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x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
(Exact name of registrant as specified in its charter)
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Delaware | 93-0809419 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
(Address of principal executive offices) (Zip Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one)
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Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company x |
Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of June 30, 2010, the aggregate market value of the registrants Common Stock held by non-affiliates of the registrant was $4,826,918. Shares of common stock held by each current executive officer and director and by each person who is known by the registrant to own 5% or more of the outstanding common stock have been excluded from this computation in that such persons may be deemed to be affiliates of the registrant. This determination of affiliate status is not a conclusive determination for other purposes.
As of March 15, 2011, the number of shares of the registrants Common Stock outstanding was 33,153,811.
Portions of the registrants Proxy Statement for the 2011 Annual Meeting of Stockholders are incorporated herein by reference in Part III of this Annual Report on Form 10-K to the extent stated herein. Such proxy statement will be filed with the Securities and Exchange Commission within 120 days of the registrants fiscal year ended December 31, 2010.
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This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). All statements other than statements of historical facts included or incorporated by reference in this annual report on Form 10-K, including without limitation, statements regarding our future financial position, business strategy, budgets, projected revenues, projected costs and plans and objective of management for future operations, are forward-looking statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as may, will, expects, intends, plans, projects, estimates, anticipates, or believes or the negative thereof or any variation there on or similar terminology or expressions.
We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements are not guarantees and are subject to known and unknown risks, uncertainties and assumptions about us that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Important factors that could cause actual results to differ materially from our expectations include, but are not limited to: a decline in ATM transaction volume or fees, changes in technology standards, a failure by third parties to service our ATMs, regulatory changes, changes to interchange fees charged by electronic funds transfer networks, intense competition which could reduce net revenue per ATM or result in us deploying fewer ATMs, increases in interest rates, the inability to obtain cash for our ATMs, disruption of cash replenishment by armored car carriers to our ATMs, and statements of assumption underlying any of the foregoing, as well as other factors set forth under Item 1A. Risk Factors beginning on page 8 of this report and Item 7 Managements Discussions and Analysis of Financial Condition and Results of Operation below.
All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the foregoing. Except as required by law, we assume no duty to update or revise our forward-looking statements.
ITEM 1. | BUSINESS |
Access to Money, Inc. (the Company, we or us) was incorporated in the State of Delaware on April 28, 2009. Prior to April 2009, the Company operated under the name of TRM Corporation which was incorporated in the State of Oregon on November 27, 1981. In June 2009, we consummated a merger of TRM Corporation with and into Access to Money, Inc., for the purpose of changing our state of incorporation from Oregon to Delaware and changing our name to Access to Money, Inc.
We are an independent automated teller machine (ATM) deployer, or IAD, acting as the source for businesses to purchase, operate and service automated teller machines, or ATMs. We entered the ATM business in 1999 and expanded our ATM operations through internal growth and acquisitions. We have made two transformative acquisitions; the first occurring in November 2004 when we acquired 15,000 ATMs from eFunds Corporation (eFunds), and the second in April 2008 when we acquired approximately 4,200 ATMs from LJR Consulting Corp. d.b.a. Access To Money (LJR). Between 2005 and 2007, we encountered financial difficulties and had to sell assets in order to reduce debt. In June 2006, we sold our United Kingdom photocopy business. In January of 2007 we sold our United Kingdom, Canadian and German ATM businesses and our United States photocopy business. In June of 2007, we sold our Canadian photocopy business. The remaining business after the sale of the aforementioned companies and assets was the domestic ATM operations which is now our primary business.
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As of December 31, 2010, we manage, own and operate approximately 10,400 ATMs in the United States. We locate our ATMs in high traffic retail environments through national merchants such as The Pantry, Inc., and through regional and locally-owned supermarkets, convenience and other stores. In addition to providing our merchant customers with supplemental revenues from transaction fees, we believe that the presence of an ATM in a merchants store helps to promote higher foot traffic, increase impulse purchases and shopping times, and improve customer retention since the presence of an ATM will likely entice customers to make return visits to the retail site knowing they can obtain cash in the future. We attempt to maximize ATM usefulness for our customers by participating in as many electronic funds transfer networks, or EFTNs, as practical, including NYCE, Visa, MasterCard, Cirrus, Plus, American Express, Discover/Novus, STAR, Allpoint, and Moneypass.
Historically we have deployed and operated ATMs under two programs, Full placement and Merchant-owned:
| Full placement program. Under this program there are three basic arrangements under which an ATM is operated: |
| We own the ATM and are responsible for all of the operating expenses including maintenance, cash management and loading, supplies, signage and telecommunication services; |
| We own the ATM and are responsible for all operational aspects of the unit except for cash management and loading; or |
| We are responsible for all operational aspects of the unit but the ATM is owned by another party. |
| Merchant-owned program. Under this program, a merchant typically buys an ATM from us and is responsible for the operating expenses, such as maintenance, cash management, supplies, and telecommunication services. We provide access to transaction processing services and act as a source for procuring maintenance services in the event a machine needs to be repaired. |
In 2010, we began offering a third arrangement under which we deploy ATMs on a fully outsourced basis for a minimum fixed fee, primarily to local and community banks and regional credit unions. While similar to the full placement model, these machines are typically located in professional settings such as office complexes, legal firms, hospitals, and other non-retail professional settings. Our offering has provided participating financial institutions the ability to expand banking services to their customers with no capital outlay while giving customers the same benefits they would have banking at their local branch or member office.
We also offer prospective retailers a program under which they can rent an ATM and source maintenance support and supplies from us.
We typically place ATMs in high visibility, high traffic locations. Our experience has demonstrated that the following locations, among others, often meet these criteria:
| convenience stores; |
| combination convenience stores and gas stations; |
| supermarkets; |
| drug stores; |
| entertainment facilities such as bowling alleys, movie theaters, amusement parks, casinos, and racetracks; |
| restaurants (particularly chain restaurants), bars and fast-food establishments; |
| shopping malls; and |
| sporting stadiums. |
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We offer our customers the ability to deploy ATMs that can provide both a surcharge and a surcharge free experience when using the ATM. We promote the benefits of our surcharge-free ATM program as an alternative to the traditional format under which the ATM charges a fee for cash withdrawal. Our experience has shown that surcharge-free ATMs result in increased transaction volume in retail environments. While the consumer using the ATM is not surcharged, a participating financial institution does pay a per transaction fee for their customers use of the ATM. The program is intended to increase transaction levels by offering surcharge free banking to a potentially large customer base while still providing a revenue stream on those transactions. In tests we conducted at two major convenience store retailers, we have seen transaction levels increase by as much as 100% with revenue levels remaining constant or increasing.
Our sales and marketing team focuses on developing relationships with prospective customers on both a regional and national level, while building and maintaining relationships with our existing customers. We market and sell through distributors who maintain relationships with customers, independent merchants and small chain accounts. Ours sales force is organized into groups that focus on new merchant sales, new full placement and fully outsourced opportunities, and financial institutions, including banks and credit unions. We also have a dedicated team directed to sell specifically to Dunkin Donut franchises. We recently expanded our relationship with Dunkin Brands and are now authorized to market our ATM programs to all Dunkin Donut franchises in the United States. In support of our sales team, we also have a team focused on customer retention which answers contract questions, negotiates renewals, and acts as another point of contact for our existing customers to help them operate their ATMs effectively.
We have contracts with national and regional companies in addition to numerous independent store operators. ATMs at The Pantry locations accounted for approximately 13.4% and 12.5% of our total transacting ATMs at December 31, 2010 and 2009, respectively.
The terms of our contracts vary as a result of negotiations at the time of execution. Contract terms typically include:
| an initial term of three to five years; |
| ATM exclusivity at locations where we install an ATM and, in many cases, a right of first refusal for all other locations; |
| a requirement that the merchant provide a highly visible space for the ATM and signage; |
| protection against underperforming locations which permit us to increase the withdrawal fee or remove the ATM(s); |
| provisions making the merchants fee variable based on the number of ATM transactions and milestones; |
| provisions imposing an obligation on the merchant to operate the ATM at any time its store is open to the public; and |
| provisions that require a merchant to use its best efforts to have any purchaser of the merchants store assume our contract. |
A typical ATM transaction occurs when a cardholder inserts a credit or debit card into an ATM to withdraw funds, obtain a balance inquiry, or make a transfer between accounts. The transaction is routed from the ATM through a designated network to a processing company via a phone line, wireless based service, or internet WAN technology. The processing company identifies the cardholders bank and authorizes the requested transaction after a Personal Identification Number (PIN) is input to ensure the transaction is processed securely.
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We have found that the primary factors affecting transaction volume at a given ATM are its location within the site and merchandising, such as indoor and outdoor signage directing consumers to the machine location. We seek to maximize the visibility and accessibility of our ATMs, because we believe that once a customer establishes a pattern of using a particular ATM, the customer will generally continue to use that ATM. At December 31, 2010 we had 1,839 ATMs for which we were responsible for cash management and 8,561 ATMs for which merchants were responsible for cash management. During 2010, we experienced approximately a 3.7% decrease in the average number of withdrawal transactions per ATM to 247 from 256 in 2009. This decrease in the average number of withdrawal transactions is mainly due to a larger percent of merchant-owned ATMs (which typically have lower transaction volumes than full placement ATMs) to the percentage of full placement ATMs in our portfolio. The decrease in transaction volume was also affected by the loss of one customer that typically had ATMs with higher transaction volumes.
We generate revenue primarily from transaction based fees and to a lesser extent, service and sales of ATM machines. Transaction based fees consist of (i) withdrawal fees, which are referred to the industry as surcharges or convenience fees and (ii) interchange fees which are charged to the customers financial institution by EFTNs. For a more complete description of our revenue model, please see Part II Item 7 below titled MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Equipment Suppliers. We purchase our ATMs primarily from Triton Systems, Hyosung America, Inc., and Hantle USA. We have previously purchased ATMs from NCR Corporation. All of our new ATMs feature advanced functionality, diagnostics and ease of use features including color displays, personal computer-based operating systems, thermal printing, dial-up, remote and wide area network (WAN) monitoring capabilities, and upgrade and capacity-expansion capabilities. All machines can perform basic cash dispensing and balance inquiry transactions, transmit on-screen marketing, and dispense coupons. Most of our equipment is modular in design, which allows us to be flexible and accommodating to the needs of our clients as technology advances. We believe that the large quantity of ATMs 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 stay informed regarding product updates and to minimize technical problems with purchased equipment. We believe that our relationships with all of our ATM suppliers are good.
ATM Maintenance and Servicing. We have service supplier relationships with NCR Corporation, Solvport, Diebold and other regional vendors to provide installation, maintenance, diagnostic and repair services to both full placement and merchant-owned ATMs.
Transaction Processing. We have transaction processing relationships with WorldPayTM, Fidelity Information Systems, Inc., and First Data Retail ATM Services, L.P.
Cash Management. We obtain cash to fill our Company-owned ATMs under an agreement with our cash provider Elan Financial Services, a division of U.S. Bank, N.A. We pay a monthly fee on the average amount of cash outstanding based on the Prime Rate. At all times, beneficial ownership of the cash is retained by the cash providers, and we have no access or right to the cash. For additional information on our vault cash agreement, see Note 3 Vault Cash in the Notes to our Consolidated Financial Statements.
Cash Replenishment. We contract with armored courier services to transport and transfer the cash we use to fill our full-placement ATMs. We use industry leading armored couriers such as Brinks, Garda and Pendum. Per our agreements, the armored couriers pick up bulk cash and, using instructions received from our cash management team, 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 swapping out the remaining cash for a new fully loaded cassette, and then balance each machine and provide reporting to Elan who in turn provides us with information regarding the machine balances.
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We report our operating results under one segment. We own or have relationships with merchants who own ATMs in all fifty states.
We experience higher transaction volumes per machine in the second and third quarters of the calendar year as compared to the first and fourth quarters. The increased volumes in the middle quarters of the year coincide with vacations and holidays during the warm weather months in which we find the public to be traveling more and using cash above other payment forms such as debit and credit cards.
Individuals seeking ATM-related services have a variety of choices at banking locations and within retail establishments. The convenience cash delivery and balance inquiry market is, and we expect it to remain, highly competitive. Our principal competition arises from other IADs similar to us including FCTI, Global Axcess Corp., International Merchant Services, Inc., Cardtronics, Inc., ATM Express, Inc., and PAI ATM Services. We also compete with numerous national and regional banks that operate ATMs at their branches and at other non-branch locations. We believe that there will be continued consolidation in the ATM industry in the United States. Accordingly, new competitors could emerge and potentially acquire significant market share. Many of our competitors have substantially greater human, financial and other resources and may be able to respond faster than we can to changes in the marketplace.
As of December 31, 2010, we had a total of 62 full time employees working in sales, customer service and administration. None of our employees are represented by a union or covered by a collective bargaining agreement. We believe relations with our employees are good.
During 2009 and 2010, we did not recognize any expense pertaining to research and development.
A majority of our ATM locations are identified by distinctive yellow, green and black trapezoidal signs bearing TRM ATM(TM), Got Cash?, and TRM Cash Machine(TM). We have registered the name TRM Corporation(TM) and TRM ATM(TM) trademarks for signage used in the United States. Certain of our trademarks will expire in 2011, but can be renewed. We also claim common law trademark rights in the names Access to Money, Access to Money Well Show you the Money, Acce$$ to Money, Acce$$ to Money Well Show you the Money and its logo, in connection with the goods of automated teller machines, namely, electronic currency dispensing apparatus for installation in retail environments other than banks, and instruction manuals sold as a unit therewith. During 2009, we selected use of a single brand, Access to Money. We consider our business name and brands to be important to our business. We filed for trademark protection on the Access to Money name during 2009.
Our business is subject to government and industry regulations which are subject to change. Our failure to comply with existing or future laws and regulations could result in restrictions that may impact our ability to provide our products and services.
Americans with Disabilities Act (ADA). The U.S. Department of Justice has issued new regulations under the ADA that become effective in March 2012. The ADA standards regulate the amount of clear floor space required in front of each ATM, prescribe the maximum height and reach depth of each ATM and dictate the capabilities, instructions, and information required for the use of an ATM by individuals who have visual and hearing impairments and/or wheelchair bound. We have been preparing for these new regulations by purchasing and deploying ATMs that meet the standards in the regulations and do not anticipate an adverse impact related to our full-placement machines. We are working with our merchants who have machines that do not meet the standards to purchase new units that meet the ADA requirements.
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Rehabilitation Act. On December 1, 2006, a United States District Court ruled that the United States currency (as currently designed) violates the Rehabilitation Act, a law that prohibits discrimination in government programs on the basis of disability, as the paper currencies issued by the United States are identical in size and color, regardless of denomination. Under the current ruling, the United States 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 December 1, 2006 ruling, the Justice Department filed an appeal with the United States 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 and banking industries and could require the Bureau of Engraving and Printing to have to make substantial investments in order to manufacture new currency. On September 15, 2008, the United States Court of Appeals for the District of Columbia Circuit ruled and ordered the United States Treasury Department to provide meaningful access to United States currency for blind and other visually impaired persons. The United States Treasury Department must file a status report with the Court of Appeals every six months after March 16, 2009 regarding steps taken to implement the court order. The United States Treasury Department issued a study in July 2009 to review possible options to comply with the Court of Appeals ruling. No decision has been made public by the United States Treasury Department regarding the results of the study or what options may be taken. No timetable has been set for the future redesign of United States paper currency. If options chosen by the United States Treasury Department require changes to paper currency then changes must be implemented by the next redesign of paper currency. While it is still uncertain at this time what changes may be made to paper currency, we along with other participants in the ATM and banking industries may be forced to incur significant costs to upgrade current machine hardware and software components.
Dodd-Frank Act. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the Act), which contains broad measures aimed at overhauling existing financial regulations within the United States, was signed into law on July 21, 2010. Among many other things, the Act includes provisions that (1) call for the establishment of a new Bureau of Consumer Financial Protection, (2) limit the activities that banking entities may engage in, and (3) give the Federal Reserve the authority to regulate interchange transaction fees charged by EFTNs for electronic debit transactions. Many of the detailed regulations required under the Act have yet to be finalized but are currently required to be finalized on or before July 31, 2011. The Act limits fees that financial institutions can charge retailers for use of debit cards. Based on the interpretations of the current language contained within the Act, it appears that the regulation of interchange fees for electronic debit transactions will not apply to ATM cash withdrawal transactions. While we do not believe that the regulations will have a material impact on our operations, if ATM cash withdrawals were to be considered a transaction that falls under the Act, interchange fees could be reduced from their current levels and negatively impact our future revenues and operating profits. There is also language in the proposed regulations aimed at providing merchants with flexibility for point-of-sale transactions, for which cash would have to be paid versus payment by debit or credit cards. Implementation of this change could result in increased use of cash and could positively impact our future revenues and operating profits (through increased transaction levels at our ATMs). The Act also requires debit cards to be recognized (or authorized) over at least two non-affiliated networks and provides for rules that would allow merchants greater flexibility in routing transactions across networks which could be economical. The Federal Reserve requested comments as to whether these network and routing provisions should apply to ATM transactions. If the final rules apply to ATM transactions and allow flexible routing, we and other ATM operators may be able to manage transactions more effectively and economically.
Regulation of transaction fees. The imposition of fees on ATM transactions in the United States is not currently subject to federal regulation. There have, however, been various state and local efforts in the United States to ban or limit transaction fees, generally as a result of activities of consumer advocacy groups that believe transaction fees are unfair to users. We are not aware of any existing bans or limits on transaction fees applicable to us in any of the jurisdictions in which we currently do business with the exception of Mississippi and Wyoming. Nevertheless, there can be no assurance that transaction fees will not be banned or limited in other cities and states where we operate. Such a ban or limit could have a material adverse effect on us and other ATM operators. We have also experienced State efforts, specifically in South Dakota, to assess a tax on ATM withdrawal transactions. Due to a ruling by the Supreme court of South Dakota that ATM
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transactions, in their State, are subject to their gross receipt and sales tax regulations, we now adjust commission payments to merchants for the tax due and remit the tax to the State. If other states or municipalities assess similar taxes on ATM transactions, our revenue and profit could be reduced on our full-placement machines.
Electronic Funds Transfer Networks Regulations (EFTNs). EFTNs have adopted extensive regulations that are applicable to various aspects of our operations and the operations of other ATM 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 consumers 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.
Encrypting Pin Pad (EPP) and Triple Data Encryption Standard (Triple DES). Data encryption makes ATMs more tamper-resistant. Two of the more recently developed advanced data encryption methods are commonly referred to as EPP and 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 December 31, 2010, all of our owned ATMs in the United States were compliant with EPP and Triple DES and all our merchant-owned ATMs actively operating also met the required standards.
Electronic Funds Transfer Act. The United States Electronic Funds Transfer Act, while directed principally at banks and other financial institutions, also has provisions that apply to us. In particular, the act requires ATM operators who impose withdrawal fees to notify a customer of the withdrawal fee before the customer completes a withdrawal and incurs the fee. Notification must be made through signs placed at or on the ATM and by notification either on the ATM screen or through a print-out from the ATM. All of our ATMs in the United States provide both types of notification.
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ITEM 1A. | RISK FACTORS |
We operate in a business environment that involves substantial risk and uncertainty. The following section of this report identifies some of the risks that could cause, or contribute to, actual results differing materially from expectations or past performance. We caution readers to pay particular attention to the risk descriptions. If the risks described below actually occur, our business, financial condition or results of operations could be materially and adversely affected and we may have to consider various alternative business contingencies based upon the specific risk that is triggered.
Our operating results depend on both transaction volume and the amount of the transaction fees we receive from our ATM network. Our transaction volume and fees depend principally upon:
| our ability to replace sites lost through non-renewal or termination of our contracts by merchants in whose stores we currently have placed our ATMs; |
| competition, which can result in over-served markets, reduced opportunities to secure placement of our machines, and pressure to both reduce existing fee structures and increase sales commissions to merchants; |
| our ability to service, maintain and repair, and deliver cash to ATMs in our network promptly and efficiently; |
| continued market acceptance of our services; and |
| government regulation and network adjustment of our fees. |
If our transaction volume or the level of transaction fees we receive decrease, our sales could decline, which would impact our operating results.
In the last two decades consumers in the United States have more alternatives in which to make payments for purchases other than cash and checks. The use of credit cards, debit cards and retail stored-value/gift cards have become common place and many merchants now offer zero-charge cash back availability when making purchases. The continued growth in these alternative payment methods could result in a reduced need for cash in the marketplace and ultimately, a decline in the usage of our ATMs.
Interchange fees represented approximately 20.6% of our total ATM transaction revenues for the year ended December 31, 2010. The fees are earned and collected from the various EFT networks for transactions conducted on our ATMs. Interchange fees are set by each network and typically vary by network. Accordingly, if some or all of the networks through which our ATM transactions are routed were to reduce the interchange rates paid to us or increase their transaction fees charged to us for routing transactions across their network, or both, our future transaction revenues could decline.
During 2010, certain networks reduced the net interchange fees paid to ATM deployers for transactions routed through their networks. When contractually allowable, we pass these fee and rate changes through to our customers as a reduction in commissions paid. We have taken steps to change the terms of our base contract for new customers to earn revenue on a fee per transaction which will insulate us from changes in rules from the EFT networks. We still may experience an adverse affect to our revenue on contracts that we cannot pass the fees along to our customers. We can give no assurances that we will be successful in offsetting the effects of any future reductions in the interchange fees received by us, if and when they occur.
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Although our merchant-owned ATM customers have multi-year contracts with us for transaction processing services, due to competition, some of these customers may leave us for our competitors prior to the expiration of their contracts, or may not renew their contracts upon their expiration. If a material number of merchant-owned ATM customers end their relationships with us, it could cause a material reduction in our ATM sales.
Persons seeking ATM services have numerous choices. These choices include ATMs offered by banks or other financial institutions and ATMs offered by IADs such as us. Some of our competitors offer services directly comparable to ours while others are only indirect competitors. We believe that there will be continued consolidation in the ATM industry in the United States. New competitors could emerge and acquire significant market share. This competition could prevent us from obtaining or maintaining desirable locations, reduce the transaction volume on our machines, affect the transaction fee levels we charge or require us to increase our merchants share of transaction fees thus lowering our profit margin. The occurrence of any of these factors could limit our growth or reduce our sales and income.
Our ability to provide reliable service depends largely on the efficient and uninterrupted operations of our transaction processors, EFTNs and other service providers. Any significant interruptions could severely harm our business and reputation and result in a loss of sales. If we cause any such interruption, we could lose the confidence of merchants under contract with us and or damage our relationships with them. Our systems and operations, and those of our transaction processors, EFTNs 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. Further, our property and business interruption insurance may not be adequate to compensate us for all losses or failures that may occur.
We rely on several EFTNs and transaction processors to provide card authorization, data capture and settlement services to us and our merchant customers. Any inability on our part to renew our agreements with these or similar service providers or their failure to provide their services efficiently and effectively may damage our relationships with our merchants and may permit those merchants to terminate their agreements with us.
Our ATM net sales are dependent upon the transaction fees we receive through EFTNs. If one or more of the EFTNs in which we participate reduces the transaction fees it pays us, and we are unable to route transactions to other EFTNs to replace them, our ATM net sales could be reduced.
We obtain cash, which we call vault cash, to fill ATMs which we are responsible for cash management, through a cash provisioning agreement with ELAN Financial Services. If our cash provisioning agreement is terminated, we may be unable to obtain cash from alternative sources to fulfill our cash managed ATMs. If we do not have access to vault cash we would have to suspend the operations of those ATMs under cash management and our operating results would be negatively impacted.
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We have a cash provisioning agreement with a financial institution that supplies the vault cash for ATMs that we cash manage. This cash provisioning agreement includes a variable interest rate formula under which we are charged for the use of cash. An increase in the prime interest rate would increase our operating costs and expenses.
Our success depends upon the proper functioning of our ATMs. We rely on third-party service providers over whom we have no control, to service and deliver cash to our ATMs. If our third-party service providers fail to service or deliver cash to our ATMs properly or fail to respond quickly to problems, we may lose customers which will decrease our transaction volume and adversely affect our ability to generate income. Additionally if our third-party service providers fail to service or deliver cash to our ATMs, our reputation and ability to grow can be impaired.
New technology in the ATM industry may result in machines under our management becoming obsolete. This may require us or the merchants in our networks who own their machines, to either replace or upgrade existing equipment. Any replacement or upgrade program for machines that we own or that we must upgrade or replace under contracts with merchant owners would involve substantial expense. A failure to either replace or upgrade obsolete machines could result in customers using other ATM networks that could employ newer technology, thereby reducing our sales and reducing or eliminating our gross profit and income. Depending upon the scope and scale of potential changes in technology, we may not have sufficient capital to provide upgrades or replacements to a significant degree. This could impact our operating results.
The agreements that are in effect with respect to our debt include covenants that, among other things, restrict our ability to:
| engage in mergers, consolidations and asset dispositions; |
| pay dividends on or redeem or repurchase stock; |
| merge into or consolidate with any third party; |
| create, incur, assume or guarantee additional indebtedness; |
| create, incur, assume or permit any liens on any asset; |
| make loans and investments; |
| engage in transactions with affiliates; |
| prepay, redeem or repurchase subordinated indebtedness; |
| enter into sale and leaseback transactions; |
| make asset or property dispositions outside the normal course of business; and |
| change the nature of our business. |
Our credit agreements also contains covenants that require us to:
| maintain a certain fixed Charge Coverage ratio; |
| maintain a certain level of minimum liquidity; and |
| maintain a funded debt to EBITDA ratio. |
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A failure to comply with the covenants under our credit agreement could result in an event of default. In the event of a default our lender could elect to declare all borrowings, accrued and unpaid interest and other fees outstanding, due and payable, and require us to apply all of our available cash to repay these borrowings.
As of December 31, 2010, we had outstanding indebtedness of approximately $18.7 million. Our substantial indebtedness 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; |
| require us to dedicate a substantial portion of our cash flow in the future 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; and |
| limit our ability to borrow additional amounts for working capital, capital expenditures, acquisitions, debt service requirements, execution of our growth strategy, or other purposes. |
Based on our restructuring efforts over the past three years, operating history and historical financial results, the projections of our future sales and operating expenses are limited to the indicators and knowledge we have currently. Our planned expense levels are based in part on expectations concerning future sales which are difficult to forecast accurately based on uncertainties related to competition and our ability to successfully generate new business. We may be limited in our ability to adjust costs to compensate for unexpected shortfalls in sales.
Our ability to service our customers depends on the efficient and uninterrupted operation of our computer system. Any significant interruptions could severely harm our business and result in a loss of customers. Our system and operations could be exposed to damage or interruption from fire, natural disaster, power loss, telecommunications failure, unauthorized entry and computer viruses. Although we have our system and operational data mirrored and available for restore, we cannot be certain that this can be done in a timely manner or that we would be successful and that we would not experience additional system failures. Although we have property and business interruption insurance, it may not be adequate to cover damages or loss of sales that may occur.
Because of reported instances of fraudulent use of ATMs, including the use of electronic devices to scan ATM card information, or skimming, legislation is pending that would require state or federal licensing and background checks of ATM operators and would regulate the deployment and operation of ATMs. There are proposals pending in some jurisdictions that would require merchants that are not financial institutions to be licensed in order to maintain an ATM on their premises; some jurisdictions currently require such licensing. New licensing, deployment or operating requirements could increase our cost of doing business in those markets.
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.
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The continued instability in the global economic downturn and financial market instability have had and could continue to have a material adverse effect on our business, results of operations, financial condition, access to funding and the trading price of our common stock.
The continued global economic instability has adversely affected unemployment rates, consumer spending, consumer indebtedness, availability of consumer credit, asset values, investments and liquidity. These factors, along with an already high level of consumer indebtedness, have adversely affected the ability and willingness of individuals to spend money, thus resulting in a lower ATM transaction volume. The willingness of individuals to access cash from ATMs could continue to be adversely affected, thus lowering transaction volume, which may materially adversely affect our profitability.
The U.S. Department of Justice has issued new regulations under the Americans with Disabilities Act (ADA) that become effective in March 2012. The ADA standards regulate the amount of clear floor space required in front of each ATM, prescribe the maximum height and reach depth of each ATM and requires capabilities, instructions, and information concerning the use of an ATM by individuals who are visually and hearing impaired and/or wheelchair bound. We have been preparing for these new regulations by purchasing and deploying ATMs that meet the standards in the regulations and do not anticipate an adverse impact related to our full-placement machines. We are working with our merchants who have machines that do not meet the standards to purchase new units that meet the ADA requirements.
ATM withdrawal transactions involve the electronic transfer of funds through EFTNs. The United States Electronic Funds Transfer Act provides the basic framework establishing the rights, liabilities and responsibilities of participants in EFTNs. In addition, there have been various state and local efforts to ban, limit or otherwise regulate ATM transaction fees, which make up a large portion of our sales. For example, in Tennessee, Nebraska and Iowa only bank-sponsored ATMs can impose withdrawal fees. As a result, in these states we must make arrangements with a local bank to act as a sponsor of ATMs in our networks, which typically involves additional documentation costs and payment of a fee to the bank. Any limitation to our ability to charge withdrawal fees in areas where we have a concentration of ATMs could reduce our ATM sales and reduce the incentive that merchants would have to keep ATMs in our network on their premises. If existing regulations are made more restrictive or new regulations are enacted, we could also incur significant expense to comply with them.
Recent concerns expressed by the United States 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, individual merchants who load their own cash could incur additional costs thereby making their ATMs less profitable. Some merchants may decide to discontinue their ATM operations if burdensome regulations are enacted and enforced, 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 and income.
On November 26, 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 United States are identical in size and color,
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regardless of denomination. Due to this ruling, the United States Treasury conducted a study to determine the options to make United States paper currency accessible to the blind or visually impaired. It is our understanding that the Bureau of Engraving and Printing received that study on or about July 28, 2009, and together with the United States Treasury and the Federal Reserve, are reviewing the study. Upon the completion of their review, these institutions will publish recommendations and seek public comments on those recommendations. Following the public comment period, a final recommendation will be made to the Secretary of the Treasury, who has authority to change the design and features of the currency notes utilized in the United States. While it is still uncertain at this time what impact, if any, this process will have on the ATM industry (including us), it is possible that any changes made to the design of the paper currency notes utilized in the United States could require us to incur additional costs to modify our ATMs in order to store and dispense such notes.
We are required to have bank sponsorship in order to process transactions over the networks on which our transactions occur. We are currently sponsored by two banks driven by our processing vendor relationships.
We have never paid cash dividends on our common stock. Any payment of cash dividends in the future will depend upon our earnings, if any, financial condition and capital requirements. We do not anticipate paying dividends in the foreseeable future. In addition, we have executed certain loan agreements which prohibit the payment of a dividend on our common stock as long as such agreements are in place. Accordingly, any potential investor who anticipates the need for current dividends from its investment should not purchase any of our securities.
Our common stock is currently traded over-the-counter on the OTC Bulletin Board. There can be no assurance that an active market for our shares will develop or, if developed, will be sustained. Absent an active public trading market, an investor may be unable to liquidate its investment. We believe that factors such as the announcements of the availability of new services and new contracts by us or our competitors, quarterly fluctuations in our financial results and general conditions in the economy could cause the price of our common stock to fluctuate substantially. If stockholders seek to sell their shares in a thinly traded stock, it may be difficult to obtain the price desired. In addition, stock markets have experienced extreme price volatility in recent years. This volatility has had a substantial effect on the market prices of securities issued by many companies for reasons unrelated to the operating performance of the specific companies.
Our directors, officers and principal stockholders, and certain of their affiliates, beneficially own approximately 63.8% of our common stock (assuming the exercise or conversion of any options, warrants or other convertible securities) and will continue to have significant influence over the outcome of all matters submitted to the stockholders for approval, including the election of our directors. In addition, such influence by management could have the effect of discouraging others from attempting to take control of us, thereby increasing the likelihood that the market price of our common stock will not reflect a premium for control.
We recently issued 10,636,364 shares of restricted common stock in connection with the refinancing of our outstanding indebtedness and agreed to file a registration statement with the Securities and Exchange Commission to register the public resale of such shares. These restricted securities may also become eligible
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for public resale pursuant to SEC Rule 144, or other applicable exemptions from registration under the Securities Act and applicable state securities laws. Generally, SEC Rule 144 provides that a person who has held restricted securities for a prescribed period may, under certain conditions, publicly resell such shares as early as six months after the date of issuance of such shares. The availability of a large number of shares for sale to the public and the sale of such shares in public markets could have an adverse effect on the market price of our common stock.
We are subject to the Sarbanes-Oxley Act of 2002 (SOX), as well as rules adopted pursuant to that legislation by the SEC. We expect that these and other new laws, rules and regulations will continue to increase our legal and financial compliance costs and place a significant burden on management. We also expect that new regulatory requirements will make it more difficult and more expensive for us to obtain director and officer liability insurance. We may be required to accept reduced coverage or incur significantly higher premium costs to obtain coverage. These new requirements are also likely to make it more difficult for us to attract and retain qualified individuals to serve as members of our board of directors or committees of the board, particularly the audit committee. We may need to hire additional personnel and/or engage outside consulting firms to assist in our efforts to comply with Section 404 of SOX. Any failure to improve our internal accounting controls or other problems with our control systems could result in delays or inaccuracies in reporting financial information or non-compliance with SEC reporting and other regulatory requirements, any of which could adversely affect our business and stock price.
Provisions in our certificate of incorporation and bylaws may have the effect of delaying or preventing a change of control or changes in our management. These provisions include the following:
| Our board of directors has the right to appoint directors to fill a vacancy created by the expansion of the board of directors or the resignation, death or removal of a director, which would prevent stockholders from being able to fill vacancies on our board of directors. |
| Stockholders must provide advance notice to nominate individuals for election to the board of directors or to propose matters that can be acted upon at a stockholders meeting. These provisions may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirers own slate of directors or otherwise attempting to obtain control of our company. |
| Our board of directors is classified into three separate classes, meaning that it could take three successive annual meetings to replace all directors. |
| Members of our board of directors may only be removed for cause by the affirmative vote of the holders of 75% of our outstanding shares. |
| Our board of directors may issue, without stockholder approval, shares of preferred stock. The ability to issue preferred stock makes it possible for our board of directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to acquire us. |
| As a Delaware corporation, we are also subject to certain Delaware anti-takeover provisions. Under Delaware law, a corporation may not engage in a business combination with any holder of 15% or more of its capital stock unless the holder has held the stock for three years or, among other things, the board of directors has approved the transaction. Our board of directors could rely on Delaware law to prevent or delay an acquisition of us. |
| A business combination with a shareholder owning at least 5% of our outstanding stock must be approved by the affirmative vote of the holders of at least 75% of our outstanding shares, subject to certain limited exceptions. |
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ITEM 2. | PROPERTIES |
Our principal administrative office is located at 1101 Kings Highway N, Suite G100, Cherry Hill, New Jersey 08034. Our principal operations office is located at 628 State Route 10, Whippany, New Jersey 07981. We currently lease approximately 2,000 square feet in Portland, Oregon. Effective March 1, 2008, we entered into a 38-month lease for 3,000 square feet of office space in Cherry Hill, New Jersey for use as executive office space. Effective July 1, 2008, we entered into a 60-month lease for 14,289 square feet of office and warehouse space in Whippany, New Jersey, where our primary operations and customer service functions are performed. Effective November 1, 2010, we renewed the lease for 2,100 square feet of office and warehouse space in Whippany, New Jersey, for a one-year term. A Portland lease covering 18,572 square feet of sublet space expired in March 2010 and was not renewed. Two warehouse leases for approximately 7,230 square feet expired in 2010 and were not renewed. If we cannot renew any of the current leases we want to retain, we do not anticipate any difficulty leasing suitable replacement space.
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Location | Approximate Square Footage |
Use | Remaining Term | |||
Whippany, New Jersey | 14,289 | Office and Warehouse | Twenty-nine months | |||
Cherry Hill, New Jersey | 3,000 | Office | Eight months | |||
Whippany, New Jersey | 2,100 | Office | Nine months | |||
East Hanover, NJ | 3,360 | Warehouse | Seven months | |||
Portland, Oregon | 2,000 | Office and Warehouse | Six months |
ITEM 3. | LEGAL PROCEEDINGS |
We are not a party to any litigation.
ITEM 4. | (REMOVED AND RESERVED) |
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ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Our common stock is currently quoted on the Over-the-Counter Bulletin Board (OTCBB) under the symbol AEMI. The following table sets forth the high and low bid prices as reported by the OTCBB. The quoted prices represent only prices between dealers on each trading day as submitted from time to time by certain of the securities dealers wishing to trade in our common stock, do not reflect retail markups, mark-downs or commissions, and may differ substantially from prices in actual transactions.
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High | Low | |||||||
2010 |
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4th Quarter | $ | 0.30 | $ | 0.19 | ||||
3rd Quarter | $ | 0.31 | $ | 0.19 | ||||
2nd Quarter | $ | 0.65 | $ | 0.22 | ||||
1st Quarter | $ | 0.51 | $ | 0.30 | ||||
2009 |
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4th Quarter | $ | 0.46 | $ | 0.23 | ||||
3rd Quarter | $ | 0.46 | $ | 0.22 | ||||
2nd Quarter | $ | 0.34 | $ | 0.08 | ||||
1st Quarter | $ | 0.21 | $ | 0.08 |
As of March 15, 2011, there were 33,213,652 shares of our common stock ($.001 par value) issued and outstanding. We are authorized to issue a maximum of 70,000,000 shares of common stock and 5,000,000 shares of preferred stock.
We have not paid any dividends on our common stock, and we do not plan to pay dividends on our common stock for the foreseeable future. We intend to retain earnings, if any, to fund our operations. Our ability to pay dividends on our common stock is restricted to terms within our credit agreement which require our lenders consent. Our Board of Directors will determine any changes in our dividend policy based upon its analysis of factors it deems relevant. We expect these factors will include our earnings, financial condition and cash requirements.
As of March 15, 2011, we had 193 holders of record of our common stock.
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ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This Managements Discussion and Analysis of Financial Condition and Results Of Operation and other parts of this Annual Report on Form 10-K contain forward-looking statements that involve risks and uncertainties. All forward-looking statements included in this Annual Report on Form 10-K are based on information available to us on the date hereof, and except as required by law, we assume no obligation to update any such forward-looking statements. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the caption Risk Factors beginning on page 8 of this report and elsewhere herein. The following should be read in conjunction with our annual financial statements contained elsewhere in this report.
Our discussion and analysis includes the following:
| Overview of Business |
| Strategic Outlook |
| Developing Trends in the ATM and Financial Services Industry |
| Recent Events |
| Operating Metrics |
| Results of Operations |
| Liquidity and Capital Resources |
| Critical Accounting Policies and Estimates |
We are an IAD which acts as the source for businesses to purchase and operate automated teller machines, or ATMs. Since 1999, we have expanded our ATM sales, service and operations through internal growth and acquisitions.
We currently manage, own and operate approximately 10,400 ATMs across the United States (typically under multi-year contracts) for independent store owners, larger retail chains, hotels, stadiums, universities, banks, credit unions, and other financial institutions. We also offer our financial institution clients a one-stop solution for new branch construction and fit outs. In addition to providing our merchant customers with supplemental revenues from transaction fees, we believe that the presence of ATMs in a merchants store helps to promote higher foot traffic, increase impulse purchases, and allow longer shopping times since they often make the retail site a destination for cash. We attempt to maximize the usefulness of our ATMs to our customers by participating in as many Electronic Funds Transfer Networks (EFTNs) as practical, including NYCE, Visa, MasterCard, Cirrus, Plus, American Express, Discover/Novus, STAR, Allpoint and Moneypass.
During 2011, we will experience the full year impact of the loss of a major customer that occurred during the third quarter of 2010. We believe our growth opportunities include:
| Deployment of ATMs at Dunkin Donuts franchise locations nationwide; |
| Expansion of our surcharge free offerings at our full-placement locations with The Pantry; |
| The generation of alternative revenues by deploying content advertising; and |
| Placing fully outsourced ATMs in professional non-retail locations. |
In addition to the activities listed above, we will continue to search for opportunities to:
| Increase the number of deployed devices with existing as well as new merchant relationships; |
| Increase transaction levels at our existing locations; and |
| Acquire ATM portfolios that complement our installed base. |
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We also continue to evaluate the profitability of our ATMs on a regular basis and make decisions to maximize the value of each unit.
Managed Services. While many banks 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 smaller financial institutions. Operating a network of ATMs is not a core competency for the majority of banks, other financial institutions, or retailers. 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 and retailers to manage their ATM networks. Such outsourcing arrangements could reduce a financial institutions operational costs while extending their customer service.
Decrease in Interchange Rates. The interchange rates paid to independent ATM deployers, are set by the various EFT networks over which the underlying transactions are routed. Recently, certain networks have reduced the net interchange fees paid to ATM deployers for transactions routed through their networks. If additional financial institutions move to take advantage of the lower interchange rate, or if additional networks reduce the interchange rates they currently pay to ATM deployers or increase their network fees, our future revenues and gross profits would be negatively impacted.
Financial Regulatory Reform in the United States. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the Act), which contains broad measures aimed at overhauling existing financial regulations within the United States, was signed into law on July 21, 2010. Among many other things, the Act includes provisions that (1) call for the establishment of a new Bureau of Consumer Financial Protection, (2) limit the activities that banking entities may engage in, and (3) give the Federal Reserve the authority to regulate interchange transaction fees charged by electronic funds transfer networks for electronic debit transactions. Many of the detailed regulations required under the Act have yet to be finalized but are currently required to be finalized on or before July 31, 2011. The Act limits fees that financial institutions can charge retailers for use of debit cards. Based on the interpretations of the current language contained within the Act, it appears that the regulation of interchange fees for electronic debit transactions will not apply to ATM cash withdrawal transactions. While we do not believe that the regulations will have a material impact on our operations, if ATM cash withdrawals were to be considered a transaction that falls under the Act, interchange fees could be reduced from their current levels and negatively impact our future revenues and operating profits. There is also language in the proposed regulations aimed at providing merchants with flexibility for point-of-sale transactions, for which cash would have to be paid versus payment by debit or credit cards. Implementation of this change could result in increased use of cash and could positively impact our future revenues and operating profits (through increased transaction levels at our ATMs). The Act also requires debit cards to be recognized (or authorized) over at least two non-affiliated networks and provides for rules that would allow merchants greater flexibility in routing transactions across networks which could be economical for the merchant. The Federal Reserve requested comments as to whether these network and routing provisions should apply to ATM transactions. If the final rules apply to ATM transactions and allow flexible routing, we and other ATM operators may be able to manage transactions so it is more economical for more parties.
Dunkin Donuts. As of February 16, 2011, we received notification from our customer, Dunkin Brands, the parent company over Dunkin Donut franchises, that we were authorized to extend our sales and marketing effort to all franchise owners nationwide.
Legal Entity Organization. As of January 1, 2011, we formed a new corporation in the State of Delaware named Access to Money ATM Corporation and merged LJR Consulting Corp. and TRM ATM Corporation into the new corporation. With this merger completed, all of our legal entities are now solely registered in the State of Delaware, the prior brand name, TRM, has been removed from our nomenclature, and final tax returns will filed for the merged companies for the 2010 tax year.
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Corporate Debt Restructuring. During the third quarter of 2010, we obtained $5.5 million in new financing with Sovereign Bank. The proceeds of the loan together with $2.0 million of cash on hand were used to repay $7.5 million principal amount of our existing $11.0 million, 13% interest rate note payable to our current lenders, LC Capital Master Fund, Ltd. and Cadence Special Holdings II, LLC. The remaining $3.5 million balance due on the foregoing notes and our $9.8 million note payable to Douglas Falcone were restructured. In exchange for restructuring the note and terminating outstanding warrants to purchase 15.0 million shares of common stock, we issued 10,636,364 shares of common stock to our current lenders. As there has been a substantial change in debt terms, a debt extinguishment has occurred resulting in a loss on extinguishment of approximately $1.0 million in 2010.
The terms of the senior secured loan with Sovereign Bank provide for an interest rate of 6.81% and monthly payments of principal and interest amortizing over five years. The terms of the $3.5 million outstanding balance on the Lampe Note were restructured to be junior to Sovereign Bank, mature in 61 months, and provide for an initial interest rate of 7.00% in cash, or 10.00% PIK (payment in kind) at our option, subject to annual increase. The amended Lampe Note with Douglas Falcone was restructured to be coterminous with the restructured Lampe Note, subordinated to both Sovereign Bank and the current lenders, and provide for an initial interest rate of 7.00% in cash, or 10.00% PIK at the Companys option, subject to annual increase.
For additional information on our financing activities during the period, see Note 7 Term Loans Payable and Other Debt of our Notes to Consolidated Financial Statements included in Part II Item 8 of this report.
We derive most of our revenue from transaction-based sales. We also generate revenue from the sale of ATM equipment and service calls. A description of these revenue sources is provided below.
Transaction-based sales sales we derive from withdrawal fees and interchange fees.
| Withdrawal fees fees we receive from a processor derived from a customer making an ATM withdrawal. Withdrawal fees are sometimes referred to as surcharge or convenience fees in the industry. We collect those fees on a daily basis via deposits from processing companies with whom we have contracts. |
| Interchange fees fees that an EFTN charges the customers financial institution for routing a withdrawal transaction or an account balance inquiry. The interchange fee is shared based on an agreement between us and the EFTN. Interchange fees are typically earned on all transactions, in addition to withdrawal transactions, on ATMs owned by both us and our merchants. |
Service and other sales fees we charge for providing repair, maintenance, other services, parts and supplies to merchants who purchase or rent ATMs from us.
Sales of ATM equipment sales of ATM equipment to an independent operator or merchant.
The principal cost related to the operation of an ATM is the commission we pay to a merchant or the ATM owner. The amount of the commission paid is dependent on a number of factors the most important of which is whether we provide cash for the machine. Under our merchant-owned model, the merchant supplies the ATM with cash to operate the unit and retains the majority or all of the surcharge which is the primary component of commission. For ATMs we deploy under our full placement model where we pay the costs to operate the unit, the merchant receives a smaller amount of commission than those in our merchant-owned model. Full placement machines typically generate more income on a per unit basis to the Company compared to a merchant-owned unit.
Our cost of sales primarily consists of costs directly associated with transactions that occur on ATMs we and our merchants own and operate. These costs include vault cash rental expense, service costs, armored car costs, communications expense, transaction processing costs, and other direct operations expense. While
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merchant commissions are a cost associated with the operation of our ATMs, we present them above cost of sales, individually, on our operating statement, as a direct reduction of gross sales.
Vault Cash Rental Expense. We pay a fee to our vault cash provider for renting cash that is used in our full-placement ATMs. See Note 3 Vault Cash in our Notes to Consolidated Financial Statements included in Part II Item 8 of this report, for more detail related to our vault cash.
Armored Car Costs. We contract with armored courier services to transport and transfer the cash we use to fill our full-placement ATMs. We use industry leading armored couriers such as Brinks, Garda and Pendum. Per our agreements, the armored couriers pick up bulk cash and, using instructions received from our cash management team, 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 swapping out the remaining cash for a new fully loaded cassette, and then balance each machine and provide reporting to Elan who in turn provides us with information regarding the machine balances.
Service Costs. Depending on the type of arrangement with the merchant, we may be responsible for the maintenance of ATMs we operate. We typically use third parties with national operations to provide these services but also have staff technicians who perform repairs. Our primary service vendors are NCR Corporation and Solvport.
Communications. For our full-placement ATMs, we are responsible for providing telecommunications capabilities, allowing them to connect with the applicable EFT network.
Transaction Processing. We pay fees to third-party processors to conduct transactions to EFT networks for authorization by the cardholders financial institutions and to settle transactions. We have contracts with Fidelity Information Services, WorldPayTM and First Data Retail ATM Services, L.P.
Cost of Machine Sales. In connection with the sale of equipment to merchants, we incur costs associated with purchasing equipment from manufacturers, as well as delivery and installation expenses.
Our sales, general and administrative expenses include salaries, benefits, advertising and marketing, depreciation, amortization of intangible assets, freight and postage, professional services such as legal and accounting, administrative costs, travel related expenses, telecommunications, and other corporate related costs.
We rely on certain key measures to monitor our operating performance, including total transactions, total withdrawal transactions, number of transacting ATMs, withdrawals per ATM per month, gross sales per withdrawal transaction, commission per withdrawal, and net transaction based sales per withdrawal per month.
The following table sets forth information regarding these key measures for the twelve month periods ended December 31, 2010 and 2009:
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Twelve Months Ended December 31, |
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2010 | 2009 | |||||||
Total transactions | 39,843,094 | 43,330,209 | ||||||
Withdrawal transactions | 31,953,828 | 34,632,128 | ||||||
Average number of transacting ATMs | 10,794 | 11,265 | ||||||
Average withdrawals per ATM per month | 247 | 256 | ||||||
Average gross transaction-based sales per withdrawal | $ | 2.44 | $ | 2.43 | ||||
Average commission per withdrawal | $ | 1.78 | $ | 1.73 | ||||
Average net transaction-based sales per withdrawal | $ | .66 | $ | .70 |
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The average number of transacting ATMs in our network during 2010 decreased by 471 from 11,265 in 2009 compared to 10,794 in 2010. This decrease was primarily due to normal attrition and the removal of 465 ATMs due to the non-renewal of a customer contract which occurred in June 2010. The decrease in the number of transacting machines contributed to a 2.7 million, or 7.7%, decrease in the number of withdrawal transactions between 2010 and 2009.
The number of transacting ATMs in our network at December 31, 2010 was 10,400 compared to 11,006 at December 31, 2009.
We experienced a decrease in the average net transaction-based sales per withdrawal of $0.04 to $0.66 in 2010 from $0.70 in 2009. This decrease was primarily due to the removal of units that contributed larger per unit margins and new contracts that were installed with higher commission structures. Net transaction-based sales were also impacted in 2010 due to lower interchange revenue as a result of networks increasing their fees per transaction. While a majority of these fees are being fully passed through to the ATM merchant/operator, the fee reduction directly reduces revenue on our full placement units. The network fees had less of an impact over the twelve-month period of 2010 because they were not implemented by the networks until the second quarter of 2010. We expect however, the most recent fee increases and any future network fee increases will impact margins on units on which the fees cannot be passed forward to the ATM merchant/operator.
We have completed the transition of our corporate name and brand to Access to Money. We believe this name and brand uniquely identify the products and services we offer and provides a simple, yet powerful, vision and connection to our clients, industry and consumers.
The following table sets forth our Consolidated Statements of Operations information as percentages of sales. The percentages for commission and net transaction-based sales are calculated as a percentage of gross transaction-based sales. The percentages for ATM equipment and other sales are calculated as a percentage of net sales. The percentages for net sales are calculated as a percentage of the sum of gross transaction-based sales plus ATM equipment and other sales. The percentages for Cost of ATM operating sales are calculated as a percentage of net transaction-based sales. The percentages for Cost of ATM equipment and other sales are calculated as a percentage of ATM equipment and other sales. All other percentages are calculated as a percentage of net sales. Percentages may not add due to rounding.
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Twelve Months Ended December 30, |
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2010 | 2009 | |||||||
Gross transaction-based sales | 100.0 | % | 100.0 | % | ||||
Commission | 72.6 | 71.1 | ||||||
Net transaction-based sales | 27.4 | 28.9 | ||||||
ATM equipment and other sales | 22.3 | 17.3 | ||||||
Net sales | 32.7 | 32.9 | ||||||
Cost of ATM operating sales | 54.6 | 51.0 | ||||||
Cost of ATM equipment and other sales | 64.6 | 43.1 | ||||||
Total cost of sales | 56.9 | 49.7 | ||||||
Gross profit | 43.1 | 50.3 | ||||||
Sales, general and administrative expenses | 39.3 | 36.7 | ||||||
Operating income | 3.9 | 13.6 | ||||||
Interest expense |
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Interest expense | 9.9 | 10.6 | ||||||
Amortization debt issuance | 5.5 | 7.6 | ||||||
Total Interest Expense | 15.4 | 18.2 | ||||||
Loss/(gain) on warrant value | (11.2 | ) | 17.9 | |||||
Net loss | (4.7 | )% | (22.5 | )% |
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The following table sets forth selected information from our Condensed Consolidated Statements of Operations. The results are in thousands, except for percentages.
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Twelve Months Ended December 31, | ||||||||||||
2010 | 2009 | % Change | ||||||||||
Gross transaction-based sales | $ | 78,054 | $ | 84,252 | (7.4 | ) | ||||||
Commissions | 56,693 | 59,926 | (5.4 | ) | ||||||||
Net transaction-based sales | 21,361 | 24,326 | (12.2 | ) | ||||||||
Service and other sales | 2,570 | 2,868 | (10.4 | ) | ||||||||
ATM equipment sales | 3,360 | 1,936 | 73.6 | |||||||||
Branch build out | 202 | 292 | (30.9 | ) | ||||||||
Net sales | $ | 27,493 | $ | 29,422 | (6.6 | ) |
Gross transaction-based sales were approximately $78.1 million during the twelve months ended December 31, 2010 compared to $84.3 million for the corresponding period of 2009. This $6.2 million, or 7.4%, decrease was primarily attributable to fewer transacting units in 2010.
Service and other sales decreased by $298,000, or 10.4%, to $2.6 million during the twelve-month period ended December 31, 2010 compared to $2.9 million in the corresponding period in 2009. The decrease was primarily due to fewer billable service calls as a result of the replacement of older ATMs with newer equipment.
Sales of ATM machines increased by $1.4 million, or 73.6%, to approximately $3.4 million during 2010 from $1.9 million during 2009. This increase was the result of hardware sales to several large customers in 2010 compared to 2009 when many customers waited for the economy to improve before spending capital on new equipment.
Our merchants receive fees from transactions generated by the ATMs on their premises. These fees, or commissions, represent a share of transaction fees. The amount of the commission depends on a variety of factors, including the type of arrangement under which we place the ATM with the merchant and the number of transactions at the ATM.
Commissions decreased from $59.9 million during the twelve-month period ended December 31, 2009 to $56.7 million in the twelve-month period ended December 31, 2010. This decrease of approximately $3.2 million, or 5.4%, resulted primarily from fewer withdrawal transactions which decreased by 7.7%. As a percentage of gross transaction-based sales, commissions increased to 72.6% in 2010 from 71.1% during 2009. The average commission per withdrawal transaction increased to $1.78 for 2010 as compared to $1.73 for 2009. The higher commission per withdrawal is the result of new commission structures on recent ATM contracts compared to those for machines with lower commission structures that were taken out of service during 2009.
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The following table sets forth selected costs of sales data from our Condensed Consolidated Statements of Operations. The results are in thousands, except for percentages.
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Twelve Months Ended December 31, | ||||||||||||
2010 | 2009 | % Change | ||||||||||
Processing costs | $ | 2,373 | $ | 2,539 | (6.5 | ) | ||||||
Armored car service | 2,257 | 2,457 | (8.1 | ) | ||||||||
Cost of cash | 1,946 | 1,931 | 0.7 | |||||||||
Service costs | 3,104 | 3,534 | (12.2 | ) | ||||||||
Machine depreciation | 989 | 862 | 14.7 | |||||||||
Communication costs | 809 | 901 | (10.2 | ) | ||||||||
Other costs | 835 | 583 | 43.2 | |||||||||
Total cost of sales (less machine cost) | $ | 12,313 | $ | 12,807 | (3.9 | ) | ||||||
Cost of machine sales | 3,317 | 1,806 | 83.7 | |||||||||
Total cost of sales (including machine cost) | $ | 15,630 | $ | 14,613 | 7.0 |
Cost of sales from operations consist primarily of cost of vault cash, service costs, processing costs, armored car service costs, communication costs and machine depreciation. We also include the cost of machines we purchase for resale and have provided total cost of sales including and excluding this amount. Machine sale cost is directly related to machine sales and varies period to period based on sales volumes. Cost of sales excluding machine sale cost decreased by $494,000, or 3.9%, between the twelve months ended December 31, 2010 and 2009. This decrease is primarily associated with the reduction in our transaction volume. Cost of sales including machine cost increased approximately $1.0 million, or 7.0%, to $15.6 million during the twelve months ended December 31, 2010 compared to $14.6 million in the same period in 2009. This increase is mostly driven by the 83.7% increase in cost of machine sales.
Processing fees decreased $166,000, or 6.5%, to approximately $2.4 million, in the twelve months ended December 31, 2010 compared to $2.5 million in the same period of 2009. The decrease is due to fewer transactions in 2010 compared to 2009.
Armored car costs decreased $200,000, or 8.1%, to $2.3 million in the twelve months ended December 31, 2010 from $2.5 million in the same period of 2009. This decrease is attributable to a decrease in the number of ATMs for which we supply cash.
Our cost of vault cash increased by $15,000, or 0.7%, to $1.9 million during the twelve months ended December 31, 2010 from $1.9 million in the same period of 2009. While the cost year over year is relatively unchanged, we did experience a 60% increase in the insurance premium paid per machine per month assessed by our vault cash provider. The interest rate on our vault cash facility remained constant at 2.75% between December 31, 2009 and December 31, 2010.
Maintenance and third party service costs decreased $420,000, or 12.2%, to approximately $3.1 million during 2010 compared to $3.5 million during 2009. This reduction is the result of improvements in coordination with our third party service vendors combined with improved communication between our clients and our customer and technical services teams. The reduction is also attributable to not having to pay for the maintenance for 465 ATMs under a contract that did not get renewed.
Machine sale cost increased $1.5 million, or 83.7%, to $3.3 million in 2010 from $1.8 million in 2009 due to hardware sales to several large customers in 2010 compared to the same period in 2009 during which customers were hesitant to make large capital outlays due to economic conditions.
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Gross Profit (in thousands, except for percentages)
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Twelve Months Ended December 31, | ||||||||||||
2010 | 2009 | % Change | ||||||||||
Gross profit | $ | 11,863 | $ | 14,809 | (19.9 | ) |
During the twelve months ended December 31, 2010, gross profit was approximately $11.9 million compared to $14.8 million in the same period of 2009. The reasons for the decreases have been discussed above in sales and costs.
Selling, General, and Administrative Expenses (in thousands, except for percentages)
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Twelve Months Ended December 31, | ||||||||||||
2010 | 2009 | % Change | ||||||||||
Selling, general and administrative | $ | 10,793 | $ | 10,803 | (0.1 | ) |
Selling, general and administrative expense remained relatively constant during the twelve months ended December 31, 2010 and 2009. Selling, general and administrative expense as a percent of net sales increased to 39.3% in 2010 from 36.7% in 2009.
In connection with the loss of income related to the non-renewal of a major customer contract, we have made staff reductions, reduced general and administrative cost and instituted company-wide salary reductions. Payroll related costs decreased by $418,000, or 8.0%, to $4.8 million for the twelve months ended December 31, 2010 compared to $5.2 million in the same period in 2009. This decrease is primarily attributable to reductions in bonus, commission, and headcount.
We have experienced decreases in repairs and maintenance, telephone, insurance, office related, bank fees, legal and outsourced services of approximately $539,000 in 2010 compared to 2009. These reductions have been offset by a combined increase of approximately $166,000 of costs related to rent, travel and entertainment and marketing in 2010 compared to the corresponding period of 2009.
Selling, general and administrative expense for 2010 also included $440,000 in non-recurring charges, comprised of $146,000 pertaining to a revalue of inventory, $74,000 related to the write-off of an old trademark, and $220,000 for the writedown of fixed assets related to the termination of a contract with a significant customer.
Operating Income (in thousands, except for percentages)
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Twelve Months Ended December 31, | ||||||||||||
2010 | 2009 | % Change | ||||||||||
Operating income | $ | 1,070 | $ | 4,006 | (73.3 | ) |
During the twelve months ended December 31, 2010, operating income was $1.1 million, compared to $4.0 million earned in the corresponding period of 2009. The reasons for the decreases have been discussed above in sales and costs.
Depreciation and Amortization (in thousands, except for percentages)
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Twelve Months Ended December 31, | ||||||||||||
2010 | 2009 | % Change | ||||||||||
Depreciation expense | $ | 1,350 | $ | 1,201 | 12.4 | |||||||
Amortization expense | $ | 2,224 | $ | 2,917 | (23.8 | ) |
Depreciation is accounted for in both cost of sales and selling, general and administrative expense. Machine depreciation for ATMs that we own is included in cost of sales while all other depreciation related to furniture fixtures and equipment, computer related assets and automobiles is included in selling, general and administrative expense. Amortization listed above is related to intangible assets and debt issuance. Debt issuance amortization is accounted for below operating income and included in interest expense.
The increase in the depreciation between the twelve-month periods of 2009 and 2010 is primarily due to the addition of full placement ATMs and computer equipment acquired during 2010.
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Interest Expense and Amortization of Debt Issuance Cost (in thousands except for percentages)
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Twelve Months Ended December 31, | ||||||||||||
2010 | 2009 | % Change | ||||||||||
Interest expense | $ | 2,715 | $ | 3,133 | (13.3 | ) | ||||||
Amortization debt issuance | 1,505 | 2,233 | (32.6 | ) | ||||||||
Total interest related expense | $ | 4,220 | $ | 5,366 | (21.3 | ) |
Total interest related expense for the twelve months ended December 31, 2010 decreased by $1.2 million, or 21.3%, to $4.2 million from $5.4 million in the corresponding period of 2009. This decrease was based on accruals related to the terms of our new and amended loan agreements with our lenders. As a result of our new credit facility and restructuring of other long-term indebtedness, we expect interest expense to further decrease in 2011.
Loss on Debt Extinguishment (in thousands except for percentages)
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Twelve Months Ended December 31,, | ||||||||||||
2010 | 2009 | % Change | ||||||||||
Loss on debt extinguishment | $ | 995 | $ | | |
The $995,000 loss on debt extinguishment is the result of three components derived from the refinancing of our debt which included an exchange of warrants. The first component of the loss was $164,000 pertaining to the write-off of deferred financing costs associated with the 2008 Notes which released the lenders as the primary debtor, thus extinguishing the liability. The second component of the loss on debt extinguishment was approximately $1.2 million representing the remaining unamortized debt discount also associated with the 2008 Notes. The third component was $422,000 representing the gain in value between warrants exchanged and shares issued. See Note 9 Shareholders Deficit in our Notes to Consolidated Financial Statements included in Part II Item 8 of this report for more detail related to the exchange of warrants.
During the normal course of business in 2010 we incurred a loss of $46,000 related to the disposal and sale of ATMs. Machines that come out of service are inspected by our technical services group to determine if they can be deployed to an alternative location. In some cases we determined that the unit was past its expected or useful life and was better utilized for its parts.
We have recorded no benefit from our losses for 2010 and 2009 because we are uncertain that we will be able to realize the benefit of our net operating loss carry forwards and future deductible amounts.
Effective January 1, 2009, we adopted new accounting guidance that can affect the accounting for warrants and many convertible instruments with provisions that protect holders from a decline in the stock price. Protection provisions reduce the exercise price of a warrant or convertible instrument if the issuer either issues equity shares for a price that is lower than the exercise price of those instruments or issues new warrants or convertible instruments that have a lower exercise price. We evaluated and determined that outstanding warrants to acquire our stock contain provisions that protect holders from declines in the stock price and as a result, recognized these warrants as liabilities at their respective fair values on each reporting date. For a complete description of the loss on warrant value, see our consolidated financial statements contained elsewhere in this report.
We have warrants outstanding which provide the holder to purchase up to an aggregate of 3.1 million shares of common stock upon exercise. The warrants expire November 2013 and have an exercise price of $0.28. The outstanding warrants are exercisable at any time and we have agreed to register the shares issuable upon the exercise of the warrants. We use a Black-Scholes valuation model to estimate the fair value of the outstanding warrants.
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The table below provides a reconciliation of the beginning and ending balances for our warrant liability and increase in fair value using significant unobservable inputs (Level 3) as of December 31, 2010 (in thousands).
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Balance as of January 1, 2010 | $ | 6,747 | ||
Exchange of warrants | (3,081 | ) | ||
Decrease in fair value of warrants | 3,079 | |||
Balance as of December 31, 2010 | $ | 587 |
We determined the fair value of our warrants using a Black-Scholes model. The significant assumptions considered by the model were the amount of outstanding warrants, the remaining term of each warrant, the per share stock price of $0.22, a risk free rate of 0.91%, and a historical volatility of 183.8%.
Due to the exchange of warrants which occurred in 2010, we expect that the change in fair value of our remaining warrants should not have any material impact to our financial statements in future quarters.
Net Loss (in thousands, except for percentages)
Our net losses in 2010 and 2009 have been materially impacted by the accounting associated with warrant valuations and a large charge in 2010 associated with the refinance of outstanding debt. The following table provides a reconciliation of net loss to adjusted net loss to show the impact of those items.
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Twelve Months Ended December 31, | ||||||||||||
2010 | 2009 | % Change | ||||||||||
Net loss | $ | (1,305 | ) | $ | (6,623 | ) | (80.3 | ) | ||||
Loss on debt redemption | 995 | | | |||||||||
Loss (gain) on warrant value | (3,078 | ) | 5,253 | 158.6 | ||||||||
Net loss after adjustments | $ | (3,388 | ) | $ | (1,370 | ) | (147.3 | ) |
We recognized a net loss after adjustments of approximately $2.0 million, or 147.3%, to $3.4 million for the twelve months ended December 31, 2010 compared to an adjusted net loss of $1.4 million for the same period of 2009.
Our principal ongoing funding requirements are for working capital to finance operations, make debt payments, and fund capital expenditures. We believe that our liquidity and capital resources are adequate for our currently anticipated needs over the next twelve months. We have satisfied our funding requirements through a combination of cash from operations and proceeds from credit facilities. Below is a description of our principal source of external funding.
On September 3, 2010 we obtained $5.5 million via a senior secured loan, (the Senior Loan), pursuant to a Loan and Security Agreement, (the Senior Loan and Security Agreement), by and among us, our subsidiaries, and Sovereign Bank. The Senior Loan is due September 3, 2015, accrues interest at the rate of 6.81% per annum, requires monthly payments of principal and interest amortizing over a five year period, and is secured by substantially all of our assets. We have the right to prepay the then outstanding balance, in whole or in part, at anytime. If we prepay 50.0% or more of the then outstanding balance, we are required to pay a fee initially equal to 5.0% of the amount prepaid which reduces ratably on an annual basis to 1% of the amount prepaid four years after funding. On October 21, 2010 we entered into a First Amendment to the Senior Loan and Security Agreement. The Senior Loan and Security Agreement, as amended, contains standard and customary covenants including, prohibitions on incurring additional indebtedness, making loans or investments, granting security interests in any of our property, or acquiring any business or assets without the consent of Sovereign Bank. Financial covenants require that we maintain minimum liquidity of $2.0 million on deposit with Sovereign Bank, a fixed charge coverage ratio of 1.25 to 1 as of the end of each fiscal quarter, a funded debt to EBITDA ratio of not more than 2 to 1 as of the end of each fiscal quarter, and a minimum cash balance of $3.25 million on deposit with Sovereign Bank after making any payment on subordinated indebtedness. As of December 31, 2010, we were in compliance with all financial covenants.
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The proceeds of the Senior Loan, together with $2.0 million of cash on hand, were used to repay $7.5 million of principal due on our existing $11.0 million Senior Secured Notes payable to LC Capital Master Fund, Ltd. (LC Capital) and Cadence Special Holdings II, LLC (Cadence), (the 2008 Notes). The 2008 Notes accrued interest at the rate of 13.0% per annum, were secured by substantially all of our assets, and were due and payable in full on April 18, 2011. In connection with the closing of the Senior Loan, we entered into an Amended and Restated Loan and Security Agreement, dated September 3, 2010, with LC Capital, Cadence and Lampe Conway & Co., LLC as administrative agent and collateral agent (the Amended and Restated Lampe Loan and Security Agreement), pursuant to which the 2008 Notes were amended and restated (the 2010 Secured Notes). The 2010 Secured Notes have an aggregate principal amount of $3.5 million, are due October 3, 2015, are subordinated to the Senior Loan, accrue interest at the rate of 7.0% per annum if paid currently, or 10.0% if accrued, payable on March 3rd and September 3rd of each year, with each interest rate increasing .25% on the first anniversary of the closing, 1.0% on the second anniversary of the closing, 2.5% on the third anniversary of the closing, and 5.0% on the fourth anniversary of the closing, may be prepaid in whole or in part at anytime at our option, and are secured by substantially all of our assets, subject to the lien in favor of Sovereign Bank. Pursuant to the Amended and Restated Lampe Loan and Security Agreement and an Amendment, entered into October 21, 2010, (the Lampe Amendment), we are prohibited from paying interest on the 2010 Secured Notes unless we have a cash balance of $3.25 million after such payment. The Lampe facility, as amended, also contains financial covenants which require a minimum liquidity of $1.45 million on deposit with Sovereign Bank, a fixed charge coverage ratio of not less than 1.25 to 1 as of the end of each fiscal quarter, and a funded debt to EBITDA ratio of not more than 2.2 to 1 as of the end of each fiscal quarter. As of December 31, 2010, we were in compliance with all financial covenants.
Our note payable to Douglas B. Falcone, our Chief Operating Officer, in the principal amount of $9.75 million was also restructured. The initial note accrued interest at the rate of 13.0% per annum payable quarterly with the principal balance due April 18, 2015, was unsecured, and subordinated to the payment in full of the 2008 Notes. In connection with the foregoing transactions, we issued an Amended and Restated Subordinated Promissory Note to Mr. Falcone (the Subordinated Note). The Subordinated Note is due and payable in full October 3, 2015, is unsecured, and is subordinated in all respects to the Senior Loan and the 2010 Secured Notes. The Subordinated Note accrues interest and contains payment terms substantially similar to the 2010 Secured Notes. During 2010, we accrued $1.4 million related to our note payable to Douglas B. Falcone. On October 21, 2010, we executed a First Allonge to the Subordinated Note (the Allonge). The Allonge amends the dates in which interest shall be paid from April 18 and October 18 of each year to March 3 and September 3 of each year.
Net cash provided by operating activities during the year ended December 31, 2010 was $1.7 million compared to net cash provided by operating activities during the year ended December 31, 2009 of $4.4 million. During 2010 the principal adjustments to our operating loss were depreciation and amortization, the non-cash change in warrant value, a non-cash charge recorded as a loss on debt redemption associated with refinancing our debt facilities, and an increase in accounts payable other primarily associated with interest accruals. The primary drivers of the $2.7 million difference in operating cash between December 31, 2010 and December 31, 2009 were a $1.0 million increase in restricted cash in 2009 compared to 2010 combined with lower net income in 2010 due to the non-renewal of a major customer and expense associated with the contract renewal of another customer in December 2010.
Net cash used in investing activities during the year ended December 31, 2010 was $1.5 million compared to $1.6 million in 2009. Cash used in 2010 consisted primarily of capital expenditures for ATMs and equipment. Cash used in 2009 was primarily for capital expenditures.
Net cash used in financing activities was $3.6 million during the year ended December 31, 2010 and consisted of repayment of term loans. Net cash used in financing during the year ended December 31, 2009 was $1.6 million for the payment of term loans.
We had cash and cash equivalents of approximately $2.4 million at December 31, 2010 compared to $5.8 million at December 31, 2009. At December 31, 2010, we had a net working capital deficit of $6.6 million compared to a net working capital deficit of $1.9 million at December 31, 2009. We believe that our cash balances are sufficient to operate the business for the foreseeable future, however, will be at levels
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lower than in the past. The decrease was due primarily to the use of $2.0 million to pay down debt, an increase in our net loss related to the loss of a customer, the renegotiation of another customer contract, and a $1.3 million increase in accrued expenses.
Other than cash needed for operating activities, during 2011 we only expect to use cash to purchase ATMs that will generate revenue.
We do not use our own funds for vault cash, but rather rely upon third party sources to place cash in ATMs which we own or have an arrangement with the merchant to fund the cash. In general, we rent vault cash from financial institutions and pay a negotiated interest rate for the use of the money. The vault cash is never in the possession of or controlled by us but rather cycles from the bank to the armored car carrier and to the ATM. Each days withdrawals are settled back to the bank on the next business day. We have a contract with the bank and armored car carriers stating that the vault cash belongs to the bank and that neither we nor the armored car carriers have any legal rights to the funds.
TRM ATM Corporation, our wholly-owned subsidiary, entered into a series of Cash Provisioning Agreements with U.S. Bank National Association, doing business as Elan Financial Services (Elan), and various armored car carriers, dated October 31, 2008 (the Cash Provisioning Agreements). The Cash Provisioning Agreements provide that Elan will provide cash, through the use of armored car carriers, for our ATMs. The term of the Cash Provisioning Agreements is for a period of five years and automatically renews for additional one year periods unless either party gives the other party notice of its intent to terminate. We are responsible for the payment of fees related to the use of the cash based upon the amount of cash used and a rental rate tied to the prime rate. We provided Elan with a subordinated lien and security interest in the ATMs, subject to the security interest of Sovereign Bank, Lampe Conway & Co., LLC, and any third party providing direct financing of any ATM equipment and any refinancings of any of the foregoing. The Cash Provisioning Agreements also require us to maintain a positive demand account balance with Elan or, at our option, a letter of credit in favor of Elan in an amount not less than $600,000. Elan may draw on the account balance or letter of credit (i) in the event we materially default in the performance of any duties or obligations, which is not cured within 30 days notice; (ii) if we (A) terminate or suspend our business, (B) become subject to any bankruptcy or insolvency proceeding under federal or state statute, (C) become insolvent or become subject to direct control by a trustee, receiver or similar authority, (D) wind up or liquidate, or (E) are required to terminate our involvement in the activities covered by the Cash Provisioning Agreements by order of a court of competent jurisdiction or a regulatory agency which governs the activities of a party; and (iii) in order to obtain payment of any fees, charges or other obligations that have not been paid pursuant to the Cash Provisioning Agreements. The demand account balance or letter of credit must remain open and funded by us for a period of 90 days after the termination of the Cash Provisioning Agreements.
We have no off-balance sheet arrangements that are reasonably likely to have a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.
We prepare our consolidated financial statements in accordance with GAAP. The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, sales, costs and expenses, and the disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates and judgments, including those related to impairments, depreciation, intangible assets, accounts receivable, inventories, and income taxes. We base our estimates and judgments on historical experience and on various assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making 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.
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We have identified the following accounting policies as critical to our business and to the understanding of our financial statements.
Goodwill and Other Intangible Assets. In accordance with ASC 350-20 requiring goodwill to be tested for impairment on an annual basis, we tested our goodwill for impairment using a November 30th measurement date which we have consistently used in years past. We conduct interim impairment tests of our goodwill whenever a triggering event has occurred. Circumstances that could represent triggering events and therefore require an interim impairment test of goodwill or evaluation of our finite-lived intangible assets or other long lived assets include the following: loss of key personnel, unanticipated competition, higher or earlier than expected customer attrition, deterioration of operating performance, significant adverse industry, economic or regulatory changes or a significant decline in market capitalization. Accounting standards also provide guidance for testing goodwill and other non-amortized intangible assets for impairment and 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 units net assets and liabilities, including, among other things, an assessment of market conditions, projected cash flows, interest rates, and growth rates, which could significantly impact the reported value of goodwill and other intangible assets. Testing under this code exposes us to the possibility that changes in market conditions could result in potentially significant impairment charges in the future.
We determined the fair value of our reporting unit using a discounted cash flow approach and market approach. The discounted cash flow approach calculated the present value of projected future cash flows using appropriate discount and growth rates. The market approach we utilized was based on our comparison to seven companies providing similar services within the financial services industry. The fair values derived from these valuation methods were compared to the carrying value of the reporting unit to determine whether impairment exists. Based on the conclusions of our testing, it is our opinion that as of November 30, 2010 our Goodwill is not impaired.
Due to the current economic environment there can be no assurances that our estimates and assumptions regarding the duration of the economic recession, or the period or strength of recovery, made for purposes of our goodwill impairment testing will prove to be accurate predictions of the future if our assumptions regarding forecasted revenues or margin growth rates of the reporting units are not achieved.
As of December 31, 2010 and 2009, our assets include goodwill of $10.6 million, respectively, and other intangible assets with a net carrying amount of $1.4 million and $1.7 million, respectively.
Valuation of Long-Lived Assets. In accordance with ASC 360-10, we test all finite-lived intangible assets and other long-lived assets, such as fixed assets, for impairment only if circumstances indicated that possible impairment exists. Whenever events or changes in circumstances indicate that our merchant contracts or equipment may be impaired, we evaluate the recoverability of the asset. We periodically evaluate the estimated economic lives and related amortization expense for our finite-lived intangible assets. To the extent actual useful lives are less than our previously estimated lives, we will increase our amortization expense on a prospective basis. We estimate useful lives of our intangible assets by reference to both contractual arrangements and current and projected cash flows. Should the sum of the expected future net cash flows be less than the carrying values of the tangible or 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 tangible or intangible assets exceeded their fair value.
Realization of Tax Assets. We have established valuation allowances to reduce our deferred tax assets to the amount that we believe we will realize. Because we are uncertain that we will be able to realize the benefit of our net operating loss carry forwards and future deductible amounts, we have established valuation allowances that reduced the carrying value of our net deferred tax assets to zero as of December 31, 2009 and 2010. If we determine that we will realize deferred tax assets in the future, we will increase (decrease) net income (loss) in the period in which we make the determination.
ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The financial statements and supplementary data required by this item are included in this Annual Report on Form 10-K commencing on page 30.
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To the Board of Directors and Shareholders of Access to Money, Inc.:
We have audited the accompanying consolidated balance sheet of Access to Money, Inc. and subsidiaries (the Company) as of December 31, 2010 and 2009, and the related consolidated statements of operations, changes in shareholders deficit, and cash flows for the years ended December 31, 2010 and 2009. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of their internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion of the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. 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.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Access to Money, Inc. as of December 31, 2010 and 2009, and the results of their operations and their cash flows for the years ended December 31, 2010 and 2009, in conformity with accounting principles generally accepted in the United States of America.
/s/ Friedman LLP
East Hanover, New Jersey
March 28, 2011
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December 31, | ||||||||
2010 | 2009 | |||||||
Assets |
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Current assets: |
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Cash | $ | 2,421 | $ | 5,770 | ||||
Restricted cash | 601 | 800 | ||||||
Accounts receivable, net | 2,552 | 2,494 | ||||||
Leases receivable, net | 163 | 109 | ||||||
Inventories | 917 | 767 | ||||||
Prepaid expenses and other | 440 | 289 | ||||||
Deferred financing costs | 44 | 259 | ||||||
Total current assets | 7,138 | 10,488 | ||||||
Property and equipment, net | 2,445 | 3,220 | ||||||
Intangible assets, net | 1,368 | 1,711 | ||||||
Goodwill | 10,559 | 10,559 | ||||||
Deferred financing costs, long term | 166 | 78 | ||||||
Other assets | 473 | 319 | ||||||
Total assets | $ | 22,149 | $ | 26,375 | ||||
Liabilities and Shareholders Deficit |
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Current liabilities: |
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Accounts payable | $ | 5,667 | $ | 5,639 | ||||
Accrued expenses | 6,940 | 5,691 | ||||||
Term loans | 1,131 | 1,092 | ||||||
Total current liabilities | 13,738 | 12,422 | ||||||
Long term liabilities: |
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Term loans and other debt | 17,590 | 18,406 | ||||||
Warrants | 587 | 6,747 | ||||||
Total liabilities | 31,915 | 37,575 | ||||||
Shareholders deficit: |
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Common stock, $0.001 par value 70,000,000 shares authorized; 33,205,318 and 22,085,624 shares issued as of December 31, 2010 and December 31, 2009, respectively, and 33,146,333 and 22,073,225 shares outstanding at December 31, 2010 and December 31, 2009, respectively |
33 | 22 | ||||||
Preferred stock 5,000 shares authorized, none issued and outstanding |
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Additional paid-in capital | 138,681 | 135,935 | ||||||
Treasury stock | (21 | ) | (3 | ) | ||||
Accumulated deficit | (148,459 | ) | (147,154 | ) | ||||
Total shareholders deficit | (9,766 | ) | (11,200 | ) | ||||
Total liabilities and shareholders deficit | $ | 22,149 | $ | 26,375 |
See accompanying notes to consolidated financial statements.
31
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For the Fiscal Years ended December 31, |
||||||||||||
2010 | 2009 | |||||||||||
Revenues: |
||||||||||||
Gross transaction-based sales | $ | 78,054 | $ | 84,252 | ||||||||
Commissions | 56,693 | 59,926 | ||||||||||
Net transaction-based sales | 21,361 | 24,326 | ||||||||||
ATM equipment and other sales | 6,132 | 5,096 | ||||||||||
Net sales | 27,493 | 29,422 | ||||||||||
Cost of sales: |
||||||||||||
Cost of ATM operating sales | 11,666 | 12,415 | ||||||||||
Cost of ATM equipment and other sales | 3,964 | 2,198 | ||||||||||
Total cost of sales | 15,630 | 14,613 | ||||||||||
Gross profit | 11,863 | 14,809 | ||||||||||
Selling, general and administrative expense | 10,793 | 10,803 | ||||||||||
Operating income | 1,070 | 4,006 | ||||||||||
Interest expense | 2,715 | 3,133 | ||||||||||
Amortization of debt issuance costs | 1,505 | 2,233 | ||||||||||
Loss on early extinguishment of debt | 995 | | ||||||||||
Other expense (income) | 238 | 10 | ||||||||||
Change in fair value of warrants | (3,078 | ) | 5,253 | |||||||||
Provision (benefit) for income taxes | | | ||||||||||
Net loss | $ | (1,305 | ) | $ | (6,623 | ) | ||||||
Net loss per common share basic and diluted | $ | (0.05 | ) | $ | (0.30 | ) | ||||||
Weighted average common shares outstanding basic and diluted | 25,720 | 21,731 |
See accompanying notes to consolidated financial statements.
32
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Common | Treasury | Additional Paid-in Capital |
Accumulated Deficit |
Total Shareholders Deficit |
||||||||||||||||||||||||
Shares | Amounts | Shares | Amounts | |||||||||||||||||||||||||
Balances, December 31, 2008 | 21,486 | $ | 22 | | $ | | $ | 135,935 | $ | (139,175 | ) | $ | (3,218 | ) | ||||||||||||||
Cumulative effect of accounting change for warrant valuation | | | | | | (1,493 | ) | (1,493 | ) | |||||||||||||||||||
Net loss | | | | | | (6,623 | ) | (6,623 | ) | |||||||||||||||||||
Share-based compensation | | | | | | 137 | 137 | |||||||||||||||||||||
Shares issued | | | 12 | (3 | ) | | | (3 | ) | |||||||||||||||||||
Restricted shares vested | 600 | | | | $ | | $ | | | |||||||||||||||||||
Balances, December 31, 2009 | 22,086 | $ | 22 | 12 | $ | (3 | ) | $ | 135,935 | $ | (147,154 | ) | $ | (11,200 | ) | |||||||||||||
Net loss | | | | | | (1,305 | ) | (1,305 | ) | |||||||||||||||||||
Share-based compensation | | | | | 98 | | 98 | |||||||||||||||||||||
Shares issued | 11,119 | 11 | 47 | (18 | ) | 2,648 | | 2,641 | ||||||||||||||||||||
Balances December 31, 2010 | 33,205 | $ | 33 | 59 | $ | (21 | ) | $ | 138,681 | $ | (148,459 | ) | $ | (9,766 | ) |
See accompanying notes to consolidated financial statements.
33
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For the Fiscal Years ended December 31, | ||||||||
2010 | 2009 | |||||||
Cash flows from operating activities: |
||||||||
Net loss | $ | (1,305 | ) | $ | (6,623 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities: |
||||||||
Impairment charges | 440 | | ||||||
Depreciation | 1,350 | 1,201 | ||||||
Amortization | 2,224 | 2,917 | ||||||
Non-cash share-based compensation | 98 | 138 | ||||||
Loss on disposal or retirement of equipment | 46 | 122 | ||||||
Provision for doubtful accounts | 133 | 146 | ||||||
Loss on debt extinguishment | 995 | | ||||||
Change in warrant value | (3,078 | ) | 5,254 | |||||
Changes in assets and liabilities, net of acquisitions |
||||||||
Restricted cash | 199 | 1,212 | ||||||
Accounts receivable | (191 | ) | 358 | |||||
Leases receivable | (54 | ) | 852 | |||||
Inventories | (294 | ) | (262 | ) | ||||
Prepaid expenses and other | (151 | ) | 19 | |||||
Accounts payable | 28 | (1,212 | ) | |||||
Accrued expenses | 1,257 | 322 | ||||||
Cash provided by operating activities | 1,697 | 4,444 | ||||||
Cash flows from investing activities: |
||||||||
Capital expenditures | (964 | ) | (1,770 | ) | ||||
Acquisition of intangible and other assets | (508 | ) | 118 | |||||
Proceeds from sale of equipment | | 37 | ||||||
Cash used in investing activities | (1,472 | ) | (1,615 | ) | ||||
Cash flows from financing activities: |
||||||||
Proceeds from term loans | 5,500 | 57 | ||||||
Payment on term loans | (8,849 | ) | (1,651 | ) | ||||
Debt financing costs | (225 | ) | | |||||
Cash used in financing activities | (3,574 | ) | (1,594 | ) | ||||
Net increase (decrease) in cash and cash equivalents | (3,349 | ) | 1,235 | |||||
Beginning cash and cash equivalents | 5,770 | 4,535 | ||||||
Ending cash and cash equivalents | $ | 2,421 | $ | 5,770 | ||||
Supplemental cash flow information: |
||||||||
Cash paid for interest | $ | 1,444 | $ | 1,641 | ||||
Cash paid for taxes | $ | 4 | $ | (4 | ) |
See accompanying notes to consolidated financial statements.
34
We are an IAD acting as the source for businesses to purchase, operate and service automated teller machines, or ATMs. We entered the ATM business in 1999 and expanded our ATM operations through internal growth and acquisitions. The Company has made two transformative acquisitions, the first occurring in November 2004 when we acquired 15,000 ATMs from eFunds Corporation (eFunds), and the second in April 2008 when we acquired approximately 4,200 ATMs from LJR Consulting Corp. d.b.a. Access To Money (LJR). Between 2005 and 2007, the Company encountered financial difficulties and had to sell assets in order to reduce debt. In June 2006, we sold our United Kingdom photocopy business. In January of 2007 we sold our United Kingdom, Canadian and German ATM businesses and our United States photocopy business. In June of 2007, we sold our Canadian photocopy business. The remaining business after the sale of the aforementioned companies and assets was the domestic ATM operations which is now our primary business.
The consolidated financial statements include the accounts of Access to Money, Inc. and its subsidiaries. Our subsidiaries at December 31, 2010 included TRM ATM Corporation, Access to Money ATM Corporation, Access to Money Acquisition Corporation, LJR Consulting Corp., and Access to Money-SL, Inc. All significant intercompany transactions and accounts are eliminated.
Certain financial statement reclassifications have been made to prior period amounts to conform to the current period presentation. These changes had no impact on shareholders deficit or previously reported net income or loss. Based on the Company maintaining treasury stock we have made a reclassification to identify the value of the treasury stock on the balance sheet and have adjusted common stock and additional paid-in capital to reflect their appropriate balances.
The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, sales, costs and expenses, and the disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates and judgments, including those related to impairments, depreciation, intangible assets, accounts receivable, inventories, and taxes. We base our estimates and judgments on historical experience and on various assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making 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.
We measure and disclose the estimated fair value of financial assets and liabilities using the fair value hierarchy prescribed by U.S. GAAP. The fair value hierarchy has three levels which are based on reliable available inputs of observable data. The hierarchy requires the use of observable market data when available. The levels are defined as follows:
| Level 1 quoted prices for identical instruments in active markets; |
| Level 2 quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and |
| Level 3 fair value measurements derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. |
35
If quoted market prices or inputs are not available, fair value measurements are based upon valuation models that utilize current market or independently sourced market inputs, such as interest rates, option volatilities, credit spreads, market capitalization rates, etc. The primary valuation model we use is the Black-Scholes model.
Financial instruments, including cash equivalents, accounts receivable and accounts payable approximate fair market value because of the short maturity of these instruments. Fair value approximates the carrying value of our borrowings under our variable-rate long-term debt, based upon interest rates available for the same or similar instruments. In 2010, the majority of our debt had fixed interest rates and the fair value was estimated at $22.7 million. This amount includes approximately $3.9 million of interest accounted for in accrued expense in addition to our term loans and other debt.
For purposes of reporting financial condition and cash flows, cash and cash equivalents include cash in bank and short-term deposit sweep accounts. The Company maintains cash on deposit with a bank that is pledged in support of a specific contract related to our vault cash provider. This balance is classified as restricted cash in current assets on the Consolidated Balance Sheets. As of December 31, 2010 and 2009, there were $600,000 and $800,000, respectively, of restricted cash.
We record and report revenue pertaining to the use and operation of ATMs including transaction based sales, service sales, and equipment sales, and net from those sales commissions, which is the amount owed to the merchant where the ATM resides. For revenue we generate from ATM transactions, we receive daily electronic transaction reports from processing companies pertaining to the ATMs we own and operate in addition to machines owned and operated by merchants who contract with us. On a monthly basis, we accumulate the daily transaction data and calculate the gross and net revenue amounts to record. We recognize ATM transaction-based sales upon receipt of transaction data reported by the processing companies which generally correlates with consummation of the transaction.
In addition to transaction sales, we earn revenue from the sale of ATMs and other related equipment and provide service to ATM owners who need repairs to their equipment. For equipment sales, we recognize revenue when the title and risk of loss transfers to the customer, which is typically when the related equipment is shipped. While we expect to derive a minimal profit on the sale of equipment, there are circumstances in which no profit or a loss may be recognized at the time of the sale.
We have contracts with regional and national merchants and numerous independent store operators. As of December 31, 2010 and 2009, we had one customer which accounted for approximately 22.0% and 18.6% of our transaction-based sales.
In situations in which our arrangements combine multiple elements, we allocate revenue to each element based on its fair value and we limit the amount of revenue recognition for delivered elements to the amount that is not contingent on the future delivery of services or future performance obligations.
The Company reviews the accounts receivable on a regular basis to determine the collectability of each account. The Company maintains allowances for doubtful accounts for estimated losses which may result from the failure of its clients to make required payments. During each reporting period, the Company evaluates the adequacy of the allowance for doubtful accounts and calculates appropriate changes based on historical experience, credit evaluations, specific client collection issues and the length of time a receivable has been past due. When the Company deems the receivable to be uncollectible, the Company charges the receivable against the allowance. Accounts receivable are shown net of the allowance of $78,000 and $272,000 at December 31, 2010 and December 31, 2009, respectively.
36
Inventory is stated at the lower of cost (first-in, first-out method) or market. Inventory consists primarily of ATMs and related parts and equipment. ATMs and parts available for sale are classified as inventory until such time they are sold or installed. Once the ATM or part is sold, it is relieved to cost of sales.
Inventories (in thousands)
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December 31, | ||||||||
2010 | 2009 | |||||||
Machines | $ | 753 | $ | 439 | ||||
Parts | 164 | 328 | ||||||
$ | 917 | $ | 767 |
We account for long-lived assets, primarily equipment and amortizable intangible assets, in accordance with ASC 360-10, Accounting for the Impairment or Disposal of Long-Lived Assets, which requires us to review the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Whenever events or changes in circumstances indicate that our merchant contracts or equipment may be impaired, we evaluate the recoverability of the asset by measuring the related carrying amounts against the associated estimated undiscounted future cash flows. Should the sum of the expected future net cash flows be less than the carrying values of the tangible or 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 tangible or intangible assets exceeded their fair value.
Fixed assets are recorded at cost plus installation costs. Depreciation begins when assets are placed in service and is generally calculated using the straight-line method over the estimated remaining useful lives of the particular asset. Estimated useful lives are as follows:
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ATMs | 3 5 years | |
Computer equipment | 2 5 years | |
Furniture and fixtures | 5 7 years |
Upon the sale or disposition of an asset, cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in gain/(loss) on sale of assets.
During 2010, we took a non-recurring charge of $220,000 related to ATMs removed from service as the result of a lost customer. The ATMs taken out of service will not be redeployed due to their age and could potentially be sold for parts.
We recognize deferred tax assets and liabilities for future tax consequences attributable to differences between the financial statement reporting balances of assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those differences are expected to be recovered or reversed. There were no uncertain tax positions at December 31, 2010 or December 31, 2009, as the Companys tax positions for open years meet the recognition thresholds of more likely than not to be sustained upon examination. The federal and state tax returns for the years ending December 31, 2007, 2008 and 2009 have been filed and are currently open and the tax returns for the year ended December 31, 2010 will be filed by September 15, 2011.
37
Share-based compensation is measured as the fair value of the award at its grant date based on the estimated number of awards that are expected to vest and is recorded over a defined service period. In the absence of an observable market price for a share-based award, the fair value is based upon a valuation methodology that takes into consideration various factors, including the exercise price of the award, the term of the award, the current price of the underlying shares, the expected volatility of the underlying share price, the expected dividends on the underlying shares, and a risk-free interest rate. Compensation expense is recognized based on the estimated grant date fair value method using a Black-Scholes valuation model.
Effective January 1, 2009, we adopted new accounting guidance that can affect the accounting for warrants and many convertible instruments with provisions that protect holders from a decline in the stock price. Protection provisions reduce the exercise price of a warrant or convertible instrument if the issuer either issues equity shares for a price that is lower than the exercise price of those instruments or issues new warrants or convertible instruments that have a lower exercise price. We have outstanding warrants that contain provisions to protect the holders from declines in stock price. As a result of the provisions, we recognize these warrants as liabilities at their respective fair values on each reporting date.
Basic earnings per share is computed using the weighted average number of common shares outstanding during the period. It also assumes that outstanding common shares were increased by shares issuable upon exercise of those stock options and warrants for which the market price exceeds exercise price, less shares which we could have purchased with related proceeds. All outstanding options and warrants were excluded from the calculation of diluted earnings per share for 2009 and 2010 because their inclusion would have been antidilutive.
Equipment (in thousands):
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December 31, | ||||||||
2010 | 2009 | |||||||
ATMs | $ | 5,000 | $ | 6,886 | ||||
Computer equipment | 6,029 | 5,803 | ||||||
Furniture and fixtures | 636 | 697 | ||||||
Vehicles | 115 | 115 | ||||||
Leasehold improvements | 334 | 323 | ||||||
12,114 | 13,824 | |||||||
Accumulated depreciation | (9,669 | ) | (10,604 | ) | ||||
$ | 2,445 | $ | 3,220 |
We do not use our own funds for vault cash, but rather rely upon third party sources to place cash in ATMs which we own or have an arrangement with the merchant to fund the cash. In general, we rent vault cash from financial institutions and pay a negotiated interest rate for the use of the money. The vault cash is never in the possession of or controlled by us but rather cycles from the bank to the armored car carrier and to the ATM. Each days withdrawals are settled back to the bank on the next business day. We have a contract with the bank and armored car carriers stating that the vault cash belongs to the bank and that neither we nor the armored car carrier has any legal rights to the funds.
38
We entered into a series of Cash Provisioning Agreements with U.S. Bank National Association, doing business as Elan Financial Services (Elan), and various armored car carriers, dated October 31, 2008 (the Cash Provisioning Agreements). The Cash Provisioning Agreements provide that Elan will provide cash, through the use of armored car carriers, for our ATMs. The term of the Cash Provisioning Agreements is for a period of five years and automatically renews for additional one year periods unless either party gives the other parties notice of its intent to terminate. We are responsible for the payment of fees related to the use of the cash based upon the amount of cash used and a rental rate tied to the prime rate. We provided Elan with a subordinated lien and security interest in the ATMs, subject to the security interest of Sovereign Bank, Lampe Conway & Co., LLC, and any third party providing the direct financing of any ATM equipment and any refinancings of any of the foregoing. The Cash Provisioning Agreements also require us to maintain a positive demand account balance with Elan or, at our option, a letter of credit in favor of Elan in an amount not less than $600,000. Elan may draw on the account balance or letter of credit (i) in the event we materially default in the performance of any duties or obligations, which is not cured within 30 days notice; (ii) if we (A) terminate or suspend our business, (B) become subject to any bankruptcy or insolvency proceeding under federal or state statute, (C) become insolvent or become subject to direct control by a trustee, receiver or similar authority, (D) wind up or liquidate, or (E) are required to terminate our involvement in the activities covered by the Cash Provisioning Agreements by order of a court of competent jurisdiction or a regulatory agency which governs the activities of a party; and (iii) in order to obtain payment of any fees, charges or other obligations that have not been paid pursuant to the Cash Provisioning Agreements. The demand account balance or letter of credit must remain open and funded by us for a period of 90 days after the termination of the Cash Provisioning Agreements.
During 2010 the rental rate pertaining to the use of vault cash was 2.75% and the average monthly amount of cash used to vault our ATMs was $38.8 million.
Goodwill is tested for impairment at least annually and whenever a triggering event is identified that may indicate an impairment has occurred by applying a two-step approach. Potential impairment indicators include a significant decline in revenues or a decline in our capitalization below carrying value. Goodwill is tested by comparing the estimated fair value of a reporting unit containing goodwill to its carrying value. If the carrying value exceeds the estimated fair value, the second step of the test is needed to measure the amount of potential goodwill impairment. The second step requires the estimated fair value of the reporting unit to be allocated to all the assets and liabilities of the reporting unit as if it had been acquired in a business combination at the date of the impairment test. The excess estimated fair value of the reporting unit over the estimated fair value of assets and liabilities is the implied value of goodwill and is used to determine the amount of impairment. We perform an annual impairment test as of November 30 each fiscal year. Since December 31, 2010 there have been no indicators of impairment.
The following table summarizes goodwill (in thousands):
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Total | ||||
Balance December 31, 2008 | $ | 10,657 | ||
Adjustment to goodwill | (98 | ) | ||
Balance December 31, 2009 | $ | 10,559 | ||
Changes to goodwill | | |||
Balance December 31, 2010 | $ | 10,559 |
39
The following table summarizes Intangible assets (in thousands):
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December 31, 2010 | December 31, 2009 | |||||||||||||||||||||||
Gross carrying amount |
Accumulated amortization |
Net | Gross carrying amount |
Accumulated amortization |
Net | |||||||||||||||||||
Subject to amortization |
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Non-compete agreement | $ | 175 | $ | (157 | ) | $ | 18 | $ | 175 | $ | (99 | ) | $ | 76 | ||||||||||
Customer contracts | 1,382 | (793 | ) | 589 | 1,200 | (480 | ) | 720 | ||||||||||||||||
Distributor agreements | 225 | (101 | ) | 124 | 225 | (63 | ) | 162 | ||||||||||||||||
Non-contractual customer base | 250 | (113 | ) | 137 | 250 | (71 | ) | 179 | ||||||||||||||||
2,032 | (1,164 | ) | 868 | 1,850 | (713 | ) | 1,137 | |||||||||||||||||
Trademarks not subject to amortization | 500 | | 500 | 574 | | 574 | ||||||||||||||||||
$ | 2,532 | $ | (1,164 | ) | $ | 1,368 | $ | 2,424 | $ | (713 | ) | $ | 1,711 |
Amortization of intangible and other assets, which is included in selling, general and administrative expense in operations was approximately $451,000 and $409,000 for 2010 and 2009, respectively. Estimated amortization expense for the next five years for intangible and other assets held at December 31, 2010 is approximately: 2011 $475,000; 2012 $280,000; 2013 $125,000, 2014 $39,000, and 2015 $0. Customer contracts increased between 2009 and 2010 due to the acquisition of a small group of ATMs. In 2010 we took a $74,000 charge to writedown a trademark that was no longer in use.
The following table summarizes accounts payable and accrued liabilities (in thousands):
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December 31, | ||||||||
2010 | 2009 | |||||||
Accrued payroll expenses | $ | 125 | $ | 339 | ||||
Interest payable | 3,946 | 2,675 | ||||||
ATM maintenance and other expenses | 206 | 438 | ||||||
Other accrued expenses | 2,663 | 2,239 | ||||||
$ | 6,940 | $ | 5,691 |
The following table summarizes term loans payable and other debt (in thousands):
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December 31, | ||||||||
2010 | 2009 | |||||||
Sovereign Bank | $ | 5,264 | $ | | ||||
Lampe Loan Facility | 3,150 | 9,900 | ||||||
Cadence Special Holdings II, LLC | 350 | 1,100 | ||||||
Note payable to former owner of LJR Consulting | 9,755 | 9,755 | ||||||
Notemachine | | 324 | ||||||
Other debt | 202 | 991 | ||||||
Debt discount | | (2,572 | ) | |||||
Total | $ | 18,721 | $ | 19,498 | ||||
Less: current portion | 1,131 | 1,092 | ||||||
Total long-term debt, excluding current portion | $ | 17,590 | $ | 18,406 |
40
On September 3, 2010 we obtained $5.5 million via a senior secured loan, (the Senior Loan), pursuant to a Loan and Security Agreement, (the Senior Loan and Security Agreement), by and among us, our subsidiaries, and Sovereign Bank. The Senior Loan is due September 3, 2015, accrues interest at the rate of 6.81% per annum, requires monthly payments of principal and interest amortizing over a five year period, and is secured by substantially all of our assets. We have the right to prepay the then outstanding balance, in whole or in part, at anytime. If we prepay 50.0% or more of the then outstanding balance, we are required to pay a fee initially equal to 5.0% of the amount prepaid which reduces ratably on an annual basis to 1% of the amount prepaid four years after funding. On October 21, 2010 we entered into a First Amendment to the Senior Loan and Security Agreement. The Senior Loan and Security Agreement, as amended, contains standard and customary covenants including, prohibitions on incurring additional indebtedness, making loans or investments, granting security interests in any of our property, or acquiring any business or assets without the consent of Sovereign Bank. Financial covenants require that we maintain minimum liquidity of $2.0 million on deposit with Sovereign Bank, a fixed charge coverage ratio of 1.25 to 1 as of the end of each fiscal quarter, a funded debt to EBITDA ratio of not more than 2 to 1 as of the end of each fiscal quarter. As of December 31, 2010, we were in compliance with all financial covenants.
The proceeds of the Senior Loan, together with $2.0 million of cash on hand, were used to repay $7.5 million of principal due on our existing $11.0 million Senior Secured Notes payable to LC Capital Master Fund, Ltd. (LC Capital) and Cadence Special Holdings II, LLC (Cadence), (the 2008 Notes). The 2008 Notes accrued interest at the rate of 13.0% per annum, were secured by substantially all of our assets, and were due and payable in full on April 18, 2011. In connection with the closing of the Senior Loan, we entered into an Amended and Restated Loan and Security Agreement, dated September 3, 2010, with LC Capital, Cadence and Lampe Conway & Co., LLC as administrative agent and collateral agent (the Amended and Restated Lampe Loan and Security Agreement), pursuant to which the 2008 Notes were amended and restated (the 2010 Secured Notes). The 2010 Secured Notes have an aggregate principal amount of $3.5 million, are due October 3, 2015, are subordinated to the Senior Loan, accrue interest at the rate of 7.0% per annum if paid currently, or 10.0% if accrued, payable on March 3rd and September 3rd of each year, with each interest rate increasing .25% on the first anniversary of the closing, 1.0% on the second anniversary of the closing, 2.5% on the third anniversary of the closing, and 5.0% on the fourth anniversary of the closing, may be prepaid in whole or in part at anytime at our option, and are secured by substantially all of our assets, subject to the lien in favor of Sovereign Bank. Pursuant to the Amended and Restated Lampe Loan and Security Agreement and an Amendment, (the Lampe Amendment), entered into October 21, 2010, we are prohibited from paying interest on the 2010 Secured Notes unless we have a cash balance of $3.25 million after such payment. The Lampe facility, as amended, also contains financial covenants which require a minimum liquidity of $1.45 million on deposit with Sovereign Bank, a fixed charge coverage ratio of not less than 1.25 to 1 as of the end of each fiscal quarter, and a funded debt to EBITDA ratio of not more than 2.2 to 1 as of the end of each fiscal quarter. As of December 31, 2010, we were in compliance with all financial covenants.
Our existing note payable to Douglas B. Falcone, our Chief Operating Officer, in the principal amount of $9.75 million was also restructured. The initial note accrued interest at the rate of 13.0% per annum payable quarterly with the principal balance due April 18, 2015, was unsecured, and subordinated to the payment in full of the 2008 Notes. In connection with the foregoing transactions, we issued an Amended and Restated Subordinated Promissory Note to Mr. Falcone (the Subordinated Note). The Subordinated Note is due and payable in full October 3, 2015, is unsecured, and is subordinated in all respects to the Senior Loan and the 2010 Secured Notes. The Subordinated Note accrues interest and contains payment terms substantially similar to the 2010 Secured Notes. On October 21, 2010, we executed a First Allonge to the Subordinated Note (the Allonge). The Allonge amends the dates in which interest shall be paid from April 18 and October 18 of each year to March 3 and September 3 of each year. Mr. Falcone has deferred approximately $3.9 million of interest payments under the note since its inception. The accrued interest is represented in our Consolidated Balance Sheets under accrued expenses.
41
In connection with an exchange of warrants, we had a $995,000 loss on debt extinguishment which consisted of $164,000 pertaining to the write-off of deferred financing costs associated with the 2008 Notes which released the lenders as the primary debtor thus extinguishing the liability; approximately $1.2 million which was the remaining unamortized debt discount also associated with the 2008 Notes; and $422,000 representing a gain in value between the warrants exchanged and shares issued. See Note 9 Shareholders Deficit for more detail related to the exchange of warrants.
Deferred tax assets (liabilities) are comprised of the following components (in thousands):
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December 31, | ||||||||
2010 | 2009 | |||||||
Current: |
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Accounts receivable allowance | $ | 32 | $ | 109 | ||||
Unrealized exchange gains | | 85 | ||||||
Pantry Contract Discount | 173 | | ||||||
Valuation allowance | (205 | ) | (194 | ) | ||||
$ | | $ | | |||||
Noncurrent: |
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Net operating losses | $ | 31,749 | $ | 23,985 | ||||
Depreciation and amortization | 10 | (942 | ) | |||||
Goodwill | 34,106 | 38,058 | ||||||
Intangible assets | 764 | 3,265 | ||||||
Non-cash share-based compensation | 41 | 76 | ||||||
Valuation allowance | (66,670 | ) | (64,442 | ) | ||||
$ | | $ | |
We have established a valuation allowance to reduce our deferred tax assets to the amount that we believe we will realize. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, we determined, because of our history of losses, that we may not realize all or part of our net deferred tax assets in the future, and, accordingly, we have recorded a full valuation allowance against our net deferred tax assets. If we determine that we will realize deferred tax assets in the future, we will increase income in the period in which we make the determination.
The effective tax rate for income (loss) from operations differs from the federal statutory tax rate as follows (in thousands except percentage data):
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2010 | 2009 | |||||||
Statutory federal rate | 34.0 | % | 34.0 | % | ||||
Deferred tax asset valuation allowance | (34.0 | ) | (34.0 | )% |
As of December 31, 2010, we have net operating loss carry forwards of approximately $77.3 million available to offset future taxable income for United States federal income tax purposes which expire in the years 2020 through 2029. Utilization of our United States net operating loss carry forwards may be subject to certain limitations in the event of a change in control of our Company.
Accounting for Income Taxes. ACS 740-10 clarifies the accounting and reporting of income taxes recognized in the financial statements and provides how tax benefits may be recognized. Income tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized in subsequent
42
periods. Code also provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. At December 31, 2010 and 2009 we had no unrecognized tax benefits. We recognize interest and penalty accrued related to unrecognized tax benefits and penalties as income tax expense.
The federal and state tax returns for the years ending December 31, 2007, 2008 and 2009 have been filed and are currently open and the tax returns for the year ended December 31, 2010 will be filed by September 15, 2011.
In connection with the Amended and Restated Lampe Loan Agreement, we entered into an Exchange Agreement with LC Capital (the LC Capital Exchange Agreement) and an Exchange Agreement with Cadence (the Cadence Exchange Agreement) and together with the LC Capital Exchange Agreement (the Exchange Agreements). Pursuant to the Exchange Agreements, the 2008 Notes and warrants to purchase an aggregate of 15.0 million shares of common stock issued in connection with the 2008 Notes were exchanged for the 2010 Secured Notes described above and an aggregate of 10,636,664 shares of common stock.
The table below provides a reconciliation of the beginning and ending balances for our warrant liability and increase in fair value using significant unobservable inputs (Level 3) as of December 31, 2010 (in thousands).
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Balance as of January 1, 2010 | $ | 6,747 | ||
Exchange of warrants | (3,081 | ) | ||
Decrease in fair value of warrants | 3,079 | |||
Balance as of December 31, 2010 | $ | 587 |
Following the exchange agreements, we still have warrants outstanding which provide a holder to purchase up to an aggregate of 3.1 million shares of common stock upon exercise. The warrants expire November 2013 and have an exercise price of $0.28. The outstanding warrants are exercisable at any time and we have agreed to register the shares issuable upon the exercise of the warrants. Because these warrants contain provisions that protect the holder from declines in stock price, we recognize these warrants as liabilities at their respective fair value on each reporting date. We use a Black-Scholes valuation model to estimate the fair value of the outstanding warrants. The significant assumptions considered by the model were the amount of outstanding warrants, the remaining term of each warrant, the per share stock price of $0.22, a risk free rate of 0.91%, and a historical volatility of 183.8%.
We have reserved 5,700,000 shares of common stock for use under our stock incentive plan of which 1,185,327 shares remain available for issuance as of December 31, 2010. Under our plan, we are authorized to issue incentive and nonqualified stock options and restricted shares of common stock. All grants terminate no more than ten years from the date of grant and vest over various schedules ranging up to five years.
We calculate the fair value of share-based instruments awarded to employees on the date of grant and recognizes the calculated fair value, net of estimated forfeitures, as compensation expense over the requisite service periods of the related awards.
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The following table summarizes the total share-based compensation expense amounts included in our Consolidated Statements of Operations for the fiscal years ended December 31, 2010 and 2009 (in thousands):
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Year ended December 31, | ||||||||
2010 | 2009 | |||||||
Option grants | $ | 14 | $ | 25 | ||||
Restricted shares | 84 | 113 | ||||||
Total share-based compensation expense | $ | 98 | $ | 138 |
The weighted average fair value of options granted during 2010 and 2009 is calculated using the Black-Scholes option pricing method. The assumptions used are shown in the following table.
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2010 | 2009 | |||||||
Expected volatility (based on historical data) | | 147.3 | % | |||||
Risk-free interest rate | | 1.86 | % | |||||
Expected life | | 5.0 years |
Options: The following table summarizes stock option activity during the fiscal years ended December 31, 2010 and 2009, as follows:
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Number of shares |
Weighted average exercise price |
|||||||
Options Outstanding December 31, 2009 | 322,500 | $ | 1.13 | |||||
Granted | | | ||||||
Exercised | | | ||||||
Cancelled | | | ||||||
Options Outstanding December 31, 2010 | 322,500 | $ | 1.13 |
As of December 31, 2010, options to acquire 322,500 shares at a weighted average exercise price of $1.13 per share were exercisable, with an aggregate intrinsic value of $11,250 and a weighted average remaining contractual term of 3.1 years with a range of exercise prices of $0.15 $12.12.
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Options Outstanding | Options Exercisable | |||||||||||
Exercise Prices | As of December 31, 2010 |
Weighted Average Contractual Life Remaining |
As of December 31, 2010 |
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$0.15 | 150,000 | 2.9 years | 150,000 | |||||||||
$0.29 | 75,000 | 3.9 years | 75,000 | |||||||||
$0.98 | 30,000 | 6.6 years | 30,000 | |||||||||
$1.80 | 2,500 | 1.7 years | 2,500 | |||||||||
$2.19 | 50,000 | 0.8 years | 50,000 | |||||||||
$11.75 | 10,000 | 1.7 years | 10,000 | |||||||||
$12.12 | 5,000 | 1.7 years | 5,000 | |||||||||
322,500 | 322,500 |
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The weighted average per share fair value price of options granted during 2010 and 2009 was $0 and $0.26, respectively. The total intrinsic value of options exercised during 2010 and 2009 was $0 and $0, respectively.
Restricted Stock. We have issued shares of restricted stock to our directors and certain officers and employees. The restricted shares vest annually over periods of one to four years. The following table summarizes restricted stock activity during the fiscal years ended December 31, 2010 and 2009, as follows:
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Shares | ||||
Restricted shares January 1, 2009 | 1,410,000 | |||
Granted | 150,000 | |||
Vested | (600,005 | ) | ||
Forfeited | (125,000 | ) | ||
Restricted shares January 1, 2010 | 834,995 | |||
Granted | 105,000 | |||
Vested | (483,330 | ) | ||
Forfeited | (103,332 | ) | ||
Restricted shares December 31, 2010 | 353,333 |
The weighted average fair market value of restricted shares vested and exercised during 2010 and 2009 was $184,441 and $121,468, respectively. The weighted average per share fair value price of restricted stock granted during 2010 and 2009 was $0.29 and $0.22, respectively.
As of December 31, 2010, there was approximately $47,000 of total unrecognized compensation cost related to share based compensation arrangements granted under our stock award plans that are expected to vest. We expect to recognize that cost over a weighted average period of 1.3 years.
We have a profit sharing retirement plan for eligible employees. The plan has profit sharing and 401(k) components. Our contribution under the profit sharing portion of the plan is discretionary. Under the 401(k) part of the plan, each employee may contribute, on a pre-tax basis, up to the maximum allowed under the Internal Revenue Code.
No amounts were accrued or paid for profit sharing for 2009 and 2010. Under the 401(k) component of the Plan we paid matching contributions of approximately $68,000 and $51,000 to our defined contribution plans for the years ended December 31, 2010 and 2009, respectively.
We have operating leases, primarily for office and warehouse space, with expiration dates through 2013. Minimum lease payments for our operating leases are: 2011 $322,000; 2012 $215,000; and 2013 $107,000.
Rental expense included in operations for 2010 and 2009 was $347,000 and $304,000, respectively.
As of December 31, 2010, we had a letter of credit issued on our behalf by Wells Fargo Bank, N.A. in the amount of $600,000 in connection with our vault cash agreement. The letter of credit is supported by cash deposited with Wells Fargo Bank, N.A.
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During 2010 we purchased $1.7 million and $1.2 million of ATMs from two suppliers, Hyosung and Hantle USA, respectively. We primarily used two companies, NCR and Solvport, to provide maintenance services for our company-owned installed ATMs and paid $1.5 million and $1.2 million, respectively, for those services in 2010.
In connection with the acquisition of LJR Consulting, we entered into a vault cash agreement with the owner, Douglas Falcone who is now our Chief Operating Officer. The agreement called for us to return vault cash, estimated at the date of closing, as it was replaced with vault cash supplied by our primary vault cash supplier. The vault cash was returned in full as of January 2010.
In connection with the acquisition of LJR Consulting, we entered into a $9.8 million principal amount promissory note payable to Douglas Falcone, the former owner of LJR Consulting who is now our Chief Operating Officer. In connection with the Companys refinancing of its debt as of September 3, 2010, we issued an Amended and Restated Subordinated Promissory Note to Mr. Falcone (the Subordinated Note). The Subordinated Note is due and payable in full October 3, 2015, is unsecured, and is subordinated in all respects to the Senior Loan and the 2010 Secured Notes. The Subordinated Note accrues interest and contains payment terms substantially similar to the 2010 Secured Notes. On October 21, 2010, we executed a First Allonge to the Subordinated Note (the Allonge). The Allonge amends the dates in which interest shall be paid from April 18 and October 18 of each year to March 3 and September 3 of each year.
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First Quarter |
Second Quarter |
Third Quarter |
Fourth Quarter |
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2010: |
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Sales | $ | 22,203 | $ | 21,987 | $ | 21,153 | $ | 18,842 | ||||||||
Net sales | 7,631 | 7,088 | 6,945 | 5,829 | ||||||||||||
Gross profit | 3,313 | 3,693 | 2,983 | 1,874 | ||||||||||||
Net income (loss) from operations | (716 | ) | 2,048 | (729 | ) | (1,908 | ) | |||||||||
Basic loss per share | (.03 | ) | .09 | (.03 | ) | (.06 | ) | |||||||||
Diluted loss per share | (.03 | ) | .07 | (.03 | ) | (.06 | ) | |||||||||
2009: |
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Sales | $ | 22,245 | $ | 23,130 | $ | 23,319 | $ | 20,654 | ||||||||
Net sales | 7,264 | 7,293 | 8,028 | 6,837 | ||||||||||||
Gross profit | 3,657 | 3,579 | 3,911 | 3,663 | ||||||||||||
Net income (loss) from operations | (597 | ) | (3,232 | ) | (2,628 | ) | (165 | ) | ||||||||
Basic loss per share | (.03 | ) | (.15 | ) | (.12 | ) | (.01 | ) | ||||||||
Diluted loss per share | (.03 | ) | (.15 | ) | (.12 | ) | (.01 | ) |
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ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
Not applicable.
ITEM 9A. | CONTROLS AND PROCEDURES |
Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15(d)-15(e) under the Exchange Act) as of the end of the period covered by this report pursuant to Rule 13a-15(b) under the Exchange Act. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2010, our disclosure controls and procedures were effective to ensure (i) that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and (ii) that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, in order to allow timely decisions regarding required disclosure.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an assessment of the effectiveness of our internal control over financial reporting. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control Integrated Framework. Based on managements assessment based on the criteria of the COSO, we concluded that, as of December 31, 2010, the Companys internal control over financial reporting is effective at the reasonable assurance level.
Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the U.S. Our internal control over financial reporting includes those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the U.S., and that receipts and expenditures of the Company are being made only in accordance with authorization of management and directors of the Company; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Companys assets that could have a material effect on our consolidated financial statements.
This report does not include an attestation report of Friedman LLP, our registered public accounting firm, regarding internal control over financial reporting. Managements report was not subject to attestation by our registered public accounting firm pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, which permits us to provide only managements report in this report.
There have not been any changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal quarter ended December 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The information required by this item will be set forth in our definitive proxy statement with respect to our 2011 annual meeting of shareholders to be filed not later than 120 days after December 31, 2010 and is incorporated herein by this reference.
ITEM 11. | EXECUTIVE COMPENSATION |
The information required by this item will be set forth in our definitive proxy statement with respect to our 2011 annual meeting of shareholders to be filed not later than 120 days after December 31, 2010 and is incorporated herein by this reference.
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information required by this item will be set forth in our definitive proxy statement with respect to our 2011 annual meeting of shareholders to be filed not later than 120 days after December 31, 2010 and is incorporated herein by this reference.
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The information required by this item will be set forth in our definitive proxy statement with respect to our 2011 annual meeting of shareholders to be filed not later than 120 days after December 31, 2010 and is incorporated herein by this reference.
ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The information required by this item will be set forth in our definitive proxy statement with respect to our 2011 annual meeting of shareholders to be filed not later than 120 days after December 31, 2010 and is incorporated herein by this reference.
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ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
(a) The exhibits listed below are filed as part of this report
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Exhibit Number |
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2.1 | Stock Purchase Agreement dated April 18, 2008 between TRM Corporation and Douglas Falcone (incorporated herein by reference to Exhibit 2.1 of Form 10-Q for the quarter ended March 31, 2008) | |
2.2 | Agreement and Plan of Merger between TRM Corporation and Access to Money, Inc., a wholly-owned subsidiary of TRM Corporation (incorporated herein by reference to Appendix C of the Definitive Proxy Statement filed on April 30, 2009) | |
3.1 | Certificate of Incorporation of Access to Money, Inc. (incorporated herein by reference to Appendix D of the Definitive Proxy Statement filed on April 30, 2009) | |
3.2 | By-laws of Access to Money, Inc. (incorporated herein by reference to Appendix E of the Definitive Proxy Statement filed on April 30, 2009) | |
4.1 | Specimen Stock Certificate (incorporated herein by reference to Exhibit 4.1 of Form S-3/A filed on August 25, 2004 [No. 333-116748]) | |
4.2 | Amended and Restated Warrant to GSO Credit Opportunities Fund (Helios), L.P., dated April 18, 2008 (incorporated by reference to Exhibit 4.5 of Form 10-Q for the quarter ended March 31, 2008) | |
4.3 | Amended and Restated Warrant to GSO Special Situations Overseas Benefit Plan Fund Ltd., dated April 18, 2008 (incorporated by reference to Exhibit 4.6 of Form 10-Q for the quarter ended March 31, 2008) | |
4.4 | Amended and Restated Warrant to GSO Special Situations Fund Ltd., dated April 18, 2008 (incorporated by reference to Exhibit 4.7 of Form 10-Q for the quarter ended March 31, 2008) | |
4.5 | Amended and Restated Warrant to GSO Domestic Capital Funding Partners LP., dated April 18, 2008 (incorporated by reference to Exhibit 4.8 of Form 10-Q for the quarter ended March 31, 2008) | |
4.6 | Warrant to GSO Credit Opportunities Fund (Helios), L.P. (incorporated herein by reference to Exhibit 4.1 of Form 8-K filed on November 22, 2006) | |
4.7 | Warrant to GSO Special Situations Overseas Benefit Plan Fund Ltd. (incorporated herein by reference to Exhibit 4.2 of Form 8-K filed on November 22, 2006) | |
4.8 | Warrant to GSO Special Situations Fund Ltd. (incorporated herein by reference to Exhibit 4.3 of Form 8-K filed on November 22, 2006) |
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Exhibit Number |
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4.9 | Warrant to GSO Domestic Capital Funding Partners LP (incorporated herein by reference to Exhibit 4.4 of Form 8-K filed on November 22, 2006) | |
10.1 | First Amendment to Loan and Security Agreement, dated as of October 21, 2010 and effective as of September 3, 2010, by and among the Company, certain of the Companys subsidiaries, and Sovereign Bank (incorporated herein by reference to Exhibit 10.1 of Form 8-K filed on October 26, 2010). | |
10.2 | First Amendment to Amended and Restated Loan and Security Agreement, dated as of October 21, 2010 and effective as of September 3, 2010, by and among the Company, certain of the Companys subsidiaries, LC Capital Master Fund, LP, Cadence Special Holdings II, LLC, and Lampe Conway & Co., LLC, as administrative and collateral agent (incorporated herein by reference to Exhibit 10.2 of Form 8-K filed on October 26, 2010). | |
10.3 | First Allonge to Amended and Restated Subordinated Promissory Note, dated October 21, 2010 and effective as of September 3, 2010, executed by the Company in favor of Douglas Falcone (incorporated herein by reference to Exhibit 10.3 of Form 8-K filed on October 26, 2010). | |
10.4 | Loan and Security Agreement, dated September 3, 2010, by and among the Company, Sovereign Bank and the other signatories thereof (incorporated herein by reference to Exhibit 10.1 of Form 8-K filed on September 10, 2010). | |
10.5 | $5,500,000 Note, dated September 3, 2010, executed by the Company in favor of Sovereign Bank (incorporated herein by reference to Exhibit 10.2 of Form 8-K filed on September 10, 2010). | |
10.6 | Amended and Restated Loan and Security Agreement, dated September 3, 2010, by and among the Company, LC Capital Master Fund, LP, Cadence Special Holdings II, LLC, Lampe Conway & Co., LLC, as administrative and collateral agent, and the other signatories thereto (incorporated herein by reference to Exhibit 10.3 of Form 8-K filed on September 10, 2010). | |
10.7 | $3,150,000 Note, dated September 3, 2010, executed by the Company in favor of LC Capital Master Fund, Ltd. (incorporated herein by reference to Exhibit 10.4 of Form 8-K filed on September 10, 2010). | |
10.8 | $350,000 Note, dated September 3, 2010, executed by the Company in favor of Cadence Special Holdings II, LLC (incorporated herein by reference to Exhibit 10.5 of Form 8-K filed on September 10, 2010). | |
10.9 | Exchange Agreement, dated September 3, 2010, by and between the Company and LC Capital Master Fund, Ltd. (incorporated herein by reference to Exhibit 10.6 of Form 8-K filed on September 10, 2010). | |
10.10 | Exchange Agreement, dated September 3, 2010, by and between the Company and Cadence Special Holdings II, LLC (incorporated herein by reference to Exhibit 10.7 of Form 8-K filed on September 10, 2010). | |
10.11 | $9,754,465 Amended and Restated Subordinated Promissory Note, executed by the Company in favor of Douglas Falcone (incorporated herein by reference to Exhibit 10.8 of Form 8-K filed on September 10, 2010). | |
10.12 | a) Lease dated April 15, 2008 between Christian N. Peter and LJR Inc. T/A Access to Money (incorporated herein by reference to Exhibit 10.1(a) of Form 10-K for the fiscal year ended December 31, 2008) | |
b) Lease dated January 9, 2008 between 1101 Associates, LP and TRM Corporation (for Registrants executive offices) incorporated herein by reference to Exhibit 10.1 of Form 10-Q for the quarter ended June 30, 2008) | ||
10.13 | TRM Omnibus Stock Incentive Plan (incorporated herein by reference to Appendix A of the Definitive Proxy Statement filed on April 30, 2009) |
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Exhibit Number |
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10.14 | Amendment No. 2 to the TRM Omnibus Stock Incentive Plan (incorporated herein by reference to Appendix B of the Definitive Proxy Statement filed on April 30, 2009) | |
10.15 | a) Form of Incentive Stock Option Agreement under TRM Omnibus Stock Incentive Plan (incorporated herein by reference to Exhibit 10.2(a) of Form 10-Q for the period ended June 30, 2005 | |
b) Form of Non Qualified Stock Option agreement under TRM Omnibus Stock Incentive Plan (incorporated herein by reference to Exhibit 10.2(b) of Form 10-Q for the period ended June 30, 2005) | ||
c) Form of Award Agreement under TRM Omnibus Stock Incentive Plan (incorporated herein by reference to Exhibit 10.2(c) of Form 10-Q for the period ended June 30, 2005) | ||
10.16 | Employment Agreements: | |
a) Amendment No. 1 to the Employment Agreement effective December 1, 2008, by and between TRM Corporation and Richard B. Stern (incorporated herein by reference to Exhibit 10.6(a) of Form 10-K for the fiscal year ended December 31, 2008) | ||
b) Amendment No. 1 to the Employment Agreement effective December 1, 2008, by and between TRM Corporation and Michael J. Dolan (incorporated herein by reference to Exhibit 10.6(b) of Form 10-K for the fiscal year ended December 31, 2008) | ||
c) Amendment No. 1 to the Employment Agreement effective December 1, 2008, by and between TRM Corporation and Douglas B. Falcone (incorporated herein by reference to Exhibit 10.6(c) of Form 10-K for the fiscal year ended December 31, 2008) | ||
d) Employment Agreement dated April 18, 2008 by and between TRM Corporation and Douglas Falcone (incorporated herein by reference to Exhibit 10.6 of Form 10-Q for the quarter ended March 31, 2008) | ||
e) Employment Agreement dated May 21, 2007, by and between TRM Corporation and Richard B. Stern (incorporated herein by reference to Exhibit 10.6(c) of Form 10-Q for the period ended March 31, 2007) | ||
f) Employment Agreement dated August 1, 2007 by and between TRM Corporation and Michael Dolan (incorporated herein by reference to Exhibit 10.6(a) of Form 10-Q for the period ended June 30, 2007) | ||
10.17 | ATM Vault Cash Purchase Agreement effective June 26, 2008 by and among Genpass Technologies, LLC doing business as Elan Financial Services, TRM Inventory Funding Trust, TRM ATM Corporation, and DZ Bank AG, Deutsche Zentral-Genossenschaftsbank Frankfurt am Main (incorporated herein by reference of Form 10-Q for the quarter ended June 30, 2008) | |
10.18 | ATM Vault Cash Purchase Agreement, effective November 3, 2008, by and among U.S. Bank National Association, doing business as Elan Financial Services, TRM ATM Corporation, TRM Inventory Funding Trust and DZ Bank, AG, Deutsche Zentral-Genossenschaftsbank Frankfurt Am Main (incorporated herein by reference of Form 10-Q for the quarter ended September 30, 2008) | |
10.19 | a) Cash Provisioning Agreement by and among Genpass Technologies LLC doing business as Elan Financial Services, TRM ATM Corporation, TRM ATM Corporation, and Pendum, Inc., dated August 28, 2007 (incorporated herein by reference to Exhibit 10.1 of Form 8-K filed on August 14, 2008) | |
b) Amendment No. 1 to Cash Provisioning Agreement by and among Genpass Technologies LLC doing business as Elan Financial Services, TRM ATM Corporation, TRM ATM Corporation, and Pendum, Inc., dated May 8, 2008 (incorporated herein by reference to Exhibit 10.2 of Form 8-K filed on August 14, 2008) |
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Exhibit Number |
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c) Amendment No. 2 to Cash Provisioning Agreement, dated October 31, 2008, by and among Genpass Technologies LLC, doing business as Elan Financial Services, TRM ATM Corporation and Pendum, Inc. (incorporated herein by reference to Exhibit 10.2 of Form 10-Q for the quarter ended September 30, 2009) | ||
d) Cash Provisioning Agreement, dated October 31, 2008, by and among U.S. Bank National Association, doing business as Elan Financial Services, TRM ATM Corporation and Brinks U.S., A Division of Brinks, Incorporated (incorporated herein by reference to Exhibit 10.3 of Form 10-Q for the quarter ended September 30, 2008) | ||
e) Cash Provisioning Agreement, dated October 31, 2008, by and among U.S. Bank National Association, doing business as Elan Financial Services, TRM ATM Corporation and Garda Global (incorporated herein by reference to Exhibit 10.4 of Form 10-Q for the quarter ended September 30, 2008) | ||
f) Cash Provisioning Agreement, dated October 31, 2008, by and among U.S. Bank National Association, doing business as Elan Financial Services, TRM ATM Corporation and Rochester Armored (incorporated herein by reference to Exhibit 10.5 of Form 10-Q for the quarter ended September 30, 2008) | ||
g) Cash Provisioning Agreement, dated October 31, 2008, by and among U.S. Bank National Association, doing business as Elan Financial Services, TRM ATM Corporation and ATM Solutions, Inc. (incorporated herein by reference to Exhibit 10.6 of Form 10-Q for the quarter ended September 30, 2008) | ||
h) Cash Provisioning Agreement, dated October 31, 2008, by and among U.S. Bank National Association, doing business as Elan Financial Services, TRM ATM Corporation and Mount Vernon Money Center (incorporated herein by reference to Exhibit 10.7 of Form 10-Q for the quarter ended September 30, 2008) | ||
10.24 | Services Agreement dated November 3, 2008, by and among U.S. Bank National Association doing business as Elan Financial Services, TRM ATM Corporation, and eFunds Corporation (incorporated herein by reference to Exhibit 10.9 of Form 10-Q for the quarter ended September 30, 2008) | |
10.25 | Irrevocable Letter of Credit dated October 31, 2008 from Wells Fargo Bank, N.A. in favor of U.S. Bank National Association (incorporated herein by reference to Exhibit 10.10 of Form 10-Q for the quarter ended September 30, 2008) | |
21.1 | Subsidiaries of the Registrant | |
23.1 | Consent of Friedman LLP | |
31.1 | Certification of Chief Executive Officer pursuant to Rules 13a-14a and 15d-14a of the Securities and Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2 | Certification of Chief Financial Officer pursuant to Rules 13a-14a and 15d-14a of the Securities and Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1 | Certification of Chief Executive Officer of TRM Corporation pursuant to 18 U.S.C. Section 1350 | |
32.2 | Certification of Chief Financial Officer of TRM Corporation pursuant to 18 U.S.C. Section 1350 |
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in Cherry Hill, New Jersey, on March 28, 2011.
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ACCESS TO MONEY, INC. | ||
By: /s/ Richard B. Stern |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 28, 2011:
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Signature | Title | |
/s/ Richard B. Stern![]() |
President and Chief Executive Officer (Principal Executive Officer) |
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/s/ Michael J. Dolan![]() |
Chief Financial Officer (Principal Financial and Accounting Officer) |
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/s/ Douglas B. Falcone![]() |
Director | |
/s/ Ethan S. Buyon![]() |
Director | |
/s/ Thomas S. McNamara![]() |
Director | |
/s/ Kenneth Paull![]() |
Director | |
/s/ Michael E. Venezia![]() |
Director |
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Exhibit Number |
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21.1 | Subsidiaries of the Registrant | |
23.1 | Consent of Friedman LLP | |
31.1 | Certification of Chief Executive Officer pursuant to Rules 13a-14a and 15d-14a of the Securities and Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2 | Certification of Chief Financial Officer pursuant to Rules 13a-14a and 15d-14a of the Securities and Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1 | Certification of Chief Executive Officer of TRM Corporation pursuant to 18 U.S.C. Section 1350 | |
32.2 | Certification of Chief Financial Officer of TRM Corporation pursuant to 18 U.S.C. Section 1350 |
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Subsidiary
|
State or Place
of Incorporation
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TRM ATM Corporation
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Oregon
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Access to Money ATM Corporation
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Delaware
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Access to Money Acquisition Corporation
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Delaware
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LJR Consulting Corp.
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New Jersey
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Access to Money – SL, Inc.
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Delaware
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/s/ Friedman LLP
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East Hanover, New Jersey
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March 28, 2011
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1.
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I have reviewed this annual report on Form 10-K for the fiscal year ended December 31, 2010 of Access to Money, Inc.;
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2.
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Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
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3.
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Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
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4.
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The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
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(a)
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Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
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(b)
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Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
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(c)
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Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
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(d)
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Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
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5.
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The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
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(a)
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All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
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(b)
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Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
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Date: March 28, 2011
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By:
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/s/ Richard B. Stern
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Richard B. Stern
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Chief Executive Officer
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1.
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I have reviewed this annual report on Form 10-K for the fiscal year ended December 31, 2010 of Access to Money, Inc.;
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2.
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Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
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3.
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Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
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4.
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The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
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(a)
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Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
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(b)
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Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
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(c)
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Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
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(d)
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Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
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5.
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The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
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(a)
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All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
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(b)
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Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
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Date: March 28, 2011
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By:
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/s/ Michael J. Dolan
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Michael J. Dolan
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Chief Financial Officer
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Dated: March 28, 2011
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By:
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/s/ Richard B. Stern
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Richard B. Stern
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Chief Executive Officer
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Dated: March 28, 2011
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By:
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/s/ Michael J. Dolan
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Michael J. Dolan
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Chief Financial Officer
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