GLOBAL CASH ACCESS HOLDINGS, INC., 10-Q filed on 8/6/2013
Quarterly Report
Document and Entity Information
6 Months Ended
Jun. 30, 2013
Jul. 26, 2013
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
Jun. 30, 2013 
 
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
 
65,385,676 
Document Fiscal Year Focus
2013 
 
Document Fiscal Period Focus
Q2 
 
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2013
Jun. 30, 2012
Jun. 30, 2013
Jun. 30, 2012
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
 
 
 
 
Revenues
$ 149,066 
$ 147,465 
$ 295,887 
$ 298,530 
Costs and expenses
 
 
 
 
Cost of revenues (exclusive of depreciation and amortization)
111,724 
108,378 
222,822 
222,193 
Operating expenses
19,479 
18,958 
38,463 
36,446 
Depreciation
1,945 
1,820 
3,513 
3,564 
Amortization
2,285 
2,346 
4,555 
4,667 
Total costs and expenses
135,433 
131,502 
269,353 
266,870 
Operating income
13,633 
15,963 
26,534 
31,660 
Other expenses
 
 
 
 
Interest expense, net of interest income
2,733 
4,063 
5,896 
8,547 
Total other expenses
2,733 
4,063 
5,896 
8,547 
Income from operations before tax
10,900 
11,900 
20,638 
23,113 
Income tax provision
4,124 
4,816 
7,726 
8,901 
Net income
6,776 
7,084 
12,912 
14,212 
Foreign currency translation
(97)
(217)
(512)
(72)
Comprehensive income
$ 6,679 
$ 6,867 
$ 12,400 
$ 14,140 
Earnings per share
 
 
 
 
Basic (in dollars per share)
$ 0.10 
$ 0.11 
$ 0.19 
$ 0.22 
Diluted (in dollars per share)
$ 0.10 
$ 0.11 
$ 0.19 
$ 0.21 
Weighted average common shares outstanding
 
 
 
 
Basic (in shares)
66,116 
65,774 
66,401 
65,470 
Diluted (in shares)
66,993 
67,383 
67,425 
66,786 
CONDENSED CONSOLIDATED BALANCE SHEETS (USD $)
In Thousands, unless otherwise specified
Jun. 30, 2013
Dec. 31, 2012
ASSETS
 
 
Cash and cash equivalents
$ 65,448 
$ 153,020 
Restricted cash and cash equivalents
200 
200 
Settlement receivables
123,283 
29,484 
Other receivables, net of allowances for doubtful accounts of $5.1 million and $6.9 million, respectively
14,102 
11,571 
Inventory
7,567 
7,126 
Prepaid expenses and other assets
19,157 
18,254 
Property, equipment and leasehold improvements, net
19,491 
15,441 
Goodwill
180,097 
180,141 
Other intangible assets, net
31,821 
33,994 
Deferred income taxes, net
97,453 
104,664 
Total assets
558,619 
553,895 
Liabilities
 
 
Settlement liabilities
186,557 
182,446 
Accounts payable and accrued expenses
55,870 
51,190 
Borrowings
112,000 
121,500 
Total liabilities
354,427 
355,136 
Commitments and Contingencies (Note 5)
   
   
Stockholders' Equity
 
 
Common stock, $0.001 par value, 500,000 shares authorized and 88,561 and 87,545 shares issued at June 30, 2013 and December 31, 2012, respectively
88 
87 
Convertible preferred stock, $0.001 par value, 50,000 shares authorized and 0 shares outstanding at June 30, 2013 and December 31, 2012, respectively
   
   
Additional paid-in capital
222,797 
217,990 
Retained earnings
136,526 
123,614 
Accumulated other comprehensive income
2,046 
2,558 
Treasury stock, at cost, 22,425 and 20,724 shares at June 30, 2013 and December 31, 2012, respectively
(157,265)
(145,490)
Total stockholders' equity
204,192 
198,759 
Total liabilities and stockholders' equity
$ 558,619 
$ 553,895 
CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
In Millions, except Share data in Thousands, unless otherwise specified
Jun. 30, 2013
Dec. 31, 2012
CONDENSED CONSOLIDATED BALANCE SHEETS
 
 
Allowances for doubtful accounts
$ 5.1 
$ 6.9 
Common stock, par value (in dollars per share)
$ 0.001 
$ 0.001 
Common stock, shares authorized
500,000 
500,000 
Common stock, shares issued
88,561 
87,545 
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
22,425 
20,724 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (USD $)
In Thousands, unless otherwise specified
6 Months Ended
Jun. 30, 2013
Jun. 30, 2012
Cash flows from operating activities
 
 
Net income
$ 12,912 
$ 14,212 
Adjustments to reconcile net income to cash (used in)/provided by operating activities:
 
 
Depreciation
3,513 
3,564 
Amortization of intangibles
4,555 
4,667 
Amortization of financing costs
852 
710 
Loss on sale or disposal of assets
115 
177 
Provision for bad debts
3,971 
2,027 
Stock-based compensation
2,455 
2,109 
Changes in operating assets and liabilities:
 
 
Settlement receivables
(93,902)
12,838 
Other receivables, net
(6,286)
3,150 
Inventory
(441)
(837)
Prepaid and other assets
(1,238)
(1,445)
Deferred income taxes
7,211 
8,678 
Settlement liabilities
4,396 
(25,198)
Accounts payable and accrued expenses
1,665 
1,117 
Net cash (used in)/provided by operating activities
(60,222)
25,769 
Cash flows from investing activities
 
 
Capital expenditures
(7,194)
(5,001)
Proceeds from sale of fixed assets
35 
 
Changes in restricted cash and cash equivalents
 
255 
Net cash used in investing activities
(7,159)
(4,746)
Cash flows from financing activities
 
 
Issuance costs of amended credit facility
(764)
 
Repayments against credit facility
(9,500)
(40,000)
Proceeds from exercise of stock options
2,382 
3,602 
Purchase of treasury stock
(11,654)
(123)
Net cash used in financing activities
(19,536)
(36,521)
Effect of exchange rates on cash
(655)
(76)
Cash and cash equivalents
 
 
Net decrease for the period
(87,572)
(15,574)
Balance, beginning of the period
153,020 
55,535 
Balance, end of the period
65,448 
39,961 
Supplemental cash flow disclosures
 
 
Cash paid for interest
5,184 
5,821 
Cash paid for income tax, net of refunds
181 
201 
Non-cash tenant improvements paid by landlord
$ 2,930 
 
BUSINESS
BUSINESS

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. In addition, we 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.

BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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 six months ended June 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 to 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. 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. The unpaid negotiable instrument amounts and electronic settlement amounts owing to gaming establishments are included within settlement liabilities 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 and 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 or Central Credit to gaming establishments to purchase dishonored checks. Additionally, we pay a portion of TeleCheck’s operating expenses and certain operating expenses associated with our third party partners related to the provision of these 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, 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.

 

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

 

 

 

Level of
Hierarchy
(*)

 

Fair
Value

 

Carrying
Value

 

 

 

 

 

 

 

 

 

June 30, 2013

 

 

 

 

 

 

 

Senior credit facility

 

2

 

$  112,280

 

$  112,000

 

 

 

 

 

 

 

 

 

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 June 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 June 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) represent 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.

ATM FUNDING AGREEMENTS
ATM FUNDING AGREEMENTS

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 terminates on November 30, 2014, unless otherwise amended or extended.

 

As of June 30, 2013 and December 31, 2012, the outstanding balances of ATM cash utilized by GCA from Wells Fargo were $316.6 million and $360.4 million, 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.  For the three and six months ended June 30, 2013 and 2012, the cash usage fees incurred by the Company were $0.6 million and $1.1 million and $0.9 million and $1.8 million, respectively, and are reflected as interest expense within our condensed consolidated statements of income and comprehensive income.

 

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.  For the three and six months ended June 30, 2013 and 2012, we incurred no material losses related to this self-insurance.

 

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 $113.0 million and $107.5 million as of June 30, 2013 and December 31, 2012, respectively.

BORROWINGS
BORROWINGS

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.

 

In May 2013, Holdings and GCA entered into a second amendment to its 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 reduced 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 for an increase option permitting us 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).

 

As of June 30, 2013, we had $112.0 million of outstanding indebtedness under the Senior Credit Facility, all of which was outstanding under the term loan facility.

 

The weighted average interest rate was 5.7% and 6.4%, respectively, for the three and six months ended June 30, 2013. We also had no amounts outstanding under our letter of credit sub facility that is part of our revolving credit facility as of June 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. As of June 30, 2013, we were in compliance with the required covenants.

COMMITMENTS AND CONTINGENCIES
COMMITMENTS AND CONTINGENCIES

5.              COMMITMENTS AND CONTINGENCIES

 

We are subject to a variety of other 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.

SHAREHOLDERS' EQUITY
SHAREHOLDERS' EQUITY

6.              SHAREHOLDERS’ EQUITY

 

Common Stock Repurchase Program

 

In October 2012, our Board of Directors authorized a new two year Common Stock Repurchase Program that superseded all outstanding share repurchase authorizations. This new 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 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.

 

We have repurchased approximately 1.0 million shares and 1.7 million shares of common stock for cash of $7.0 million and $11.7 million, respectively, under the share repurchase program during the three and six months ended June 30, 2013.

 

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 4,000 shares and 11,000 shares of common stock at an aggregate purchase price of approximately $29,000 and $78,000, respectively, to satisfy the minimum applicable tax withholding obligations incident to the vesting of such restricted stock awards during the three and six months ended June 30, 2013.

WEIGHTED AVERAGE COMMON SHARES
WEIGHTED AVERAGE COMMON SHARES

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):

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding - basic

 

66,116

 

65,774

 

66,401

 

65,470

 

Potential dilution from equity grants(1)

 

877

 

1,609

 

1,024

 

1,316

 

Weighted average number of common shares outstanding - diluted

 

66,993

 

67,383

 

67,425

 

66,786

 

 

(1)                                 The potential dilution excludes the weighted average effect of stock options to acquire 7.7 million and 6.0 million and 5.6 million and 6.6 million of common stock of Holdings for the three and six months ended June 30, 2013 and 2012, respectively, because the application of the treasury stock method, as required, makes them anti-dilutive.

SHARE-BASED COMPENSATION
SHARE-BASED COMPENSATION

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):

 

 

 

Stock Options
Granted

 

Restricted Stock
Granted

 

Equity Awards
Available for Grant

 

 

 

 

 

 

 

 

 

Outstanding, December 31, 2012

 

9,449

 

111

 

2,629

 

 

 

 

 

 

 

 

 

Additional authorized shares

 

-

 

-

 

3,174

 

Granted

 

1,205

 

370

 

(1,575)

 

Exercised options or vested shares

 

(538)

 

(42)

 

-

 

Canceled or forfeited

 

(116)

 

(2)

 

118

 

 

 

 

 

 

 

 

 

Outstanding, June 30, 2013

 

10,000

 

437

 

4,346

 

 

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:

 

 

 

Six Months Ended June 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%

 

The following table presents the options activity under the 2005 Plan:

 

 

 

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

 

1,205

 

7.09

 

 

 

 

Exercised

 

(538)

 

4.38

 

 

 

 

Canceled or forfeited

 

(116)

 

7.27

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding, June 30, 2013

 

10,000

 

$

7.33

 

6.5

 

$

 6,898

 

 

 

 

 

 

 

 

 

Vested and expected to vest, June 30, 2013

 

9,462

 

$

 7.42

 

6.3

 

$

 6,419

 

 

 

 

 

 

 

 

 

Exercisable, June 30, 2013

 

6,610

 

$

 8.07

 

5.3

 

$

 4,204

 

There were no options granted during the three months ended June 30, 2013.  The weighted average grant date fair value per share of the options granted was $3.32 for the six months ended June 30, 2013.  The weighted average grant date fair value per share of the options granted was $3.95 and $2.87, respectively, for the three and six months ended June 30, 2012.  The total intrinsic value of options exercised was $0.8 million and $1.5 million and $0.9 million and $2.2 million, respectively, for the three and six months ended June 30, 2013 and 2012.

 

As of June 30, 2013, there was $9.4 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 2.7 years.  During the six months ended June 30, 2013, the Company granted options to acquire approximately 1.2 million shares of common stock, received $2.4 million in proceeds from the exercise of options and recorded $2.2 million in non-cash compensation expense related to options granted that are expected to vest.

 

As of June 30, 2012, there was $10.9 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 2.1 years.  During the six months ended June 30, 2012, the Company granted options to acquire approximately 2.3 million shares of common stock, received $3.6 million in proceeds from the exercise of options and recorded $1.9 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:

 

 

 

Shares
Outstanding
(in thousands)

 

Weighted
Average Grant
Date Fair Value
(per share)

 

 

 

 

 

 

 

Outstanding, December 31, 2012

 

111

 

$

5.72

 

 

 

 

 

 

 

Granted

 

370

 

7.09

 

Vested

 

(42)

 

3.90

 

Forfeited

 

(2)

 

7.09

 

Outstanding, June 30, 2013

 

437

 

$

7.05

 

 

There was no restricted stock granted during the three months ended June 30, 2013.  The weighted average grant date fair value per share of restricted stock granted was $7.09 for the six months ended June 30, 2013.  The weighted average grant date fair value per share of restricted stock granted was $6.62 for both the three and six months ended June 30, 2012.  The total fair value of shares vested were $0.1 million and $0.3 million and $0.3 million and $0.6 million for the three and six months ended June 30, 2013 and 2012, respectively.

 

As of June 30, 2013, there was $2.4 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 3.6 years.  During the six months ended June 30, 2013, there were 42,245 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.

 

As of June 30, 2012, there was $0.6 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 1.0 year.  During the six months ended June 30, 2012, there were 84,954 shares of time-based restricted shares vested, and we recorded $0.2 million in non-cash compensation expense related to the restricted stock granted that is expected to vest.

INCOME TAXES
INCOME TAXES

9.              INCOME TAXES

 

The Company’s effective income tax rate for the three and six months ended June 30, 2013 and 2012 was 37.8% and 37.4% and 40.5% and 38.5%, respectively, both 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 June 30, 2013, there has been no material change to the balance of unrecognized tax benefits from December 31, 2012.

SEGMENT INFORMATION
SEGMENT INFORMATION

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 six months ended June 30, 2013 and 2012, none of our customers had combined revenues from all segments equal to or exceeding 10%.  For the three and six months ended June 30, 2013 and 2012, our five largest customers accounted for approximately 33% and 33% and 32% and 32%, respectively, of our total revenues.

 

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 June 30,

 

For the Six Months Ended June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

Cash advance

 

$

57,292

 

$

56,675

 

$

115,987

 

$

115,036

 

ATM

 

72,972

 

76,603

 

148,247

 

156,950

 

Check services

 

5,530

 

6,605

 

11,401

 

13,121

 

Other

 

13,272

 

7,582

 

20,252

 

13,423

 

Corporate

 

-

 

-

 

-

 

-

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

149,066

 

$

147,465

 

$

295,887

 

$

298,530

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

 

 

 

 

 

 

 

Cash advance

 

$

15,568

 

$

16,755

 

$

31,313

 

$

32,602

 

ATM

 

6,230

 

8,715

 

13,211

 

17,669

 

Check services

 

3,403

 

3,781

 

6,799

 

7,196

 

Other

 

6,350

 

3,778

 

9,796

 

6,890

 

Corporate

 

(17,918)

 

(17,066)

 

(34,585)

 

(32,697)

 

 

 

 

 

 

 

 

 

 

 

Total operating income

 

$

13,633

 

$

15,963

 

$

26,534

 

$

31,660

 

 

 

 

At

 

 

June 30, 2013

 

December 31, 2012

Total assets

 

 

 

 

Cash advance

 

$

179,070

 

$

149,113

ATM

 

118,974

 

59,781

Check services

 

35,406

 

35,216

Other

 

44,836

 

39,838

Corporate

 

180,333

 

269,947

 

 

 

 

 

Total assets

 

$

558,619

 

$

553,895

 

SUBSEQUENT EVENTS
SUBSEQUENT EVENTS

11.       SUBSEQUENT EVENTS

 

As of August 6, 2013, the Company had not identified, and was not aware of, any subsequent events for the three and six months ended June 30, 2013.

 

BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (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 six months ended June 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 to 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. 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. The unpaid negotiable instrument amounts and electronic settlement amounts owing to gaming establishments are included within settlement liabilities 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 and 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 or Central Credit to gaming establishments to purchase dishonored checks. Additionally, we pay a portion of TeleCheck’s operating expenses and certain operating expenses associated with our third party partners related to the provision of these 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, 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.

 

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

 

 

 

Level of
Hierarchy
(*)

 

Fair
Value

 

Carrying
Value

 

 

 

 

 

 

 

 

 

June 30, 2013

 

 

 

 

 

 

 

Senior credit facility

 

2

 

$  112,280

 

$  112,000

 

 

 

 

 

 

 

 

 

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 June 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 June 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) represent 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.

BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Tables)
Schedule of fair value and carrying value of GCA's borrowings

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

 

 

 

Level of
Hierarchy
(*)

 

Fair
Value

 

Carrying
Value

 

 

 

 

 

 

 

 

 

June 30, 2013

 

 

 

 

 

 

 

Senior credit facility

 

2

 

$  112,280

 

$  112,000

 

 

 

 

 

 

 

 

 

December 31, 2012

 

 

 

 

 

 

 

Senior credit facility

 

2

 

$  122,715

 

$  121,500

 

WEIGHTED AVERAGE COMMON SHARES (Tables)
Schedule of weighted average number of common shares outstanding used in the computation of basic and diluted earnings per share

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 June 30,

 

Six Months Ended June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding - basic

 

66,116

 

65,774

 

66,401

 

65,470

 

Potential dilution from equity grants(1)

 

877

 

1,609

 

1,024

 

1,316

 

Weighted average number of common shares outstanding - diluted

 

66,993

 

67,383

 

67,425

 

66,786

 

 

(1)                                 The potential dilution excludes the weighted average effect of stock options to acquire 7.7 million and 6.0 million and 5.6 million and 6.6 million of common stock of Holdings for the three and six months ended June 30, 2013 and 2012, respectively, because the application of the treasury stock method, as required, makes them anti-dilutive.

SHARE-BASED COMPENSATION (Tables)

A summary of award activity under the 2005 Plan is as follows (in thousands):

 

 

 

Stock Options
Granted

 

Restricted Stock
Granted

 

Equity Awards
Available for Grant

 

 

 

 

 

 

 

 

 

Outstanding, December 31, 2012

 

9,449

 

111

 

2,629

 

 

 

 

 

 

 

 

 

Additional authorized shares

 

-

 

-

 

3,174

 

Granted

 

1,205

 

370

 

(1,575)

 

Exercised options or vested shares

 

(538)

 

(42)

 

-

 

Canceled or forfeited

 

(116)

 

(2)

 

118

 

 

 

 

 

 

 

 

 

Outstanding, June 30, 2013

 

10,000

 

437

 

4,346

 

 

Six Months Ended June 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

 

1,205

 

7.09

 

 

 

 

Exercised

 

(538)

 

4.38

 

 

 

 

Canceled or forfeited

 

(116)

 

7.27

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding, June 30, 2013

 

10,000

 

$

7.33

 

6.5

 

$

 6,898

 

 

 

 

 

 

 

 

 

Vested and expected to vest, June 30, 2013

 

9,462

 

$

 7.42

 

6.3

 

$

 6,419

 

 

 

 

 

 

 

 

 

Exercisable, June 30, 2013

 

6,610

 

$

 8.07

 

5.3

 

$

 4,204

 

Shares
Outstanding
(in thousands)

 

Weighted
Average Grant
Date Fair Value
(per share)

 

 

 

 

 

 

 

Outstanding, December 31, 2012

 

111

 

$

5.72

 

 

 

 

 

 

 

Granted

 

370

 

7.09

 

Vested

 

(42)

 

3.90

 

Forfeited

 

(2)

 

7.09

 

Outstanding, June 30, 2013

 

437

 

$

7.05

 

SEGMENT INFORMATION (Tables)
Schedule of results of operations and total assets by operating segment

The following tables present the Company’s segment information (in thousands):

 

 

 

For the Three Months Ended June 30,

 

For the Six Months Ended June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

Cash advance

 

$

57,292

 

$

56,675

 

$

115,987

 

$

115,036

 

ATM

 

72,972

 

76,603

 

148,247

 

156,950

 

Check services

 

5,530

 

6,605

 

11,401

 

13,121

 

Other

 

13,272

 

7,582

 

20,252

 

13,423

 

Corporate

 

-

 

-

 

-

 

-

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

149,066

 

$

147,465

 

$

295,887

 

$

298,530

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

 

 

 

 

 

 

 

Cash advance

 

$

15,568

 

$

16,755

 

$

31,313

 

$

32,602

 

ATM

 

6,230

 

8,715

 

13,211

 

17,669

 

Check services

 

3,403

 

3,781

 

6,799

 

7,196

 

Other

 

6,350

 

3,778

 

9,796

 

6,890

 

Corporate

 

(17,918)

 

(17,066)

 

(34,585)

 

(32,697)

 

 

 

 

 

 

 

 

 

 

 

Total operating income

 

$

13,633

 

$

15,963

 

$

26,534

 

$

31,660

 

 

 

 

At

 

 

June 30, 2013

 

December 31, 2012

Total assets

 

 

 

 

Cash advance

 

$

179,070

 

$

149,113

ATM

 

118,974

 

59,781

Check services

 

35,406

 

35,216

Other

 

44,836

 

39,838

Corporate

 

180,333

 

269,947

 

 

 

 

 

Total assets

 

$

558,619

 

$

553,895

BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details) (USD $)
1 Months Ended
Jan. 31, 2012
Jan. 5, 2012
Jun. 30, 2013
Fair Value, Level 2
Senior credit facility
Dec. 31, 2012
Fair Value, Level 2
Senior credit facility
Jun. 30, 2013
Fair Value, Level 2
Carrying Value
Senior credit facility
Dec. 31, 2012
Fair Value, Level 2
Carrying Value
Senior credit facility
Fair value and carrying value of borrowings and interest rate cap
 
 
 
 
 
 
Senior credit facility
 
 
$ 112,280,000 
$ 122,715,000 
$ 112,000,000 
$ 121,500,000 
Inventory
 
 
 
 
 
 
Term of interest rate cap
3 years 
 
 
 
 
 
Variable rate basis
LIBOR 
 
 
 
 
 
Increase in LIBOR which is covered by interest rate cap (as a percent)
 
1.50% 
 
 
 
 
Notional amount of interest rate cap
 
$ 150,000,000 
 
 
 
 
ATM FUNDING AGREEMENTS (Details) (USD $)
In Millions, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2013
Jun. 30, 2012
Jun. 30, 2013
Jun. 30, 2012
Dec. 31, 2012
ATM Funding Agreements
 
 
 
 
 
Gains (losses) related to self-insurance
$ 0 
$ 0 
$ 0 
$ 0 
 
Site-Funded ATM liability
113.0 
 
113.0 
 
107.5 
Indemnification guarantee |
Wells Fargo owned funds
 
 
 
 
 
ATM Funding Agreements
 
 
 
 
 
Cash usage fees incurred
0.6 
0.9 
1.1 
1.8 
 
Indemnification guarantee |
Contract Cash Solutions Agreement |
Wells Fargo owned funds
 
 
 
 
 
ATM Funding Agreements
 
 
 
 
 
Outstanding balance of ATM cash utilized
316.6 
 
316.6 
 
360.4 
Indemnification guarantee |
Second Amendment, Contract Cash Solutions Agreement |
Wells Fargo owned funds |
Maximum
 
 
 
 
 
ATM Funding Agreements
 
 
 
 
 
Maximum amount
 
$ 500.0 
 
$ 500.0 
 
BORROWINGS (Details) (USD $)
6 Months Ended 3 Months Ended 6 Months Ended 0 Months Ended 6 Months Ended 0 Months Ended 6 Months Ended
Jun. 30, 2013
Dec. 31, 2012
Jun. 30, 2013
Maximum
Jun. 30, 2013
Senior credit facility
Jun. 30, 2013
Senior credit facility
Jun. 30, 2013
Term loan
May 22, 2013
Term loan
LIBOR
Jun. 30, 2013
Term loan
LIBOR
May 22, 2013
Term loan
LIBOR
Minimum
Jun. 30, 2013
Term loan
LIBOR
Minimum
Jun. 30, 2013
Increase option, additional term loan commitments
May 22, 2013
Increase option, additional term loan commitments
Jun. 30, 2013
Revolving credit facility
Jun. 30, 2013
Letters of credit
Jun. 30, 2013
Swing-line loans
BORROWINGS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Maximum borrowing capacity
 
 
 
 
 
$ 210,000,000 
 
 
 
 
 
$ 50,000,000 
$ 35,000,000 
$ 10,000,000 
$ 5,000,000 
Percentage of the aggregate initial principal amount required to be repaid
 
 
 
 
 
0.25% 
 
 
 
 
 
 
 
 
 
Variable rate basis
 
 
 
 
 
 
LIBOR 
LIBOR 
 
 
 
 
 
 
 
Interest rate margin (as a percent)
 
 
 
 
 
 
5.50% 
3.00% 
 
 
 
 
 
 
 
Variable rate of debt (as a percent)
 
 
 
 
 
 
 
 
1.50% 
1.00% 
 
 
 
 
 
Minimum borrowing capacity after amendment
 
 
 
 
 
 
 
 
 
 
50,000,000 
 
 
 
 
Total leverage ratio after amendment in Credit Agreement
 
 
2.50 
 
 
 
 
 
 
 
 
 
 
 
 
Outstanding indebtedness
112,000,000 
121,500,000 
 
 
 
112,000,000 
 
 
 
 
 
 
 
 
 
Weighted average interest rate (as a percent)
 
 
 
5.70% 
6.40% 
 
 
 
 
 
 
 
 
 
 
Outstanding amount under letter of credit sub facility
 
 
 
 
 
 
 
 
 
 
 
 
 
$ 0 
 
Percentage of the stock of foreign subsidiaries by which the amounts under the credit facility are secured
 
 
 
 
65.00% 
 
 
 
 
 
 
 
 
 
 
SHAREHOLDERS' EQUITY (Details) (USD $)
1 Months Ended 3 Months Ended 6 Months Ended
Oct. 31, 2012
Jun. 30, 2013
Mar. 31, 2013
Jun. 30, 2013
Common Stock Repurchase Program
 
 
 
 
Period of new common stock repurchase program that will supersedes all existing programs
2 years 
 
 
 
Period of share repurchase under new share repurchase program
 
 
2 years 
 
Shares of common stock repurchased
 
1,000,000 
 
1,700,000 
Aggregate purchase price of shares repurchased
 
$ 7,000,000 
 
$ 11,700,000 
Total Number of Shares Purchased or Withheld
 
 
 
 
Shares repurchased under the current plan
 
4,000 
 
11,000 
Shares withheld from restricted stock vesting (in dollars)
 
29,000 
 
78,000 
Maximum
 
 
 
 
Common Stock Repurchase Program
 
 
 
 
Authorized repurchase amount
 
 
 
$ 40,000,000 
WEIGHTED AVERAGE COMMON SHARES (Details)
3 Months Ended 6 Months Ended
Jun. 30, 2013
Jun. 30, 2012
Jun. 30, 2013
Jun. 30, 2012
Weighted-average number of common shares outstanding used in the computation of basic and diluted earnings per share
 
 
 
 
Weighted average number of common shares outstanding - basic
66,116,000 
65,774,000 
66,401,000 
65,470,000 
Potential dilution from equity grants (in shares)
877,000 
1,609,000 
1,024,000 
1,316,000 
Weighted average number of common shares outstanding - diluted
66,993,000 
67,383,000 
67,425,000 
66,786,000 
Stock options
 
 
 
 
Anti-dilutive securities
 
 
 
 
Anti-dilutive stock options excluded from computation of earnings per share (in shares)
7,700,000 
5,600,000 
6,000,000 
6,600,000 
SHARE-BASED COMPENSATION (Details) (USD $)
3 Months Ended 6 Months Ended 12 Months Ended
Jun. 30, 2013
Jun. 30, 2012
Jun. 30, 2013
Jun. 30, 2012
Dec. 31, 2012
Equity Awards Available for Grant
 
 
 
 
 
Balance outstanding at the beginning of the period (in shares)
 
 
2,629,000 
 
 
Additional authorized shares
 
 
3,174,000 
 
 
Granted (in shares)
 
 
(1,575,000)
 
 
Canceled or forfeited (in shares)
 
 
118,000 
 
 
Balance outstanding at the end of the period (in shares)
4,346,000 
 
4,346,000 
 
 
Stock options
 
 
 
 
 
Equity Incentive Awards
 
 
 
 
 
Vesting rate (as a percent)
 
 
25.00% 
 
 
Vesting period for 25% of shares
 
 
1 year 
 
 
Vesting period for remaining shares
 
 
36 months 
 
 
Vesting period
 
 
4 years 
 
 
Expiration period
 
 
10 years 
 
 
Stock Options Granted
 
 
 
 
 
Balance outstanding at the beginning of the period (in shares)
 
 
9,449,000 
 
 
Granted (in shares)
 
1,205,000 
2,300,000 
 
Exercised options (in shares)
 
 
(538,000)
 
 
Canceled or forfeited (in shares)
 
 
(116,000)
 
 
Balance outstanding at the end of the period (in shares)
10,000,000 
 
10,000,000 
 
9,449,000 
Vested and expected to vest (in shares)
9,462,000 
 
9,462,000 
 
 
Balance exercisable at the end of the period (in shares)
6,610,000 
 
6,610,000 
 
 
Weighted Average Exercise Price
 
 
 
 
 
Balance outstanding at the beginning of the period (in dollars per share)
 
 
$ 7.19 
 
 
Granted (in dollars per share)
 
 
$ 7.09 
 
 
Exercised options (in dollars per share)
 
 
$ 4.38 
 
 
Canceled or forfeited (in dollars per share)
 
 
$ 7.27 
 
 
Balance outstanding at the end of the period (in dollars per share)
$ 7.33 
 
$ 7.33 
 
$ 7.19 
Vested and expected to vest (in dollars per share)
$ 7.42 
 
$ 7.42 
 
 
Balance exercisable at the end of the period (in dollars per share)
$ 8.07 
 
$ 8.07 
 
 
Weighted-average assumptions used in estimating fair value
 
 
 
 
 
Risk-free interest rate (as a percent)
 
 
1.00% 
1.00% 
 
Expected life of options
 
 
4 years 
6 years 
 
Expected volatility (as a percent)
 
 
61.00% 
62.00% 
 
Expected dividend yield (as a percent)
 
 
0.00% 
0.00% 
 
Weighted Average Life Remaining
 
 
 
 
 
Balance outstanding at the beginning of the period
 
 
6 years 6 months 
 
6 years 4 months 24 days 
Balance outstanding at the end of the period
 
 
6 years 6 months 
 
6 years 4 months 24 days 
Vested and expected to vest
 
 
6 years 3 months 18 days 
 
 
Balance exercisable at the end of the period
 
 
5 years 3 months 18 days 
 
 
Aggregate Intrinsic Value
 
 
 
 
 
Balance outstanding at the beginning of the period (in dollars)
 
 
$ 16,626,000 
 
 
Balance outstanding at the end of the period (in dollars)
6,898,000 
 
6,898,000 
 
16,626,000 
Vested and expected to vest (in dollars)
6,419,000 
 
6,419,000 
 
 
Balance exercisable at the end of the period (in dollars)
4,204,000 
 
4,204,000 
 
 
Additional disclosures
 
 
 
 
 
Total intrinsic value of options exercised
800,000 
900,000 
1,500,000 
2,200,000 
 
Restricted stock, time-based
 
 
 
 
 
Equity Incentive Awards
 
 
 
 
 
Vesting rate (as a percent)
 
 
25.00% 
 
 
Vesting period for 25% of shares
 
 
1 year 
 
 
Vesting period for remaining shares
 
 
36 months 
 
 
Vesting period
 
 
4 years 
 
 
Restricted Stock Granted
 
 
 
 
 
Balance outstanding at the beginning of the period (in shares)
 
 
111,000 
 
 
Granted (in shares)
 
370,000 
 
 
Vested (in shares)
 
 
(42,245)
(84,954)
 
Forfeited (in shares)
 
 
(2,000)
 
 
Balance outstanding at the end of the period (in shares)
437,000 
 
437,000 
 
 
Additional disclosures
 
 
 
 
 
Total fair value of shares vested
$ 100,000 
$ 300,000 
$ 300,000 
$ 600,000 
 
SHARE-BASED COMPENSATION (Details 2) (USD $)
3 Months Ended 6 Months Ended
Jun. 30, 2013
Jun. 30, 2012
Jun. 30, 2013
Jun. 30, 2012
Equity Incentive Awards
 
 
 
 
Proceeds from exercise of stock options
 
 
$ 2,382,000 
$ 3,602,000 
Stock options
 
 
 
 
Equity Incentive Awards
 
 
 
 
Vesting period
 
 
4 years 
 
Weighted average grant date fair value (in dollars per share)
 
$ 3.95 
$ 3.32 
$ 2.87 
Unrecognized compensation expense
9,400,000 
10,900,000 
9,400,000 
10,900,000 
Weighted-average period for recognition of unrecognized compensation expense
 
 
2 years 8 months 12 days 
2 years 1 month 6 days 
Proceeds from exercise of stock options
 
 
2,400,000 
3,600,000 
Non-cash compensation expense
 
 
2,200,000 
1,900,000 
Restricted stock, time-based
 
 
 
 
Equity Incentive Awards
 
 
 
 
Vesting period
 
 
4 years 
 
Weighted average grant date fair value (in dollars per share)
 
$ 6.62 
$ 7.09 
$ 6.62 
Unrecognized compensation expense
2,400,000 
600,000 
2,400,000 
600,000 
Weighted-average period for recognition of unrecognized compensation expense
 
 
3 years 7 months 6 days 
1 year 
Non-cash compensation expense
 
 
$ 300,000 
$ 200,000 
Restricted Stock Granted
 
 
 
 
Balance outstanding at the beginning of the period (in shares)
 
 
111,000 
 
Granted (in shares)
 
370,000 
 
Vested (in shares)
 
 
(42,245)
(84,954)
Forfeited (in shares)
 
 
(2,000)
 
Balance outstanding at the end of the period (in shares)
437,000 
 
437,000 
 
Weighted Average Grant Date Fair Value (in dollars per share)
 
 
 
 
Balance outstanding at the beginning of the period (in dollars per share)
 
 
$ 5.72 
 
Granted (in dollars per share)
$ 0.00 
$ 0.00 
$ 7.09 
$ 0.00 
Vested (in dollars per share)
 
 
$ 3.90 
 
Forfeited (in dollars per share)
 
 
$ 7.09 
 
Balance outstanding at the end of the period (in dollars per share)
$ 7.05 
 
$ 7.05 
 
INCOME TAXES (Details)
3 Months Ended 6 Months Ended
Jun. 30, 2013
Jun. 30, 2012
Jun. 30, 2013
Jun. 30, 2012
INCOME TAXES
 
 
 
 
Effective tax rate (as a percent)
37.80% 
40.50% 
37.40% 
38.50% 
Statutory federal rate (as a percent)
 
 
35.00% 
 
SEGMENT INFORMATION (Details) (USD $)
3 Months Ended 6 Months Ended
Jun. 30, 2013
item
Jun. 30, 2012
item
Jun. 30, 2013
item
Jun. 30, 2012
item
SEGMENT INFORMATION
 
 
 
 
Number of distinct business segments
 
 
 
Number of segments that exceeded the established materiality for segment reporting
 
 
Amount of significant assets in foreign locations
$ 0 
 
$ 0 
 
Major Customers
 
 
 
 
Number of customers individually exceeding 10% of consolidated revenue
Number of major customers
 
 
 
Five largest customers
 
 
 
 
Major Customers
 
 
 
 
Revenue (as a percent)
33.00% 
32.00% 
33.00% 
32.00% 
SEGMENT INFORMATION (Details 2) (USD $)
In Thousands, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2013
Jun. 30, 2012
Jun. 30, 2013
Jun. 30, 2012
Results of operations by operating segment
 
 
 
 
Revenues
$ 149,066 
$ 147,465 
$ 295,887 
$ 298,530 
Operating income
13,633 
15,963 
26,534 
31,660 
Cash advance
 
 
 
 
Results of operations by operating segment
 
 
 
 
Revenues
57,292 
56,675 
115,987 
115,036 
Operating income
15,568 
16,755 
31,313 
32,602 
ATM
 
 
 
 
Results of operations by operating segment
 
 
 
 
Revenues
72,972 
76,603 
148,247 
156,950 
Operating income
6,230 
8,715 
13,211 
17,669 
Check services
 
 
 
 
Results of operations by operating segment
 
 
 
 
Revenues
5,530 
6,605 
11,401 
13,121 
Operating income
3,403 
3,781 
6,799 
7,196 
Other
 
 
 
 
Results of operations by operating segment
 
 
 
 
Revenues
13,272 
7,582 
20,252 
13,423 
Operating income
6,350 
3,778 
9,796 
6,890 
Corporate
 
 
 
 
Results of operations by operating segment
 
 
 
 
Operating income
$ (17,918)
$ (17,066)
$ (34,585)
$ (32,697)
SEGMENT INFORMATION (Details 3) (USD $)
In Thousands, unless otherwise specified
Jun. 30, 2013
Dec. 31, 2012
Assets by operating segment
 
 
Total Assets
$ 558,619 
$ 553,895 
Cash advance
 
 
Assets by operating segment
 
 
Total Assets
179,070 
149,113 
ATM
 
 
Assets by operating segment
 
 
Total Assets
118,974 
59,781 
Check services
 
 
Assets by operating segment
 
 
Total Assets
35,406 
35,216 
Other
 
 
Assets by operating segment
 
 
Total Assets
44,836 
39,838 
Corporate
 
 
Assets by operating segment
 
 
Total Assets
$ 180,333 
$ 269,947