Filed Pursuant to Rule 424(b)(4)

Registration No. 333-145929

PROSPECTUS

 

Cardtronics, Inc.

 

 

 

		Per Share				Total
Public offering price		$	10.00			$	120,000,000
Underwriting discounts and commissions		$	0.70			$	8,400,000
Proceeds, before expenses, to the Company		$	9.30			$	111,600,000

Deutsche Bank Securities	William Blair & Company	Banc of America Securities LLC

JPMorgan	Piper Jaffray	RBC Capital Markets

 

TABLE OF CONTENTS

 

 

 

Dealer Prospectus Delivery Obligation

 

Through and including January 4, 2008 (25 days after the date of this prospectus), all dealers that effect transactions in these securities, whether or not participating in the offering, may be required to deliver a prospectus. This is in addition to the dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions.

 

About this Prospectus

 

You should rely only on the information contained in this prospectus or to which we have referred you, including any free writing prospectus that we file with the SEC relating to this offering. We have not authorized any other person to provide you with different information. We are only offering to sell, and only seeking offers to buy, the common stock in jurisdictions where offers and sales are permitted.

 

The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date.

	•	We have recently seen a decline in the average number of merchant-owned ATMs that we operate in the United States of 14.1% in 2006 and 4.2% during the nine months ended September 30, 2007.
	•	The U.S. has seen a shift in consumer payment trends since the late 1990’s, with more customers now opting for electronic forms of payment (e.g., credit cards and debit cards)

		for their in-store purchases over traditional paper-based forms of payment (e.g., cash and checks).

	•	We have incurred substantial losses in the past and may continue to incur losses in the future.
	•	We currently expect to incur operating losses associated with providing advanced-functionality services through our Vcomtm units within the first 12-18 months subsequent to the 7-Eleven ATM Transaction.
	•	We derive a substantial portion of our revenues from ATMs placed with a small number of merchants, with 7-Eleven comprising 35.8% of our pro forma revenues for the year ended December 31, 2006.
	•	We have a substantial amount of indebtedness. As of September 30, 2007, we had outstanding indebtedness of approximately $408.9 million, which represents approximately 95.9% of our total capitalization of $426.4 million.

Common stock offered		12,000,000 shares
Total offering		12,000,000 shares
Common stock outstanding after the offering		38,566,207 shares (31.1% of which are the shares being offered in this offering)
Use of proceeds		Our net proceeds from this offering, after deducting underwriting discounts and commissions and estimated offering expenses, will be approximately $110.1 million.
		We intend to use the net proceeds we receive from this offering to pay down indebtedness outstanding under our credit facility. See “Use of Proceeds.”
		We will not receive any of the proceeds from the sale of shares of our common stock by certain stockholders if the underwriters exercise their over-allotment option. See “Principal Stockholders.”
Dividend policy		We do not expect to pay any dividends on our common stock for the foreseeable future.
Nasdaq Global Market symbol		“CATM”
Risk Factors		See “Risk Factors” beginning on page 15 of this prospectus for a discussion of factors that you should carefully consider before deciding to invest in shares of our common stock.

	•	4,990,489 shares of common stock that will be issuable upon the exercise of stock options outstanding under the 2001 Stock Incentive Plan subsequent to the offering;
	•	an aggregate of 40,082 shares of common stock reserved for future issuance under our 2001 Stock Incentive Plan; and
	•	any shares of common stock reserved for future issuance under our 2007 Stock Incentive Plan, which was approved in August 2007.

																										Pro Forma
														Pro Forma												Nine Months
														Year Ended				Nine Months Ended								Ended
		Years Ended December 31,												December 31,				September 30,								September 30,
		2004				2005				2006				2006				2006				2007				2007
Consolidated Statements of Operations Data:		(in thousands, except share, per share, and per withdrawal transaction statistics)
Revenues:
ATM operating revenues		$	182,711			$	258,979			$	280,985			$	416,961			$	209,542			$	251,854			$	331,167
Vcomtm operating revenues (1)			—				—				—				27,686				—				685				8,882
ATM product sales and other revenues			10,204				9,986				12,620				12,620				9,218				9,805				9,805
Total revenues			192,915				268,965				293,605				457,267				218,760				262,344				349,854
Cost of revenues:
Cost of ATM operating revenues (exclusive of depreciation, accretion, and amortization, shown separately below)(2)(3)(4)			143,504				199,767				209,850				309,433				157,225				191,046				249,891
Cost of Vcomtm operating revenues			—				—				—				16,309				—				2,644				11,770
Cost of ATM product sales and other revenues			8,703				9,681				11,443				11,443				8,142				9,196				9,196
Total cost of revenues			152,207				209,448				221,293				337,185				165,367				202,886				270,857
Gross profit			40,708				59,517				72,312				120,082				53,393				59,458				78,997
Operating expenses:
Selling, general, and administrative expenses (5)(6)			13,571				17,865				21,667				27,580				15,709				20,985				23,422
Depreciation and accretion expense			6,785				12,951				18,595				23,702				14,072				18,541				21,357
Amortization expense (7)			5,508				8,980				11,983				23,297				9,610				14,062				18,903
Total operating expenses			25,864				39,796				52,245				74,579				39,391				53,588				63,682
Income from operations			14,844				19,721				20,067				45,503				14,002				5,870				15,315
Other (income) expense:
Interest expense, net (8)			5,235				22,426				25,072				39,333				18,769				21,592				29,172
Other (9)			228				983				(4,986	)			(4,986	)			(868	)			751				751
Total other expense			5,463				23,409				20,086				34,347				17,901				22,343				29,923
Income (loss) before income taxes			9,381				(3,688	)			(19	)			11,156				(3,899	)			(16,473	)			(14,608	)
Income tax provision (benefit)			3,576				(1,270	)			512				4,658				(1,217	)			3,212				3,212
Net income (loss)			5,805				(2,418	)			(531	)			6,498				(2,682	)			(19,685	)			(17,820	)
Preferred stock dividends and accretion expense			2,312				1,395				265				265				199				200				200
Net income (loss) available to common stockholders		$	3,493			$	(3,813	)		$	(796	)		$	6,233			$	(2,881	)		$	(19,885	)		$	(18,020	)
Net income (loss) per common share
Basic		$	1.56			$	(2.16	)		$	(0.46	)		$	3.56			$	(1.64	)		$	(11.28	)		$	(10.23	)
Diluted		$	1.47			$	(2.16	)		$	(0.46	)		$	2.17			$	(1.64	)		$	(11.28	)		$	(10.23	)
Weighted average shares outstanding
Basic			2,238,801				1,766,419				1,749,328				1,749,328				1,752,442				1,762,200				1,762,200
Diluted			2,372,204				1,766,419				1,749,328				2,872,271				1,752,442				1,762,200				1,762,200

																										Pro Forma
														Pro Forma												Nine Months
														Year Ended				Nine Months Ended								Ended
		Years Ended December 31,												December 31,				September 30,								September 30,
		2004				2005				2006				2006				2006				2007				2007
Pro forma share and per share data(10):
Net income (loss) per common share:
Basic		$	0.20			$	(0.27	)		$	(0.06	)		$	0.45			$	(0.21	)		$	(1.41	)		$	(1.28	)
Diluted		$	0.18			$	(0.27	)		$	(0.06	)		$	0.27			$	(0.21	)		$	(1.41	)		$	(1.28	)
Weighted average shares outstanding:
Basic			17,904,297				14,126,530				13,989,849				13,989,849				14,014,753				14,092,794				14,092,794
Diluted			18,971,157				14,126,530				13,989,849				22,970,328				14,014,753				14,092,794				14,092,794
Consolidated Statements of Cash Flows Data:
Cash flows from operating activities		$	20,466			$	33,227			$	25,446							$	16,867			$	35,189
Cash flows from investing activities		$	(118,926	)		$	(139,960	)		$	(35,973	)						$	(25,933	)		$	(179,469	)
Cash flows from financing activities		$	94,318			$	107,214			$	11,192							$	7,773			$	147,693
Other Financial Data (unaudited):
EBITDA (11)		$	26,909			$	40,669			$	55,631			$	97,488			$	38,552			$	37,722			$	54,824
Capital expenditures (12):
Maintenance capital expenditures		$	2,354			$	1,680			$	2,384			$	9,599			$	1,910			$	5,740			$	6,611
Growth capital expenditures			17,393				30,246				33,707				45,818				24,111				39,598				43,301
Total capital expenditures		$	19,747			$	31,926			$	36,091			$	55,417			$	26,021			$	45,338			$	49,912
Operating Data (unaudited):
Average number of transacting ATMs(13)			17,936				26,164				25,778				31,301				25,913				27,149				31,033
Total transactions (in thousands)			111,577				156,851				172,808				264,431				128,539				166,183				222,360
Total withdrawal transactions (in thousands)			86,821				118,960				125,078				192,107				93,756				113,934				155,100
Per withdrawal transaction:
ATM operating revenues		$	2.10			$	2.18			$	2.25			$	2.17			$	2.23			$	2.21			$	2.14
ATM operating gross profit (exclusive of depreciation, accretion, and amortization)(4)(14)		$	0.45			$	0.50			$	0.57			$	0.56			$	0.56			$	0.53			$	0.52
ATM operating gross profit margin (exclusive of depreciation, accretion, and amortization)(4)			21.4	%			22.9	%			25.3	%			25.8	%			25.0	%			24.1	%			24.5	%

										As of
		As of December 31,								September 30, 2007
		2005				2006				Actual				As Adjusted(15)
		(in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents		$	1,699			$	2,718			$	6,118			$	10,618
Total assets			343,751				367,756				562,201				566,701
Total long-term debt and capital lease obligations, including current portion			247,624				252,895				408,910				303,310
Preferred stock(16)			76,329				76,594				76,794				—
Total stockholders’ equity (deficit)			(49,084	)			(37,168	)			(59,329	)			127,565

(1)		Includes upfront placement fee revenues of $18.7 million and $4.8 million for the pro forma year ended December 31, 2006 and the pro forma nine months ended September 30, 2007, respectively, received by 7-Eleven related to the acquired Vcomtm operations, of which $18.0 million and $4.2 million, respectively, relate to arrangements that ended prior to our acquisition and thus, are not expected to continue in the future.
(2)		Includes expense reductions of $7.5 million and $4.4 million for the pro forma year ended December 31, 2006 and pro forma nine months ended September 30, 2007, respectively. These amounts reflect the pro forma purchase accounting adjustments made with respect to certain unfavorable leases and an unfavorable contract assumed in connection with the 7-Eleven ATM Transaction. Although these adjustments will serve to reduce our future expense recorded for the cost of ATM operating revenues, we will still be required to pay the higher rates stipulated in the assumed leases and contract for the remaining terms of such agreements, the substantial majority of which expire in 2009.
(3)		Includes $0.9 million of inventory adjustments for the year ended December 31, 2006 (both on a historical and pro forma basis), the majority of which related to our Triple-DES upgrade efforts. Also includes $1.7 million of costs incurred related to our efforts to convert our ATM portfolio over to our in-house transaction processing switch and $0.5 million of inventory cost adjustments related to our Triple-DES upgrade efforts for the nine months ended September 30, 2007 (both on a historical and pro forma basis).
(4)		Excludes effects of depreciation, accretion, and amortization expense of $11.4 million, $20.6 million, and $29.2 million for the years ended December 31, 2004, 2005, and 2006, respectively, $45.6 million for the pro forma year ended December 31, 2006, $22.6 million and $31.3 million for the nine month periods ended September 30, 2006 and 2007, respectively, and $39.0 million for the pro forma nine month period ended September 30, 2007.
(5)		Includes non-cash stock-based compensation totaling $1.0 million, $2.2 million, and $0.8 million in 2004, 2005 and 2006, respectively, $0.6 million for the nine months ended September 30, 2006, $0.7 million for the nine months ended September 30, 2007, and $0.8 million and $0.7 million for the pro forma year ended December 31, 2006 and the pro forma nine months ended September 30, 2007, respectively, related to options granted to certain employees and a restricted stock grant made to our Chief Executive Officer in 2003. Additionally, the 2004 results include a bonus of $1.8 million paid to our Chief Executive Officer related to the tax liability associated with such restricted stock grant. See Note 3 to our consolidated financial statements.
(6)		Includes the write-off in 2004 of approximately $1.8 million in costs associated with our decision to not pursue a financing transaction to completion.
(7)		Includes pre-tax impairment charges of $1.2 million and $2.8 million in 2005 and 2006, respectively, and $2.8 million and $5.3 million for the nine months ended September 30, 2006 and 2007, respectively, and the pro forma year ended December 31, 2006 and the pro forma nine months ended September 30, 2007, respectively.
(8)		Includes the write-off of $5.0 million and $0.5 million of deferred financing costs in 2005 and 2006, respectively, and $0.5 million for the nine months ended September 30, 2006 as a result of (i) amendments to our existing credit facility and the repayment of our existing term loans in August 2005 and (ii) certain modifications made to our revolving credit facility in February 2006.
(9)		The “Other“ line item in 2004 and 2005 primarily consists of losses on the sale or disposal of assets. “Other“ in 2006 (both on a historical and pro forma basis) reflects the recognition of approximately $4.8 million in other income primarily related to settlement proceeds received from Winn-Dixie Stores, Inc. (“Winn-Dixie”), one of our merchant customers, as part of that company’s successful emergence from bankruptcy, a $1.1 million contract termination payment received from one of our customers, and a $0.5 million payment received from one of our customers related to the sale of a number of its stores to another party, which were partially offset by $1.6 million of losses on the sale or disposal of fixed assets during the year. Finally, “Other“ for the nine months ended September 30, 2007 (both on a historical and pro forma basis) includes $1.5 million of losses on the disposal of fixed assets, which were partially offset by $0.6 million of gains related to the sale of the Winn-Dixie equity securities, which we received from Winn-Dixie in 2006 as a part of its bankruptcy settlement.
(10)		Gives effect to the anticipated stock split of our common stock in connection with the offering. The stock split reflected in the above pro forma net income (loss) per common share amounts reflects (i) the conversion mechanics applicable to the Series B Convertible Preferred Stock held by TA Associates, as described in “Certain Relationships and Related Party Transactions,” (ii) the conversion of the remaining Series B Convertible Preferred Stock into an equal number of common shares, and (iii) a resulting 7.9973 to 1 stock split for all common shares, which will be effected immediately prior to the closing of the offering.
(11)		EBITDA represents net income before interest expense, income tax expense, and depreciation, accretion and amortization expense. This term, as we define it, may not be comparable to similarly titled measures employed by other companies and is not a measure of performance calculated in accordance with accounting principles generally accepted in the United States, or GAAP. EBITDA should not be considered in isolation or as a substitute for operating income, net income, cash flows from operating, investing, and financing activities or other income or cash flow statement data prepared in accordance with GAAP.

		We believe EBITDA is useful to an equity investor in evaluating our operating performance because:
		• it is used by investors to measure a company’s operating performance without regard to items such as interest expense, depreciation, accretion, and amortization, which can vary substantially from company to company within our industry depending upon accounting methods and book values of assets, capital structures and the method by which the assets were acquired; and
		• it helps investors to more meaningfully evaluate and compare the results of our operations from period to period by removing the impact of our capital structure and asset base from our operating results.
		Our management uses EBITDA:
		• as a measure of operating performance because it assists them in comparing our performance on a consistent basis as it removes the impact of our capital structure and asset base from our operating results;
		• as a measure for planning and forecasting overall expectations and for evaluating actual results against such expectations;
		• to assess compliance with financial ratios and covenants included in our credit agreement;
		• in communications with lenders concerning our financial performance; and
		• as a performance measure by which our management is evaluated and compensated.
		Management compensates for the limitations of EBITDA as an analytical tool by reviewing the comparable GAAP measures, understanding the differences between the measures, and incorporating this knowledge into management’s decision-making process.
		The following table provides a reconciliation of EBITDA to net income (loss), its most directly comparable GAAP financial measure, for each of the periods presented:

																										Pro Forma
														Pro Forma												Nine Months
														Year Ended				Nine Months Ended								Ended
		Years Ended December 31,												December 31,				September 30,								September 30,
		2004				2005				2006				2006				2006				2007				2007
		(in thousands)
Net income (loss)		$	5,805			$	(2,418	)		$	(531	)		$	6,498			$	(2,682	)		$	(19,685	)		$	(17,820	)
Interest expense			5,235				22,426				25,072				39,333				18,769				21,592				29,172
Income tax provision (benefit)			3,576				(1,270	)			512				4,658				(1,217	)			3,212				3,212
Depreciation, amortization, and accretion			12,293				21,931				30,578				46,999				23,682				32,603				40,260
EBITDA		$	26,909			$	40,669			$	55,631			$	97,488			$	38,552			$	37,722			$	54,824

(12)		Capital expenditure amounts for Cardtronics Mexico are reflected gross of any minority interest amounts. Additionally, the 2006 capital expenditure amount excludes our initial $1.0 million investment in Cardtronics Mexico.
(13)		The historical 2007 average number of transacting ATMs for the nine months ended September 30, 2007 includes the ATMs acquired in the 7-Eleven ATM Transaction beginning from the acquisition date (July 20, 2007) and continuing through September 30, 2007. The historical 2006 average numbers of transacting ATMs for the year ended December 31, 2006 and nine months ended September 30, 2006 includes the ATMs of our Mexico operations beginning from the acquisition date (February 8, 2006) and continuing through December 31, 2006 and September 30, 2006, respectively.
(14)		The inclusion in “Cost of ATM operating revenues” of the depreciation, accretion, and amortization expense referenced in Note 4 above would have reduced our ATM operating gross profit per withdrawal transaction by $0.13, $0.17, and $0.23 for the years ended December 31, 2004, 2005, and 2006, respectively, $0.24 for the pro forma year ended December 31, 2006, $0.24 and $0.27 for the nine month periods ended September 30, 2006 and 2007, respectively, and $0.25 for the pro forma nine month period ended September 30, 2007.
(15)		The as adjusted balance sheet figures give effect to (1) our sale of 12,000,000 shares of our common stock in this offering, (2) the application of the estimated net proceeds from the offering as discussed under “Use of Proceeds” and (3) the conversion of all Series B Convertible Preferred Stock into common stock, which includes the effect of an additional share issuance to TA Associates concurrent with the closing of this offering and (4) a stock split in the form of a stock dividend of our common stock immediately prior to the closing of this offering. See “Certain Relationships and Related Party Transactions.”
(16)		The amount reflected on our balance sheet is shown net of issuance costs of $1.4 million as of December 31, 2006 and $1.2 million as of September 30, 2007. The aggregate redemption price for the preferred stock was $78.0 million as of September 30, 2007.

 

RISK FACTORS

 

You should carefully consider the following risk factors and all other information contained in this prospectus before purchasing our common stock. We believe that the risks and uncertainties described below are the material risks and uncertainties facing us. Additional risks and uncertainties that we are unaware of, or that we currently deem immaterial, also may become important factors that affect us.

 

If any of the following risks occur, our business, financial condition or results of operations could be materially and adversely affected. In that case, the trading price of our common stock could decline, and you may lose some or all of your investment.

 

Risks Related to Our Business

 

We depend on ATM transaction fees for substantially all of our revenues, and our revenues would be reduced by a decline in the usage of our ATMs or a decline in the number of ATMs that we operate.

 

Transaction fees charged to cardholders and their financial institutions for transactions processed on our ATMs, including surcharge and interchange transaction fees, have historically accounted for most of our revenues. We expect that revenues from ATM transaction fees, including fees we receive through our bank and network branding surcharge-free offerings, will continue to account for a substantial majority of our revenues for the foreseeable future. Consequently, our future operating results will depend on (i) the continued market acceptance of our services in our target markets, (ii) maintaining the level of transaction fees we receive, (iii) our ability to install, acquire, operate and retain more ATMs, (iv) continued usage of our ATMs by cardholders, and (v) our ability to continue to expand our surcharge-free offerings. Additionally, it is possible that alternative technologies to our ATM services will be developed and implemented. If such alternatives are successful, we will likely experience a decline in the usage of our ATMs. Moreover, surcharge fees are set by negotiation between us and our merchant partners and could change over time. Further, growth in surcharge-free ATM networks and widespread consumer bias toward such networks could adversely affect our revenues, even though we maintain our own surcharge-free offerings.

 

We have also recently seen a decline in the average number of ATMs that we operate in the United States. Such decline, which totaled approximately 6.3% in 2006 and 2.0% during the nine months ended September 30, 2007, exclusive of ATMs acquired in the 7-Eleven ATM Transaction, is primarily due to customer losses experienced in our merchant-owned ATM business, offset somewhat by new Company-owned ATM locations that were deployed during the year. The decline in ATMs on the merchant-owned side of the business of 14.1% in 2006 and 4.2% during the nine months ended September 30, 2007 was due to (i) an internal initiative launched by us to identify and eliminate certain underperforming accounts, and (ii) increased competition from local and regional independent ATM service organizations.

 

We cannot assure you that our ATM transaction fees will not decline in the future. Accordingly, a decline in usage of our ATMs by ATM cardholders or in the levels of fees received by us in connection with such usage, or a decline in the number of ATMs that we operate, would have a negative impact on our revenues and would limit our future growth.

 

The proliferation of payment options other than cash in the United States, including credit cards, debit cards, and stored-value cards, could result in a reduced need for cash in the marketplace and a resulting decline in the usage of our ATMs.

 

The U.S. has seen a shift in consumer payment trends since the late 1990’s, with more customers now opting for electronic forms of payment (e.g., credit cards and debit cards) for

their in-store purchases over traditional paper-based forms of payment (e.g., cash and checks). Additionally, certain merchants are now offering free cash back at the point-of-sale for customers that utilize debit cards for their purchases, thus providing an additional incentive for consumers to use such cards. According to the Study of Consumer Payment Preferences for 2005/2006, as prepared by Dove Consulting and the American Bankers Association, paper-based forms of payment declined from approximately 57% of all in-store payments made in 1999 to 44% in 2005. While most of the increase in electronic forms of payment during this period came at the expense of traditional checks, the use of cash to fund in-store payments declined from 39% in 1999 to 33% in 2001. Although the use of cash has been relatively stable since that date (remaining at roughly 33% of all in-store payments through 2005), continued growth in electronic payment methods (most notably debit cards and stored-value cards) could result in a reduced need for cash in the marketplace and a resulting decline in the usage of our ATMs.

 

We have incurred substantial losses in the past and may continue to incur losses in the future. The conversion of our Series B Convertible Preferred Stock in connection with this offering will contribute to additional losses.

 

We have incurred net losses in three of the past five years, and have incurred a net loss of $19.7 million for the nine months ended September 30, 2007. As of September 30, 2007, we had an accumulated deficit of $23.0 million. There can be no guarantee that we will achieve profitability. If we achieve profitability, given the competitive and evolving nature of the industry in which we operate, we may not be able to sustain or increase such profitability on a quarterly or annual basis. In connection with the conversion of our Series B Convertible Preferred Stock into common stock concurrent with the closing of this offering, TA Associates will receive additional shares of common stock with a total value of approximately $35.1 million. These incremental shares result in an adjustment to the stock split ratio that will be applied to all existing stockholders. As a result of this conversion, we will recognize for accounting purposes a one-time, non-cash reduction in net income available to common stockholders in this amount during the reporting period in which this offering is completed.

 

Interchange fees, which comprise a substantial portion of our ATM transaction revenues, may be lowered at the discretion of the various EFT networks through which our ATM transactions are routed, thus reducing our future revenues.

 

Interchange fees, which represented approximately 26.2% and 27.4% of our total pro forma ATM operating revenues for the year ended December 31, 2006 and the nine months ended September 30, 2007, respectively, are set by the various EFT networks through which our ATM transactions are routed. Accordingly, if such networks decided to lower the interchange rates paid to us for ATM transactions routed through their networks, our future ATM transaction revenues would decline.

 

We derive a substantial portion of our revenue from ATMs placed with a small number of merchants. If one or more of our top merchants were to cease doing business with us, or to substantially reduce its dealings with us, our revenues could decline.

 

For the year ended December 31, 2006 and the nine months ended September 30, 2007, we derived approximately 46.0% and 44.5%, respectively, of our total pro forma revenues from ATMs placed at the locations of our five largest merchants. Of this amount, 7-Eleven represents the single largest merchant customer in our portfolio, comprising approximately 35.8% and 33.6% of our total pro forma revenues for the year ended December 31, 2006 and nine months ended September 30, 2007, respectively. In addition to 7-Eleven, our next four largest merchant customers are CVS, Walgreens, Target, and ExxonMobil, and they collectively

generated approximately 10.2% and 12.0% of our total pro forma revenues for the year ended December 31, 2006 and nine months ended September 30, 2007, respectively. Accordingly, a significant percentage of our future revenues and operating income will be dependent upon the successful continuation of our relationship with 7-Eleven and these other four merchants.

 

The loss of any of our largest merchants, or a decision by any one of them to reduce the number of our ATMs placed in their locations, would decrease our revenues. These merchants may elect not to renew their contracts when they expire. As noted above, our top five merchants (based on our total revenues) are 7-Eleven, CVS, Walgreens, Target, and ExxonMobil, and the expiration dates of our contracts with these merchants are July 20, 2017; September 21, 2011; December 31, 2013; January 31, 2012; and December 31, 2013, respectively. Even if such contracts are renewed, the renewal terms may be less favorable to us than the current contracts. If any of our five largest merchants fails to renew its contract upon expiration, or if the renewal terms with any of them are less favorable to us than under our current contracts, it could result in a decline in our revenues and gross profits.

 

We rely on EFT network providers, transaction processors, and maintenance providers; if they fail or no longer agree to provide their services, we could suffer a temporary loss of transaction revenues or the permanent loss of any merchant contract affected by such disruption.

 

We rely on EFT network providers and have agreements with transaction processors and maintenance providers and have more than one such provider in each of these key areas. These providers enable us to provide card authorization, data capture, settlement, and ATM maintenance services to the merchants we serve. Typically, these agreements are for periods of up to two or three years each. If we improperly manage the renewal or replacement of any expiring vendor contract, or if our multiple providers in any one key area failed to provide the services for which we have contracted and disruption of service to our merchants occurs, our relationship with those merchants could suffer. Further, if such disruption of service is significant, the affected merchants may seek to terminate their agreements with us.

 

If we, our transaction processors, our EFT networks or other service providers experience system failures, the ATM products and services we provide could be delayed or interrupted, which would harm our business.

 

Our ability to provide reliable service largely depends on the efficient and uninterrupted operations of our in-house transaction processing switch, third-party transaction processors, telecommunications network systems, and other service providers. Accordingly, any significant interruptions could severely harm our business and reputation and result in a loss of revenue. Additionally, if any such interruption is caused by us, especially in those situations in which we serve as the primary transaction processor, such interruption could result in the loss of the affected merchants or damage our relationships with such merchants. Our systems and operations and those of our transaction processors and our EFT network and other service providers could be exposed to damage or interruption from fire, natural disaster, unlawful acts, terrorist attacks, power loss, telecommunications failure, unauthorized entry, and computer viruses. We cannot be certain that any measures we and our service providers have taken to prevent system failures will be successful or that we will not experience service interruptions.

If not done properly, the transitioning of our ATMs from third-party processors to our own in-house transaction processing switch could lead to service interruptions and/or the inaccurate settlement of funds between the various parties to our ATM transactions, which would harm our business and our relationships with our merchants.

 

We are currently transitioning the processing of transactions conducted on our ATMs from third-party processors to our own in-house transaction processing switch, and we expect to have a substantial number of our domestic Company-owned and merchant-owned ATMs converted over to that switch by the end of 2007. We currently have very limited experience in ATM transaction processing and have just recently hired additional personnel with experience in running an ATM transaction processing operation, including personnel we hired in connection with the 7-Eleven ATM Transaction. Because this is a relatively new business for us, there is an increased risk that our processing conversion efforts will not be successful, thus resulting in service interruptions for our merchants. Furthermore, if not performed properly, the processing of transactions conducted on our ATMs could result in the inaccurate settlement of funds between the various parties to those transactions and expose us to increased liability.

 

Security breaches could harm our business by compromising customer information and disrupting our ATM transaction processing services and damage our relationships with our merchant customers and expose us to liability.

 

As part of our ATM transaction processing services, we electronically process, store, and transmit sensitive cardholder information utilizing our ATMs. Unauthorized access to our computer systems could result in the theft or publication of such information or the deletion or modification of sensitive records, and could cause interruptions in our operations. While such security risks are mitigated by the use of encryption techniques, any inability to prevent security breaches could damage our relationships with our merchant customers and expose us to liability.

 

Computer viruses could harm our business by disrupting our ATM transaction processing services, causing non-compliance with network rules and damaging our relationships with our merchant customers.

 

Computer viruses could infiltrate our systems, thus disrupting our delivery of services and making our applications unavailable. Although we utilize industry standard anti-virus software and intrusion detection solutions for all of our key applications, any inability to prevent computer viruses could damage our relationships with our merchant customers and cause us to be in non-compliance with applicable network rules and regulations.

 

Operational failures in our ATM transaction processing facilities could harm our business and our relationships with our merchant customers.

 

An operational failure in our ATM transaction processing facilities could harm our business and damage our relationships with our merchant customers. Damage or destruction that interrupts our ATM processing services could damage our relationships with our merchant customers and could cause us to incur substantial additional expense to repair or replace damaged equipment. We have installed back-up systems and procedures to prevent or react to such disruptions. However, a prolonged interruption of our services or network that extends for more than several hours (i.e., where our backup systems are not able to recover) could result in data loss or a reduction in revenues as our ATMs would be unable to process transactions. In addition, a significant interruption of service could have a negative impact on our reputation and could cause our present and potential merchant customers to choose alternative ATM service providers.

Errors or omissions in the settlement of merchant funds could damage our relationships with our merchant customers and expose us to liability.

 

We are responsible for maintaining accurate bank account information for our merchant customers and accurate settlements of funds into these accounts based on the underlying transaction activity. This process relies on accurate and authorized maintenance of electronic records. Although we have certain controls in place to help ensure the safety and accuracy of our records, errors or unauthorized changes to these records could result in the erroneous or fraudulent movement of funds, thus damaging our relationships with our merchant customers and exposing us to liability.

 

We rely on third parties to provide us with the cash we require to operate many of our ATMs. If these third parties were unable or unwilling to provide us with the necessary cash to operate our ATMs, we would need to locate alternative sources of cash to operate our ATMs or we would not be able to operate our business.

 

In the U.S., we have historically relied on agreements with Bank of America, N.A. (“Bank of America”) and Palm Desert National Bank (“PDNB”) to provide us with the cash that we use in approximately 11,600 of our domestic ATMs where cash is not provided by the merchant (“vault cash”). In July 2007, we entered into a separate vault cash agreement with Wells Fargo, N. A. (“Wells Fargo”) to supply us with the cash that we use in the 5,500 ATMs and Vcom^tm units acquired in the 7-Eleven ATM Transaction. As of September 30, 2007, the balance of cash held in our domestic ATMs was approximately $740.6 million, 50.8% of which was supplied by Bank of America and 48.5% by Wells Fargo.

 

Under our agreements with Bank of America, Wells Fargo, and PDNB, we pay a fee for our usage of this cash based on the total amount of vault cash that we are using at any given time. At all times during this process, legal and equitable title to the cash is held by the cash providers, and we have no access or right to the cash. Each provider has the right to demand the return of all or any portion of its cash at any time upon the occurrence of certain events beyond our control, including certain bankruptcy events of us or our subsidiaries, or a breach of the terms of our cash provider agreements. Our current agreements with Bank of America and Wells Fargo expire in October 2008 and July 2009, respectively. However, Bank of America can terminate its agreement with us upon 360 days prior written notice, and Wells Fargo can terminate its agreement with us upon 180 days prior written notice.

 

We rely on an agreement with Alliance & Leicester Commercial Bank (“ALCB”) to provide us with all of the cash that we use in approximately 1,740 of our U.K. ATMs where cash is not provided by the merchant. The balance of cash held in our U.K. ATMs as of September 30, 2007 was approximately $140.4 million. Under the agreement with ALCB, we pay a fee for our usage of this cash based on the total amount of vault cash that we are using at any time. At all times during this process, legal and equitable title of the cash is held by ALCB, and we have no access or right to the cash. Our current agreement with ALCB, which expires on January 1, 2009, contains certain provisions, which, if triggered, may allow ALCB to terminate their agreement with us and demand the return of its cash upon 180 days prior written notice.

 

In Mexico, our current ATM cash is provided by Bansi, S.A. Institución de Banca Multiple (“Bansi”), a regional bank in Mexico and a minority interest owner in Cardtronics Mexico. We currently have an agreement with Bansi to supply us with cash of up to $10.0 million U.S. that expires on March 31, 2008. As of September 30, 2007, the balance of cash held in our ATMs in Mexico was approximately $6.3 million.

 

If our cash providers were to demand return of their cash or terminate their arrangements with us and remove their cash from our ATMs, or if they were to fail to provide us with cash as and when we need it for our ATM operations, our ability to operate these ATMs would be

jeopardized, and we would need to locate alternative sources of cash in order to operate these ATMs.

 

Changes in interest rates could increase our operating costs by increasing interest expense under our credit facilities and our vault cash rental costs.

 

Interest on our outstanding indebtedness under our revolving credit facilities is based on floating interest rates, and our vault cash rental expense is based on market rates of interest. As a result, our interest expense and cash management costs are sensitive to changes in interest rates. Vault cash is the cash we use in our machines in cases where cash is not provided by the merchant. We pay rental fees on the average amount of vault cash outstanding in our ATMs under floating rate formulas based on the London Interbank Offered Rate (“LIBOR”) for Bank of America and PDNB in the U.S. and ALCB in the U.K., and based on the federal funds effective rate for Wells Fargo in the U.S. Additionally, in Mexico, we pay a monthly rental fee to our vault cash provider under a formula based on the Mexican Interbank Rate (“TIIE”). As of September 30, 2007, the balances of cash held in our domestic, U.K., and Mexico ATMs were $740.6 million, $140.4 million, and $6.3 million, respectively. Recent increases in interest rates in the U.S., the U.K., and Mexico have resulted in increases in our interest expense under our credit facility as well as our vault cash rental expense. Although we currently hedge a significant portion of our vault cash interest rate risk related to our domestic operations through December 31, 2010, including a portion of the vault cash associated with the 7-Eleven ATM Transaction, we may not be able to enter into similar arrangements for similar amounts in the future. Furthermore, we have not currently entered into any derivative financial instruments to hedge our variable interest rate exposure in the U.K. or Mexico. Any significant future increases in interest rates could have a negative impact on our earnings and cash flow by increasing our operating costs and expenses. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Disclosure about Market Risk; Interest Rate Risk.”

 

We maintain a significant amount of cash within our Company-owned ATMs, which is subject to potential loss due to theft or other events, including natural disasters.

 

As of September 30, 2007, there was approximately $887.3 million in vault cash held in our domestic and international ATMs. Although legal and equitable title to such cash is held by the cash providers, any loss of such cash from our ATMs through theft or other means is typically our responsibility (other than thefts resulting from the use of fraudulent debit or credit cards, which are typically the responsibility of the issuing financial institutions). While we maintain insurance to cover a significant portion of any losses that may be sustained by us as a result of such events, we are still required to fund a portion of such losses through the payment of the related deductible amounts under our insurance policies. Furthermore, although thefts and losses suffered by our ATMs have been relatively minor and infrequent in the past, any increase in the frequency and/or amounts of such thefts and losses could negatively impact our operating results as a result of higher deductible payments and increased insurance premiums. Additionally, any damage sustained to our merchant customers’ store locations in connection with any ATM-related thefts, if extensive and frequent enough in nature, could negatively impact our relationships with such merchants and impair our ability to deploy additional ATMs in those locations (or new locations) with those merchants in the future.

 

The ATM industry is highly competitive and such competition may increase, which may adversely affect our profit margins.

 

The ATM business is and can be expected to remain highly competitive. While our principal competition comes from national and regional financial institutions, we also compete with other independent ATM companies in the United States and the United Kingdom. Several

of our competitors, namely national financial institutions, are larger, more established, and have greater financial and other resources than we do. Our competitors could prevent us from obtaining or maintaining desirable locations for our ATMs, cause us to reduce the surcharge revenue generated by transactions at our ATMs, or cause us to pay higher merchant fees, thereby reducing our profits. In addition to our current competitors, additional competitors may enter the market. We can offer no assurance that we will be able to compete effectively against these current and future competitors. Increased competition could result in transaction fee reductions, reduced gross margins and loss of market share.

 

In the United Kingdom, we face competition from several companies with operations larger than our own. Many of these competitors have financial and other resources substantially greater than our U.K. subsidiary.

 

The election of our merchant customers to not participate in our surcharge-free network offerings could impact the networks’ effectiveness, which would negatively impact our financial results.

 

Financial institutions that are members of our Allpoint and MasterCard^® surcharge-free networks pay a fee in exchange for allowing their cardholders to use selected Cardtronics owned and/or managed ATMs on a surcharge-free basis. The success of these networks is dependent upon the participation by our merchant customers in such networks. In the event a significant number of our merchants elect not to participate in such networks, the benefits and effectiveness of the networks would be diminished, thus potentially causing some of the participating financial institutions to not renew their agreements with us, and thereby negatively impacting our financial results.

 

We may be unable to integrate our recent and future acquisitions in an efficient manner and inefficiencies would increase our cost of operations and reduce our profitability.

 

Our acquisitions involve certain inherent risks to our business, including the following:

 

 

Since April 2001, we have acquired 14 ATM networks and one surcharge-free ATM network. Prior to our E*TRADE Access acquisition in June 2004, we had acquired only the assets of deployed ATM networks, rather than businesses and their related infrastructure. We currently anticipate that our future acquisitions will likely reflect a mix of asset acquisitions and acquisitions of businesses, with each acquisition having its own set of unique characteristics. To the extent that we elect to acquire an existing company or the operations, technology, and personnel of another ATM provider, we may assume some or all of the liabilities associated with the acquired company and face new and added challenges integrating such acquisition into our operations.

 

The 7-Eleven ATM Transaction involves certain inherent risks to our business. Most notably, our existing management, information systems, and resources may be strained due to the size of the 7-Eleven ATM Transaction. Accordingly, we will need to continue to invest in and improve our financial and managerial controls, reporting systems, and procedures as we look to integrate

the acquired 7-Eleven ATM operations. We will also need to hire, train, supervise, and manage new employees. We may be unsuccessful in those efforts, thus hindering our ability to effectively manage the expansion of our operations resulting from this acquisition. Furthermore, the advanced-functionality services we provide through the Vcom^tm units may subject us or our service providers to additional requirements such as permit applications or regulatory filings. As a result, we may need to discontinue certain Vcom^tm operations in certain jurisdictions until such requirements have been fulfilled. Furthermore, if we are unsuccessful in integrating the 7-Eleven ATM Transaction, or if our integration efforts take longer than anticipated, we may not achieve the level of revenues, earnings or cash flows anticipated from such acquisition. If that were to occur, such shortfalls could require us to write down the carrying value of the tangible and intangible assets associated with the acquired operations, which would adversely impact our reported operating results.

 

Any inability on our part to manage effectively our past or future growth could limit our ability to successfully grow the revenue and profitability of our business.

 

Our international operations involve special risks and may not be successful, which would result in a reduction of our gross profits.

 

On a pro forma basis as of December 31, 2006 and on a historical basis as of September 30, 2007, approximately 5.6% and 9.2% of our ATMs were located in the U.K. and Mexico, respectively. Those ATMs contributed 12.8% and 16.9% of our pro forma gross profits (exclusive of depreciation, accretion, and amortization) for the year ended December 31, 2006 and the nine months ended September 30, 2007, respectively, and 13.0% and 17.6% of our pro forma gross profits (inclusive of depreciation, accretion, and amortization) for the year ended December 31, 2006 and the nine months ended September 30, 2007, respectively. We expect to continue to expand in the U.K. and Mexico and potentially into other countries as opportunities arise.

 

Our international operations are subject to certain inherent risks, including:

 

 

Any of these factors could reduce the profitability and revenues derived from our international operations and international expansion.

 

Our proposed expansion efforts into new international markets involve unique risks and may not be successful.

 

We currently plan to expand our operations internationally with a focus on high growth emerging markets, such as Central and Eastern Europe, China, India and Brazil. Because the off-premise ATM industry is relatively undeveloped in these emerging markets, we may not be

successful in these expansion efforts. In particular, many of these markets do not currently employ or support an off-premise ATM surcharging model, meaning that we would have to rely on interchange fees as our primary source of revenue. While we have had some success in deploying non-surcharging ATMs in selected markets (most notably in the United Kingdom), such a model requires significant transaction volumes to make it economically feasible to purchase and deploy ATMs. Furthermore, most of the ATMs in these markets are owned and operated by financial institutions, thus increasing the risk that cardholders would be unwilling to utilize an off-premise ATM with an unfamiliar brand. Finally, the regulatory environments in many of these markets are evolving and unpredictable, thus increasing the risk that a particular deployment model chosen at inception may not be economically viable in the future.

 

We operate in a changing and unpredictable regulatory environment. If we are subject to new legislation regarding the operation of our ATMs, we could be required to make substantial expenditures to comply with that legislation, which may reduce our net income and our profit margins.

 

With its initial roots in the banking industry, the U.S. ATM industry has always been regulated, if not by individual states, then by the rules and regulations of the federal Electronic Funds Transfer Act, which establishes the rights, liabilities, and responsibilities of participants in EFT systems. The vast majority of states have few, if any, licensing requirements. However, legislation related to the U.S. ATM industry is periodically proposed at the state and local level. To date, no such legislation has been enacted that materially adversely affects our business.

 

In the United Kingdom, the ATM industry is largely self-regulating. Most ATMs are part of the LINK network and must operate under the network rules set forth by LINK, including complying with rules regarding required signage and screen messages. Additionally, legislation is proposed from time-to-time at the national level, though nothing to date has been enacted that materially affects our business.

 

Finally, the ATM industry in Mexico has been historically operated by financial institutions. The Central Bank of Mexico (“Banco de Mexico”) supervises and regulates ATM operations of both financial institutions and non-bank ATM deployers. Although, Banco de Mexico’s regulations permit surcharge fees to be charged in ATM transactions, it has not issued specific regulations for the provision of ATM services. In addition, in order for an non-bank ATM deployer to provide ATM services in Mexico, the deployer must be affiliated with Promoción y Operación S.A. de C.V. (“PROSA-RED”), a credit card and debit card proprietary network that transmits information and settles ATM transactions between its participants. As only financial institutions are allowed to be participants of PROSA-RED, Cardtronics Mexico entered into a joint venture with Bansi, who is a member of PROSA-RED. As a financial institution, Bansi and all entities in which it participates, including Cardtronics Mexico, are regulated by the Ministry of Finance and Public Credit (“Secretaria de Hacienda y Crédito Público”) and supervised by the Banking and Securities Commission (“Comisión Nacional Bancaria y de Valores”). Additionally, Cardtronics Mexico is subject to the provisions of the Ley del Banco de Mexico (Law of Banco de Mexico), the Ley de Instituciones de Crédito (Mexican Banking Law), and the Ley para la Transparencia y Ordenamiento de los Servicios Financieros (Law for the Transparency and Organization of Financial Services).

 

We will continue to monitor all such legislation and attempt, to the extent possible, to prevent the passage of such laws that we believe are needlessly burdensome or unnecessary. If regulatory legislation is passed in any of the jurisdictions in which we operate, we could be required to make substantial expenditures which would reduce our net income.

The passing of legislation banning or limiting surcharge fees would severely impact our revenue.

 

Despite the nationwide acceptance of surcharge fees at ATMs, a few consumer activists (most notably in California) have from time to time attempted to impose local bans on surcharge fees. Even in the few instances where these efforts have passed the local governing body (such as with an ordinance adopted by the city of Santa Monica, California), federal courts have overturned these local laws on federal preemption grounds. However, those efforts may resurface and, should the federal courts abandon their adherence to the federal preemption doctrine, those efforts could receive more favorable consideration than in the past. Any successful legislation banning or limiting surcharge fees could result in a substantial loss of revenues and significantly curtail our ability to continue our operations as currently configured.

 

In the United Kingdom, the Treasury Select Committee of the House of Commons published a report regarding surcharges in the ATM industry in March 2005. This committee was formed to investigate public concerns regarding the ATM industry, including (1) adequacy of disclosure to ATM customers regarding surcharges, (2) whether ATM providers should be required to provide free services in low-income areas and (3) whether to limit the level of surcharges. While the committee made numerous recommendations to Parliament regarding the ATM industry, including that ATMs should be subject to the Banking Code (a voluntary code of practice adopted by all financial institutions in the U.K.), the U.K. government did not accept the committee’s recommendations. Despite the rejection of the committee’s recommendations, the U.K. government did sponsor an ATM task force to look at social exclusion in relation to ATM services. As a result of the task force’s findings, approximately 600 additional free-to-use ATMs will be installed in low income areas throughout the U.K. during 2007. While this is less than a two percent increase in free-to-use ATMs through the U.K., there is no certainty that other similar proposals will not be made and accepted in the future. If the legislature or another body with regulatory authority in the U.K. were to impose limits on the level of surcharges for ATM transactions, our revenue from operations in the U.K. would be negatively impacted.

 

In Mexico, surcharging for off-premise ATMs was legalized in late 2003, but was not formally implemented until July 2005. As such, the charging of fees to consumers to utilize off-premise ATMs is a relatively new experience in Mexico. Accordingly, it is too soon to predict whether public concerns over surcharging will surface in Mexico. However, if such concerns were to be raised, and if the applicable legislative or regulatory bodies in Mexico decided to impose limits on the level of surcharges for ATM transactions, our revenue from operations in Mexico would be negatively impacted.

 

The passing of legislation requiring modifications to be made to ATMs could severely impact our cash flows.

 

Under a current ruling of the U.S. District Court, it was determined that the United States’ currencies (as currently designed) violate the Rehabilitation Act, as the paper currencies issued by the U.S. are identical in size and color, regardless of denomination. Under the ruling, the U.S. Treasury Department has been ordered to develop ways in which to differentiate paper currency such that an individual who is visually-impaired would be able to distinguish between the different denominations. While it is still uncertain at this time what the outcome of the appeals process will be, in the event the current ruling is not overturned, participants in the ATM industry (including us) could be forced to incur significant costs to upgrade current machines’ hardware and software components. If required, such capital expenditures could limit our free cash such that we do not have enough cash available for the execution of our growth strategy, research and development costs, or other purposes.

The passing of anti-money laundering legislation could cause us to lose certain merchant accounts and reduce our revenues.

 

Recent concerns by the U.S. federal government regarding the use of ATMs to launder money could lead to the imposition of additional regulations on our sponsoring financial institutions and our merchant customers regarding the source of cash loaded into their ATMs. In particular, such regulations could result in the incurrence of additional costs by individual merchants who load their own cash, thereby making their ATMs less profitable. Accordingly, some individual merchants may decide to discontinue their ATM operations, thus reducing the number of merchant-owned accounts that we currently manage. If such a reduction were to occur, we would see a corresponding decrease in our revenues.

 

A substantial portion of our future revenues and operating profits will be generated by the new 7-Eleven merchant relationship. Accordingly, if 7-Eleven’s financial condition deteriorates in the future and it is required to close some or all of its store locations, or if our ATM placement agreement with 7-Eleven expires or is terminated, our future financial results would be significantly impaired.

 

7-Eleven is now the single largest merchant customer in our portfolio, representing 35.8% and 33.6% of our total pro forma revenues for the year ended December 31, 2006 and nine months ended September 30, 2007, respectively. Accordingly, a significant percentage of our future revenues and operating income will be dependent upon the successful continuation of our relationship with 7-Eleven. If 7-Eleven’s financial condition were to deteriorate in the future and, as a result, it was required to close a significant number of its domestic store locations, our financial results would be significantly impacted. Additionally, while the underlying ATM placement agreement with 7-Eleven has an initial term of 10 years, we may not be successful in renewing such agreement with 7-Eleven upon the end of that initial term, or such renewal may occur with terms and conditions that are not as favorable to us as those contained in the current agreement. Finally, the ATM placement agreement executed with 7-Eleven contains certain terms and conditions that, if we fail to meet such terms and conditions, gives 7-Eleven the right to terminate the placement agreement or our exclusive right to provide certain services.

 

In connection with the 7-Eleven ATM Transaction, we acquired advanced-functionality Vcom^tm machines with significant potential for providing new services. Failure to achieve market acceptance among users could lead to continued losses from the Vcom^tm Services, which could adversely affect our operating results.

 

In the 7-Eleven ATM Transaction, we acquired approximately 5,500 ATM machines, including 2,000 advanced-functionality Vcom^tm machines. Advanced-functionality includes check cashing, money transfer, and bill payment services (collectively, the “Vcom^tm Services”), as well as off-premise deposit services using electronic imaging. Additional growth opportunities that we believe to be associated with the acquisition of Vcom^tm machines, including possible services expansion of our existing ATMs, may be impaired if we cannot achieve market acceptance among users or if we cannot implement the right mix of services and locations or adopt effective targeted marketing strategies.

 

We have estimated that the Vcom^tm Services generated an operating profit of $11.4 million for the year ended December 31, 2006 and an operating loss of $3.6 million for the nine months ended September 30, 2007. However, excluding the upfront placement fees, which may not continue in the future, the Vcom^tm Services generated operating losses of $6.6 million and $7.8 million for the year ended December 31, 2006 and for the nine months ended September 30, 2007, respectively. For the period from the acquisition (July 20, 2007) through September 30, 2007, the Vcom^tm Services generated an operating loss of $2.1 million. By

continuing to provide the Vcom^tm Services, we currently expect that we may incur up to $10.0 million operating losses associated with such services for the first 12-18 months subsequent to the 7-Eleven ATM Transaction. We plan to continue to operate the Vcom^tm units and restructure the Vcom^tm operations to improve the financial results of the acquired Vcom^tm operations; however, we may be unsuccessful in this effort. In the event we are not able to improve the operating results and we incur cumulative losses of $10.0 million associated with providing the Vcom^tm Services, our current intent is to terminate the Vcom^tm Services and utilize the Vcom^tm machines solely to provide traditional ATM services. However, even if we are unsuccessful in improving its operating results, we may decide not to exit this business immediately but rather extend the period of time it takes to restructure the acquired Vcom^tm operations, thus potentially resulting in losses of greater than $10.0 million. The future losses associated with the acquired Vcom^tm operations could be significantly higher than those currently estimated, which would negatively impact our future operating results and financial condition. Even if we decide to terminate the provision of Vcom^tm Services, our operating income may not improve because our estimate of historical losses was based on a review of the expenses of the financial services business of 7-Eleven Inc., which required us to allocate the expenses not directly associated with the provision of Vcom^tm Services. In addition, in the event we decide to terminate the Vcom^tm Services, we may be required to pay up to $1.5 million of contract termination payments, and may incur additional costs and expenses, which could negatively impact our future operating results and financial condition. Finally, to the extent we pursue future advanced functionality services independent of our Vcom efforts as indicated in “Prospectus Summary — Our Strategy,” we can provide no assurance that such efforts will be profitable.

 

Material weaknesses previously identified in our internal control over financial reporting by our independent registered public accounting firm could result in a material misstatement to our financial statements as well as result in our inability to file periodic reports within the time periods required by federal securities laws, which could have a material adverse effect on our business and stock price.

 

We are required to design, implement, and maintain effective controls over financial reporting. In connection with the preparation of our consolidated financial statements as of and for the years ended December 31, 2006 and 2005, our independent registered public accounting firm identified certain control deficiencies, which represent material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis. Specifically, our independent registered public accounting firm identified material weaknesses regarding our ability to account for complex or unusual transactions, including (1) deferred financing cost adjustments related to our debt modifications and refinancings, and (2) modifications to our asset retirement obligations. These material weaknesses resulted in, or contributed to, adjustments to our financial statements and, in certain cases, restatement of prior financial statements. While we have taken action to remediate the identified weaknesses, including the hiring of additional personnel with the requisite accounting skills and expertise, we cannot provide assurance that the measures we have taken or any future measures will adequately remediate the material weaknesses identified by our independent registered public accounting firm. Failure to implement new or improved controls, or any difficulties encountered in the implementation of such controls, could result in a material misstatement in our annual or interim consolidated financial statements that would not be prevented or detected. Such material misstatement could require us to restate our financial statements or otherwise cause investors to lose confidence in our reported financial information.

We are required to document and test our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which will require annual management assessments and a report by our independent registered public accounting firm on the effectiveness of our internal control over financial reporting. We must complete our Section 404 annual management report and include the report beginning in our 2007 Annual Report on Form 10-K, which will be filed in early 2008. Additionally, our independent registered public accounting firm must complete its attestation report, which must be included beginning in our 2008 Annual Report on Form 10-K, which will be filed in early 2009. As described above, our independent registered public accounting firm has identified material weaknesses in our internal control over financial reporting, and we or it may discover additional material weaknesses or deficiencies, which we may not be able to remediate in time to meet our deadline for compliance with Section 404. Testing and maintaining internal controls may divert our management’s attention from other matters that are important to our business. We may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 or our independent registered public accounting firm may not issue a favorable assessment. We cannot be certain as to the timing of completion of our evaluation, testing, and remediation actions or their effect on our operations. If either we are unable to conclude that we have effective internal control over financial reporting or our independent registered public accounting firm is unable to provide us with an unqualified report, investors could lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock.

 

Failure to remediate any identified material weaknesses could cause us to not meet our reporting obligations. The rules of the Securities and Exchange Commission (“SEC”) require that we file periodic reports containing our financial statements within a specified time following the completion of quarterly and annual fiscal periods. Any failure by us to timely file our periodic reports with the SEC may result in a number of adverse consequences that could materially and adversely impact our business, including, without limitation, potential action by the SEC against us, possible defaults under our debt arrangements, shareholder lawsuits, delisting of our stock from The Nasdaq Global Market, and general damage to our reputation.

 

Our operating results have fluctuated historically and could continue to fluctuate in the future, which could affect our ability to maintain our current market position or expand.

 

Our operating results have fluctuated in the past and may continue to fluctuate in the future as a result of a variety of factors, many of which are beyond our control, including the following:

 

 

 

Any of the foregoing factors could have a material adverse effect on our business, results of operations, and financial condition. Although we have experienced growth in revenues in recent quarters, this growth rate is not necessarily indicative of future operating results. A relatively large portion of our expenses are fixed in the short-term, particularly with respect to personnel expenses, depreciation and amortization expenses, and interest expense. Therefore, our results of operations are particularly sensitive to fluctuations in revenues. As such, comparisons to prior periods should not be relied upon as indications of our future performance.

 

If our goodwill or other intangible assets become impaired, we may be required to record a significant charge to earnings.

 

We have a large amount of goodwill and other intangible assets and are required to perform periodic assessments for any possible impairment for accounting purposes. At September 30, 2007, we had goodwill and other intangible assets of $371.2 million, or approximately 66% of our total assets. We evaluate periodically the recoverability and the amortization period of our intangible assets under GAAP. Some factors that we consider to be important in assessing whether or not impairment exists include the performance of the related assets relative to the expected historical or projected future operating results, significant changes in the manner of our use of the assets or the strategy for our overall business, and significant negative industry or economic trends. These factors, assumptions, and changes in them could result in an impairment of our goodwill and other intangible assets. We may be required to record a significant charge to earnings in our financial statements during the period in which any impairment of our goodwill or amortizable intangible assets is determined, resulting in an impact on our results of operations, the effect of which could be material. For example, in the quarter ended September 30, 2007 we recorded approximately $5.1 million of impairment charges related to our merchant contract with Target, which we acquired in 2004. Other impairment charges in the future may also adversely affect our results of operations.

 

We have a substantial amount of indebtedness, which may adversely affect our cash flow and our ability to operate our business, remain in compliance with debt covenants and make payments on our indebtedness.

 

As of September 30, 2007, we had outstanding indebtedness of approximately $408.9 million, which represents approximately 95.9% of our total capitalization of $426.4 million.

 

Our substantial indebtedness could have important consequences to you. For example, it could:

 

 

 

Any of the above listed 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.

 

The terms of our credit agreement and the indentures governing our senior subordinated notes may restrict our current and future operations, particularly our ability to respond to changes in our business or to take certain actions.

 

Our credit agreement and the indentures governing our senior subordinated notes include a number of covenants that, among other items, restrict our ability to:

 

 

In addition, we are required by our credit agreement to maintain specified financial ratios and limit the amount of capital expenditures incurred in any given 12-month period. As a result of these ratios and limits, we are limited in the manner in which we conduct our business and may be unable to engage in favorable business activities or finance future operations or capital needs. Accordingly, these restrictions may limit our ability to successfully operate our business and prevent us from fulfilling our debt obligations. A failure to comply with the covenants or financial ratios could result in an event of default. In the event of a default under our credit agreement, the lenders could exercise a number of remedies, some of which could result in an event of default under the indentures governing the senior subordinated notes. An acceleration of indebtedness under our credit agreement would also likely result in an event of default under the terms of any other financing arrangement we have outstanding at the time. If any or all of our debt were to be accelerated, there can be no assurance that our assets would be sufficient to repay any such indebtedness in full. If we are unable to repay outstanding borrowings under our bank credit facility when due the lenders will have the right to proceed against the collateral securing such indebtedness. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Financing Facilities” for an additional discussion of our financing instruments.

Risks Related to the Offering

 

There is no existing market for our common stock, and an active trading market may not develop.

 

There has not been a public market for our common stock. We cannot predict the extent to which investor interest in us will lead to the development of an active trading market on The Nasdaq Global Market or otherwise or how liquid that market might become. If an active trading market does not develop, you may have difficulty selling any of our common stock that you buy. The initial public offering price for the shares will be determined by negotiations between us and the representatives of the underwriters and may not be indicative of prices that will prevail in the open market following this offering. Consequently, you may not be able to sell shares of our common stock at prices equal to or greater than the price paid by you in this offering.

 

We do not intend to pay, and we are currently prohibited from paying, dividends on our common stock and, consequently, your only opportunity to achieve a return on your investment is if the price of our stock appreciates.

 

We do not plan to declare dividends on shares of our common stock in the foreseeable future. Additionally, we are currently prohibited from making any cash dividends pursuant to the terms of our credit facility. Consequently, your only opportunity to achieve a return on your investment in us will be if the market price of our common stock appreciates, which may not occur, and you sell your shares at a profit. There is no guarantee that the price of our common stock that will prevail in the market after this offering will ever exceed the price that you pay.

 

Future sales of our common stock in the public market could lower our stock price, and any additional capital raised by us through the sale of equity or convertible securities may dilute your ownership in us.

 

We may sell additional shares of common stock in subsequent public offerings. We may also issue additional shares of common stock or convertible securities. After the completion of this offering, we will have 38,566,207 outstanding shares of common stock. This number includes 12,000,000 shares that we are selling in this offering, which may be resold immediately in the public market. The remaining 26,566,207 shares, or 68.9% of our total outstanding shares, are restricted from immediate resale under the federal securities laws and a substantial portion of them are subject to the lock-up agreements between our current stockholders and the underwriters described in “Underwriting,” but may be sold into the market in the near future.

 

All of our existing stockholders are parties to an investors agreement with us. Under that agreement, certain of these stockholders will have the right, after the expiration of the lock-up period of 180 days from the effective date of this registration statement, to require us to effect the registration of their shares. In addition, if we propose to register, or are required to register following the exercise of registration rights, any of our shares of common stock under the Securities Act, all the stockholders who are parties to the investors agreement will be entitled to include their shares of common stock in that registration.

 

We cannot predict the size of future issuances of our common stock or the effect, if any, that future issuances and sales of shares of our common stock will have on the market price of our common stock. Sales of substantial amounts of our common stock (including shares issued in connection with an acquisition), or the perception that such sales could occur, may adversely affect prevailing market prices of our common stock.

You will suffer immediate and substantial dilution.

 

The initial public offering price per share is substantially higher than the pro forma net tangible book value per share immediately after the offering. As a result, you will pay a price per share that substantially exceeds the book value of our assets after subtracting our liabilities. At the initial public offering price of $10.00, you will incur immediate and substantial dilution in the amount of $17.23 per share. We also have outstanding stock options to purchase shares of our common stock at a weighted average exercise price of $6.99 per share. To the extent these options are exercised, you will experience further dilution. Investors who purchase common stock in this offering will have purchased 31.1% of the shares outstanding immediately after the offering, but will have paid 58.4% of the total consideration for our shares. See “Dilution” for more information.

 

Your ability to influence corporate matters may be limited because a small number of stockholders beneficially own a substantial amount of our common stock.

 

CapStreet II, L.P. and CapStreet Parallel II, L.P. (together with The CapStreet Group LLC, “The CapStreet Group”) and TA Associates are our largest equity stockholders. After giving effect to this offering, assuming no exercise by the underwriters of their over-allotment option, affiliates of The CapStreet Group will beneficially own approximately 9,096,567 shares, or 22.1%, of our common stock, and affiliates of TA Associates will beneficially own approximately 12,171,472 shares, or 29.5%, of our common stock. The percentage and number of shares owned by each of these stockholders after giving effect to this offering will vary based upon the initial public offering price. As a result of their ownership interests, these investors will be in a position to exert significant influence over the outcome of matters requiring a stockholder vote, including the election of directors, the entering into of mergers, sales of substantially all of our assets and other extraordinary transactions, and amendments to our certificate of incorporation or bylaws. In addition, this concentration of ownership may have the effect of preventing, discouraging or deferring a change of control, which could depress the market price of our common stock. See “Certain Relationships and Related Party Transactions” and “Principal Stockholders.”

 

Certain of our directors may have conflicts of interest because they are affiliated with significant stockholders. The resolution of these conflicts of interest may not be in our or your best interests.

 

Following the closing of this offering, certain of our directors may have conflicts of interest because of their affiliation with significant stockholders. Fred Lummis is associated with The CapStreet Group and Mike Wilson is associated with TA Associates. This may create conflicts of interest because Fred Lummis has responsibilities to The CapStreet Group and its owners and Mike Wilson has responsibilities to TA Associates and its owners. Their duties to The CapStreet Group and TA Associates may conflict with their duties as directors of our company regarding business dealings between these investor groups and us and other matters. The resolution of these conflicts may not always be in our or your best interests. For example, The CapStreet Group and TA Associates are in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly or indirectly with us. The CapStreet Group and TA Associates may also pursue acquisition opportunities that may be complementary to our business and, as a result, those acquisition opportunities may not be available to us. There is no formal mechanism among The CapStreet Group, TA Associates, and Cardtronics for handling potential conflicts of interest. See “Certain Relationships and Related Party Transactions” and “Principal Stockholders.”

 

Affiliates of certain of our underwriters are lenders under our revolving credit facility. Because proceeds of this offering will be used to repay borrowings under that facility, those underwriters have interests in this offering beyond customary underwriting discounts and commissions.

 

Affiliates of Banc of America Securities LLC and J.P. Morgan Securities Inc. are lenders under our revolving credit facility and will receive a portion of the proceeds of this offering, which will be used to repay in full the amount outstanding under the revolving credit facility. See “Use of Proceeds” and “Underwriting.” These underwriters, through their affiliates, may be deemed to receive financial benefits as a result of the consummation of this offering beyond the benefits customarily received by underwriters in similar offerings.

 

Anti-takeover provisions in our third amended and restated certificate of incorporation, our amended and restated bylaws, and Delaware law could discourage a change of control that our stockholders may favor, which could negatively affect our stock price.

 

Provisions in our third amended and restated certificate of incorporation and our amended and restated bylaws and applicable provisions of the Delaware General Corporation Law may make it more difficult and expensive for a third party to acquire control of us even if a change of control would be beneficial to the interests of our stockholders. These provisions could discourage potential takeover attempts and could adversely affect the market price of our common stock. Our third amended and restated certificate of incorporation and our amended and restated bylaws, which will be in effect at the time this offering is consummated, and the Delaware General Corporation Law will:

 

 

INDUSTRY AND MARKET DATA

 

In this prospectus, we rely on and refer to information and statistics regarding economic trends and conditions and other data pertaining to the ATM industry. We have obtained this data from our own research, surveys and studies conducted by third parties such as Dove Consulting Group, Inc., industry or other publications, such as ATM&Debit News, the U.K. Payment Statistics publication from APACS, and other publicly available sources. We believe that our sources of information and estimates are reliable and accurate, but we have not independently verified them. Our statements about the ATM industry in general, the number and type of ATMs in various markets, and the size and operations of our competitors in this prospectus are based on our management’s belief, this statistical data, internal studies, and our knowledge of industry trends.

 

INTELLECTUAL PROPERTY

 

We own or have rights to various trademarks, copyrights and trade names used in our business, including the following: “CARDTRONICS” (registered with the U.S. Patent & Trademark Office—registration no. 1.970.030); “bankmachine” (registered under the Trade Marks Act of 1994 of Great Britain and Northern Ireland—trademark registration no. 2350262); “ALLPOINT” (registered with the U.S. Patent & Trademark Office—registration no. 2.940.550); and “VCOM” (registered with the U.S. Patent & Trademark Office—registration no. 2.598.789). This prospectus also includes trademarks, service marks, and trade names of other companies.

 

FORWARD-LOOKING STATEMENTS

 

This prospectus contains forward-looking statements that involve risks and uncertainties. We may, in some cases, use words such as “project,” “believe,” “anticipate,” “plan,” “expect,” “estimate,” “intend,” “should,” “would,” “could,” “will,” or “may,” or other words that convey uncertainty of future events or outcomes to identify these forward-looking statements. Forward-looking statements in this prospectus may include statements about:

 

 

There are a number of important factors that could cause actual results to differ materially from the results anticipated by these forward-looking statements. These important factors include those that we discuss in this prospectus under the caption “Risk Factors.” You should read these factors and the other cautionary statements made in this prospectus as being applicable to all related forward-looking statements wherever they appear in this prospectus. If one or more of these factors materialize, or if any underlying assumptions prove incorrect, our actual results, performance or achievements may vary materially from any future results, performance or achievements expressed or implied by these forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, except as required by law, whether as a result of new information, future events or otherwise.

 

USE OF PROCEEDS

 

We are offering 12,000,000 shares of our common stock. Certain stockholders have also granted the underwriters an option to purchase up to an aggregate of 1,800,000 additional shares of our common stock to cover over-allotments. We will not receive any of the proceeds from the sale of shares by these certain stockholders if the over-allotment option is exercised.

 

We estimate that our net proceeds from the sale of the shares of common stock by us will be approximately $110.1 million, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

We intend to use the net proceeds from this offering to repay amounts outstanding under our existing revolving credit facility, which may be drawn down again in the future. That facility, which consists of a $175.0 million revolving line of credit, matures in May 2012 and bears interest at a variable rate based upon LIBOR or prime rate, at our option. As of December 10, 2007, we had approximately $115.6 million in borrowings under the facility, and we had $51.9 million available for additional borrowings. The weighted average interest rate on these borrowings was approximately 7.9%. Of the outstanding borrowings under the facility, approximately $45.0 million was used to help fund the acquisition of the financial services business of 7-Eleven on July 20, 2007 and the balance was primarily drawn to fund working capital and capital expenditure needs. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Financing Facilities—Revolving Credit Facility” for additional information regarding our credit facility.

 

DIVIDEND POLICY

 

We do not expect to pay dividends on our common stock for the foreseeable future. Instead, we anticipate that all of our earnings in the foreseeable future will be used for the operation and growth of our business. Our ability to pay dividends to holders of our common stock is currently prohibited by the terms of our credit facility. Any future determination to pay dividends on our common stock is subject to the discretion of our board of directors and will depend upon various factors, including our financial position, results of operations, liquidity requirements, restrictions that may be imposed by applicable law and our contracts, including our credit facility and the indentures governing our senior subordinated notes, and other factors deemed relevant by our board of directors. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Financing Facilities” for additional information on the restrictions and covenants in our credit facility and indentures.

 

CAPITALIZATION

 

The following table sets forth our cash and cash equivalents and our capitalization as of September 30, 2007:

 

 

You should read this table together with the “Use of Proceeds,” “Unaudited Pro Forma Condensed Consolidated Financial Statements,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Description of Capital Stock,” and our consolidated financial statements included elsewhere in this prospectus.

 

 

 

 

 

DILUTION

 

If you invest in our common stock, your interest will be diluted to the extent of the difference between the public offering price per share of our common stock and the net tangible book value per share of our common stock after this offering. We calculate net tangible book value per share by dividing our net tangible book value, which equals total assets less goodwill, net other intangible assets and total liabilities, by the number of common shares outstanding. The pro forma net tangible book value of our common stock as of September 30, 2007, after giving effect to the impact of the conversion of our Series B Convertible Preferred Stock into common stock and the 7.9973 to 1 estimated stock split for our common shares, which will be effected immediately prior to the closing of the offering, was approximately $(388.9) million, or $(14.63) per share, based upon 26,566,207 shares outstanding. After giving effect to the sale of 12,000,000 shares of common stock by us in this offering at the initial public offering price of $10.00 per share, and after deducting the estimated underwriting discounts and commissions and offering expenses payable by us, our pro forma net tangible book value as of September 30, 2007 would have been $(278.8) million, or $(7.23) per share. This represents an immediate increase in net tangible book value of $7.40 per share to existing stockholders and an immediate dilution in net tangible book value of $17.23 per share to investors purchasing shares in this offering. The following table illustrates this per share dilution:

 

 

The following table summarizes, on the same pro forma basis set forth above as of September 30, 2007, the total number of shares of common stock owned by existing stockholders and to be owned by new investors, the total consideration paid, and the average

price per share paid by our existing stockholders and to be paid by new investors in this offering, calculated before deduction of estimated underwriting discounts and commissions.

 

 

The tables above do not reflect the issuance of an additional 4,990,489 shares of common stock issuable upon the exercise of stock options that will be outstanding, but unexercised, after the offering. Exercise of the options with an exercise price of less than the initial public offering price will result in additional dilution of net tangible book value per share to new investors.

 

If the underwriters exercise their over-allotment option in full, the number of shares held by new investors will increase to 13,800,000 shares, or 35.8% of the total number of shares of common stock outstanding after this offering.

 

SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA

 

The following selected historical consolidated financial and operating data should be read together with “Unaudited Pro Forma Condensed Consolidated Financial Statements,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the consolidated financial statements and related notes included elsewhere in this prospectus. The selected consolidated balance sheet data as of December 31, 2005 and 2006 and the selected consolidated statements of operations data for the years ended December 31, 2004, 2005, and 2006 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The balance sheet data as of December 31, 2003 and 2004, and the statements of operations data for the year ended December 31, 2003 have been derived from our audited financial statements, while the balance sheet data as of December 31, 2002 and the statements of operations data for the year ended December 31, 2002 have been derived from our unaudited financial statements, none of which are included in this prospectus. The selected consolidated balance sheet data as of September 30, 2007, and the selected consolidated statements of operations data for the nine months ended September 30, 2006 and 2007 have been derived from our unaudited interim condensed consolidated financial statements included elsewhere in this prospectus. The unaudited balance sheet data as of September 30, 2006 has been derived from our unaudited interim condensed consolidated financial statements for such period, which are not included in this prospectus. The unaudited interim period financial information, in the opinion of management, includes all adjustments, which are normal and recurring in nature, necessary for a fair presentation for the periods shown. Results for the nine months ended September 30, 2007 are not necessarily indicative of the results to be expected for the full year. Historical results are not necessarily indicative of the results to be expected in the future.