GLOBAL CASH ACCESS HOLDINGS, INC., 10-Q filed on 5/8/2012
Quarterly Report
Document and Entity Information
3 Months Ended
Mar. 31, 2012
May 1, 2012
Document and Entity Information
 
 
Entity Registrant Name
Global Cash Access Holdings, Inc. 
 
Entity Central Index Key
0001318568 
 
Document Type
10-Q 
 
Document Period End Date
Mar. 31, 2012 
 
Amendment Flag
false 
 
Current Fiscal Year End Date
--12-31 
 
Entity Current Reporting Status
Yes 
 
Entity Filer Category
Accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
65,762,867 
Document Fiscal Year Focus
2012 
 
Document Fiscal Period Focus
Q1 
 
CONDENSED CONSOLIDATED BALANCE SHEETS (USD $)
In Thousands, unless otherwise specified
Mar. 31, 2012
Dec. 31, 2011
ASSETS
 
 
Cash and cash equivalents
$ 40,566 
$ 55,535 
Restricted cash and cash equivalents
200 
455 
Settlement receivables
73,197 
80,246 
Other receivables, net
11,922 
16,885 
Inventory
7,930 
7,087 
Prepaid expenses and other assets
14,430 
15,406 
Property, equipment and leasehold improvements, net
14,942 
15,577 
Goodwill, net
180,141 
180,122 
Other intangible assets, net
36,648 
38,216 
Deferred income taxes, net
115,606 
119,538 
Total assets
495,582 
529,067 
Liabilities:
 
 
Settlement liabilities
124,676 
141,827 
Accounts payable
39,450 
32,223 
Accrued expenses
20,084 
21,159 
Borrowings
142,000 
174,000 
Total liabilities
326,210 
369,209 
COMMITMENTS AND CONTINGENCIES (Note 5)
   
   
Stockholders' Equity:
 
 
Common stock, $0.001 par value, 500,000 shares authorized and 86,120 and 85,651 shares issued at March 31, 2012 and December 31, 2011, respectively
86 
86 
Convertible preferred stock, $0.001 par value, 50,000 shares authorized and 0 shares outstanding at March 31, 2012 and December 31, 2011, respectively
   
   
Additional paid-in capital
207,030 
204,735 
Retained earnings
105,054 
97,925 
Accumulated other comprehensive income
2,485 
2,340 
Treasury stock, at cost, 20,696 and 20,686 shares at March 31, 2012 and December 31, 2011, respectively
(145,283)
(145,228)
Total stockholders' equity
169,372 
159,858 
Total liabilities and stockholders' equity
$ 495,582 
$ 529,067 
CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
In Thousands, except Per Share data, unless otherwise specified
Mar. 31, 2012
Dec. 31, 2011
CONDENSED CONSOLIDATED BALANCE SHEETS
 
 
Common stock, par value (in dollars per share)
$ 0.001 
$ 0.001 
Common stock, shares authorized
500,000 
500,000 
Common stock, shares issued
86,120 
85,651 
Convertible preferred stock, par value (in dollars per share)
$ 0.001 
$ 0.001 
Convertible preferred stock, shares authorized
50,000 
50,000 
Convertible preferred stock, shares outstanding
Treasury stock, shares
20,696 
20,686 
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended
Mar. 31, 2012
Mar. 31, 2011
Revenues
 
 
Total revenues
$ 151,065 
$ 134,389 
Cost of revenues (exclusive of depreciation and amortization)
113,815 
105,233 
Operating expenses
17,488 
16,105 
Amortization
2,321 
1,625 
Depreciation
1,745 
2,121 
Operating income
15,696 
9,305 
Interest expense, net of interest income
4,483 
5,147 
Loss on early extinguishment of debt
 
943 
Interest expense, net
4,483 
6,090 
Income before income tax provision
11,213 
3,215 
Income tax provision
4,085 
1,473 
Net income
7,128 
1,742 
Foreign currency translation
145 
21 
Comprehensive income
7,273 
1,763 
Basic earnings per share:
 
 
Net income per share - basic (in dollars per share)
$ 0.11 
$ 0.03 
Diluted earnings per share:
 
 
Net income per share - diluted (in dollars per share)
$ 0.11 
$ 0.03 
Weighted average number of common shares outstanding:
 
 
Basic (in shares)
65,134 
63,952 
Diluted (in shares)
66,190 
64,182 
Cash advance
 
 
Revenues
 
 
Total revenues
58,361 
50,873 
ATM
 
 
Revenues
 
 
Total revenues
80,347 
71,191 
Check services
 
 
Revenues
 
 
Total revenues
6,516 
6,411 
Other revenues
 
 
Revenues
 
 
Total revenues
$ 5,841 
$ 5,914 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Mar. 31, 2012
Mar. 31, 2011
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
Net income
$ 7,128 
$ 1,742 
Adjustments to reconcile net income to cash provided by (used in) operating activities:
 
 
Amortization of financing costs
355 
278 
Amortization of intangibles
2,321 
1,625 
Depreciation
1,745 
2,121 
Gain on sale or disposal of assets
(57)
(14)
Provision for bad debts
1,190 
1,487 
Loss on early extinguishment of debt
 
943 
Stock-based compensation
843 
1,097 
Changes in operating assets and liabilities:
 
 
Settlement receivables
7,115 
4,473 
Other receivables, net
5,246 
(1,714)
Inventory
(843)
(397)
Prepaid and other assets
687 
(1,577)
Deferred income taxes
3,935 
1,319 
Settlement liabilities
(17,241)
(15,435)
Accounts payable
7,224 
5,050 
Accrued expenses
(1,367)
(3,037)
Net cash provided by (used in) operating activities
18,281 
(2,039)
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
Acquisitions, net of cash
 
(20)
Purchase of property, equipment, leasehold improvements and other intangibles
(1,800)
(1,885)
Changes in restricted cash and cash equivalents
255 
 
Net cash used in investing activities
(1,545)
(1,905)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
Repayments against old credit facility
 
(208,750)
Securing of new credit facility
 
214,000 
Issuance costs of new credit facility
 
(6,941)
Repayments against new credit facility
(32,000)
(14,000)
Proceeds from exercise of stock options
1,005 
87 
Purchase of treasury stock
(55)
(52)
Net cash used in financing activities
(31,050)
(15,656)
NET EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
(655)
(505)
NET DECREASE IN CASH AND CASH EQUIVALENTS
(14,969)
(20,105)
CASH AND CASH EQUIVALENTS - Beginning of Period
55,535 
60,636 
CASH AND CASH EQUIVALENTS - End of Period
40,566 
40,531 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
 
 
Cash paid for interest
3,955 
6,938 
Cash paid for taxes, net of refunds
$ 191 
$ 170 
BUSINESS AND BASIS OF PRESENTATION
BUSINESS AND BASIS OF PRESENTATION

1.              BUSINESS AND BASIS OF PRESENTATION

 

Overview

 

Global Cash Access Holdings, Inc. (“Holdings”) is a holding company, the principal asset of which is the capital stock of Global Cash Access, Inc. (“GCA”).  Unless otherwise indicated, the terms “the Company,” “Holdings,” “we,” “us” and “our” refer to Holdings together with its consolidated subsidiaries. Holdings was formed on February 4, 2004 for the purpose of holding all of the outstanding capital stock of GCA and to guarantee the obligations under our senior secured credit facilities.

 

We are a global provider of cash access and data intelligence services and solutions to the gaming industry.  Our services and solutions provide gaming establishment patrons access to cash through a variety of methods, including automated teller machine (“ATM”) cash withdrawals, credit card cash access transactions, point-of-sale (“POS”) debit card transactions, check verification and warranty services and money transfers.  In addition, we also provide products and services that improve credit decision-making, automate cashier operations and enhance patron marketing activities for gaming establishments.  We also sell and service cash access devices such as slot machine ticket redemption and jackpot kiosks to the gaming industry.

 

The Company also owns and operates a credit reporting agency for the gaming industry through a wholly-owned subsidiary, Central Credit, LLC (“Central Credit”), which provides credit-information services and credit-reporting history on gaming patrons to various gaming establishments. Central Credit operates in both international and domestic gaming markets.  The results of operations of Central Credit have been reflected in other revenues.

 

In May 2010, we completed the acquisition of Western Money Systems (“Western Money”), a manufacturer of redemption kiosk devices.  The results of operations of Western Money have been reflected in other revenues.

 

In November 2011, we acquired substantially all of the assets of MCA Processing LLC (“MCA”), a provider of ATM, debit card and credit card cash access services to gaming establishments and also a manufacturer, seller, licensor and servicer of redemption kiosk devices.

 

Basis of Presentation

 

The unaudited condensed consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Some of the information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. In the opinion of management, all adjustments (which include normal recurring adjustments) necessary for a fair presentation of results for the interim periods have been made. The results for the three months ended March 31, 2012 are not necessarily indicative of results to be expected for the full fiscal year.

 

These unaudited condensed consolidated financial statements should be read in conjunction with the annual consolidated financial statements and notes thereto included within the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 (the “2011 10-K”).

 

Use of Estimates

 

The Company has made estimates and judgments affecting the amounts reported in these financial statements and the accompanying notes. The actual results may differ from these estimates. These accounting estimates incorporated into the Company’s consolidated financial statements include, but are not limited to:

 

·                  the estimated reserve for warranty expense associated with our check warranty receivables;

 

·                  the valuation and recognition of share-based compensation;

 

·                  the valuation allowance on our deferred income tax assets; and

 

·                  the estimated cash flows in assessing the recoverability of long-lived assets.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

2.              SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

 

The unaudited condensed consolidated financial statements presented for the three months ended March 31, 2012 and 2011 and as of March 31, 2012 and December 31, 2011 include the accounts of Holdings and its subsidiaries.  All significant intercompany transactions and balances have been eliminated in consolidation.

 

Earnings Applicable to Common Stock

 

Basic earnings per share are calculated by dividing net income by the weighted-average number of common shares outstanding for the period.  Diluted earnings per share reflect the effect of potential common stock resulting from equity grants.

 

The weighted-average number of common shares outstanding used in the computation of basic and diluted earnings per share is as follows (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Weighted average number of common shares outstanding - basic(1)

 

65,134

 

63,952

 

Potential dilution from equity grants(2)

 

1,056

 

230

 

 

 

 

 

 

 

Weighted average number of common shares outstanding - diluted

 

66,190

 

64,182

 

 

 

(1)                Included in the calculation of weighted average common shares outstanding — basic are 9,400 and 23,000 unvested shares of restricted common stock of Holdings granted in share-based payment transactions for the three months ended March 31, 2012 and 2011, respectively, that are participating securities because such shares have voting rights as well as the right to participate in dividend distributions made by the Company to its common stockholders.

 

(2)                The potential dilution excludes the weighted average effect of stock options to acquire 6.3 million and 7.5 million shares of common stock of Holdings for the three months ended March 31, 2012 and 2011, respectively, because the application of the treasury stock method, as required, makes them anti-dilutive.

 

Warranty Receivables

 

In the check services transactions provided by Central Credit, Central Credit warrants check cashing transactions performed at gaming establishments.  If a gaming establishment chooses to have a check warranted, it sends a request to a check warranty service provider asking whether it will warrant the check.  The gaming establishment then pays the patron the check amount and deposits the check.  If the check is dishonored by the patron’s bank, the gaming establishment invokes the warranty and the check warranty service provider purchases the check from the gaming establishment for the full check amount and then pursues collection activities on its own. All amounts paid out to the gaming establishment related to these items result in a warranty receivable from the patron.  This amount is recorded in other receivables, net on the condensed consolidated balance sheets.  On a monthly basis, Central Credit evaluates the collectability of the outstanding balances and establishes a reserve for the face amount of the expected losses on these receivables.  The warranty expense associated with this reserve is included within cost of revenues (exclusive of depreciation and amortization) in the condensed consolidated statements of income.  The Company writes off substantially all warranty receivables that are generally older than one year in age.

 

A summary of the activity for the check warranty reserve for the three months ended March 31, 2012, is as follows (amounts in thousands):

 

 

 

Amount

 

 

 

 

 

Balance, December 31, 2011

 

$

6,756

 

 

 

 

 

Warranty expense provision

 

1,211

 

Charge offs against reserve

 

(1,155

)

 

 

 

 

Balance, March 31, 2012

 

$

6,812

 

 

Fair Values of Financial Instruments

 

The fair value of a financial instrument represents the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Fair value estimates are made at a specific point in time, based upon relevant market information about the financial instrument.

 

The carrying amount of cash and cash equivalents, other receivables, net, settlement receivables and settlement liabilities approximates fair value due to the short-term maturities of these instruments. The fair value of GCA’s borrowings are estimated based on quoted market prices for the same issue or in instances where no market exists the quoted market prices for similar issues with similar terms are used to estimate fair value. The fair values of all other financial instruments, including amounts outstanding under the ATM funding agreements approximate their book values as the instruments are short-term in nature or contain market rates of interest.

 

GCA uses the market approach when measuring the fair value of an asset or liability for recurring and nonrecurring fair value measurements categorized within Levels 1 and 2 of the fair value hierarchy.  Level 1 inputs are quoted market prices in active markets for identical assets or liabilities. Level 2 inputs are inputs other than quoted market prices that are directly or indirectly observable for the asset or liability.  The market approach uses prices and other relevant information from market transactions involving identical or comparable assets or liabilities to measure fair value.  Level 3 inputs indicate that the fair value is determined using pricing inputs that are unobservable for the investment and include situations where there is little, if any, market activity for the investment.  Significant management estimates and judgment are used in the determination of the fair value of Level 3 pricing inputs.  The Company does not have any assets or liabilities categorized within Level 2 or 3 of the fair value hierarchy.

 

Interest Rate Cap

 

In conjunction with the terms and conditions of the New Senior Credit Facility, as described in footnote 6, GCA purchased a $150.0 million notional amount interest rate cap with an effective date of January 5, 2012 and a term of three years. GCA purchased this interest rate cap to partially reduce the Company’s exposure to increases in the LIBOR above 1.5% during the term of the interest rate cap with respect to its variable rate debt obligations under the New Senior Credit Facility and its obligations under the Contract Cash Solutions Agreement with Wells Fargo.  This interest rate cap is recorded in other assets in the balance sheet, and is marked-to-market based on a quoted market price with the effects offset in the income statement.

 

The following table presents the fair value and carrying value of GCA’s borrowings and interest rate cap (amounts in thousands):

 

 

 

Level of
Hierarchy

 

Fair
Value

 

Carrying
Value

 

 

 

 

 

 

 

 

 

March 31, 2012

 

 

 

 

 

 

 

New senior secured credit facility

 

1

 

$

143,065

 

$

142,000

 

Interest rate cap

 

1

 

$

492

 

$

492

 

 

 

 

 

 

 

 

 

December 31, 2011

 

 

 

 

 

 

 

New senior secured credit facility

 

1

 

$

173,565

 

$

174,000

 

 

Inventory

 

Inventory, which consists primarily of finished goods such as redemption kiosk devices, as well as work-in-progress and parts, is stated at lower of cost or market. The cost of inventory includes cost of materials, labor, overhead and freight. Inventory is accounted for using the average cost method.

 

Acquisitions

 

The Company accounts for business combinations in accordance with the accounting standards, which require that the assets acquired and liabilities assumed be recorded at their estimated fair values.

ATM FUNDING AGREEMENTS
ATM FUNDING AGREEMENTS

3.              ATM FUNDING AGREEMENTS

 

The Company’s Contract Cash Solutions Agreement with Wells Fargo allows for the Company to utilize up to $400.0 million in funds owned by Wells Fargo to provide the currency needed for normal operating requirements for the Company’s ATMs. For the use of these funds, the Company pays Wells Fargo a cash usage fee on the average daily balance of funds utilized multiplied by a contractually defined cash usage rate. Pursuant to the Contract Cash Solutions Agreement, Wells Fargo has agreed to supply the Company with up to $50.0 million in excess of this limit for a calendar day up to four times per calendar year and subject to certain additional conditions and limitations, and in certain cases, upon approval, the Company can be supplied up to $475.0 million.

 

As of March 31, 2012 and December 31, 2011, the outstanding balances of ATM cash utilized by GCA from Wells Fargo were $412.2 million and $467.8 million, respectively.  For the three months ended March 31, 2012 and 2011, the cash usage fees incurred by the Company were $0.9 million and $0.6 million, respectively, and are reflected as interest expense within the condensed consolidated statements of income.

 

The Company is responsible for any losses of cash in the ATMs under its agreement with Wells Fargo.  The Company is self-insured related to this risk.  For the three months ended March 31, 2012 and 2011, the Company incurred no material losses related to this self-insurance.

 

Site Funded ATMs

 

The Company operates ATMs at certain customer gaming establishments where the gaming establishment provides the cash required for the ATM operational needs. GCA is required to reimburse the customer for the amount of cash dispensed from these Site-Funded ATMs. The Site-Funded ATM liability is included within settlement liabilities in the accompanying consolidated balance sheets and was $79.7 million and $85.9 million as of March 31, 2012 and December 31, 2011, respectively.

BENEFIT PLANS
BENEFIT PLANS

4.              BENEFIT PLANS

 

In January 2005, the Company adopted the 2005 Stock Incentive Plan (the “2005 Plan”) to attract and retain the best available personnel, to provide additional incentives to employees, directors and consultants and thus to promote the success of the Company’s business. The 2005 Plan is administered by the Board of Directors but may be administered by our Compensation Committee. The administrator of the 2005 Plan has the authority to select individuals who are to receive options or other equity incentive awards under the 2005 Plan and to specify the terms and conditions of grants of options or other equity incentive awards, the vesting provisions, the term and the exercise price.

 

Generally, stock options and restricted stock granted under the 2005 Plan (other than those granted to non-employee directors) will vest at a rate of 25% of the shares underlying the option after one year and the remaining shares vest in equal portions over the following 36 months, such that all shares are vested after four years. Unless otherwise provided by the administrator, an option granted under the 2005 Plan generally expires ten years from the date of grant. Stock options are issued at the closing market price on the date of grant.

 

A summary of award activity under the 2005 Plan as of March 31, 2012 and changes during the three months ended is as follows:

 

 

 

Number of
Common Shares

 

Weighted Average
Exercise Price
(Per Share)

 

Weighted
Average Life
Remaining
(Years)

 

Aggregate
Intrinsic Value

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Balance outstanding - December 31, 2011

 

9,227,541

 

$

6.87

 

6.9

 

$

6,118

 

 

 

 

 

 

 

 

 

 

 

Granted

 

1,980,000

 

 

 

 

 

 

 

Exercised

 

(426,710

)

 

 

 

 

 

 

Canceled or forfeited

 

(140,239

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance outstanding - March 31, 2012

 

10,640,592

 

$

6.78

 

7.2

 

$

23,724

 

 

 

 

 

 

 

 

 

 

 

Balance exercisable - March 31, 2012

 

6,050,683

 

$

8.30

 

5.8

 

$

11,221

 

 

The fair value of options was determined as of the date of grant using Black-Scholes option pricing model with the following weighted-average assumption in the period ended March 31, 2012 and 2011, respectively.

 

 

 

Three Months Ended March 31,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Risk-free interest rate

 

1.1

%

2.5

%

Expected life of options (in years)

 

6.3

 

6.3

 

Expected volatility

 

62.2

%

62.9

%

Expected dividend yield

 

0.0

%

0.0

%

 

As of March 31, 2012, there was $11.1 million in unrecognized compensation expense related to options expected to vest.  This cost is expected to be recognized on a straight-line basis over a weighted average period of 2.3 years.  During the three months ended March 31, 2012, the Company granted options to acquire approximately 2.0 million shares of common stock, received $1.0 million in proceeds from the exercise of options and recorded $0.7 million in non-cash compensation expense related to options granted that are expected to vest.

 

As of March 31, 2011, there was $12.0 million in unrecognized compensation expense related to options expected to vest.  This cost was expected to be recognized on a straight-line basis over a weighted average period of 1.3 years.  During the three months ended March 31, 2011, the Company granted options to acquire approximately 1.9 million shares of common stock, received $0.1 million in proceeds from the exercise of options and recorded $1.6 million in non-cash compensation expense related to options granted that are expected to vest.

 

Restricted Stock

 

The Company began issuing restricted stock to employees in the first quarter of 2006. The vesting provisions are similar to those applicable to stock options. Because these restricted shares are issued primarily to employees of the Company, many of the shares issued will be withheld by the Company to satisfy the statutory withholding requirements applicable to the restricted stock grants. Therefore, as these awards vest the actual number of shares outstanding as a result of the restricted stock awards is reduced. These shares will vest over a period of four years. There are certain restricted stock shares that have rights to the dividends declared and voting rights, and, therefore, the shares are considered issued and outstanding prior to vesting.

 

A summary of all non-vested awards for the Company’s time-based restricted stock awards as of March 31, 2012 is as follows:

 

 

 

Shares
Outstanding

 

Weighted
Average Grant
Date Fair Value 
(Per Share)

 

Aggregate
Fair Value

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Balance outstanding - December 31, 2011

 

198,279

 

$

2.20

 

$

437

 

 

 

 

 

 

 

 

 

Granted

 

 

 

 

 

Vested

 

(42,226

)

 

 

(94

)

Forfeited

 

(2,710

)

 

 

(6

)

 

 

 

 

 

 

 

 

Balance outstanding - March 31, 2012

 

153,343

 

$

2.20

 

$

337

 

 

As of March 31, 2012, there was $0.4 million in unrecognized compensation expense related to shares of time-based restricted shares expected to vest.  This cost is expected to be recognized on a straight-line basis over a weighted average period of 0.9 years.  During the three months ended March 31, 2012, there were 42,226 shares of time-based restricted shares vested, and we recorded $0.1 million in non-cash compensation expense related to restricted stock granted that is expected to vest.

 

As of March 31, 2011, there was $1.0 million in unrecognized compensation expense related to shares of time-based restricted shares expected to vest.  This cost was expected to be recognized on a straight-line basis over a weighted average period of 0.9 years.  During the three months ended March 31, 2011, there were 61,508 shares of time-based restricted shares vested, and we recorded a reduction of $0.5 million in non-cash compensation expense related to the restricted stock granted that is expected to vest.

COMMITMENTS AND CONTINGENCIES
COMMITMENTS AND CONTINGENCIES

5.              COMMITMENTS AND CONTINGENCIES

 

Litigation Claims and Assessments

 

Automated Systems America, Inc.

 

On July 7, 2010, an action was commenced by Automated Systems America, Inc. in the United States District Court, Central District of California, against Holdings, GCA and certain current employees of GCA. The complaint seeks a declaratory judgment of invalidity, unenforceability and non-infringement of certain patents owned by the Company and alleges antitrust violations of Section 2 of the Sherman Act, unfair competition violations under the Lanham Act and tortuous interference and defamation per se. The plaintiff seeks damages in excess of $2.0 million, punitive damages, and a trebling of damages associated with the allegations under Section 2 of the Sherman Act. On March 3, 2011, the Company filed a motion to dismiss this action. In February 2012, the District Court entered an order granting the Company’s motion to dismiss this action without prejudice, allowing the plaintiff to file a new complaint if it chooses to do so. The plaintiff subsequently filed an amended complaint alleging substantially similar claims to those contained in the original complaint. At this stage of the litigation, the Company is unable to make an evaluation of whether the likelihood of an unfavorable outcome is either probable or remote or the amount or range of potential loss; however, the Company believes it has meritorious defenses and will vigorously defend this action.

 

We are also subject to a variety of other claims and suits that arise from time to time in the ordinary course of its business. We do not believe the liabilities, if any, which may ultimately result from the outcome of such matters, individually or in the aggregate, will have a material adverse impact on our financial position, liquidity or results of operations.

BORROWINGS
BORROWINGS

6.              BORROWINGS

 

As of December 31, 2010, we had total indebtedness of $208.8 million in principal amount (of which $127.8 million consisted of senior subordinated notes described below and $81.0 million consisted of senior secured debt under the Second Amended and Restated Credit Agreement described below, collectively referred to as the “Old Credit Facility”). On March 1, 2011, GCA, together with its sole stockholder, Holdings entered into a Credit Agreement (“the Credit Agreement”) with certain lenders, Deutsche Bank Trust Company Americas, as Administrative Agent and Wells Fargo Securities, LLC, as Syndication Agent. The Credit Agreement provides for a $210.0 million term loan facility and a $35.0 million revolving credit facility (the “New Senior Credit Facility”). The revolving credit facility includes provisions for the issuance of up to $10.0 million of letters of credit and up to $5.0 million in swingline loans. We used the proceeds from the New Senior Credit Facility to repay all outstanding indebtedness under our existing senior secured credit facility under the Second Amended and Restated Credit Agreement and to defease our senior subordinated notes.

 

The Credit Agreement also contains an increase option permitting GCA to arrange with existing lenders and/or new lenders for them to provide up to an aggregate of $50.0 million in additional term loan commitments. All $210.0 million of available borrowings under the term loan facility were borrowed concurrent with the establishment of the New Senior Credit Facility. Once repaid, no amounts under the term loan facility may be re-borrowed. In addition, $4.0 million of available borrowings under the revolving credit facility were borrowed concurrent with the establishment of the New Senior Credit Facility. Once repaid, amounts under the revolving credit facility may be re-borrowed.

 

The term loan requires principal repayments of one quarter of 1% of the aggregate initial principal amount of term loans, adjusted for any non-mandatory prepayments per quarter, as well as annual mandatory prepayment provisions based on an excess cash flow sweep equal to a fixed percentage of excess cash flow (as defined in the Credit Agreement). The remaining principal is due on the maturity date, March 1, 2016. GCA may prepay the loans and terminate the commitments at any time after the first year, without premium or penalty, subject to certain qualifications set forth in the Credit Agreement. Furthermore, the Credit Agreement contains mandatory prepayment provisions which, under certain circumstances, such as asset or equity sales, obligate GCA to apply defined portions of its cash flow to prepayment of the New Senior Credit Facility.

 

Borrowings under the New Senior Credit Facility bear interest at either (x) a specified base rate plus a 4.50% margin, or (y) LIBOR plus a 5.50% margin.  The base rate minimum is 2.50% and the LIBOR minimum is 1.50%.  Interest in respect of base rate loans is payable quarterly in arrears and interest in respect of LIBOR loans is payable in arrears at the end of the applicable interest period and every three months in the case of interest periods in excess of three months. Interest is also payable at the time of repayment of any loans and at maturity.  As of March 31, 2012, we had $142.0 million of outstanding indebtedness under the New Senior Credit Facility, all of which is outstanding under the term loan facility.  The weighted average interest rate, inclusive of the applicable margin of 550 basis points, was 7.0%.  We also had no amounts outstanding under our letter of credit sub facility that is part of our revolving credit facility as of March 31, 2012.  The New Senior Credit Facility is unconditionally guaranteed by Holdings and each direct and indirect domestic subsidiary of GCA.  All amounts owing under the New Senior Credit Facility are secured by a first priority perfected security interest in all stock (but only 65% of the stock of foreign subsidiaries), other equity interests and promissory notes owned by GCA and a first priority perfected security interest in all other tangible and intangible assets owned by GCA and the guarantors.

 

The Credit Agreement contains customary affirmative and negative covenants, financial covenants, representations and warranties and events of defaults.  As of March 31, 2012, the Company is in compliance with the required covenants.

 

Second Amended and Restated Credit Agreement

 

On November 1, 2006, GCA and Holdings entered into the Second Amended and Restated Credit Agreement with certain lenders, Bank of America, N.A., as Administrative Agent and Wachovia Bank, N.A., as Syndication Agent.  The Second Amended and Restated Credit Agreement significantly amended and restated the terms of GCA’s existing senior secured credit facilities to provide for a $100.0 million term loan facility and a $100.0 million five-year revolving credit facility, with a $25.0 million letter of credit sublimit and a $5.0 million swing-line loan sublimit.

 

Borrowings under the Second Amended and Restated Credit Agreement bore interest at LIBOR plus an applicable margin, which was based on the Company’s Senior Leverage Ratio (as defined under the Second Amended and Restated Credit Agreement).  As of December 31, 2010, the applicable margin was 112.5 basis points and the effective rate of interest was 1.39%.  As of December 31, 2010, the balance of this financial instrument was $81.0 million with $0 under the revolving portion and $2.8 million in letters of credit issued and outstanding.

 

Senior Subordinated Notes

 

On March 10, 2004, GCA completed a private placement offering of $235.0 million of 8.75% senior subordinated notes due 2012 (the “Notes”).  All of GCA’s existing and future domestic wholly owned subsidiaries were guarantors of the Notes on a senior subordinated basis. In addition, effective upon the closing of our initial public offering of common stock, Holdings guaranteed, on a subordinated basis, all of GCA’s obligations under the Notes.

 

Interest on the Notes accrued based upon a 360-day year comprised of twelve 30-day months and was payable semiannually on March 15th and September 15th.  On October 31, 2005, $82.3 million or 35% of these Notes were redeemed at a price of 108.75% of face, out of the net proceeds from our initial public offering. GCA could have redeemed all or a portion of the Notes at redemption prices of 104.375%, on or after March 15, 2008, 102.19% on or after March 15, 2009, or 100.00% on or after March 15, 2011.  On May 3, 2010, GCA redeemed prior to their maturity $25.0 million in the aggregate principal amount of the Notes at a redemption price of 100% of the principal amount of such Notes.  As of December 31, 2010, the Company had $127.8 million in borrowings outstanding under the indenture governing the Notes.

 

On March 1, 2011 the Company defeased our obligations under the Senior Subordinated Notes.

RELATED PARTY TRANSACTIONS
RELATED PARTY TRANSACTIONS

7.              RELATED PARTY TRANSACTIONS

 

Michael Rumbolz, who serves as a member of our Board of Directors, also serves as a member of the board of directors of Affinity Gaming LLC (“Affinity Gaming”). The Company provides various cash access products and services to Affinity Gaming. Mr. Rumbolz receives both cash and equity compensation from Affinity Gaming in consideration for serving on the board of directors of Affinity Gaming, however, none of this consideration is tied in any manner to the Company’s performance or obligations under its cash access agreements with Affinity Gaming. In addition, Mr. Rumbolz was not involved in the negotiation of the Company’s cash access agreements with Affinity Gaming.

INCOME TAXES
INCOME TAXES

8.              INCOME TAXES

 

The Company’s effective income tax rate for the three months ended March 31, 2012 and 2011 was 36.4% and 45.8%, respectively. The higher effective tax rate for the three months ended March 31, 2011 was due primarily to the expiration of non-qualified stock options, combined with a greater impact from incentive stock options.

 

The Company accounts for uncertain tax positions in accordance with the applicable accounting guidance.  As of March 31, 2012, there has been no material change to the balance of unrecognized tax benefits reported at December 31, 2011.

SEGMENT INFORMATION
SEGMENT INFORMATION

9.              SEGMENT INFORMATION

 

Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision-making group consists of the Chief Executive Officer and Chief Financial Officer. The operating segments are reviewed separately because each represents products or services that can be, and often are, marketed and sold separately to our customers.

 

The Company operates in three distinct business segments: (1) cash advance, (2) ATM and (3) check services. These segments are monitored separately by management for performance against its internal forecast and are consistent with the Company’s internal management reporting. Other lines of business, none of which exceed the established materiality for segment reporting, include Western Money, credit reporting services and Casino Marketing Services, among others.

 

The Company does not allocate depreciation and amortization expenses to the business segments.  Certain corporate overhead expenses have been allocated to the segments for identifiable items related to such segments or based on a reasonable methodology.

 

The Company’s business is predominantly domestic, with no specific regional concentrations and no significant assets in foreign locations.

 

Major Customers

 

For the three months ended March 31, 2012, none of our customers had combined revenues from all segments equal to or exceeding 10.0%.  For the three months ended March 31, 2012 and 2011, our five largest customers accounted for approximately 31.3% and 29.8%, respectively, of our total revenue.

 

The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies.

 

The tables below present the results of operations by operating segment for the three months ended March 31, 2012 and 2011, respectively (amounts in thousands):

 

 

 

Cash

 

 

 

Check

 

 

 

 

 

 

 

 

 

Advance

 

ATM

 

Services

 

Other

 

Corporate

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

58,361

 

$

80,347

 

$

6,516

 

$

5,841

 

$

 

$

151,065

 

Operating income

 

15,847

 

8,956

 

3,413

 

3,111

 

(15,631

)

15,696

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

50,873

 

$

71,191

 

$

6,411

 

$

5,914

 

$

 

$

134,389

 

Operating income

 

8,175

 

8,690

 

3,430

 

2,780

 

(13,770

)

9,305

 

 

The table below presents total assets by operating segment as of March 31, 2012 and December 31, 2011, respectively (amounts in thousands):

 

 

 

March 31, 2012

 

December 31, 2011

 

 

 

 

 

 

 

Cash Advance

 

$

154,606

 

$

164,515

 

ATM

 

96,209

 

98,418

 

Check services

 

34,261

 

37,231

 

Other

 

39,659

 

39,570

 

Corporate

 

170,847

 

189,333

 

 

 

 

 

 

 

Total Assets

 

$

495,582

 

$

529,067