, no
single merchant customer represented 10.0% or more of the
Company’s consolidated revenues. However, as a result of
the 7-Eleven ATM Transaction, the Company’s revenues from
its merchant contract with 7-Eleven comprised 17.5% (33.0% on a
pro forma basis) of its consolidated revenues for the year ended
December 31, 2007. Additionally, the Company expects that
revenues from its contract with 7-Eleven will continue to
represent in excess of 30% of its consolidated revenues in
future years.
(21) Supplemental
Guarantor Financial Information
The Company’s Series A and Series B Notes are
guaranteed on a full and unconditional basis by the
Company’s domestic subsidiaries. The following information
sets forth the condensed consolidating statements of operations
and cash flows for the years ended December 31, 2007, 2006,
and 2005, and the condensed consolidating balance sheets as of
December 31, 2007 and 2006, of (i) Cardtronics, Inc.,
the parent company and issuer of the senior subordinated notes
(“Parent”); (ii) the Company’s domestic
subsidiaries on a combined
F-77
Table of Contents
CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
basis (collectively, the “Guarantors”); and
(iii) the Company’s international subsidiaries on a
combined basis (collectively, the “Non-Guarantors”):
Consolidating
Statements of Operations
| Year Ended December 31, 2007 | ||||||||||||||||||||
|
Non- |
||||||||||||||||||||
| Parent | Guarantors | Guarantors | Eliminations | Total | ||||||||||||||||
| (in thousands) | ||||||||||||||||||||
|
Revenues
|
$ | — | $ | 310,160 | $ | 68,220 | $ | (82 | ) | $ | 378,298 | |||||||||
|
Operating costs and expenses
|
1,253 | 302,733 | 64,450 | (57 | ) | 368,379 | ||||||||||||||
|
Operating income (loss)
|
(1,253 | ) | 7,427 | 3,770 | (25 | ) | 9,919 | |||||||||||||
|
Interest expense, net
|
8,269 | 18,152 | 4,743 | — | 31,164 | |||||||||||||||
|
Equity in (earnings) losses of subsidiaries
|
13,206 | — | — | (13,206 | ) | — | ||||||||||||||
|
Other expense, net
|
(112 | ) | 1,085 | 500 | (264 | ) | 1,209 | |||||||||||||
|
(Loss) income before income taxes
|
(22,616 | ) | (11,810 | ) | (1,473 | ) | 13,445 | (22,454 | ) | |||||||||||
|
Income tax expense (benefit)
|
4,713 | 207 | (284 | ) | — | 4,636 | ||||||||||||||
|
Net (loss) income
|
(27,329 | ) | (12,017 | ) | (1,189 | ) | 13,445 | (27,090 | ) | |||||||||||
|
Preferred stock conversion and accretion expense
|
36,272 | — | — | — | 36,272 | |||||||||||||||
|
Net (loss) income available to common stockholders
|
$ | (63,601 | ) | $ | (12,017 | ) | $ | (1,189 | ) | $ | 13,445 | $ | (63,362 | ) | ||||||
| Year Ended December 31, 2006 | ||||||||||||||||||||
|
Non- |
||||||||||||||||||||
| Parent | Guarantors | Guarantors | Eliminations | Total | ||||||||||||||||
| (in thousands) | ||||||||||||||||||||
|
Revenues
|
$ | — | $ | 250,765 | $ | 43,180 | $ | (340 | ) | $ | 293,605 | |||||||||
|
Operating costs and expenses
|
865 | 235,450 | 37,480 | (257 | ) | 273,538 | ||||||||||||||
|
Operating income (loss)
|
(865 | ) | 15,315 | 5,700 | (83 | ) | 20,067 | |||||||||||||
|
Interest expense, net
|
8,491 | 13,276 | 3,305 | — | 25,072 | |||||||||||||||
|
Equity in (earnings) losses of subsidiaries
|
(8,151 | ) | — | — | 8,151 | — | ||||||||||||||
|
Other (income) expense, net
|
(175 | ) | (5,639 | ) | 826 | 2 | (4,986 | ) | ||||||||||||
|
(Loss) income before income taxes
|
(1,030 | ) | 7,678 | 1,569 | (8,236 | ) | (19 | ) | ||||||||||||
|
Income tax expense (benefit)
|
(584 | ) | 278 | 818 | — | 512 | ||||||||||||||
|
Net (loss) income
|
(446 | ) | 7,400 | 751 | (8,236 | ) | (531 | ) | ||||||||||||
|
Preferred stock accretion expense
|
265 | — | — | — | 265 | |||||||||||||||
|
Net (loss) income available to common stockholders
|
$ | (711 | ) | $ | 7,400 | $ | 751 | $ | (8,236 | ) | $ | (796 | ) | |||||||
F-78
Table of Contents
CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| Year Ended December 31, 2005 | ||||||||||||||||||||
|
Non- |
||||||||||||||||||||
| Parent | Guarantors | Guarantors | Eliminations | Total | ||||||||||||||||
| (in thousands) | ||||||||||||||||||||
|
Revenues
|
$ | — | $ | 247,501 | $ | 21,822 | $ | (358 | ) | $ | 268,965 | |||||||||
|
Operating costs and expenses
|
2,547 | 227,682 | 19,254 | (239 | ) | 249,244 | ||||||||||||||
|
Operating income (loss)
|
(2,547 | ) | 19,819 | 2,568 | (119 | ) | 19,721 | |||||||||||||
|
Interest expense, net
|
8,062 | 12,715 | 1,649 | — | 22,426 | |||||||||||||||
|
Equity in (earnings) losses of subsidiaries
|
(6,399 | ) | — | — | 6,399 | — | ||||||||||||||
|
Other expense, net
|
— | 830 | 153 | — | 983 | |||||||||||||||
|
(Loss) income before income taxes
|
(4,210 | ) | 6,274 | 766 | (6,518 | ) | (3,688 | ) | ||||||||||||
|
Income tax expense (benefit)
|
(1,911 | ) | 412 | 229 | — | (1,270 | ) | |||||||||||||
|
Net (loss) income
|
(2,299 | ) | 5,862 | 537 | (6,518 | ) | (2,418 | ) | ||||||||||||
|
Preferred stock dividends and accretion expense
|
1,395 | — | — | — | 1,395 | |||||||||||||||
|
Net (loss) income available to common stockholders
|
$ | (3,694 | ) | $ | 5,862 | $ | 537 | $ | (6,518 | ) | $ | (3,813 | ) | |||||||
F-79
Table of Contents
CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Consolidating
Balance Sheets
| As of December 31, 2007 | ||||||||||||||||||||
|
Non- |
||||||||||||||||||||
| Parent | Guarantors | Guarantors | Eliminations | Total | ||||||||||||||||
| (in thousands) | ||||||||||||||||||||
|
Assets:
|
||||||||||||||||||||
|
Cash and cash equivalents
|
$ | 76 | $ | 11,576 | $ | 1,787 | $ | — | $ | 13,439 | ||||||||||
|
Receivables, net
|
(292 | ) | 20,894 | 2,713 | (67 | ) | 23,248 | |||||||||||||
|
Other current assets
|
1,031 | 8,781 | 10,876 | (590 | ) | 20,098 | ||||||||||||||
|
Total current assets
|
815 | 41,251 | 15,376 | (657 | ) | 56,785 | ||||||||||||||
|
Property and equipment, net
|
— | 99,764 | 64,360 | (212 | ) | 163,912 | ||||||||||||||
|
Intangible assets, net
|
8,768 | 106,808 | 15,325 | — | 130,901 | |||||||||||||||
|
Goodwill
|
— | 150,445 | 84,740 | — | 235,185 | |||||||||||||||
|
Investments and advances to subsidiaries
|
50,249 | — | — | (50,249 | ) | — | ||||||||||||||
|
Intercompany receivable
|
(863 | ) | 6,395 | (5,532 | ) | — | — | |||||||||||||
|
Prepaid expenses and other assets
|
368,424 | 2,970 | 1,532 | (368,424 | ) | 4,502 | ||||||||||||||
|
Total assets
|
$ | 427,393 | $ | 407,633 | $ | 175,801 | $ | (419,542 | ) | $ | 591,285 | |||||||||
|
Liabilities and Stockholders’ Equity (Deficit):
|
||||||||||||||||||||
|
Current portion of long-term debt and notes payable
|
$ | — | $ | — | $ | 882 | $ | — | $ | 882 | ||||||||||
|
Current portion of capital lease obligations
|
— | 1,147 | — | — | 1,147 | |||||||||||||||
|
Current portion of other long-term liabilities
|
— | 16,032 | 169 | — | 16,201 | |||||||||||||||
|
Accounts payable and accrued liabilities
|
12,808 | 66,726 | 26,027 | (652 | ) | 104,909 | ||||||||||||||
|
Total current liabilities
|
12,808 | 83,905 | 27,078 | (652 | ) | 123,139 | ||||||||||||||
|
Long-term debt, less current portion
|
300,088 | 265,725 | 110,343 | (368,423 | ) | 307,733 | ||||||||||||||
|
Capital lease obligations, less current portion
|
— | 982 | — | — | 982 | |||||||||||||||
|
Deferred tax liability
|
7,386 | 980 | 3,114 | — | 11,480 | |||||||||||||||
|
Asset retirement obligations
|
— | 12,332 | 5,116 | — | 17,448 | |||||||||||||||
|
Other non-current liabilities and minority interest
|
— | 22,868 | 524 | — | 23,392 | |||||||||||||||
|
Total liabilities
|
320,282 | 386,792 | 146,175 | (369,075 | ) | 484,174 | ||||||||||||||
|
Stockholders’ equity (deficit)
|
107,111 | 20,841 | 29,626 | (50,467 | ) | 107,111 | ||||||||||||||
|
Total liabilities and stockholders’ equity (deficit)
|
$ | 427,393 | $ | 407,633 | $ | 175,801 | $ | (419,542 | ) | $ | 591,285 | |||||||||
F-80
Table of Contents
CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| As of December 31, 2006 | ||||||||||||||||||||
|
Non- |
||||||||||||||||||||
| Parent | Guarantors | Guarantors | Eliminations | Total | ||||||||||||||||
| (in thousands) | ||||||||||||||||||||
|
Assets:
|
||||||||||||||||||||
|
Cash and cash equivalents
|
$ | 97 | $ | 1,818 | $ | 803 | $ | — | $ | 2,718 | ||||||||||
|
Receivables, net
|
3,463 | 13,068 | 1,966 | (3,606 | ) | 14,891 | ||||||||||||||
|
Other current assets
|
544 | 14,069 | 6,204 | (39 | ) | 20,778 | ||||||||||||||
|
Total current assets
|
4,104 | 28,955 | 8,973 | (3,645 | ) | 38,387 | ||||||||||||||
|
Property and equipment, net
|
— | 59,512 | 27,326 | (170 | ) | 86,668 | ||||||||||||||
|
Intangible assets, net
|
6,982 | 45,757 | 15,024 | — | 67,763 | |||||||||||||||
|
Goodwill
|
— | 86,702 | 82,861 | — | 169,563 | |||||||||||||||
|
Investments and advances to subsidiaries
|
81,076 | — | — | (81,076 | ) | — | ||||||||||||||
|
Intercompany receivable
|
(122 | ) | 5,046 | (4,924 | ) | — | — | |||||||||||||
|
Prepaid expenses and other assets
|
211,175 | 5,006 | 369 | (211,175 | ) | 5,375 | ||||||||||||||
|
Total assets
|
$ | 303,215 | $ | 230,978 | $ | 129,629 | $ | (296,066 | ) | $ | 367,756 | |||||||||
|
Liabilities and Stockholders’ Equity (Deficit):
|
||||||||||||||||||||
|
Current portion of long-term debt and notes payable
|
$ | — | $ | — | $ | 194 | $ | — | $ | 194 | ||||||||||
|
Current portion of other long-term liabilities
|
— | 2,458 | 43 | — | 2,501 | |||||||||||||||
|
Accounts payable and accrued liabilities
|
8,458 | 32,202 | 14,218 | (3,622 | ) | 51,256 | ||||||||||||||
|
Total current liabilities
|
8,458 | 34,660 | 14,455 | (3,622 | ) | 53,951 | ||||||||||||||
|
Long-term debt, less current portion
|
251,883 | 132,351 | 79,641 | (211,174 | ) | 252,701 | ||||||||||||||
|
Deferred tax liability
|
3,340 | 1,040 | 3,245 | — | 7,625 | |||||||||||||||
|
Asset retirement obligations
|
— | 7,673 | 2,316 | — | 9,989 | |||||||||||||||
|
Other non-current liabilities and minority interest
|
108 | 3,806 | 150 | — | 4,064 | |||||||||||||||
|
Total liabilities
|
263,789 | 179,530 | 99,807 | (214,796 | ) | 328,330 | ||||||||||||||
|
Preferred stock
|
76,594 | — | — | — | 76,594 | |||||||||||||||
|
Stockholders’ equity (deficit)
|
(37,168 | ) | 51,448 | 29,822 | (81,270 | ) | (37,168 | ) | ||||||||||||
|
Total liabilities and stockholders’ equity (deficit)
|
$ | 303,215 | $ | 230,978 | $ | 129,629 | $ | (296,066 | ) | $ | 367,756 | |||||||||
F-81
Table of Contents
CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Consolidating
Statements of Cash Flows
| Year Ended December 31, 2007 | ||||||||||||||||||||
|
Non- |
||||||||||||||||||||
| Parent | Guarantors | Guarantors | Eliminations | Total | ||||||||||||||||
| (in thousands) | ||||||||||||||||||||
|
Net cash provided by (used in) operating activities
|
$ | (4,509 | ) | $ | 39,986 | $ | 19,985 | $ | — | $ | 55,462 | |||||||||
|
Additional to property and equipment, net of proceeds from sale
of property and equipment
|
— | (30,748 | ) | (37,569 | ) | — | (68,317 | ) | ||||||||||||
|
Payments for exclusive license agreements and site acquisition
costs
|
— | (1,133 | ) | (1,860 | ) | — | (2,993 | ) | ||||||||||||
|
Additions to equipment to be leased to customers, net of
principal payments received under direct financing leases
|
— | — | (514 | ) | — | (514 | ) | |||||||||||||
|
Acquisitions, net of cash acquired
|
— | (135,009 | ) | — | — | (135,009 | ) | |||||||||||||
|
Proceeds from sale of Winn-Dixie equity securities
|
— | 3,950 | — | — | 3,950 | |||||||||||||||
|
Net cash (used in) provided by investing activities
|
— | (162,940 | ) | (39,943 | ) | — | (202,883 | ) | ||||||||||||
|
Proceeds from issuance of long-term debt
|
185,934 | 166,635 | 19,957 | (184,782 | ) | 187,744 | ||||||||||||||
|
Repayments of long-term debt and capital leases
|
(140,100 | ) | (33,733 | ) | (192 | ) | 33,260 | (140,765 | ) | |||||||||||
|
Issuance of long-term notes receivable
|
(184,782 | ) | — | — | 184,782 | — | ||||||||||||||
|
Payments received on long-term notes receivable
|
33,260 | — | — | (33,260 | ) | — | ||||||||||||||
|
Proceeds from borrowing under bank overdraft facility, net
|
— | — | 642 | — | 642 | |||||||||||||||
|
Issuance of capital stock
|
111,552 | (736 | ) | 547 | — | 111,363 | ||||||||||||||
|
Minority interest shareholder capital contribution
|
— | 547 | — | — | 547 | |||||||||||||||
|
Other financing activities
|
(1,376 | ) | — | — | — | (1,376 | ) | |||||||||||||
|
Net cash (used in) provided by financing activities
|
4,488 | 132,713 | 20,954 | — | 158,155 | |||||||||||||||
|
Effect of exchange rate changes
|
— | — | (13 | ) | — | (13 | ) | |||||||||||||
|
Net (decrease) increase in cash and cash equivalents
|
(21 | ) | 9,759 | 983 | — | 10,721 | ||||||||||||||
|
Cash and cash equivalents at beginning of period
|
97 | 1,818 | 803 | — | 2,718 | |||||||||||||||
|
Cash and cash equivalents at end of period
|
$ | 76 | $ | 11,577 | $ | 1,786 | $ | — | $ | 13,439 | ||||||||||
F-82
Table of Contents
CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| Year Ended December 31, 2006 | ||||||||||||||||||||
|
Non- |
||||||||||||||||||||
| Parent | Guarantors | Guarantors | Eliminations | Total | ||||||||||||||||
| (in thousands) | ||||||||||||||||||||
|
Net cash provided by (used in) operating activities
|
$ | (12,716 | ) | $ | 27,485 | $ | 10,677 | $ | — | $ | 25,446 | |||||||||
|
Additions to property and equipment, net of proceeds from sale
of property and equipment
|
— | (17,534 | ) | (14,873 | ) | — | (32,407 | ) | ||||||||||||
|
Payments for exclusive license agreements and site acquisition
costs
|
— | (2,486 | ) | (871 | ) | — | (3,357 | ) | ||||||||||||
|
Additions to equipment to be leased to customers, net of
principal payments received under direct financing leases
|
— | — | (197 | ) | — | (197 | ) | |||||||||||||
|
Acquisitions, net of cash acquired
|
(1,039 | ) | 27 | — | 1,000 | (12 | ) | |||||||||||||
|
Net cash (used in) provided by investing activities
|
(1,039 | ) | (19,993 | ) | (15,941 | ) | 1,000 | (35,973 | ) | |||||||||||
|
Proceeds from issuance of long-term debt
|
44,800 | 18,200 | 861 | (18,200 | ) | 45,661 | ||||||||||||||
|
Repayments of long-term debt
|
(37,500 | ) | (25,400 | ) | (3 | ) | 25,400 | (37,503 | ) | |||||||||||
|
Issuance of long-term notes receivable
|
(18,200 | ) | — | — | 18,200 | — | ||||||||||||||
|
Payments received on long-term notes receivable
|
25,400 | — | — | (25,400 | ) | — | ||||||||||||||
|
Proceeds from borrowing under bank overdraft facility, net
|
— | — | 3,818 | — | 3,818 | |||||||||||||||
|
Issuance of capital stock
|
— | — | 1,000 | (1,000 | ) | — | ||||||||||||||
|
Purchase of treasury stock
|
(50 | ) | — | — | — | (50 | ) | |||||||||||||
|
Other financing activities
|
(716 | ) | (18 | ) | — | — | (734 | ) | ||||||||||||
|
Net cash (used in) provided by financing activities
|
13,734 | (7,218 | ) | 5,676 | (1,000 | ) | 11,192 | |||||||||||||
|
Effect of exchange rate changes
|
— | — | 354 | — | 354 | |||||||||||||||
|
Net (decrease) increase in cash and cash equivalents
|
(21 | ) | 274 | 766 | — | 1,019 | ||||||||||||||
|
Cash and cash equivalents at beginning of period
|
118 | 1,544 | 37 | — | 1,699 | |||||||||||||||
|
Cash and cash equivalents at end of period
|
$ | 97 | $ | 1,818 | $ | 803 | $ | — | $ | 2,718 | ||||||||||
F-83
Table of Contents
CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| Year Ended December 31, 2005 | ||||||||||||||||||||
|
Non- |
||||||||||||||||||||
| Parent | Guarantors | Guarantors | Eliminations | Total | ||||||||||||||||
| (in thousands) | ||||||||||||||||||||
|
Cash flows provided by (used in) operating activities
|
$ | (4,607 | ) | $ | 32,563 | $ | 5,271 | $ | — | $ | 33,227 | |||||||||
|
Capital expenditures, net
|
— | (22,300 | ) | (4,883 | ) | — | (27,183 | ) | ||||||||||||
|
Payments for exclusive license agreements and site acquisition
costs
|
— | (988 | ) | (3,677 | ) | — | (4,665 | ) | ||||||||||||
|
Acquisitions, net of cash acquired
|
(25,369 | ) | (17,108 | ) | (88,669 | ) | 23,034 | (108,112 | ) | |||||||||||
|
Cash flows (used in) provided by investing activities
|
(25,369 | ) | (40,396 | ) | (97,229 | ) | 23,034 | (139,960 | ) | |||||||||||
|
Proceeds from issuance of long-term debt
|
451,056 | 173,037 | 66,235 | (212,319 | ) | 478,009 | ||||||||||||||
|
Repayments of long-term debt
|
(206,600 | ) | (162,141 | ) | — | 6,600 | (362,141 | ) | ||||||||||||
|
Issuance of long-term notes receivable
|
(215,083 | ) | — | — | 215,083 | — | ||||||||||||||
|
Payments received on long-term notes receivable
|
6,600 | — | — | (6,600 | ) | — | ||||||||||||||
|
Issuance of preferred stock
|
73,142 | — | — | 155 | 73,297 | |||||||||||||||
|
Redemption of preferred stock
|
(24,795 | ) | — | — | — | (24,795 | ) | |||||||||||||
|
Purchase of treasury stock
|
(46,453 | ) | — | — | — | (46,453 | ) | |||||||||||||
|
Issuance of capital stock
|
88 | — | 25,954 | (25,953 | ) | 89 | ||||||||||||||
|
Other financing activities
|
(7,861 | ) | (2,931 | ) | — | — | (10,792 | ) | ||||||||||||
|
Cash flows (used in) provided by financing activities
|
30,094 | 7,965 | 92,189 | (23,034 | ) | 107,214 | ||||||||||||||
|
Effect of exchange rate changes
|
— | — | (194 | ) | — | (194 | ) | |||||||||||||
|
Increase in cash and cash equivalents
|
118 | 132 | 37 | — | 287 | |||||||||||||||
|
Cash and cash equivalents at beginning of period
|
— | 1,412 | — | — | 1,412 | |||||||||||||||
|
Cash and cash equivalents at end of period
|
$ | 118 | $ | 1,544 | $ | 37 | $ | — | $ | 1,699 | ||||||||||
22. Supplemental
Selected Quarterly Financial Information (Unaudited)
Financial information by quarter is summarized below for the
years ended December 31, 2007 and 2006.
F-84
Table of Contents
CARDTRONICS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| Quarters Ended | ||||||||||||||||||||
| March 31 | June 30 | September 30 | December 31 | Total | ||||||||||||||||
| (in thousands, except per share amounts) | ||||||||||||||||||||
|
2007
|
||||||||||||||||||||
|
Total revenues
|
$ | 74,518 | $ | 77,239 | $ | 110,587 | $ | 115,954 | $ | 378,298 | ||||||||||
|
Gross profit(1)
|
16,985 | 17,607 | 24,866 | 25,547 | 85,005 | |||||||||||||||
|
Net loss(2)
|
(3,387 | ) | (5,615 | ) | (10,683 | ) | (7,405 | ) | (27,090 | ) | ||||||||||
|
Net loss available to common stockholders(2)
|
(3,454 | ) | (5,681 | ) | (10,750 | ) | (43,477 | ) | (63,362 | ) | ||||||||||
|
Basic and diluted net loss per common share(2)
|
$ | (0.25 | ) | $ | (0.41 | ) | $ | (0.77 | ) | $ | (2.22 | ) | $ | (4.11 | ) | |||||
|
2006
|
||||||||||||||||||||
|
Total revenues
|
$ | 69,141 | $ | 73,254 | $ | 76,365 | $ | 74,845 | $ | 293,605 | ||||||||||
|
Gross profit(3)
|
16,043 | 18,370 | 18,980 | 18,919 | 72,312 | |||||||||||||||
|
Net income (loss)(4)
|
(3,124 | ) | 769 | (327 | ) | 2,151 | (531 | ) | ||||||||||||
|
Net income (loss) available to common stockholders(4)
|
(3,190 | ) | 703 | (394 | ) | 2,085 | (796 | ) | ||||||||||||
|
Net income (loss) per common share(4):
|
||||||||||||||||||||
|
Basic
|
$ | (0.23 | ) | $ | 0.05 | $ | (0.03 | ) | $ | 0.15 | $ | (0.06 | ) | |||||||
|
Diluted
|
$ | (0.23 | ) | $ | 0.03 | $ | (0.03 | ) | $ | 0.09 | $ | (0.06 | ) | |||||||
| (1) | Excludes $8.5 million, $7.1 million, $15.7 million and $11.8 million of depreciation, accretion, and amortization for the quarters ended March 31, June 30, September 30, and December 31, respectively. | |
| (2) | Includes pre-tax impairment changes of $0.1 million, $5.2 million, and $0.4 million for the quarters ended March 31, September 30, and December 31, respectively. | |
| (3) | Excludes $8.9 million, $6.6 million, $7.1 million and $6.6 million of depreciation, accretion, and amortization for the quarters ended March 31, June 30, September 30, and December 31, respectively. | |
| (4) | Includes pre-tax impairment charge of $2.8 million related to certain contract-based intangible assets for the quarter ended March 31. Includes $4.8 million in other income in the quarter ended December 31 primarily related to settlement proceeds received from Winn-Dixie, one of the Company’s merchant customers, as a part of that company’s emergence from bankruptcy. |
F-85
Table of Contents
7-ELEVEN
FINANCIAL SERVICES BUSINESS
Financial
Statements for the
Three and
Six Months Ended June 30, 2006 and 2007
(Unaudited)
F-86
Table of Contents
7-ELEVEN
FINANCIAL SERVICES BUSINESS
(dollars in thousands)
|
December 31, |
June 30, |
|||||||
| 2006 | 2007 | |||||||
| (unaudited) | ||||||||
| Assets | ||||||||
|
Current assets
|
||||||||
|
Cash
|
$ | 13,015 | $ | 10,304 | ||||
|
Accounts receivable
|
74,565 | 65,868 | ||||||
|
Other current assets
|
7,215 | 2,986 | ||||||
|
Total current assets
|
94,795 | 79,158 | ||||||
|
Property and equipment, net
|
90,484 | 85,901 | ||||||
|
Goodwill
|
35,593 | 35,593 | ||||||
|
Total assets
|
$ | 220,872 | $ | 200,652 | ||||
| Liabilities and Shareholder’s Equity | ||||||||
|
Current liabilities
|
||||||||
|
Accrued expenses and other liabilities
|
$ | 72,242 | $ | 69,020 | ||||
|
Capital lease obligations due within one year
|
1,465 | 1,244 | ||||||
|
Total current liabilities
|
73,707 | 70,264 | ||||||
|
Deferred credits and other liabilities
|
13,004 | 11,594 | ||||||
|
Long-term capital lease obligations
|
1,900 | 1,381 | ||||||
|
Commitments and contingencies
|
||||||||
|
Shareholder’s equity
|
||||||||
|
Common stock, $.10 par value
|
— | — | ||||||
|
Additional paid-in capital
|
128,273 | 111,570 | ||||||
|
Accumulated earnings
|
3,988 | 5,843 | ||||||
|
Total shareholder’s equity
|
132,261 | 117,413 | ||||||
|
Total liabilities and shareholder’s equity
|
$ | 220,872 | $ | 200,652 | ||||
See notes to financial statements.
F-87
Table of Contents
7-ELEVEN
FINANCIAL SERVICES BUSINESS
(dollars in thousands)
(unaudited)
| Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||
| 2006 | 2007 | 2006 | 2007 | |||||||||||||
| restated | ||||||||||||||||
|
Revenues:
|
||||||||||||||||
|
Commissions
|
$ | 39,449 | $ | 37,111 | $ | 71,030 | $ | 73,464 | ||||||||
|
Other income
|
5,407 | 951 | 10,049 | 6,119 | ||||||||||||
|
Total revenues
|
44,856 | 38,062 | 81,079 | 79,583 | ||||||||||||
|
Expenses:
|
||||||||||||||||
|
Commission expense to 7-Eleven
|
12,343 | 13,709 | 23,273 | 26,124 | ||||||||||||
|
Other expenses
|
22,735 | 25,312 | 47,338 | 50,347 | ||||||||||||
|
Operating, selling, general and administrative expenses
|
35,078 | 39,021 | 70,611 | 76,471 | ||||||||||||
|
Interest expense, net
|
170 | 42 | 408 | 91 | ||||||||||||
|
Total expenses
|
35,248 | 39,063 | 71,019 | 76,562 | ||||||||||||
|
Earnings (loss) before income taxes
|
9,608 | (1,001 | ) | 10,060 | 3,021 | |||||||||||
|
Income tax expense (benefit)
|
3,709 | (386 | ) | 3,883 | 1,166 | |||||||||||
|
Net earnings (loss)
|
$ | 5,899 | $ | (615 | ) | $ | 6,177 | $ | 1,855 | |||||||
See notes to financial statements.
F-88
Table of Contents
7-ELEVEN
FINANCIAL SERVICES BUSINESS
(dollars in thousands)
(unaudited)
| Six Months Ended June 30 | ||||||||
| 2006 | 2007 | |||||||
| restated | ||||||||
|
Cash Flows From Operating Activities
|
||||||||
|
Net earnings
|
$ | 6,177 | $ | 1,855 | ||||
|
Adjustments to reconcile net earnings to net cash provided by
operating activities:
|
||||||||
|
Depreciation and amortization of equipment
|
7,516 | 9,121 | ||||||
|
Deferred income taxes
|
690 | (763 | ) | |||||
|
Net (gain) loss on disposal of equipment
|
(9 | ) | 36 | |||||
|
(Increase) decrease in accounts receivable
|
(2,414 | ) | 8,697 | |||||
|
Decrease in other assets
|
3,557 | 4,195 | ||||||
|
Decrease in trade accounts payable and other liabilities
|
(14,798 | ) | (3,835 | ) | ||||
|
Net cash provided by operating activities
|
719 | 19,306 | ||||||
|
Cash Flows From Investing Activities
|
||||||||
|
Payments for purchase of equipment
|
(12,188 | ) | (4,574 | ) | ||||
|
Net cash used in investing activities
|
(12,188 | ) | (4,574 | ) | ||||
|
Cash Flows From Financing Activities
|
||||||||
|
Principal payments under capital lease obligations
|
(4,203 | ) | (740 | ) | ||||
|
Capital contributions from (returned to) 7-Eleven, net
|
35,650 | (16,703 | ) | |||||
|
Payments related to capital lease purchase
|
(22,639 | ) | — | |||||
|
Net cash provided by (used in) financing activities
|
8,808 | (17,443 | ) | |||||
|
Net decrease in cash
|
(2,661 | ) | (2,711 | ) | ||||
|
Cash at beginning of year
|
15,392 | 13,015 | ||||||
|
Cash at end of period
|
$ | 12,731 | $ | 10,304 | ||||
See notes to financial statements.
F-89
Table of Contents
7-ELEVEN
FINANCIAL SERVICES BUSINESS
SIX MONTHS ENDED JUNE 30, 2006 and 2007
(unaudited)
| NOTE 1: | Basis of Presentation and Summary of Significant Accounting Policies |
Basis of Presentation — 7-Eleven, Inc. (the
“Company” or “7-Eleven”) operates a business
consisting of a network of both traditional ATMs and
advance-function devices (“Vcoms”) in most of its
stores and selected licensed stores in the United States. The
business consists of fixed assets, placement agreements
governing the right to offer ATM services in 7-Eleven stores,
product partner agreements and third party lease and service
agreements (“7-Eleven Financial Services Business” or
the “Business”). The Company has staff dedicated to
the Business and allocates certain additional costs to the
Business where appropriate. The financial statements include the
accounts of the Business. The operations of the Business include
both the operations of the ATM network used in 7-Eleven stores
as well as the
Vcomtm
equipment and services provided therein. The assets and certain
service agreements pertaining to the ATM network are maintained
in a subsidiary of the Company known as
Vcomtm
Financial Services, Inc.
The balance sheet as of June 30, 2007, and the related
statements of earnings for the three- and six-month periods
ended June 30, 2006 and 2007, and the statements of cash
flows for the six-month periods ended June 30, 2006 and
2007, have been prepared by the Business without audit. In the
opinion of management, all adjustments necessary to state fairly
the financial position at June 30, 2007, and the results of
operations and cash flows for all periods presented have been
made. The results of operations for the interim periods are not
necessarily indicative of the operating results for the full
year.
The balance sheet as of December 31, 2006 is derived from
the audited financial statements as of and for the year then
ended but does not include all disclosures required by generally
accepted accounting principles. The notes accompanying the
financial statements in the Business’s audited report for
the year ended December 31, 2006 include accounting
policies and additional information pertinent to an
understanding of both the December 31, 2006 balance sheet
and the interim financial statements. The information has not
changed except as a result of normal transactions in the six
months ended June 30, 2007, and as discussed in the notes
herein.
Restatement of Previously Issued Financial
Statements — The Business has restated its
previously issued financial statements for the six-months ended
June 30, 2006 to correct errors in the depreciation of
certain fixed assets. It was determined that these fixed assets
were not being depreciated commencing in the period the fixed
assets were initially placed in service in accordance with the
Company’s fixed asset policy. The financial statements have
been restated to record $210,000 of additional depreciation in
operating, selling, general and administrative
(“OSG&A”) expense for the three and six months
ended June 30, 2006. The effects of this restatement were
as follows:
| 2006 | ||||||||
|
Impact of |
As |
|||||||
| restatement | restated | |||||||
| (dollars in thousands) | ||||||||
|
Six Months Ended June 30:
|
||||||||
|
OSG&A
|
$ | 210 | $ | 70,611 | ||||
|
Earnings before income taxes
|
(210 | ) | 10,060 | |||||
|
Income tax expense
|
(81 | ) | 3,883 | |||||
|
Net earnings
|
(129 | ) | 6,177 | |||||
|
Net cash provided by operating activities
|
(2 | ) | 719 | |||||
|
Net cash provided by financing activities
|
2 | 8,808 | ||||||
F-90
Table of Contents
7-ELEVEN
FINANCIAL SERVICES BUSINESS
NOTES TO
FINANCIAL STATEMENTS—(Continued)
Comprehensive Earnings — Comprehensive earnings
are defined as the change in equity (net assets) of a business
enterprise during a period, except for those changes resulting
from investments by owners and distributions to owners. There
are no components of other comprehensive earnings and,
consequently, comprehensive earnings are equal to net earnings.
| NOTE 2: | Recently Issued Accounting Standards |
Effective January 1, 2007, the Company adopted the
provisions of Financial Accounting Standards Board
(“FASB”) Interpretation No. 48
(“FIN 48”), “Accounting for Uncertainty in
Income Taxes,” which clarifies the accounting for
uncertainty in income taxes recognized in an entity’s
financial statements in accordance with FASB Statement
No. 109, “Accounting for Income Taxes.”
FIN 48 prescribes a recognition threshold and measurement
criteria for the financial statement recognition and measurement
of a tax position taken or expected to be taken in a tax return.
FIN 48 also provides guidance on derecognition of tax
benefits, classification on the balance sheet, interest and
penalties, disclosure and transition.
The results of the Business are included in the income tax
filings of the Company in the United States, all states and in
various local jurisdictions. To the extent that the Business may
be included in an examination of the Company’s income tax
filings, the ultimate outcome of examinations and discussions
with the Internal Revenue Service or other taxing authorities,
as well as an estimate of any related change to amounts recorded
for uncertain tax positions, cannot be presently determined. As
of the adoption date, the Business is subject to examination for
tax years 2003 — 2006.
There were no unrecognized tax benefits or accrued interest or
penalties applicable to the Business as of January 1, 2007
or as of June 30, 2007. Management does not believe it is
reasonably possible that the total amount of unrecognized tax
benefits will significantly increase or decrease within the next
12 months.
It is the Company’s policy to classify accrued interest and
penalties related to unrecognized tax benefits in the provision
for income taxes. The Company has not recorded interest or
penalties for the Business related to FIN 48 for the three-
or six-month periods ended June 30, 2007.
| NOTE 3: | Subsequent Event |
On July 20, 2007, the Company completed the sale of
substantially all of the assets of the Business to a third party
for approximately $135 million less transaction-related
costs. In conjunction with the sale, the two parties entered
into a
10-year
contractual agreement whereby the purchaser of the Business will
continue to operate ATM devices in U.S. 7-Eleven
Company-operated and franchised stores and in new stores opened
during this period. In accordance with the terms of the
agreement, the purchaser will pay fixed and variable-rate
commissions to 7-Eleven on a monthly basis.
F-91
Table of Contents
7-ELEVEN
FINANCIAL SERVICES BUSINESS
Financial Statements for the
Years Ended December 31, 2004, 2005 and 2006
F-92
Table of Contents
Report of
Independent Auditors
To the Management and Board of Directors
of 7-Eleven, Inc.
In our opinion, the accompanying balance sheets and the related
statements of earnings and cash flows present fairly, in all
material respects, the financial position of the 7-Eleven
Financial Services Business (the “Company”) at
December 31, 2006 and 2005, and the results of its
operations and its cash flows for each of the three years in the
period ended December 31, 2006 in conformity with
accounting principles generally accepted in the United States of
America. 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 of these statements in accordance with
auditing standards generally accepted in the United States of
America. 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, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
As discussed in Note 1 to the financial statements, the
Company has restated its 2006 and 2005 financial statements.
/s/ PricewaterhouseCoopers
LLP
Dallas, TX
March 29, 2007,
except for the restatement discussed
in Note 1 to the financial statements,
as to which the date is
July 16, 2007
F-93
Table of Contents
7-ELEVEN
FINANCIAL SERVICES BUSINESS
(dollars
in thousands)
|
December 31, |
December 31, |
|||||||
| 2005 | 2006 | |||||||
| restated | restated | |||||||
|
Assets
|
||||||||
|
Current assets
|
||||||||
|
Cash
|
$ | 15,392 | $ | 13,015 | ||||
|
Accounts receivable
|
43,093 | 74,565 | ||||||
|
Other current assets
|
9,094 | 7,215 | ||||||
|
Total current assets
|
67,579 | 94,795 | ||||||
|
Property and equipment, net
|
86,970 | 90,484 | ||||||
|
Goodwill
|
35,593 | 35,593 | ||||||
|
Other assets
|
34 | — | ||||||
|
Total assets
|
$ | 190,176 | $ | 220,872 | ||||
|
Liabilities and Shareholder’s Equity
|
||||||||
|
Current liabilities
|
||||||||
|
Accrued expenses and other liabilities
|
$ | 50,002 | $ | 72,242 | ||||
|
Capital lease obligations due within one year
|
9,008 | 1,465 | ||||||
|
Total current liabilities
|
59,010 | 73,707 | ||||||
|
Deferred credits and other liabilities
|
18,912 | 13,004 | ||||||
|
Long-term capital lease obligations
|
21,921 | 1,900 | ||||||
|
Commitments and contingencies
|
||||||||
|
Shareholder’s equity
|
||||||||
|
Common stock, $.10 par value; 1,000 shares issued and
outstanding
|
— | — | ||||||
|
Additional paid-in capital
|
97,122 | 128,273 | ||||||
|
Accumulated (deficit) earnings
|
(6,789 | ) | 3,988 | |||||
|
Total shareholder’s equity
|
90,333 | 132,261 | ||||||
|
Total liabilities and shareholder’s equity
|
$ | 190,176 | $ | 220,872 | ||||
See notes to financial statements.
F-94
Table of Contents
7-ELEVEN
FINANCIAL SERVICES BUSINESS
(dollars
in thousands)
| Years Ended December 31 | ||||||||||||
| 2004 | 2005 | 2006 | ||||||||||
| restated | restated | |||||||||||
|
Revenues:
|
||||||||||||
|
Commissions
|
$ | 65,363 | $ | 138,243 | $ | 142,735 | ||||||
|
Other income
|
31,754 | 19,748 | 20,927 | |||||||||
|
Total revenues
|
97,117 | 157,991 | 163,662 | |||||||||
|
Expenses:
|
||||||||||||
|
Commission expense to 7-Eleven
|
25,816 | 47,413 | 49,233 | |||||||||
|
Other expenses
|
68,577 | 101,657 | 96,356 | |||||||||
|
Operating, selling, general and administrative expenses
|
94,393 | 149,070 | 145,589 | |||||||||
|
Interest expense, net
|
909 | 1,056 | 520 | |||||||||
|
Total expenses
|
95,302 | 150,126 | 146,109 | |||||||||
|
Earnings before income taxes
|
1,815 | 7,865 | 17,553 | |||||||||
|
Income tax expense
|
702 | 3,036 | 6,776 | |||||||||
|
Net earnings
|
$ | 1,113 | $ | 4,829 | $ | 10,777 | ||||||
See notes to financial statements.
F-95
Table of Contents
7-ELEVEN
FINANCIAL SERVICES BUSINESS
(dollars
in thousands)
| Years Ended December 31 | ||||||||||||
| 2004 | 2005 | 2006 | ||||||||||
| restated | restated | |||||||||||
|
Cash Flows from Operating Activities
|
||||||||||||
|
Net earnings
|
$ | 1,113 | $ | 4,829 | $ | 10,777 | ||||||
|
Adjustments to reconcile net earnings to net cash provided by
operating activities:
|
||||||||||||
|
Depreciation and amortization of equipment
|
12,465 | 14,456 | 15,820 | |||||||||
|
Deferred income taxes
|
1,815 | 2,454 | 228 | |||||||||
|
Net loss (gain) on disposal of equipment
|
116 | (13 | ) | (115 | ) | |||||||
|
Increase in accounts receivable
|
(16,274 | ) | (13,326 | ) | (31,472 | ) | ||||||
|
Increase in other assets
|
(919 | ) | (1,437 | ) | (708 | ) | ||||||
|
Increase in trade accounts payable and other liabilities
|
18,078 | 18,508 | 18,725 | |||||||||
|
Net cash provided by operating activities
|
16,394 | 25,471 | 13,255 | |||||||||
|
Cash Flows from Investing Activities
|
||||||||||||
|
Payments for purchase of equipment
|
(11,151 | ) | (26,296 | ) | (19,325 | ) | ||||||
|
Proceeds from sale of equipment
|
1,243 | 13 | 106 | |||||||||
|
Acquisition of a business
|
(44,743 | ) | — | — | ||||||||
|
Net cash used in investing activities
|
(54,651 | ) | (26,283 | ) | (19,219 | ) | ||||||
|
Cash Flows from Financing Activities
|
||||||||||||
|
Principal payments under capital lease obligations
|
(6,348 | ) | (9,549 | ) | (4,932 | ) | ||||||
|
Capital contributions from 7-Eleven, net
|
54,324 | 15,713 | 31,151 | |||||||||
|
Payments related to capital lease purchase
|
— | — | (22,632 | ) | ||||||||
|
Payments to
7-Eleven for return of
Vcomtm
kiosks’ cash inventory
|
(96,298 | ) | — | — | ||||||||
|
Net cash (used in) provided by financing activities
|
(48,322 | ) | 6,164 | 3,587 | ||||||||
|
Net (decrease) increase in cash
|
(86,579 | ) | 5,352 | (2,377 | ) | |||||||
|
Cash at beginning of year
|
96,619 | 10,040 | 15,392 | |||||||||
|
Cash at end of year
|
$ | 10,040 | $ | 15,392 | $ | 13,015 | ||||||
|
Related disclosures for cash flow reporting
|
||||||||||||
|
Assets obtained by entering into capital leases
|
$ | 3,291 | $ | — | $ | — | ||||||
See notes to financial statements.
F-96
Table of Contents
7-ELEVEN
FINANCIAL SERVICES BUSINESS
(dollars
and shares in thousands)
|
Common |
||||||||||||||||||||
| Stock |
Additional |
Accumulated |
||||||||||||||||||
|
Par |
Paid-in |
(Deficit) |
Shareholder’s |
|||||||||||||||||
| Shares | Value | Capital | Earnings | Equity | ||||||||||||||||
|
Balance at December 31, 2003
|
1 | $ | — | $ | 123,383 | $ | (12,731 | ) | $ | 110,652 | ||||||||||
|
Net earnings
|
1,113 | 1,113 | ||||||||||||||||||
|
Payments to
7-Eleven for return of
Vcomtm
kiosks’ cash inventory
|
(96,298 | ) | (96,298 | ) | ||||||||||||||||
|
Capital contributions from 7-Eleven, net
|
54,324 | 54,324 | ||||||||||||||||||
|
Balance at December 31, 2004
|
1 | — | 81,409 | (11,618 | ) | 69,791 | ||||||||||||||
|
Net earnings, as restated (see Note 1)
|
4,829 | 4,829 | ||||||||||||||||||
|
Capital contributions from 7-Eleven, net, as restated (see
Note 1)
|
15,713 | 15,713 | ||||||||||||||||||
|
Balance at December 31, 2005, as restated
|
1 | — | 97,122 | (6,789 | ) | 90,333 | ||||||||||||||
|
Net earnings, as restated (see Note 1)
|
10,777 | 10,777 | ||||||||||||||||||
|
Capital contributions from 7-Eleven, net, as restated (see
Note 1)
|
31,151 | 31,151 | ||||||||||||||||||
|
Balance at December 31, 2006, as restated
|
1 | $ | — | $ | 128,273 | $ | 3,988 | $ | 132,261 | |||||||||||
See notes to financial statements.
F-97
Table of Contents
7-ELEVEN
FINANCIAL SERVICES BUSINESS
NOTES TO
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2005 and 2006
YEARS ENDED DECEMBER 31, 2004, 2005 and 2006
| NOTE 1: | Basis of Presentation and Summary of Significant Accounting Policies |
Basis of Presentation — 7-Eleven, Inc. (the
“Company” or “7-Eleven”) operates a business
consisting of a network of both traditional ATMs and
advance-function devices (“Vcoms”) in most of its
stores and selected licensed stores in the United States. The
business consists of fixed assets, placement agreements
governing the right to offer ATM services in 7-Eleven stores,
product partner agreements and third party lease and service
agreements (“7-Eleven Financial Services Business” or
the “Business”). The Company has staff dedicated to
the Business and allocates certain additional costs to the
Business where appropriate. The financial statements include the
accounts of the Business. The operations of the Business include
both the operations of the ATM network used in 7-Eleven stores
as well as the
Vcomtm
equipment and services provided therein. The assets and certain
service agreements pertaining to the ATM network are maintained
in a subsidiary of the Company known as
Vcomtm
Financial Services, Inc. (“VFS”).
Restatement of Previously Issued Financial
Statements — The Business has restated its
previously issued December 31, 2006 financial statements to
correct errors in the depreciation of certain fixed assets as
well as in the correct amount of fixed assets associated with
the Business. We determined that certain fixed assets were not
being depreciated commencing in the period the fixed assets were
initially placed in service in accordance with the
Company’s fixed asset policy. The financial statements have
been restated to record $430,000 of additional depreciation in
operating, selling, general and administrative
(“OSG&A”) expense for the year ended
December 31, 2006. We also determined that certain of the
Company’s fixed assets were incorrectly included as being
associated with the Business and the financial statements were
restated to reduce property and equipment, net, by $903,000 as
of December 31, 2006.
These adjustments are in addition to the previous restatement of
the December 31, 2005 and 2006 financial statements to
appropriately include certain tender offer expenses resulting
from the purchase of the noncontrolling equity interests of the
Company by its owner, Seven-Eleven Japan Co., Ltd., in November
2005. These previously restated financial statements had been
restated to allocate $1.7 million of compensation costs
related to the managers and employees of the Business to
OSG&A expense for the year ended December 31, 2005.
F-98
Table of Contents
7-ELEVEN
FINANCIAL SERVICES BUSINESS
NOTES TO FINANCIAL STATEMENTS — (Continued)
NOTES TO FINANCIAL STATEMENTS — (Continued)
The restatement effect in the following table also includes
differences that were identified during the December 31,
2006 audit of the Business. We had determined these items were
individually and in the aggregate immaterial to the financial
statements. In connection with this restatement, we corrected
these items by recording them in the period to which they were
attributable. The effects of these restatements were as follows:
| 2005 | 2006 | |||||||||||||||
|
Impact of |
Impact of |
|||||||||||||||
| Restatement | As Restated | Restatement | As Restated | |||||||||||||
| (dollars in thousands) | ||||||||||||||||
|
As of December 31:
|
||||||||||||||||
|
Total current assets
|
— | — | $ | (379 | ) | $ | 94,795 | |||||||||
|
Property and equipment, net
|
— | — | (1,333 | ) | 90,484 | |||||||||||
|
Total current liabilities
|
— | — | (99 | ) | 73,707 | |||||||||||
|
Deferred credits and other liabilities
|
— | — | (168 | ) | 13,004 | |||||||||||
|
Additional paid-in capital
|
$ | 1,066 | $ | 97,122 | 57 | 128,273 | ||||||||||
|
Accumulated (deficit) earnings
|
(1,066 | ) | (6,789 | ) | (1,502 | ) | 3,988 | |||||||||
|
Year Ended December 31:
|
||||||||||||||||
|
OSG&A
|
$ | 1,736 | $ | 149,070 | $ | 709 | $ | 145,589 | ||||||||
|
Earnings before income taxes
|
(1,736 | ) | 7,865 | (709 | ) | 17,553 | ||||||||||
|
Income tax expense
|
(670 | ) | 3,036 | (273 | ) | 6,776 | ||||||||||
|
Net earnings
|
(1,066 | ) | 4,829 | (436 | ) | 10,777 | ||||||||||
|
Net cash provided by operating activities
|
(1,066 | ) | 25,471 | 106 | 13,255 | |||||||||||
|
Net cash used in investing activities
|
— | — | 903 | (19,219 | ) | |||||||||||
|
Net cash provided by financing activities
|
1,066 | 6,164 | (1,009 | ) | 3,587 | |||||||||||
Use of Estimates — The preparation of financial
statements in conformity with generally accepted accounting
principles requires management to make estimates that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and revenues and expenses during the reporting
period. Such estimates are based on historical experience and on
various other assumptions that the Company believes to be
reasonable under the circumstances. The results of these
estimates form the basis of the Company’s judgments about
the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ
from these estimates under different assumptions or conditions.
Revenues — Revenues are comprised of service
fees/commissions from ATM, check-cashing and other transactions
and are separately presented in the accompanying statements of
earnings. These transaction fees/commissions are recognized at
the point of sale.
Other Income — Other income relates to
placement fees received from
Vcomtm
partners. The recognition of these funds is deferred until the
revenue is earned, as specified by the substance of the
applicable agreement.
In 2004, the Company and two of its
Vcomtm
partners, one of which provided check-cashing services, mutually
agreed to terminate their relationships. One of these partners
was simultaneously replaced with another check-cashing partner.
Included in the amount recognized in other income for the year
ended December 31, 2004, was $10.8 million that
resulted from the termination of these relationships. Because
the relationships were terminated, and the Company had no
further obligations under the agreements, recognition of the
income was accelerated.
F-99
Table of Contents
7-ELEVEN
FINANCIAL SERVICES BUSINESS
NOTES TO FINANCIAL STATEMENTS — (Continued)
NOTES TO FINANCIAL STATEMENTS — (Continued)
Commission Expense to 7-Eleven — A contractual
agreement between the Business and the Company is currently in
effect and expires at the end of 2009. This agreement and a
franchise amendment govern the portion of the ATM and
Vcomtm
transaction fees that are earned by the Business and paid to the
Company. These payments include both fixed and variable
components. The contractual agreement also governs other
ATM-related economics between the Business and the Company.
OSG&A Expenses — In addition to the ATM
and
Vcomtm
commission expense to the Company, OSG&A expense includes
certain direct costs of the Business as well as other costs
incurred by the Company and allocated to the Business on a basis
that management believes to be reasonable. Such costs include
hardware, cash management, operations support, cash rent and
other corporate expenses. Also included in OSG&A expense
are reasonable allocations of indirect costs incurred by the
Company for compensation, travel and office space for certain
key employees who devote significant time to the Business. These
allocated costs were $866,000, $1.0 million and
$1.0 million for the years ended December 31, 2004,
2005 and 2006, respectively.
In addition, OSG&A expense for the year ended
December 31, 2005 includes $1.7 million of one-time
compensation paid to certain employees of the Company who
devoted time to the Business. The payments were made in November
2005 when the Company became a private company. This one-time
compensation cost represented the settlement for cash and
subsequent cancellation of equity-based awards issued under the
Company’s stock plans as if they had been exercised at the
tender offer price on the transaction date.
Advertising costs, also included in OSG&A, generally are
charged to expense as incurred. Advertising costs were
$4.1 million, $2.5 million and $571,000 for the years
ended December 31, 2004, 2005 and 2006, respectively.
Income Taxes — Income taxes are determined
using the liability method, where deferred tax assets and
liabilities are recognized for temporary differences between the
tax bases of assets and liabilities and their reported amounts
in the financial statements. Deferred tax assets include net
operating loss carryforwards, if any, and are reduced by a
valuation allowance if, based on available evidence, it is more
likely than not that some portion or all of the deferred tax
assets will not be realized.
Depreciation and Amortization — Depreciation of
property and equipment is based on the estimated useful lives of
these assets using the straight-line method. Acquisition and
development costs for significant business systems and related
software for internal use are capitalized and are depreciated or
amortized on a straight-line basis. Included in depreciation and
amortization of property and equipment in the accompanying
statements of cash flows is software amortization expense of
$2.2 million, $3.8 million and $4.6 million for
the years ended December 31, 2004, 2005 and 2006,
respectively.
Amortization of capital lease assets and associated leasehold
improvements is based on the lease term or the estimated useful
life, whichever is shorter. Amortization of leasehold
improvements on operating leases is based on the shorter of the
estimated useful life or the lease term.
The following table summarizes the years over which significant
assets are generally depreciated or amortized:
| Years | ||||
|
Leasehold improvements
|
3 to 20 | |||
|
Equipment
|
3 to 10 | |||
|
Software
|
3 to 7 | |||
Asset Impairment — The Company’s
long-lived assets are reviewed for impairment and written down
to fair value whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. The
Company also conducted an impairment test of its goodwill as of
December 31, 2005 and 2006 (see Note 5). The
impairment test for goodwill is comprised of two steps. Step one
compares the fair
F-100
Table of Contents
7-ELEVEN
FINANCIAL SERVICES BUSINESS
NOTES TO FINANCIAL STATEMENTS — (Continued)
NOTES TO FINANCIAL STATEMENTS — (Continued)
value of the reporting unit with its carrying amount including
goodwill. If the carrying amount exceeds the fair value, then
goodwill is impaired and step two is required to measure the
amount of impairment loss. Step two compares the implied fair
value of the reporting unit’s goodwill with the carrying
amount of that goodwill. If the carrying amount is greater than
the implied fair value of the goodwill, an impairment loss is
recognized for the excess.
Equity-Based Compensation — The Business
participated in the Company’s 1995 and 2005 Stock Incentive
Plans that provided for the granting of stock options, stock
appreciation rights, performance shares, restricted stock and
other forms of stock-based awards over
10-year
periods to certain key employees and officers of the Company.
All options granted were granted at exercise prices that were
equal to the fair market values on the date of grant. The
options vested annually in three equal installments, all
beginning one year after the grant date. Vested options were
exercisable within 10 years of the grant date. The fair
value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model. The following
weighted-average assumptions were used for the options granted
in the years ended December 31, 2004 and 2005: expected
life of three years, no dividend yield, risk-free interest rates
of 2.28% and 3.70%, and expected volatility of 46.30% and
31.48%, respectively.
The Company accounted for its stock-option grants under the
provisions of Accounting Principles Board Opinion No. 25,
“Accounting for Stock Issued to Employees.” If
compensation expense had been determined based on the grant-date
fair value of the awards consistent with the method prescribed
by SFAS No. 123, “Accounting for Stock-Based
Compensation,” the net earnings of the Business would have
been reduced to the pro forma amounts indicated in the following
table:
| Years Ended December 31 | ||||||||
| 2004 | 2005 | |||||||
| (dollars in thousands) | ||||||||
| restated | ||||||||
|
Net earnings as reported
|
$ | 1,113 | $ | 4,829 | ||||
|
Add: Stock-based compensation expense included in reported net
earnings, net of tax
|
— | 1,147 | ||||||
|
Less: Total stock-based compensation expense determined under
the fair-value-based method for all stock-option awards, net of
tax
|
(90 | ) | (1,019 | ) | ||||
|
Pro forma net earnings
|
$ | 1,023 | $ | 4,957 | ||||
Comprehensive Earnings — Comprehensive earnings
are defined as the change in equity (net assets) of a business
enterprise during a period, except for those changes resulting
from investments by owners and distributions to owners. There
are no components of other comprehensive earnings and,
consequently, comprehensive earnings are equal to net earnings.
F-101
Table of Contents
7-ELEVEN
FINANCIAL SERVICES BUSINESS
NOTES TO FINANCIAL STATEMENTS — (Continued)
NOTES TO FINANCIAL STATEMENTS — (Continued)
| NOTE 2: | Accounts Receivable |
| December 31 | ||||||||
| 2005 | 2006 | |||||||
| (dollars in thousands) | ||||||||
| restated | ||||||||
|
ATM receivables
|
$ | 35,606 | $ | 61,787 | ||||
|
Placement fee receivables
|
3,551 | 5,511 | ||||||
|
Other receivables
|
3,936 | 7,267 | ||||||
| $ | 43,093 | $ | 74,565 | |||||
| NOTE 3: | Other Current Assets |
| December 31 | ||||||||
| 2005 | 2006 | |||||||
| (dollars in thousands) | ||||||||
|
Prepaid expenses
|
$ | 5,550 | $ | 6,291 | ||||
|
Deferred income taxes
|
3,544 | 924 | ||||||
| $ | 9,094 | $ | 7,215 | |||||
| NOTE 4: | Property and Equipment |
| December 31 | ||||||||
| 2005 | 2006 | |||||||
| (dollars in thousands) | ||||||||
| restated | ||||||||
|
Cost
|
||||||||
|
Leasehold improvements
|
$ | 10 | $ | 10 | ||||
|
Developed software
|
26,772 | 28,645 | ||||||
|
Equipment
|
48,846 | 88,335 | ||||||
| 75,628 | 116,990 | |||||||
|
Original value
|
||||||||
|
Capital lease equipment
|
46,399 | 3,699 | ||||||
| 122,027 | 120,689 | |||||||
|
Accumulated depreciation and amortization (includes $8,442 and
$13,081 related to developed software)
|
(35,057 | ) | (30,205 | ) | ||||
| $ | 86,970 | $ | 90,484 | |||||
| NOTE 5: | Goodwill |
In August 2004, the Company and VFS entered into a purchase
agreement pursuant to which VFS acquired the business that
operated the ATM network being used in 7-Eleven stores for a
purchase price (including acquisition costs) of
$44.7 million of cash consideration and the assumption of
certain contractual lease commitments and other contracts
related to the business.
F-102
Table of Contents
7-ELEVEN
FINANCIAL SERVICES BUSINESS
NOTES TO FINANCIAL STATEMENTS — (Continued)
NOTES TO FINANCIAL STATEMENTS — (Continued)
The acquisition was accounted for under the purchase method. The
purchase price included the acquisition of approximately 4,500
ATM machines (as well as approximately 1,000 warehoused units,
the majority of which were sold by December 31,
2004) and the right to receive all future ATM transaction
revenue generated through both these machines and the more than
1,000
Vcomtm
machines owned by the Company before the acquisition. During the
fourth quarter of 2004, the Company finalized the purchase price
allocation and, as a result of this analysis, recorded goodwill
of $35.6 million representing the excess of purchase price
over net assets acquired. Goodwill is not subject to
amortization but has been reviewed for impairment as of
December 31, 2005 and 2006 (see Note 1). There was no
evidence of impairment in either test.
| NOTE 6: | Accrued Expenses and Other Liabilities |
| December 31 | ||||||||
| 2005 | 2006 | |||||||
| (dollars in thousands) | ||||||||
| restated | ||||||||
|
Interest
|
$ | 81 | $ | 79 | ||||
|
Accrued advertising
|
390 | 432 | ||||||
|
Accrued rent
|
885 | 432 | ||||||
|
Deferred income
|
2,038 | 824 | ||||||
|
Settlement payables
|
41,180 | 65,808 | ||||||
|
Other
|
5,428 | 4,667 | ||||||
| $ | 50,002 | $ | 72,242 | |||||
Settlement payables represent amounts owed to
Vcomtm
partners for cash collected on transactions at the ATM and
Vcomtm
terminals. Amounts collected are generally paid to
Vcomtm
partners one to three days after the transaction has occurred.
Other liabilities include monthly charges for cash management,
replenishment and maintenance.
| NOTE 7: | Deferred Credits and Other Liabilities |
| December 31 | ||||||||
| 2005 | 2006 | |||||||
| (dollars in thousands) | ||||||||
| restated | ||||||||
|
Deferred income taxes
|
$ | 13,489 | $ | 11,096 | ||||
|
Deferred income
|
5,423 | 1,908 | ||||||
| $ | 18,912 | $ | 13,004 | |||||
| NOTE 8: | Leases |
Leases — Certain equipment used in the Business
is leased, generally for terms from three to 10 years. The
present value of future minimum lease payments for capital lease
obligations is reflected in the balance sheets as long-term
debt. The amount representing imputed interest necessary to
reduce net minimum lease payments to present value has been
calculated generally at the Company’s incremental borrowing
rate at the inception of each lease.
F-103
Table of Contents
7-ELEVEN
FINANCIAL SERVICES BUSINESS
NOTES TO FINANCIAL STATEMENTS — (Continued)
NOTES TO FINANCIAL STATEMENTS — (Continued)
In November 2002, the Company entered into a lease facility with
a third-party institution that provided the Company with
$43.2 million in financing for
Vcomtm
equipment. The leases were accounted for as capital leases
having a five-year lease term from the date of funding, which
occurred on a monthly basis from December 2002 through June
2003. The leases bore interest at LIBOR plus 1.25%. Upon lease
termination, whether prior to or at expiration of the five-year
lease term, the Company was obligated to pay the lessor an
amount equal to the original cost of the equipment financed less
amortization to date plus accrued interest. Effective
June 30, 2006, the facility was terminated and the capital
lease assets were purchased by the Company.
Future minimum lease payments for years ending December 31 are
as follows:
|
Capital |
Operating |
|||||||
| Leases | Leases | |||||||
| (dollars in thousands) | ||||||||
|
2007
|
$ | 1,638 | $ | 4,016 | ||||
|
2008
|
1,048 | 3,965 | ||||||
|
2009
|
755 | 3,837 | ||||||
|
2010
|
233 | 225 | ||||||
|
Future minimum lease payments
|
3,674 | $ | 12,043 | |||||
|
Amount representing imputed interest
|
(309 | ) | ||||||
|
Present value of future minimum lease payments
|
$ | 3,365 | ||||||
Minimum lease payments are calculated in accordance with
SFAS No. 13, as amended. The minimum lease payments
include any base rent plus step increases and escalation
clauses, any guarantee of residual value by the Company and any
payments for failure to renew the lease. In the event the base
rent is dependent upon an index or rate that can change over the
term of the lease, the minimum lease payments are calculated
using the rate or index in effect at the inception of the lease.
Minimum lease payments do not include executory costs such as
insurance, maintenance and taxes. Minimum lease payments for
operating leases are recognized on a straight-line basis over
the term of the lease.
Rent expense on operating leases totaled $5.5 million,
$8.7 million and $7.7 million for the years ended
December 31, 2004, 2005 and 2006, respectively.
The maturities of the Company’s non-cancelable capital
lease obligations as of December 31, 2006, are as follows
(dollars in thousands):
|
2007
|
$ | 1,465 | ||
|
2008
|
955 | |||
|
2009
|
716 | |||
|
2010
|
229 | |||
| $ | 3,365 | |||
| NOTE 9: | Benefit Plans |
Profit Sharing Plans — The Business
participates in all of the Company’s benefit plans such as
the Profit Sharing Plan (the “Plan”), which provides
retirement benefits to eligible employees. Contributions to the
Plan, which is a defined contribution plan, are made by both the
participants and the Company. Effective January 1, 2006,
the Plan was amended such that the Company’s contribution
to the Plan is based on a fixed percentage match of the
participants’ contributions. In prior years, the Company
contributed to the Plan an amount
F-104
Table of Contents
7-ELEVEN
FINANCIAL SERVICES BUSINESS
NOTES TO FINANCIAL STATEMENTS — (Continued)
NOTES TO FINANCIAL STATEMENTS — (Continued)
determined at the discretion of the Company and allocated it to
the participants based on their individual contributions and
years of participation in the Plan. Of the Company’s total
contributions to the Plan, $88,000, $134,000 and $44,000 were
allocated to the Business for the years ended December 31,
2004, 2005 and 2006, respectively. These amounts are included in
OSG&A expense in the accompanying statements of earnings.
| NOTE 10: | Commitments and Contingencies |
Information Technology — Under the terms of a
contract with an information technology service provider, VFS
and the Company were obligated to purchase $9.5 million of
information technology hardware and additional maintenance
services in 2006. VFS is also required in years 2007 through
2010 to purchase all of its ATM or
Vcomtm
equipment from this provider for any new or existing 7-Eleven
store for which there is not an existing ATM agreement in place
and is obligated to purchase maintenance services. The Company
met the threshold for information technology expenditures in
2006.
Under the terms of a contract with another information
technology service provider, VFS and the Company are obligated
to purchase the greater of $300,000 per month or 60% of the
average monthly charge for the immediately preceding six-month
period in information technology services through
December 31, 2009.
| NOTE 11: | Income Taxes |
The provision for income tax expense on earnings in the
accompanying statements of earnings consists of the following:
| Years Ended December 31 | ||||||||||||
| 2004 | 2005 | 2006 | ||||||||||
| (dollars in thousands) | ||||||||||||
| restated | restated | |||||||||||
|
Current
|
||||||||||||
|
Federal
|
$ | (1,613 | ) | $ | (118 | ) | $ | 5,798 | ||||
|
State
|
500 | 700 | 750 | |||||||||
|
Subtotal
|
(1,113 | ) | 582 | 6,548 | ||||||||
|
Deferred
|
1,815 | 2,454 | 228 | |||||||||
|
Income tax expense on earnings
|
$ | 702 | $ | 3,036 | $ | 6,776 | ||||||
Reconciliations of income tax expense on earnings at the federal
statutory rate to the Company’s actual income tax expense
are provided as follows:
| Years Ended December 31 | ||||||||||||
| 2004 | 2005 | 2006 | ||||||||||
| (dollars in thousands) | ||||||||||||
| restated | restated | |||||||||||
|
Tax expense at federal statutory rate
|
$ | 635 | $ | 2,753 | $ | 6,144 | ||||||
|
State income tax expense, net of federal income tax benefit
|
67 | 283 | 632 | |||||||||
| $ | 702 | $ | 3,036 | $ | 6,776 | |||||||
F-105
Table of Contents
7-ELEVEN
FINANCIAL SERVICES BUSINESS
NOTES TO FINANCIAL STATEMENTS — (Continued)
NOTES TO FINANCIAL STATEMENTS — (Continued)
Significant components of the Company’s deferred tax assets
and liabilities are as follows:
| December 31 | ||||||||
| 2005 | 2006 | |||||||
| (dollars in thousands) | ||||||||
| restated | ||||||||
|
Deferred tax assets
|
||||||||
|
Property and equipment
|
$ | 3,544 | $ | 924 | ||||
|
Deferred tax liabilities
|
||||||||
|
Property and equipment
|
(12,178 | ) | (9,925 | ) | ||||
|
Intangible assets and other
|
(1,311 | ) | (1,171 | ) | ||||
|
Subtotal
|
(13,489 | ) | (11,096 | ) | ||||
|
Net deferred tax liability
|
$ | (9,945 | ) | $ | (10,172 | ) | ||
|
Deferred taxes consist of the following:
|
||||||||
|
Current deferred tax assets
|
$ | 3,544 | $ | 924 | ||||
|
Noncurrent deferred tax liabilities
|
(13,489 | ) | (11,096 | ) | ||||
|
Net deferred tax liability
|
$ | (9,945 | ) | $ | (10,172 | ) | ||
| NOTE 12: | Recently Issued Accounting Standards |
Effective January 1, 2007, the Company will adopt the
provisions of FASB Interpretation No. 48, “Accounting
for Uncertainty in Income Taxes” (“FIN 48”),
which clarifies the accounting for uncertainty in income taxes
recognized in an entity’s financial statements in
accordance with FASB Statement No. 109, “Accounting
for Income Taxes.” FIN 48 requires that an entity
recognize the benefit of a tax position only when it is more
likely than not, based on the position’s technical merits,
that the position would be sustained upon examination by the
appropriate taxing authorities. The tax benefit is measured as
the largest benefit that is more than 50% likely of being
realized upon final settlement with the taxing authorities. The
Company is currently evaluating the impact of adopting
FIN 48 and anticipates that its adoption will not have a
material impact on the results of operations or financial
position of the Business.
As of December 31, 2006, the Company adopted the provisions
of SFAS No. 158, “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans,” on
a prospective basis. SFAS No. 158, which was issued in
September 2006, requires the Company to recognize the funded
status of its Executive Protection Plan as an asset or liability
in its consolidated balance sheet. The Company is also required
to recognize as a component of other comprehensive earnings the
changes in funded status that occurred during the year that are
not recognized as part of net periodic benefit cost. The
adoption of SFAS No. 158 did not impact the
Company’s results of operations for the year ended
December 31, 2006.
F-106
Table of Contents
THE EXCHANGE OFFER AND
WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 A.M. MIDNIGHT,
NEW YORK CITY TIME, ON JULY 16, 2008 (THE “EXPIRATION
DATE”), UNLESS THE EXCHANGE OFFER IS EXTENDED BY THE
COMPANY.
The Exchange Agent for the Exchange Offer is:
Wells Fargo Bank, National
Association
| By Registered & Certified Mail: | By Regular Mail or Overnight Courier: | |
|
WELLS FARGO BANK, N.A. Corporate Trust Operations MAC N9303-121 PO Box 1517 Minneapolis, MN 55480 |
WELLS FARGO BANK, N.A. Corporate Trust Operations MAC N9303-121 Sixth & Marquette Avenue Minneapolis, MN 55479 |
In Person by Hand Only:
WELLS FARGO BANK, N.A.
12th
Floor — Northstar East Building
Corporate Trust Operations
608 Second Avenue South
Minneapolis, MN
By Facsimile (for Eligible Institutions only):
(612) 667-6282
For Information or Confirmation by
Telephone:
(800) 344-5128
IF YOU WISH TO EXCHANGE CURRENTLY OUTSTANDING 9.250% SENIOR
SUBORDINATED NOTES DUE 2013 — SERIES B FOR
AN EQUAL AGGREGATE PRINCIPAL AMOUNT OF NEW 9.250% SENIOR
SUBORDINATED NOTES DUE 2013 — SERIES B
PURSUANT TO THE EXCHANGE OFFER, YOU MUST VALIDLY TENDER (AND NOT
WITHDRAW) OUTSTANDING NOTES TO THE EXCHANGE AGENT PRIOR TO
12:00 A.M. MIDNIGHT, NEW YORK CITY TIME, ON THE
EXPIRATION DATE BY CAUSING AN AGENT’S MESSAGE TO BE
RECEIVED BY THE EXCHANGE AGENT PRIOR TO SUCH TIME.
The undersigned hereby acknowledges receipt of the Prospectus,
dated June 17, 2008 (the “Prospectus”), of
Cardtronics, Inc., a Delaware corporation (the
“Company”), and this Letter of Transmittal (the
“Letter of Transmittal”), which together describe the
Company’s offer (the “Exchange Offer”) to
exchange its 9.250% Senior Subordinated Notes due
2013 — Series B (the “New Notes”) that
have been registered under the Securities Act of 1933, as
amended (the “Securities Act”), for a like principal
amount of its issued and
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outstanding 9.250% Senior Subordinated Notes due
2013 — Series B (the “Outstanding
Notes”). Capitalized terms used but not defined herein have
the respective meaning given to them in the Prospectus.
The Company reserves the right, at any time or from time to
time, to extend the Exchange Offer at its discretion, in which
event the term “Expiration Date” shall mean the latest
date to which the Exchange Offer is extended. The Company shall
notify the Exchange Agent by oral or written notice and each
registered holder of the Outstanding Notes of any extension by
press release prior to 9:00 a.m., New York City time, on
the next business day after the previously scheduled Expiration
Date.
This Letter of Transmittal is to be used by holders of the
Outstanding Notes. Tender of Outstanding Notes is to be made
according to the Automated Tender Offer Program
(“ATOP”) of the Depository Trust Company
(“DTC”) pursuant to the procedures set forth in the
prospectus under the caption “The Exchange
Offer — Procedures for Tendering.” DTC
participants that are accepting the Exchange Offer must transmit
their acceptance to DTC, which will verify the acceptance and
execute a book-entry delivery to the Exchange Agent’s DTC
account. DTC will then send a computer generated message known
as an “agent’s message” to the exchange agent for
its acceptance. For you to validly tender your Outstanding Notes
in the Exchange Offer, the Exchange Agent must receive, prior to
the Expiration Date, an agent’s message under the ATOP
procedures that confirms that:
| • | DTC has received your instructions to tender your Outstanding Notes; and | |
| • | You agree to be bound by the terms of this Letter of Transmittal. |
By using the ATOP procedures to tender outstanding notes, you
will not be required to deliver this Letter of Transmittal to
the Exchange Agent. However, you will be bound by its terms, and
you will be deemed to have made the acknowledgments and the
representations and warranties it contains, just as if you had
signed it.
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PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY.
Ladies and
Gentlemen:
1. By tendering Outstanding Notes in the Exchange Offer,
you acknowledge receipt of the Prospectus and this Letter of
Transmittal.
2. By tendering Outstanding Notes in the Exchange Offer,
you represent and warrant that you have full authority to tender
the Outstanding Notes described above and will, upon request,
execute and deliver any additional documents deemed by the
Company to be necessary or desirable to complete the tender of
Outstanding Notes.
3. You understand that the tender of the Outstanding Notes
pursuant to all of the procedures set forth in the Prospectus
will constitute an agreement between and the Company as to the
terms and conditions set forth in the Prospectus.
4. By tendering Outstanding Notes in the Exchange Offer,
you acknowledge that the Exchange Offer is being made in
reliance upon interpretations contained in no-action letters
issued to third parties by the staff of the Securities and
Exchange Commission (the “SEC”), including Exxon
Capital Holdings Corp., SEC No-Action Letter (available
April 13, 1989), Morgan Stanley & Co., Inc., SEC
No-Action Letter (available June 5, 1991) and
Shearman & Sterling, SEC No-Action Letter (available
July 2, 1993), that the New Notes issued in exchange for
the Outstanding Notes pursuant to the Exchange Offer may be
offered for resale, resold and otherwise transferred by holders
thereof (other than a broker-dealer who purchased Outstanding
Notes exchanged for such New Notes directly from the Company to
resell pursuant to Rule 144A or any other available
exemption under the Securities Act of 1933, as amended (the
“Securities Act”) and any such holder that is an
“affiliate” of the Company within the meaning of
Rule 405 under the Securities Act), without compliance with
the registration and prospectus delivery provisions of the
Securities Act, provided that such New Notes are acquired in the
ordinary course of such holders’ business and such holders
are not participating in, and have no arrangement with any
person to participate in, the distribution of such New Notes.
5. By tendering Outstanding Notes in the Exchange Offer,
you represent and warrant that:
a. the New Notes acquired pursuant to the Exchange Offer
are being obtained in the ordinary course of your business,
whether or not you are the holder;
b. neither you nor any such other person is engaging in or
intends to engage in a distribution of such New Notes;
c. neither you nor any such other person has an arrangement
or understanding with any person to participate in the
distribution of such New Notes; and
d. neither the holder nor any such other person is an
“affiliate,” as such term is defined under
Rule 405 promulgated under the Securities Act, of the
Company.
6. You may, if you are unable to make all of the
representations and warranties contained in Item 5 above
and as otherwise permitted in the Registration Rights Agreement
(as defined below), elect to have your Outstanding Notes
registered in the shelf registration statement described in the
Registration Rights Agreement, dated as of July 20, 2007
(the “Registration Rights Agreement”), by and among
the Company, the Guarantors (as defined therein) and the Initial
Purchasers (as defined therein). Such election may be made only
by notifying the Company in writing at 3110 Hayes Road,
Suite 300, Houston, Texas 77082, Attention: Chief Financial
Officer. By making such election, you agree, as a holder of
Outstanding Notes participating in a shelf registration, to
indemnify and hold harmless the Company, each of the directors
of the Company, each of the officers of the Company who signs
such shelf registration statement, each person who controls the
Company within the meaning of either the Securities Act or the
Securities Exchange Act of 1934, as amended (the “Exchange
Act”), and each other holder of Outstanding Notes, from and
against any and all losses, claims, damages or liabilities
caused by any untrue statement or alleged untrue statement of a
material fact contained in any shelf registration statement or
prospectus, or in any supplement thereto or amendment thereof,
or caused by the omission or alleged omission to state therein a
material fact required to be stated
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therein or necessary to make the statements therein, in the
light of the circumstances under which they were made, not
misleading; but only with respect to information relating to the
undersigned furnished in writing by or on behalf of the
undersigned expressly for use in a shelf registration statement,
a prospectus or any amendments or supplements thereto. Any such
indemnification shall be governed by the terms and subject to
the conditions set forth in the Registration Rights Agreement,
including, without limitation, the provisions regarding notice,
retention of counsel, contribution and payment of expenses set
forth therein. The above summary of the indemnification
provision of the Registration Rights Agreement is not intended
to be exhaustive and is qualified in its entirety by the
Registration Rights Agreement.
7. If you are a broker-dealer that will receive New Notes
for its own account in exchange for Outstanding Notes that were
acquired as a result of market-making activities or other
trading activities, you acknowledge, by tendering Outstanding
Notes in the Exchange Offer, that you will deliver a prospectus
in connection with any resale of such New Notes; however, by so
acknowledging and by delivering a prospectus, you will not be
deemed to admit that you are an “underwriter” within
the meaning of the Securities Act. If you are a broker-dealer
and Outstanding Notes held for your own account were not
acquired as a result of market-making or other trading
activities, such Outstanding Notes cannot be exchanged pursuant
to the Exchange Offer.
8. Any of your obligations hereunder shall be binding upon
your successors, assigns, executors, administrators, trustees in
bankruptcy and legal and personal representatives of the
undersigned.
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INSTRUCTIONS
FORMING
PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE
OFFER
1. Book-Entry Confirmations.
Any confirmation of a book-entry transfer to the Exchange
Agent’s account at DTC of Outstanding Notes tendered by
book-entry transfer (a “Book-Entry Confirmation”), as
well as an agent’s message, and any other documents
required by this Letter of Transmittal, must be received by the
Exchange Agent at its address set forth herein prior to
12:00 A.M. midnight, New York City time, on the Expiration
Date.
2. Partial Tenders.
Tenders of Outstanding Notes will be accepted only in integral
multiples of $1,000. The entire principal amount of
Outstanding Notes delivered to the Exchange Agent will be deemed
to have been tendered unless otherwise communicated to the
Exchange Agent. If the entire principal amount of all
Outstanding Notes is not tendered, then Outstanding Notes for
the principal amount of Outstanding Notes not tendered and Notes
issued in exchange for any Outstanding Notes accepted will be
delivered to the holder via the facilities of DTC promptly after
the Outstanding Notes are accepted for exchange.
3. Validity of Tenders.
All questions as to the validity, form, eligibility (including
time of receipt), acceptance, and withdrawal of tendered
Outstanding Notes will be determined by the Company, in its sole
discretion, which determination will be final and binding. The
Company reserves the absolute right to reject any or all tenders
not in proper form or the acceptance for exchange of which may,
in the opinion of counsel for the Company, be unlawful. The
Company also reserves the absolute right to waive any of the
conditions of the Exchange Offer or any defect or irregularity
in the tender of any Outstanding Notes. The Company’s
interpretation of the terms and conditions of the Exchange Offer
(including the instructions on this Letter of Transmittal) will
be final and binding on all parties. Unless waived, any defects
or irregularities in connection with tenders of Outstanding
Notes must be cured within such time as the Company shall
determine. Although the Company intends to notify holders of
defects or irregularities with respect to tenders of Outstanding
Notes, neither the Company, the Exchange Agent, nor any other
person shall be under any duty to give notification of any
defects or irregularities in tenders or incur any liability for
failure to give such notification. Tenders of Outstanding Notes
will not be deemed to have been made until such defects or
irregularities have been cured or waived. Any Outstanding Notes
received by the Exchange Agent that are not properly tendered
and as to which the defects or irregularities have not been
cured or waived will be returned by the Exchange Agent to the
tendering holders via the facilities of DTC, as soon as
practicable following the Expiration Date.
4. Waiver of Conditions.
The Company reserves the absolute right to waive, in whole or
part, any of the conditions to the Exchange Offer set forth in
the Prospectus or in this Letter of Transmittal.
5. No Conditional Tender.
No alternative, conditional, irregular or contingent tender of
Outstanding Notes will be accepted.
6. Request for Assistance or Additional Copies.
Requests for assistance or for additional copies of the
Prospectus or this Letter of Transmittal may be directed to the
Exchange Agent at the address or telephone number set forth on
the cover page of this Letter of Transmittal. Holders may also
contact their broker, dealer, commercial bank, trust company or
other nominee for assistance concerning the Exchange Offer.
7. Withdrawal.
Tenders may be withdrawn only pursuant to the limited withdrawal
rights set forth in the Prospectus under the caption
“Exchange Offer — Withdrawal of Tenders.”
8. No Guarantee of Late Delivery.
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There is no procedure for guarantee of late delivery in the
Exchange Offer.
IMPORTANT: By using the ATOP procedures to tender
outstanding notes, you will not be required to deliver this
Letter of Transmittal to the Exchange Agent. However, you will
be bound by its terms, and you will be deemed to have made the
acknowledgments and the representations and warranties it
contains, just as if you had signed it.
Until September 15, 2008, all dealers that effect
transactions in the new notes, whether or not participating in
this offering, may be required to deliver a prospectus. This is
in addition to the dealers’ obligation to deliver a
prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
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Until September 15, 2008, all dealers that effect
transactions in these securities, whether or not participating
in this offering, may be required to deliver a prospectus. This
is in addition to the dealers’ obligation to deliver a
prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.