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1. BUSINESS
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.
We are a global provider of cash access and related equipment services and solutions to the gaming industry. Our services, equipment 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. We also sell and service cash access devices such as slot machine ticket redemption and jackpot kiosks to the gaming industry. In addition, we provide products and services that improve credit decision making, automate cashier operations and enhance patron marketing activities for gaming establishments.
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2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 and nine months ended September 30, 2013 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, 2012 (the “2012 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.
Principles of Consolidation
All intercompany transactions and balances have been eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents include cash and all balances on deposit in banks and financial institutions. The Company considers all highly liquid investments with maturities of three months or less at the time of purchase to be cash and cash equivalents. Such balances may at times exceed the federal insurance limits. However, the Company periodically evaluates the creditworthiness of these institutions to minimize risk.
ATM Funding Agreements
The Company obtains all of the cash required to operate its ATMs through various ATM funding agreements. Some gaming establishments provide the cash utilized within the ATM (“Site-Funded”). The Site-Funded receivables generated for the amount of cash dispensed from transactions performed at our ATMs are owned by GCA and GCA is liable to the gaming establishment for the face amount of the cash dispensed. On our condensed consolidated balance sheets, the amount of the receivable for transactions processed on these ATM transactions is included within settlement receivables and the amount due to the gaming establishment for the face amount of dispensing transactions is included within settlement liabilities.
For our non-Site-Funded locations, the Company’s Contract Cash Solutions Agreement with Wells Fargo allows for the Company to utilize 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. Under this agreement, all currency supplied by Wells Fargo remains the sole property of Wells Fargo at all times until it is dispensed, at which time Wells Fargo obtains an interest in the corresponding settlement receivable. As the cash is never an asset of ours, supplied cash is not reflected on our condensed consolidated balance sheets. We are charged a cash usage fee for the cash used in these ATMs, which is included as interest expense on our condensed consolidated statements of income and comprehensive income. The Company recognizes the fees as interest expense due to the similar operational characteristics of a revolving line of credit, the fact that the fees are calculated on a financial index and the fees are paid for access to a capital resource.
Settlement Receivables and Settlement Liabilities
In the credit card cash access and POS debit card cash access transactions provided by GCA, the gaming establishment is reimbursed for the cash disbursed to gaming patrons, in most instances, through the issuance of a negotiable instrument, and, in some instances, through electronic settlement. The unpaid negotiable instrument amounts and electronic settlement amounts owing to gaming establishments are included within settlement liabilities on our condensed consolidated balance sheets.
GCA receives reimbursement from the patron’s credit or debit card issuer for the transaction in an amount equal to the amount owing to the gaming establishment plus the fee charged to the patron. This reimbursement is included within the settlement receivables on our condensed consolidated balance sheets.
Warranty Receivables
If a gaming establishment chooses to have a check warranted, it sends a request to a check warranty service provider, asking whether it would be willing to accept the risk of cashing the check. If the check warranty provider accepts the risk and warrants the check, the gaming establishment negotiates the patron’s check by providing cash for the face amount of the check. If the check is dishonored by the patron’s bank upon presentment, 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. In our Central Credit Check Warranty product under our agreement with TeleCheck, we receive all of the check warranty revenue. We are exposed to risk for the losses associated with any warranted items that we cannot collect from patrons issuing the items. Warranty receivables are defined as any amounts paid by TeleCheck to gaming establishments to purchase dishonored checks. Additionally, we pay a fee to TeleCheck for their services.
The warranty receivables amount is recorded in other receivables, net on our condensed consolidated balance sheets. On a monthly basis, the Company 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) on our condensed consolidated statements of income and comprehensive income.
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, restricted cash and cash equivalents, other receivables, net, settlement receivables, settlement liabilities, accounts payable and accrued expenses approximates fair value due to the short-term maturities of these instruments. The fair value of our borrowings are estimated based on various inputs to determine a market price, such as: market demand and supply, size of tranche, maturity and similar instruments trading in more active markets.
The fair values of all other financial instruments approximate their book values as the instruments are short-term in nature or contain market rates of interest.
The following table presents the fair value and carrying value of GCA’s borrowings (amounts in thousands):
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Level of Hierarchy(*) |
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Fair Value |
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Carrying Value |
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September 30, 2013 |
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Senior credit facility |
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2 |
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$ |
106,833 |
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$ |
106,500 |
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December 31, 2012 |
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Senior credit facility |
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2 |
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$ |
122,715 |
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$ |
121,500 |
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(*) Level 1 indicates that the fair value is determined by using quoted prices in active markets for identical investments. Level 2 indicates that the fair value is determined using pricing inputs other than quoted prices in active markets such as models or other valuation methodologies. Level 3 indicates that the fair value is determined using pricing inputs that are unobservable for the investment and include situations where there is little, if any, market activity for the investment. Significant management estimates and judgment are used in the determination of the fair value of Level 3 pricing inputs.
Interest Rate Cap
In conjunction with the terms and conditions of the Senior Credit Facility, as described in Note 4, 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 London Interbank Offer Rate (“LIBOR’) above 1.5% during the term of the interest rate cap with respect to its variable rate debt obligations under the Senior Credit Facility and its obligations under the Contract Cash Solutions Agreement with Wells Fargo. This interest rate cap is recorded in prepaid expenses and other assets on our condensed consolidated balance sheets, and is marked-to-market based on a quoted market price with the effects offset in our condensed consolidated statements of income and comprehensive income. The interest rate cap carrying value and fair value approximate each other and these values are insignificant as of September 30, 2013 and December 31, 2012.
Inventory
Inventory primarily consists of parts as well as finished goods and work-in-progress. Inventory is stated at lower of cost or market accounted for using the average cost method. The cost of inventory includes cost of materials, labor, overhead and freight.
Goodwill and Other Intangible Assets
In accordance with ASC 350, we test goodwill at the reporting unit level for impairment on an annual basis and between annual tests if events and circumstances indicate it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The Company does not believe that any of its goodwill was impaired as of September 30, 2013.
Other intangible assets consist primarily of customer contracts (rights to provide cash access services to gaming establishment customers) acquired through business combinations and acquisitions, capitalized software development costs and the acquisition cost of our patent related to the “3-in-1 rollover” technology acquired in 2005. Customer contracts require the Company to make renewal assumptions, which impact the estimated useful lives of such assets. The acquisition cost of the 3-in-1 rollover patent is being amortized over the term of the patent, which expires in 2018.
Revenue Recognition
The Company recognizes revenue when evidence of an arrangement exists, services have been rendered, the price is fixed or determinable and collectability is reasonably assured. The Company evaluates its revenue streams for proper timing of revenue recognition. Revenue is recognized as products are delivered and/or services are performed.
Cost of Revenues (exclusive of depreciation and amortization)
The cost of revenues (exclusive of depreciation and amortization) represents the direct costs required to perform revenue generating transactions. The principal costs included within cost of revenues (exclusive of depreciation and amortization) are commissions paid to gaming establishments, interchange fees paid to credit and debit card networks, transaction processing fees to our transaction processor, cost of cash access devices and associated parts and check cashing warranties.
Income Taxes
Income tax expense includes U.S. and international income taxes, plus the provision for U.S. taxes on undistributed earnings of international subsidiaries not deemed to be permanently invested. Since it is management’s practice and intent to reinvest the earnings in the international operations of our foreign subsidiaries, U.S. federal income taxes have not been provided on the undistributed earnings of any foreign subsidiaries except for GCA Macau. Some items of income and expense are not reported in tax returns and financial statements in the same year. The tax effect of such temporary differences is reported as deferred income taxes.
Foreign Currency Translation
Foreign currency denominated assets and liabilities for those foreign entities for which the local currency is the functional currency are translated into U.S. dollars based on exchange rates prevailing at the end of each period. Revenues and expenses are translated at average exchange rates during the year. The effects of foreign exchange gains and losses arising from these translations are included as a component of other comprehensive income on our condensed consolidated statements of income and comprehensive income. Translation adjustments on intercompany balances of a long-term investment nature are recorded as a component of accumulated other comprehensive income on our condensed consolidated balance sheets.
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.
Share Based Compensation
Share based payment awards result in a cost that is measured at fair value on the award’s grant date. Stock options expected to be exercised currently and in future periods are measured at fair value using the Black Scholes model with the expense associated with these awards being recognized on the straight-line basis over the awards’ vesting period. The expense associated with restricted stock awards is recognized on the straight-line basis over the awards’ vesting period. Forfeitures are estimated at the time of grant, with such estimate updated periodically and with actual forfeitures recognized currently to the extent they differ from the estimates.
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3. ATM FUNDING AGREEMENTS
Wells Fargo Contract Cash Solutions Agreement
Our Contract Cash Solutions Agreement with Wells Fargo allows for the Company to utilize 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, we pay Wells Fargo a cash usage fee on the average daily balance of funds utilized multiplied by a contractually defined cash usage rate. Under this agreement, all currency supplied by Wells Fargo remains the sole property of Wells Fargo at all times until it is dispensed, at which time Wells Fargo obtains an interest in the corresponding settlement receivable. As the cash is never an asset of ours, supplied cash is not reflected on our condensed consolidated balance sheets.
The Contract Cash Solutions Agreement allows for a maximum amount of cash to be provided to GCA of $500.0 million, and the agreement was scheduled to terminate on November 30, 2014; however, on November 4, 2013, we entered into an amendment to the Contract Cash Solutions Agreement to extend the term one year until November 30, 2015.
The outstanding balances of ATM cash utilized by GCA from Wells Fargo were $268.5 million and $360.4 million as of September 30, 2013 and December 31, 2012, respectively.
Under the terms of the Contract Cash Solutions Agreement, we pay a monthly cash usage fee based upon the product of the average daily dollars outstanding in all ATMs multiplied by a contractually defined cash usage rate. This cash usage rate is determined by an applicable LIBOR plus a mutually agreed upon margin. We are exposed to interest rate risk to the extent that the applicable LIBOR increases, subject to the interest rate cap. The cash usage fees incurred by us, reflected as interest expense within our condensed consolidated statements of income and comprehensive income, were $0.6 million and $1.7 million and $0.7 million and $2.5 million for the three and nine months ended September 30, 2013 and 2012, respectively.
We are responsible for any losses of cash in the ATMs under our agreement with Wells Fargo and we are self-insured for this risk. We incurred no material losses related to this self-insurance for the three and nine months ended September 30, 2013 and 2012.
Site Funded ATMs
We operate ATMs at certain customer gaming establishments where the gaming establishments provide the cash required for the ATMs’ operational needs. We are 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 on our condensed consolidated balance sheets and was $96.2 million and $107.5 million as of September 30, 2013 and December 31, 2012, respectively.
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4. BORROWINGS
Senior Credit Facility
We have 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 “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 swing-line loans.
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. The Credit Agreement contains mandatory prepayment provisions which, under certain circumstances, such as asset or equity sales, obligate us to apply defined portions of our cash flow to prepayment of the Senior Credit Facility.
We had $106.5 million of outstanding indebtedness under the Senior Credit Facility, all of which was outstanding under the term loan facility as of September 30, 2013.
In May 2013, we entered into a second amendment to our Credit Agreement, dated March 1, 2011, among Deutsche Bank Trust Company Americas, as administrative agent and the various lenders who are a party thereto (the “Amended Credit Agreement”). The Amended Credit Agreement reduces the interest rate on borrowings under the term loan facility from LIBOR plus a margin of 5.5% (subject to a minimum LIBOR rate of 1.50%) to LIBOR plus a margin of 3.0% (subject to a minimum LIBOR rate of 1.0%). In addition, the original Credit Agreement provided for an increase option permitting us to arrange with existing and/or new lenders for them to provide up to an aggregate of $50.0 million in additional term loan commitments. The Amended Credit Agreement now provides us with an increase option permitting the Company to arrange with existing and/or new lenders additional term loan and/or revolving credit facility loan amounts in excess of $50.0 million so long as our total leverage ratio after giving effect to such additional loan amount does not exceed 2.50:1.00 (as such leverage ratio is calculated and defined under the Amended Credit Agreement).
The weighted average interest rate was 4.0% and 5.6% for the three and nine months ended September 30, 2013, respectively. We also had no amounts outstanding under our letter of credit sub facility that is part of our revolving credit facility as of September 30, 2013. The Senior Credit Facility is unconditionally guaranteed by Holdings and each direct and indirect domestic subsidiary of GCA. All amounts owing under the 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 us and a first priority perfected security interest in all other tangible and intangible assets owned by us and our guarantors.
The Credit Agreement contains customary affirmative and negative covenants, financial covenants, representations and warranties and events of defaults. We were in compliance with the required covenants as of September 30, 2013.
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5. COMMITMENTS AND CONTINGENCIES
We are subject to a variety of claims and suits that arise from time to time in the ordinary course of 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.
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6. SHAREHOLDERS’ EQUITY
Common Stock Repurchase Program
Our current share repurchase program grants us the authority to repurchase up to $40.0 million of our outstanding common stock over a two year period, which commenced in the first quarter of 2013. We have repurchased approximately 0.4 million and 2.1 million shares of common stock for cash of $2.8 million and $14.5 million under the share repurchase program during the three and nine months ended September 30, 2013, respectively. We completed the share repurchases with cash on hand and we intend to continue to use cash on hand for these share repurchases. The repurchase program authorizes us to buy our common stock from time to time through open market, privately negotiated or other transactions, including pursuant to trading plans established in accordance with Rules 10b5-1 and 10b-18 of the Securities Exchange Act of 1934, as amended, or by a combination of such methods. The share repurchase program is subject to prevailing market conditions and other considerations and may be suspended or discontinued at any time.
Treasury Stock
In addition to open market purchases of common stock authorized under the Common Stock Repurchase Program, employees may direct us to withhold vested shares of restricted stock to satisfy the minimum statutory withholding requirements applicable to their restricted stock vesting. We repurchased or withheld from restricted stock awards approximately 1,100 shares and 12,200 shares of common stock at an aggregate purchase price of approximately $8,200 and $86,600 to satisfy the minimum applicable tax withholding obligations incident to the vesting of such restricted stock awards during the three and nine months ended September 30, 2013, respectively.
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7. WEIGHTED AVERAGE COMMON SHARES
The weighted average number of common shares outstanding used in the computation of basic and diluted earnings per share is as follows (in thousands):
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Three Months Ended September 30, |
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Nine Months Ended September 30, |
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2013 |
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2012 |
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2013 |
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2012 |
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Weighted average number of common shares outstanding - basic |
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65,525 |
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66,108 |
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66,108 |
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65,673 |
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Potential dilution from equity grants(1) |
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1,105 |
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1,493 |
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1,050 |
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1,358 |
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Weighted average number of common shares outstanding - diluted |
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66,630 |
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67,601 |
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67,158 |
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67,031 |
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(1) The potential dilution excludes the weighted average effect of stock options to acquire 6.1 million and 6.0 million and 5.5 million and 6.9 million of our common stock for the three and nine months ended September 30, 2013 and 2012, respectively, because the application of the treasury stock method, as required, makes them anti-dilutive.
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8. SHARE-BASED COMPENSATION
Equity Incentive Awards
In January 2005, we 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 our 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.
The vesting provisions of restricted stock 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.
A summary of award activity under the 2005 Plan is as follows (in thousands):
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Stock Options |
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Restricted Stock |
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Equity Awards |
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Outstanding, December 31, 2012 |
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9,449 |
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111 |
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2,629 |
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Additional authorized shares |
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- |
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- |
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3,174 |
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Granted |
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1,230 |
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370 |
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(1,600) |
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Exercised options or vested shares |
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(823) |
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(53) |
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- |
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Canceled or forfeited |
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(156) |
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(3) |
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159 |
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Outstanding, September 30, 2013 |
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9,700 |
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425 |
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4,362 |
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Stock Options
The fair value of options was determined as of the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:
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Nine Months Ended September 30, |
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2013 |
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2012 |
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Risk-free interest rate |
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1% |
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1% |
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Expected life of options (in years) |
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4 |
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6 |
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Expected volatility |
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61% |
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62% |
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Expected dividend yield |
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0% |
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0% |
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The following table presents the options activity under the 2005 Plan:
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Number of Common Shares (in thousands) |
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Weighted Average Exercise Price (per share) |
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Weighted Average Life Remaining (years) |
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Aggregate Intrinsic Value (in thousands) |
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Outstanding, December 31, 2012 |
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9,449 |
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$ |
7.19 |
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6.4 |
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$ |
16,626 |
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Granted |
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1,230 |
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7.07 |
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Exercised |
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(823) |
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4.55 |
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Canceled or forfeited |
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(156) |
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7.29 |
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Outstanding, September 30, 2013 |
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9,700 |
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$ |
7.40 |
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6.2 |
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$ |
14,486 |
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Vested and expected to vest, September 30, 2013 |
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9,213 |
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$ |
7.48 |
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6.1 |
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$ |
13,506 |
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Exercisable, September 30, 2013 |
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6,610 |
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$ |
8.08 |
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5.1 |
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$ |
8,655 |
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There were 15,000 options granted during the three months ended September 30, 2013. The weighted average grant date fair value per share of the options granted was $3.31 for both the nine months ended September 30, 2013 and 2012. The total intrinsic value of options exercised was $0.8 million and $2.3 million and $2.9 million and $5.1 million for the three and nine months ended September 30, 2013 and 2012, respectively.
As of September 30, 2013, there was $8.3 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 2.6 years. During the nine months ended September 30, 2013, the Company granted options to acquire approximately 1.2 million shares of common stock, received $3.8 million in proceeds from the exercise of options and recorded $3.2 million in non-cash compensation expense related to options granted that are expected to vest.
As of September 30, 2012, there was $10.2 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 2.7 years. During the nine months ended September 30, 2012, the Company granted options to acquire approximately 2.3 million shares of common stock, received $5.9 million in proceeds from the exercise of options and recorded $3.7 million in non-cash compensation expense related to options granted that are expected to vest.
Restricted Stock
The following table presents a summary of non-vested share awards for the Company’s time-based restricted shares:
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Shares Outstanding (in thousands) |
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Weighted Average Grant Date Fair Value (per share) |
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Outstanding, December 31, 2012 |
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111 |
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$ |
5.72 |
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Granted |
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370 |
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7.09 |
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Vested |
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(53) |
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4.49 |
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Forfeited |
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(3) |
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7.09 |
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Outstanding, September 30, 2013 |
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425 |
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$ |
7.05 |
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There was no restricted stock granted during the three months ended September 30, 2013. The weighted average grant date fair value per share of restricted stock granted was $7.09 for the nine months ended September 30, 2013. There was no restricted stock granted during the three months ended September 30, 2012. The weighted average grant date fair value per share of restricted stock granted was $6.62 for the nine months ended September 30, 2012. The total fair value of shares vested were $0.1 million and $0.4 million and $0.3 million and $1.0 million for the three and nine months ended September 30, 2013 and 2012, respectively.
As of September 30, 2013, there was $2.3 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 3.3 years. During the nine months ended September 30, 2013, there were 52,560 shares of time-based restricted shares vested, and we recorded $0.5 million in non-cash compensation expense related to the restricted stock granted that is expected to vest.
As of September 30, 2012, there was $0.5 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 2.6 years. During the nine months ended September 30, 2012, there were 126,332 shares of time-based restricted shares vested, and we recorded $0.3 million in non-cash compensation expense related to the restricted stock granted that is expected to vest.
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9. INCOME TAXES
The Company’s effective income tax rate was 36.9% and 37.3% and 36.0% and 37.7% for the three and nine months ended September 30, 2013 and 2012, respectively, all of which were greater than the statutory federal rate of 35.0% due in part to state taxes and the non-cash compensation expenses related to stock options.
The Company accounts for uncertain tax positions in accordance with the applicable accounting guidance. As of September 30, 2013, there has been no material change to the balance of unrecognized tax benefits from December 31, 2012.
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10. 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.
We operate 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 our internal management reporting. Other lines of business, none of which exceed the established materiality for segment reporting, include kiosk sales and services and credit reporting services, among others.
We do 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.
Our business is predominantly domestic, with no specific regional concentrations and no significant assets in foreign locations.
Major Customers
For the three and nine months ended September 30, 2013 and 2012, none of our customers had combined revenues from all segments equal to or exceeding 10%. Our five largest customers accounted for approximately 33% for both the three and nine months ended September 30, 2013 and 33% and 32% of our total revenues for the three and nine months ended September 30, 2012, respectively.
The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies.
The following tables present the Company’s segment information (in thousands):
|
|
For the Three Months Ended September 30, |
|
For the Nine Months Ended September 30, |
| ||||||||
|
|
2013 |
|
2012 |
|
2013 |
|
2012 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Revenues |
|
|
|
|
|
|
|
|
| ||||
Cash advance |
|
$ |
58,305 |
|
$ |
57,520 |
|
$ |
174,292 |
|
$ |
172,557 |
|
ATM |
|
71,634 |
|
76,411 |
|
219,881 |
|
233,361 |
| ||||
Check services |
|
5,385 |
|
6,611 |
|
16,786 |
|
19,731 |
| ||||
Other |
|
10,777 |
|
9,282 |
|
31,028 |
|
22,705 |
| ||||
Corporate |
|
- |
|
- |
|
- |
|
- |
| ||||
Total revenues |
|
$ |
146,101 |
|
$ |
149,824 |
|
$ |
441,987 |
|
$ |
448,354 |
|
|
|
|
|
|
|
|
|
|
| ||||
Operating income |
|
|
|
|
|
|
|
|
| ||||
Cash advance |
|
$ |
15,190 |
|
$ |
15,785 |
|
$ |
46,503 |
|
$ |
48,388 |
|
ATM |
|
6,114 |
|
7,951 |
|
19,323 |
|
25,620 |
| ||||
Check services |
|
3,074 |
|
3,822 |
|
9,874 |
|
11,017 |
| ||||
Other |
|
4,399 |
|
4,673 |
|
14,031 |
|
11,563 |
| ||||
Corporate |
|
(17,357) |
|
(17,588) |
|
(51,777) |
|
(50,287) |
| ||||
Total operating income |
|
$ |
11,420 |
|
$ |
14,643 |
|
$ |
37,954 |
|
$ |
46,301 |
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
|
|
At |
|
|
|
|
| ||||||
|
|
September 30, 2013 |
|
December 31, 2012 |
|
|
|
|
| ||||
Total assets |
|
|
|
|
|
|
|
|
| ||||
Cash advance |
|
$ |
137,015 |
|
$ |
149,113 |
|
|
|
|
| ||
ATM |
|
61,372 |
|
59,781 |
|
|
|
|
| ||||
Check services |
|
29,575 |
|
35,216 |
|
|
|
|
| ||||
Other |
|
46,157 |
|
39,838 |
|
|
|
|
| ||||
Corporate |
|
261,563 |
|
269,947 |
|
|
|
|
| ||||
Total assets |
|
$ |
535,682 |
|
$ |
553,895 |
|
|
|
|
|
|
11. SUBSEQUENT EVENTS
As of November 5, 2013, the Company had not identified, and was not aware of, any subsequent events for the three and nine months ended September 30, 2013.
|
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 and nine months ended September 30, 2013 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, 2012 (the “2012 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.
Principles of Consolidation
All intercompany transactions and balances have been eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents include cash and all balances on deposit in banks and financial institutions. The Company considers all highly liquid investments with maturities of three months or less at the time of purchase to be cash and cash equivalents. Such balances may at times exceed the federal insurance limits. However, the Company periodically evaluates the creditworthiness of these institutions to minimize risk.
ATM Funding Agreements
The Company obtains all of the cash required to operate its ATMs through various ATM funding agreements. Some gaming establishments provide the cash utilized within the ATM (“Site-Funded”). The Site-Funded receivables generated for the amount of cash dispensed from transactions performed at our ATMs are owned by GCA and GCA is liable to the gaming establishment for the face amount of the cash dispensed. On our condensed consolidated balance sheets, the amount of the receivable for transactions processed on these ATM transactions is included within settlement receivables and the amount due to the gaming establishment for the face amount of dispensing transactions is included within settlement liabilities.
For our non-Site-Funded locations, the Company’s Contract Cash Solutions Agreement with Wells Fargo allows for the Company to utilize 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. Under this agreement, all currency supplied by Wells Fargo remains the sole property of Wells Fargo at all times until it is dispensed, at which time Wells Fargo obtains an interest in the corresponding settlement receivable. As the cash is never an asset of ours, supplied cash is not reflected on our condensed consolidated balance sheets. We are charged a cash usage fee for the cash used in these ATMs, which is included as interest expense on our condensed consolidated statements of income and comprehensive income. The Company recognizes the fees as interest expense due to the similar operational characteristics of a revolving line of credit, the fact that the fees are calculated on a financial index and the fees are paid for access to a capital resource.
Settlement Receivables and Settlement Liabilities
In the credit card cash access and POS debit card cash access transactions provided by GCA, the gaming establishment is reimbursed for the cash disbursed to gaming patrons, in most instances, through the issuance of a negotiable instrument, and, in some instances, through electronic settlement. The unpaid negotiable instrument amounts and electronic settlement amounts owing to gaming establishments are included within settlement liabilities on our condensed consolidated balance sheets.
GCA receives reimbursement from the patron’s credit or debit card issuer for the transaction in an amount equal to the amount owing to the gaming establishment plus the fee charged to the patron. This reimbursement is included within the settlement receivables on our condensed consolidated balance sheets.
Warranty Receivables
If a gaming establishment chooses to have a check warranted, it sends a request to a check warranty service provider, asking whether it would be willing to accept the risk of cashing the check. If the check warranty provider accepts the risk and warrants the check, the gaming establishment negotiates the patron’s check by providing cash for the face amount of the check. If the check is dishonored by the patron’s bank upon presentment, 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. In our Central Credit Check Warranty product under our agreement with TeleCheck, we receive all of the check warranty revenue. We are exposed to risk for the losses associated with any warranted items that we cannot collect from patrons issuing the items. Warranty receivables are defined as any amounts paid by TeleCheck to gaming establishments to purchase dishonored checks. Additionally, we pay a fee to TeleCheck for their services.
The warranty receivables amount is recorded in other receivables, net on our condensed consolidated balance sheets. On a monthly basis, the Company 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) on our condensed consolidated statements of income and comprehensive income.
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, restricted cash and cash equivalents, other receivables, net, settlement receivables, settlement liabilities, accounts payable and accrued expenses approximates fair value due to the short-term maturities of these instruments. The fair value of our borrowings are estimated based on various inputs to determine a market price, such as: market demand and supply, size of tranche, maturity and similar instruments trading in more active markets.
The fair values of all other financial instruments approximate their book values as the instruments are short-term in nature or contain market rates of interest.
The following table presents the fair value and carrying value of GCA’s borrowings (amounts in thousands):
|
|
Level of Hierarchy(*) |
|
Fair Value |
|
Carrying Value |
| ||
|
|
|
|
|
|
|
| ||
September 30, 2013 |
|
|
|
|
|
|
| ||
Senior credit facility |
|
2 |
|
$ |
106,833 |
|
$ |
106,500 |
|
|
|
|
|
|
|
|
| ||
December 31, 2012 |
|
|
|
|
|
|
| ||
Senior credit facility |
|
2 |
|
$ |
122,715 |
|
$ |
121,500 |
|
(*) Level 1 indicates that the fair value is determined by using quoted prices in active markets for identical investments. Level 2 indicates that the fair value is determined using pricing inputs other than quoted prices in active markets such as models or other valuation methodologies. Level 3 indicates that the fair value is determined using pricing inputs that are unobservable for the investment and include situations where there is little, if any, market activity for the investment. Significant management estimates and judgment are used in the determination of the fair value of Level 3 pricing inputs.
Interest Rate Cap
In conjunction with the terms and conditions of the Senior Credit Facility, as described in Note 4, 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 London Interbank Offer Rate (“LIBOR’) above 1.5% during the term of the interest rate cap with respect to its variable rate debt obligations under the Senior Credit Facility and its obligations under the Contract Cash Solutions Agreement with Wells Fargo. This interest rate cap is recorded in prepaid expenses and other assets on our condensed consolidated balance sheets, and is marked-to-market based on a quoted market price with the effects offset in our condensed consolidated statements of income and comprehensive income. The interest rate cap carrying value and fair value approximate each other and these values are insignificant as of September 30, 2013 and December 31, 2012.
Inventory
Inventory primarily consists of parts as well as finished goods and work-in-progress. Inventory is stated at lower of cost or market accounted for using the average cost method. The cost of inventory includes cost of materials, labor, overhead and freight.
Goodwill and Other Intangible Assets
In accordance with ASC 350, we test goodwill at the reporting unit level for impairment on an annual basis and between annual tests if events and circumstances indicate it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The Company does not believe that any of its goodwill was impaired as of September 30, 2013.
Other intangible assets consist primarily of customer contracts (rights to provide cash access services to gaming establishment customers) acquired through business combinations and acquisitions, capitalized software development costs and the acquisition cost of our patent related to the “3-in-1 rollover” technology acquired in 2005. Customer contracts require the Company to make renewal assumptions, which impact the estimated useful lives of such assets. The acquisition cost of the 3-in-1 rollover patent is being amortized over the term of the patent, which expires in 2018.
Revenue Recognition
The Company recognizes revenue when evidence of an arrangement exists, services have been rendered, the price is fixed or determinable and collectability is reasonably assured. The Company evaluates its revenue streams for proper timing of revenue recognition. Revenue is recognized as products are delivered and/or services are performed.
Cost of Revenues (exclusive of depreciation and amortization)
The cost of revenues (exclusive of depreciation and amortization) represents the direct costs required to perform revenue generating transactions. The principal costs included within cost of revenues (exclusive of depreciation and amortization) are commissions paid to gaming establishments, interchange fees paid to credit and debit card networks, transaction processing fees to our transaction processor, cost of cash access devices and associated parts and check cashing warranties.
Income Taxes
Income tax expense includes U.S. and international income taxes, plus the provision for U.S. taxes on undistributed earnings of international subsidiaries not deemed to be permanently invested. Since it is management’s practice and intent to reinvest the earnings in the international operations of our foreign subsidiaries, U.S. federal income taxes have not been provided on the undistributed earnings of any foreign subsidiaries except for GCA Macau. Some items of income and expense are not reported in tax returns and financial statements in the same year. The tax effect of such temporary differences is reported as deferred income taxes.
Foreign Currency Translation
Foreign currency denominated assets and liabilities for those foreign entities for which the local currency is the functional currency are translated into U.S. dollars based on exchange rates prevailing at the end of each period. Revenues and expenses are translated at average exchange rates during the year. The effects of foreign exchange gains and losses arising from these translations are included as a component of other comprehensive income on our condensed consolidated statements of income and comprehensive income. Translation adjustments on intercompany balances of a long-term investment nature are recorded as a component of accumulated other comprehensive income on our condensed consolidated balance sheets.
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.
Share Based Compensation
Share based payment awards result in a cost that is measured at fair value on the award’s grant date. Stock options expected to be exercised currently and in future periods are measured at fair value using the Black Scholes model with the expense associated with these awards being recognized on the straight-line basis over the awards’ vesting period. The expense associated with restricted stock awards is recognized on the straight-line basis over the awards’ vesting period. Forfeitures are estimated at the time of grant, with such estimate updated periodically and with actual forfeitures recognized currently to the extent they differ from the estimates.
|
The following table presents the fair value and carrying value of GCA’s borrowings (amounts in thousands):
|
|
Level of Hierarchy(*) |
|
Fair Value |
|
Carrying Value |
| ||
|
|
|
|
|
|
|
| ||
September 30, 2013 |
|
|
|
|
|
|
| ||
Senior credit facility |
|
2 |
|
$ |
106,833 |
|
$ |
106,500 |
|
|
|
|
|
|
|
|
| ||
December 31, 2012 |
|
|
|
|
|
|
| ||
Senior credit facility |
|
2 |
|
$ |
122,715 |
|
$ |
121,500 |
|
|
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 September 30, |
|
Nine Months Ended September 30, |
| ||||
|
|
2013 |
|
2012 |
|
2013 |
|
2012 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding - basic |
|
65,525 |
|
66,108 |
|
66,108 |
|
65,673 |
|
Potential dilution from equity grants(1) |
|
1,105 |
|
1,493 |
|
1,050 |
|
1,358 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding - diluted |
|
66,630 |
|
67,601 |
|
67,158 |
|
67,031 |
|
(1) The potential dilution excludes the weighted average effect of stock options to acquire 6.1 million and 6.0 million and 5.5 million and 6.9 million of our common stock for the three and nine months ended September 30, 2013 and 2012, respectively, because the application of the treasury stock method, as required, makes them anti-dilutive.
|
A summary of award activity under the 2005 Plan is as follows (in thousands):
|
|
Stock Options |
|
Restricted Stock |
|
Equity Awards |
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2012 |
|
9,449 |
|
111 |
|
2,629 |
|
|
|
|
|
|
|
|
|
Additional authorized shares |
|
- |
|
- |
|
3,174 |
|
Granted |
|
1,230 |
|
370 |
|
(1,600) |
|
Exercised options or vested shares |
|
(823) |
|
(53) |
|
- |
|
Canceled or forfeited |
|
(156) |
|
(3) |
|
159 |
|
|
|
|
|
|
|
|
|
Outstanding, September 30, 2013 |
|
9,700 |
|
425 |
|
4,362 |
|
|
|
Nine Months Ended September 30, |
| ||
|
|
2013 |
|
2012 |
|
|
|
|
|
|
|
Risk-free interest rate |
|
1% |
|
1% |
|
Expected life of options (in years) |
|
4 |
|
6 |
|
Expected volatility |
|
61% |
|
62% |
|
Expected dividend yield |
|
0% |
|
0% |
|
|
|
Number of Common Shares (in thousands) |
|
Weighted Average Exercise Price (per share) |
|
Weighted Average Life Remaining (years) |
|
Aggregate Intrinsic Value (in thousands) |
| ||
|
|
|
|
|
|
|
|
|
| ||
Outstanding, December 31, 2012 |
|
9,449 |
|
$ |
7.19 |
|
6.4 |
|
$ |
16,626 |
|
|
|
|
|
|
|
|
|
|
| ||
Granted |
|
1,230 |
|
7.07 |
|
|
|
|
| ||
Exercised |
|
(823) |
|
4.55 |
|
|
|
|
| ||
Canceled or forfeited |
|
(156) |
|
7.29 |
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| ||
Outstanding, September 30, 2013 |
|
9,700 |
|
$ |
7.40 |
|
6.2 |
|
$ |
14,486 |
|
|
|
|
|
|
|
|
|
|
| ||
Vested and expected to vest, September 30, 2013 |
|
9,213 |
|
$ |
7.48 |
|
6.1 |
|
$ |
13,506 |
|
|
|
|
|
|
|
|
|
|
| ||
Exercisable, September 30, 2013 |
|
6,610 |
|
$ |
8.08 |
|
5.1 |
|
$ |
8,655 |
|
|
|
Shares Outstanding (in thousands) |
|
Weighted Average Grant Date Fair Value (per share) |
| |
|
|
|
|
|
| |
Outstanding, December 31, 2012 |
|
111 |
|
$ |
5.72 |
|
|
|
|
|
|
| |
Granted |
|
370 |
|
7.09 |
| |
Vested |
|
(53) |
|
4.49 |
| |
Forfeited |
|
(3) |
|
7.09 |
| |
|
|
|
|
|
| |
Outstanding, September 30, 2013 |
|
425 |
|
$ |
7.05 |
|
|
The following tables present the Company’s segment information (in thousands):
|
|
For the Three Months Ended September 30, |
|
For the Nine Months Ended September 30, |
| ||||||||
|
|
2013 |
|
2012 |
|
2013 |
|
2012 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Revenues |
|
|
|
|
|
|
|
|
| ||||
Cash advance |
|
$ |
58,305 |
|
$ |
57,520 |
|
$ |
174,292 |
|
$ |
172,557 |
|
ATM |
|
71,634 |
|
76,411 |
|
219,881 |
|
233,361 |
| ||||
Check services |
|
5,385 |
|
6,611 |
|
16,786 |
|
19,731 |
| ||||
Other |
|
10,777 |
|
9,282 |
|
31,028 |
|
22,705 |
| ||||
Corporate |
|
- |
|
- |
|
- |
|
- |
| ||||
Total revenues |
|
$ |
146,101 |
|
$ |
149,824 |
|
$ |
441,987 |
|
$ |
448,354 |
|
|
|
|
|
|
|
|
|
|
| ||||
Operating income |
|
|
|
|
|
|
|
|
| ||||
Cash advance |
|
$ |
15,190 |
|
$ |
15,785 |
|
$ |
46,503 |
|
$ |
48,388 |
|
ATM |
|
6,114 |
|
7,951 |
|
19,323 |
|
25,620 |
| ||||
Check services |
|
3,074 |
|
3,822 |
|
9,874 |
|
11,017 |
| ||||
Other |
|
4,399 |
|
4,673 |
|
14,031 |
|
11,563 |
| ||||
Corporate |
|
(17,357) |
|
(17,588) |
|
(51,777) |
|
(50,287) |
| ||||
Total operating income |
|
$ |
11,420 |
|
$ |
14,643 |
|
$ |
37,954 |
|
$ |
46,301 |
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
|
|
At |
|
|
|
|
| ||||||
|
|
September 30, 2013 |
|
December 31, 2012 |
|
|
|
|
| ||||
Total assets |
|
|
|
|
|
|
|
|
| ||||
Cash advance |
|
$ |
137,015 |
|
$ |
149,113 |
|
|
|
|
| ||
ATM |
|
61,372 |
|
59,781 |
|
|
|
|
| ||||
Check services |
|
29,575 |
|
35,216 |
|
|
|
|
| ||||
Other |
|
46,157 |
|
39,838 |
|
|
|
|
| ||||
Corporate |
|
261,563 |
|
269,947 |
|
|
|
|
| ||||
Total assets |
|
$ |
535,682 |
|
$ |
553,895 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|