GLOBAL CASH ACCESS HOLDINGS, INC., 10-K filed on 3/11/2014
Annual Report
Document and Entity Information (USD $)
In Millions, except Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2013
Feb. 28, 2014
Jun. 30, 2013
Document and Entity Information
 
 
 
Entity Registrant Name
Global Cash Access Holdings, Inc. 
 
 
Entity Central Index Key
0001318568 
 
 
Document Type
10-K 
 
 
Document Period End Date
Dec. 31, 2013 
 
 
Amendment Flag
false 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Well-known Seasoned Issuer
No 
 
 
Entity Voluntary Filers
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Filer Category
Accelerated Filer 
 
 
Entity Public Float
 
 
$ 422.1 
Entity Common Stock, Shares Outstanding
 
65,723,527 
 
Document Fiscal Year Focus
2013 
 
 
Document Fiscal Period Focus
FY 
 
 
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (USD $)
In Thousands, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2013
Dec. 31, 2012
Dec. 31, 2011
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
 
 
 
Revenues
$ 582,444 
$ 584,486 
$ 544,063 
Costs and expenses
 
 
 
Cost of revenues (exclusive of depreciation and amortization)
439,794 
436,059 
419,606 
Operating expenses
76,562 
75,806 
69,517 
Depreciation
7,350 
6,843 
7,971 
Amortization
9,588 
9,796 
8,673 
Total costs and expenses
533,294 
528,504 
505,767 
Operating income
49,150 
55,982 
38,296 
Other expenses
 
 
 
Interest expense, net of interest income
10,265 
15,519 
18,638 
Loss on early extinguishment of debt
 
 
943 
Total other expenses
10,265 
15,519 
19,581 
Income from operations before tax
38,885 
40,463 
18,715 
Income tax provision
14,487 
14,774 
9,586 
Net income
24,398 
25,689 
9,129 
Foreign currency translation
269 
218 
(247)
Comprehensive income
$ 24,667 
$ 25,907 
$ 8,882 
Earnings per share
 
 
 
Basic (in dollars per share)
$ 0.37 
$ 0.39 
$ 0.14 
Diluted (in dollars per share)
$ 0.36 
$ 0.38 
$ 0.14 
Weighted average common shares outstanding
 
 
 
Basic (in shares)
66,014 
65,933 
64,673 
Diluted (in shares)
67,205 
67,337 
64,859 
CONSOLIDATED BALANCE SHEETS (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2013
Dec. 31, 2012
ASSETS
 
 
Cash and cash equivalents
$ 114,254 
$ 153,020 
Restricted cash and cash equivalents
290 
200 
Settlement receivables
38,265 
29,484 
Other receivables, net of allowances for doubtful accounts of $2.8 million and $6.9 million, respectively
16,962 
11,571 
Inventory
9,413 
7,126 
Prepaid expenses and other assets
26,770 
18,254 
Property, equipment and leasehold improvements, net
18,710 
15,441 
Goodwill
180,084 
180,141 
Other intangible assets, net
31,535 
33,994 
Deferred income taxes, net
91,044 
104,664 
Total assets
527,327 
553,895 
Liabilities
 
 
Settlement liabilities
145,022 
182,446 
Accounts payable and accrued expenses
60,701 
51,190 
Borrowings
103,000 
121,500 
Total liabilities
308,723 
355,136 
Commitments and Contingencies (Note 9)
   
   
Stockholders' Equity
 
 
Common stock, $0.001 par value, 500,000 shares authorized and 89,233 and 87,545 shares issued at December 31, 2013 and December 31, 2012, respectively
89 
87 
Convertible preferred stock, $0.001 par value, 50,000 shares authorized and 0 shares outstanding at December 31, 2013 and December 31, 2012, respectively
   
   
Additional paid-in capital
231,516 
217,990 
Retained earnings
148,012 
123,614 
Accumulated other comprehensive income
2,827 
2,558 
Treasury stock, at cost, 23,303 and 20,724 shares at December 31, 2013 and December 31, 2012, respectively
(163,840)
(145,490)
Total stockholders' equity
218,604 
198,759 
Total liabilities and stockholders' equity
$ 527,327 
$ 553,895 
CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
In Thousands, except Per Share data, unless otherwise specified
Dec. 31, 2013
Dec. 31, 2012
CONSOLIDATED BALANCE SHEETS
 
 
Allowances for doubtful accounts
$ 2,800 
$ 6,900 
Common stock, par value (in dollars per share)
$ 0.001 
$ 0.001 
Common stock, shares authorized
500,000 
500,000 
Common stock, shares issued
89,233 
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
23,303 
20,724 
CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2013
Dec. 31, 2012
Dec. 31, 2011
Cash flows from operating activities
 
 
 
Net income
$ 24,398 
$ 25,689 
$ 9,129 
Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
Depreciation
7,350 
6,843 
7,971 
Amortization of intangibles
9,588 
9,796 
8,673 
Amortization of financing costs
1,793 
1,485 
1,343 
Loss on sale or disposal of assets
178 
95 
991 
Provision for bad debts
7,874 
5,182 
5,959 
Loss on early extinguishment of debt
 
 
943 
Stock-based compensation
5,078 
6,655 
6,809 
Changes in operating assets and liabilities:
 
 
 
Settlement receivables
(8,793)
50,823 
(69,881)
Other receivables, net
(13,335)
1,196 
(8,125)
Inventory
(2,286)
134 
(3,146)
Prepaid and other assets
(9,482)
(3,425)
(2,323)
Deferred income taxes
13,643 
14,376 
9,252 
Settlement liabilities
(37,200)
40,530 
82,125 
Accounts payable and accrued expenses
5,528 
(1,891)
4,532 
Net cash provided by operating activities
4,334 
157,488 
54,252 
Cash flows from investing activities
 
 
 
Acquisitions, net of cash acquired
 
 
(10,763)
Capital expenditures
(13,986)
(13,654)
(7,420)
Proceeds from sale of fixed assets
86 
868 
 
Changes in restricted cash and cash equivalents
(90)
255 
 
Net cash used in investing activities
(13,990)
(12,531)
(18,183)
Cash flows from financing activities
 
 
 
Repayments against prior credit facility
 
 
(208,750)
Securing of credit facility
 
 
214,000 
Issuance costs of amended credit facility
(764)
(676)
(7,099)
Repayments against credit facility
(18,500)
(52,500)
(40,000)
Proceeds from exercise of stock options
8,431 
6,655 
812 
Purchase of treasury stock
(18,350)
(262)
(190)
Net cash used in financing activities
(29,183)
(46,783)
(41,227)
Effect of exchange rates on cash
73 
(689)
57 
Cash and cash equivalents
 
 
 
Net (decrease)/increase for the period
(38,766)
97,485 
(5,101)
Balance, beginning of the period
153,020 
55,535 
60,636 
Balance, end of the period
114,254 
153,020 
55,535 
Supplemental cash flow disclosures
 
 
 
Cash paid for interest
8,634 
15,494 
19,166 
Cash paid for income tax, net of refunds
711 
665 
366 
Non-cash tenant improvements paid by landlord
2,930 
 
 
Accrued and unpaid capital expenditures
$ 1,073 
 
 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (USD $)
In Thousands, unless otherwise specified
Total
Common Stock - Series A
Additional Paid-in Capital
Retained Earnings
Accumulated Other Comprehensive Income
Treasury Stock
Balance at Dec. 31, 2010
$ 143,478 
$ 85 
$ 197,048 
$ 88,796 
$ 2,587 
$ (145,038)
Balance (in shares) at Dec. 31, 2010
 
85,006 
 
 
 
 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
Net income
9,129 
 
 
9,129 
 
 
Foreign currency translation
(247)
 
 
 
(247)
 
Stock-based compensation expense
6,809 
 
6,809 
 
 
 
Exercise of options
879 
878 
 
 
 
Exercise of options (in shares)
 
399 
 
 
 
 
Restricted share vesting withholdings
(190)
 
 
 
 
(190)
Restricted shares vested (in shares)
 
246 
 
 
 
 
Balance at Dec. 31, 2011
159,858 
86 
204,735 
97,925 
2,340 
(145,228)
Balance (in shares) at Dec. 31, 2011
 
85,651 
 
 
 
 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
Net income
25,689 
 
 
25,689 
 
 
Foreign currency translation
218 
 
 
 
218 
 
Stock-based compensation expense
6,655 
 
6,655 
 
 
 
Exercise of options
6,601 
6,600 
 
 
 
Exercise of options (in shares)
 
1,726 
 
 
 
 
Restricted share vesting withholdings
(262)
 
 
 
 
(262)
Restricted shares vested (in shares)
 
168 
 
 
 
 
Balance at Dec. 31, 2012
198,759 
87 
217,990 
123,614 
2,558 
(145,490)
Balance (in shares) at Dec. 31, 2012
 
87,545 
 
 
 
 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
Net income
24,398 
 
 
24,398 
 
 
Foreign currency translation
269 
 
 
 
269 
 
Stock-based compensation expense
5,078 
 
5,078 
 
 
 
Exercise of options
8,450 
8,448 
 
 
 
Exercise of options (in shares)
 
1,618 
 
 
 
 
Treasury share repurchases
(18,241)
 
 
 
 
(18,241)
Restricted share vesting withholdings
(109)
 
 
 
 
(109)
Restricted shares vested (in shares)
 
70 
 
 
 
 
Balance at Dec. 31, 2013
$ 218,604 
$ 89 
$ 231,516 
$ 148,012 
$ 2,827 
$ (163,840)
Balance (in shares) at Dec. 31, 2013
 
89,233 
 
 
 
 
BUSINESS AND BASIS OF PRESENTATION
BUSINESS AND BASIS OF PRESENTATION

1. BUSINESS AND BASIS OF PRESENTATION

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

We are a global provider of cash access services and related equipment and services to the gaming industry. Our products and services: (a) 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; (b) provide cash access devices and related services, such as slot machine ticket redemption and jackpot kiosks to the gaming industry; (c) provide products and services that improve credit decision-making, automate cashier operations and enhance patron marketing activities for gaming establishments; and (d) provide online payment processing solutions for gaming operators in states that offer intra-state, Internet-based gaming and lottery activities.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

All significant 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. We consider all highly liquid investments with maturities of three months or less at the time of purchase to be cash and cash equivalents. Such balances generally exceed the federal insurance limits. However, we periodically evaluate the creditworthiness of these institutions to minimize risk.

Restricted Cash and Cash Equivalents

As part of our Internet cash access activity, we hold deposits on behalf of lottery patrons. These funds can be utilized by lottery patrons for the purchase of lottery tickets. We reflect this cash as restricted cash and maintain a liability for these funds in accounts payable and accrued expenses. In addition, we have a sponsorship agreement that requires us to maintain a minimum deposit as collateral for any potential chargeback loss activity occurring as a result of the sponsorship arrangement. All interest received on this deposit is recorded to restricted cash and cash equivalents. The total balance of restricted cash and cash equivalents was $0.3 million and $0.2 million, at December 31, 2013 and 2012, respectively.

ATM Funding Agreements

We obtain all of the cash required to operate our 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 us and we are liable to the gaming establishment for the face amount of the cash dispensed. In the 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 the Non-Site-Funded locations, our Contract Cash Solutions Agreement with Wells Fargo allows us to use funds owned by Wells Fargo to provide the currency needed for normal operating requirements for our 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 balance sheet. We are charged a cash usage fee for the cash used in these ATMs, which is included as interest expense in the consolidated statements of income and comprehensive income. We recognize 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 us, 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. We receive 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 the consolidated balance sheets. The amounts owed to gaming establishments are included within settlement liabilities on the consolidated balance sheets.

Warranty Receivables

If a gaming establishment chooses to have a check warranted, it sends a request to our third party 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 the third party service provider, we receive all of the check warranty revenue. We are exposed to risk for the losses associated with any warranted items that cannot be collected from patrons issuing the items. Warranty receivables are defined as any amounts paid by the third party check warranty service provider to gaming establishments to purchase dishonored checks. Additionally, we pay a fee to the third party check warranty service provider for its services.

The warranty receivables amount is recorded in other receivables, net on our 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 consolidated statements of income and comprehensive income.

Unamortized Debt Issuance Costs

Debt issuance costs incurred in connection with long-term borrowings are capitalized and amortized to interest expense based upon the related debt agreements using the straight-line method, which approximates the effective interest method. Unamortized debt issuance costs are included in prepaid and other assets on the consolidated balance sheets.

Property, Equipment and Leasehold Improvements

Property, equipment and leasehold improvements are stated at cost, less accumulated depreciation, computed using the straight-line method over the lesser of the estimated life of the related assets, generally three to five years, or the related lease term.

Repairs and maintenance costs are expensed as incurred.

Upon sale or retirement, the costs and related accumulated depreciation are eliminated from the accounts and any resulting gain or loss is reflected in the consolidated statements of income and comprehensive income.

Property, equipment and leasehold improvements are reviewed for impairment whenever events or circumstances indicate that their carrying amounts may not be recoverable. Impairment is indicated when undiscounted future cash flows do not exceed the asset's carrying value. There was no impairment for any of our property, equipment, or leasehold improvements for the years ended December 31, 2013, 2012 and 2011.

Goodwill

Goodwill represents the excess of the purchase price over the identifiable tangible and intangible assets acquired plus liabilities assumed arising from business combinations.

We test for impairment annually on a reporting unit basis, at the beginning of our fourth fiscal quarter, or more often under certain circumstances. The annual impairment test is completed using either: a qualitative Step 0 assessment based on reviewing relevant events and circumstances; or a quantitative Step 1 assessment, which determines the fair value of the reporting unit, using an income approach that discounts future cash flows based on the estimated future results of our reporting units and a market approach that compares market multiples of comparable companies to determine whether or not any impairment exists. If the fair value of a reporting unit is less than its carrying amount, we use the Step 2 assessment to determine the impairment.

Other Intangible Assets

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 us to make renewal assumptions, which impact the estimated useful lives of such assets. Capitalized software development costs require us to make certain judgments as to the stages of development and costs eligible for capitalization. Capitalized software costs placed in service are amortized over their useful lives, generally not to exceed three years. The acquisition cost of the 3-in-1 rollover patent is being amortized over the term of the patent, which expires in 2018. Other intangible assets are reviewed annually for impairment based on the fair value of our reporting units as compared to the carrying amounts, or whenever events or circumstances indicate that the carrying amounts may not be recoverable. This assessment requires the use of estimates about future operating results. Changes in forecasted operations can materially affect these estimates, which could materially affect our results of operations.

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.

Interest Rate Cap

In conjunction with the terms and conditions of the Senior Credit Facility, as described in Note 8, we purchased a $150.0 million notional amount interest rate cap with an effective date of January 5, 2012 and a term of three years. We purchased this interest rate cap to partially reduce our exposure to increases in the London Interbank Offer Rate ("LIBOR") above 1.5% during the term of the interest rate cap with respect to our variable rate debt obligations under the Senior Credit Facility and our obligations under the Contract Cash Solutions Agreement with Wells Fargo. This interest rate cap is recorded in other assets in our consolidated balance sheets, and is marked-to-market based on a quoted market price with the effects offset in the 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 December 31, 2013.

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

 
  Level of
Hierarchy(*)
  Fair
Value
  Carrying
Value
 

December 31, 2013

                   

Senior credit facility

    2   $ 104,030   $ 103,000  

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.

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.

Revenue Recognition

We recognize revenue when evidence of an arrangement exists, services have been rendered, the price is fixed or determinable and collectability is reasonably assured. We evaluate our 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, inventory costs associated with the sale of our kiosks and check cashing warranties.

Advertising, Marketing and Promotional Costs

We expense advertising, marketing and promotional costs as incurred. Total advertising, marketing and promotional costs, included in operating expenses in the consolidated statements of income and comprehensive income, were $0.7 million, $0.7 million and $0.6 million for the years ended December 31, 2013, 2012 and 2011, respectively.

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 the consolidated 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 year. 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 the 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 consolidated balance sheets.

Use of Estimates

We have 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 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;

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

the budgets for future performance, weighted average cost of capital ("WACC") and growth rates as well as other factors used in our annual goodwill and other intangible assets impairment evaluations;

the renewal assumptions used for customer contracts to estimate the useful lives of such assets; and

the judgments used to determine the stages of development and costs eligible for capitalization as internally developed software.

Earnings Applicable to Common Stock

Basic earnings per share is 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 assumed stock option exercises and vesting of restricted stock.

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 and restricted stock expected to be vested currently and in future periods are measured at grant date 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. 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 us to use funds owned by Wells Fargo to provide the currency needed for normal operating requirements for our 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 balance sheet.

In June 2012, we amended the Contract Cash Solutions Agreement with Wells Fargo to increase the maximum amount of cash to be provided to us from $400.0 million to $500.0 million, and the initial term of the Contract Cash Solutions Agreement has been extended from November 30, 2013 until November 30, 2015.

The outstanding balances of ATM cash utilized by us from Wells Fargo were $427.1 million and $360.4 million as of December 31, 2013 and 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 purchased in January 2012.

Cash usage fees, reflected as interest expense within the consolidated statements of income and comprehensive income, were $2.2 million, $3.1 million and $2.8 million for the years ended December 31, 2013, 2012 and 2011, respectively.

We are responsible for any losses of cash in the ATMs under our agreement with Wells Fargo and we self-insure for this risk. We incurred no material losses related to this self-insurance for the years ended December 31, 2013 and 2012.

Site-Funded ATMs

We operate ATMs at certain customer gaming establishments where the gaming establishment provides the cash required for the ATM 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 in the accompanying consolidated balance sheets and was $68.9 million and $107.5 million as of December 31, 2013 and 2012, respectively.

WARRANTY RESERVES
WARRANTY RESERVES

4. WARRANTY RESERVES

The warranty receivables amount is recorded in other receivables, net on the consolidated balance sheets. On a monthly basis, we evaluate the collectability of the outstanding balances and establish a reserve for the face amount of the expected losses on these receivables. The warranty expense associated with this reserve is included within cost of revenues (exclusive of depreciation and amortization) in the consolidated statements of income and comprehensive income.

A summary activity of the reserve for warranty losses is as follows (in thousands):

 
  Amount  

Balance, December 31, 2011

  $ 6,756  

Warranty expense provision

    5,226  

Charge offs against reserve

    (5,074 )
       

Balance, December 31, 2012

    6,908  

Warranty expense provision

    7,874  

Charge offs against reserve

    (12,005 )
       

Balance, December 31, 2013

  $ 2,777  
       
       
BUSINESS COMBINATIONS
BUSINESS COMBINATIONS

5. BUSINESS COMBINATIONS

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

PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS

6. PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Property, equipment and leasehold improvements consist of the following (amounts in thousands):

 
   
  At December 31,  
 
  Useful Life
(years)
 
 
  2013   2012  

Cash advance equipment

  3   $ 3,178   $ 3,461  

ATM equipment

  5     28,394     29,512  

Office, computer and other equipment

  3     11,729     8,562  

Leasehold and building improvements

  Lease Term     6,362     4,308  
               

Sub-total

        49,663     45,843  

Less: accumulated depreciation

        (30,953 )   (30,402 )
               

Total

      $ 18,710   $ 15,441  
               
               
GOODWILL AND OTHER INTANGIBLE ASSETS
GOODWILL AND OTHER INTANGIBLE ASSETS

7. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

The changes in the carrying amount of goodwill are as follows (in thousands):

 
  Cash Advance   ATM   Check Services   Other   Total  

Goodwill

                               

Balance, December 31, 2011

  $ 100,918   $ 33,051   $ 23,281   $ 22,872   $ 180,122  

Foreign translation adjustment

    19                 19  
                       

Balance, December 31, 2012

  $ 100,937   $ 33,051   $ 23,281   $ 22,872   $ 180,141  
                       
                       

Foreign translation adjustment

    (57 )               (57 )
                       

Balance, December 31, 2013

  $ 100,880   $ 33,051   $ 23,281   $ 22,872   $ 180,084  
                       
                       

In accordance with ASC 350, we test goodwill at the reporting unit level, which in certain cases may be a component of an operating segment, 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. We do not believe that any of our goodwill was impaired as of December 31, 2013 based upon the results of our impairment testing.

Goodwill Testing

In performing the annual goodwill impairment test for 2013, we utilized the qualitative assessment approach, commonly known as the Step 0 approach, prescribed under Accounting Standards Codification ("ASC") 350 as amended by Accounting Standards Update ("ASU") No. 2011-08. We assessed certain applicable qualitative factors to determine whether it was more likely than not that the fair value of our reporting units was less than the total assets carrying amounts. In evaluating whether it was more likely than not that the fair value of our reporting units was less than the total assets carrying amounts, we assessed relevant events and circumstances: (a) Macroeconomic conditions such as a deterioration in general economic conditions, limitations on accessing capital, fluctuations in foreign exchange rates, or other developments in equity and credit markets; (b) Industry and market considerations such as a deterioration in the environment in which we operate, an increased competitive environment, a decline in market-dependent multiples or metrics (considered in both absolute terms and relative to peers), a change in the market for our products or services, or a regulatory or political development; (c) Cost factors such as increases in raw materials, labor, or other costs that have a negative effect on earnings and cash flows; (d) Overall financial performance such as negative or declining cash flows or a decline in actual or planned revenue or earnings compared with actual and projected results of relevant prior periods; (e) Other relevant entity-specific events such as changes in management, key personnel, strategy, or customers; contemplation of bankruptcy; or litigation; (f) Events affecting a reporting unit such as a change in the composition or carrying amount of its net assets, a more-likely-than-not expectation of selling or disposing all, or a portion, of a reporting unit, the testing for recoverability of a significant asset group within a reporting unit, or recognition of a goodwill impairment loss in the financial statements of a subsidiary that is a component of a reporting unit; and (g) If applicable, a sustained decrease in share price (considered in both absolute terms and relative to peers).

The Step 0 assessment as of October 1, 2013 was also based on our estimation of the implied fair value of the reporting units as of October 1, 2011 (the most recent valuation date). In performing the annual impairment test for 2011, we utilized the two-step approach prescribed under ASC 350. The first step required a comparison of the carrying amount of each reporting unit to its estimated fair value. To estimate the fair value of our reporting units for Step 1, we used a combination of the income and the market approaches.

The income approach is based on a discounted cash flow analysis ("DCF"). This method involves estimating the after-tax cash flows attributable to a reporting unit and then discounting the after-tax cash flows to a present value, using a risk-adjusted discount rate. Assumptions used in the DCF require the exercise of significant judgment, including judgment about appropriate discount rates and terminal values, growth rates and the amount and timing of expected future cash flows. The forecasted cash flows are based on our most recent budget and for years beyond the budget. Our budgets are based on estimated future growth rates. We believe our assumptions are consistent with the plans and estimates used to manage the underlying businesses. The discount rates, which are intended to reflect the risks inherent in future cash flow projections, used in the DCF are based on estimates of the weighted-average cost of capital, or WACC, of market participants relative to each respective reporting unit. Key assumptions used in estimating fair value under the discounted cash flow approach included a discount rate of 12.5%, projected compound average revenue growth rates of 2.0% to 3.0% and terminal value growth rates of 2.0%. The discounted cash flow analyses for our reporting units included estimated future cash inflows from operations and estimated future cash outflows for capital expenditures.

The market approach considers comparable market data based on multiples of revenue or earnings before taxes, depreciation and amortization ("EBITDA"). Key assumptions used in estimating fair value under the market approach were based on observed market multiples of enterprise value to revenue and EBITDA for both comparable publicly-traded companies and recent merger and acquisition transactions involving similar companies to estimate appropriate controlling basis multiples to apply to each of the reporting units. Based on the multiples implied by this market data, we selected multiples of revenue of 0.3 to 2.7 times and multiples of EBITDA of 6.5 times.

After assessing the totality of events and circumstances for 2013, such as those described in the preceding paragraphs, we determined that it was more likely than not that the fair value of our reporting units exceeded the total assets carrying amounts; and therefore, the first and second steps of the goodwill impairment test were determined to be unnecessary. We conducted our annual impairment test for our reporting units at the beginning of our fourth fiscal quarter 2013 and no impairment was identified.

The estimate of fair value requires significant judgment. We based our fair value estimates on assumptions that we believe to be reasonable, but that are unpredictable and inherently uncertain, including estimates of future growth rates and operating margins and assumptions about the overall economic climate and the competitive environment for our reporting units. There can be no assurance that our estimates and assumptions made for purposes of our goodwill and identifiable intangible asset testing as of the time of testing will prove to be accurate predictions of the future. If our assumptions regarding business plans, competitive environments or anticipated growth rates are not correct, we may be required to record goodwill and/or intangible asset impairment charges in future periods, whether in connection with our next annual impairment testing or earlier, if an indicator of an impairment is present before our next annual evaluation.

Other Intangible Assets

Other intangible assets consist of the following (in thousands):

 
   
  At December 31,  
 
  Useful Life
(years)
 
 
  2013   2012  

Intangible assets

                 

Computer software

  Up to 3 Years   $ 26,386   $ 26,007  

Patents and trademarks

  17     11,223     11,149  

Customer contracts

  7 - 14     39,142     39,142  

Non-compete agreements

  3     1,200     1,200  
               

Gross carrying amount

        77,951     77,498  

Less: accumulated amortization

        (46,416 )   (43,504 )
               

Net carrying amount

      $ 31,535   $ 33,994  
               
               

Amortization expense related to these intangibles totaled approximately $9.6 million, $9.8 million and $8.7 million for the years ended December 31, 2013, 2012 and 2011, respectively. We capitalized $5.1 million, $0.7 million and $0.2 million of development costs for the years ended December 31, 2013, 2012 and 2011, respectively.

The total net book value of amortizable intangible assets was approximately $31.5 million at December 31, 2013. The anticipated amortization expense related to other intangible assets, assuming no subsequent impairment of the underlying assets, is as follows (in thousands):

 
  Amount  

2014

  $ 9,867  

2015

    9,404  

2016

    7,944  

2017

    2,791  

2018

    550  

Thereafter

    979  
       

Total

  $ 31,535  
       
       
BORROWINGS
BORROWINGS

8. BORROWINGS

In March 2011, we refinanced all of our indebtedness outstanding under the Second Amended and Restated Credit Agreement (as described below) and repaid our obligations under the senior subordinated notes with proceeds from the Senior Credit Facility as described below.

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, 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 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).

In September 2012, we entered into a first amendment to our Credit Agreement. The amendment modified certain financial covenants contained in the Credit Agreement with respect to our ability to make capital expenditures, dividends and stock repurchases. Specifically, we, together with our subsidiaries, may make an additional $15.0 million of capital expenditures, as such term is defined in the Credit Agreement, during the remainder of the term of the Credit Agreement, which amount is in addition to any other permitted capital expenditures under the Credit Agreement. In addition, the Credit Agreement provided that we could make certain dividends or stock repurchases if, among other things, our total leverage ratio (as calculated under the Credit Agreement) was less than 2.0 to 1. The amendment provides that we may now make certain dividends and stock repurchases if, among other things, our total leverage ratio is less than 2.5 to 1.

As of December 31, 2013, we had $103.0 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 5.2% for the year ended December 31, 2013. We also had no amounts outstanding under our letter of credit sub facility that is part of our revolving credit facility as of December 31, 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 December 31, 2013, we were in compliance with the required covenants.

Principal Repayments

The maturities of our borrowings at December 31, 2013 (excluding excess cash flow payments) are as follows (in thousands):

 
  Amount  

2014

  $ 1,030  

2015

    1,030  

2016

    100,940  

2017

     
       

Total

  $ 103,000  
       
       

Interest Rate Cap

In conjunction with the terms and conditions of the Senior Credit Facility, we purchased a $150.0 million notional amount interest rate cap with an effective date of January 5, 2012 and a term of three years. We purchased this interest rate cap to partially reduce our exposure to increases in the London Interbank Offer Rate ("LIBOR') above 1.5% during the term of the interest rate cap with respect to our variable rate debt obligations under the Senior Credit Facility and our obligations under the Contract Cash Solutions Agreement with Wells Fargo. This interest rate cap is recorded in other assets in the balance sheet, and is marked-to-market based on a quoted market price with the effects offset in our 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 December 31, 2013.

COMMITMENTS AND CONTINGENCIES
COMMITMENTS AND CONTINGENCIES

9. COMMITMENTS AND CONTINGENCIES

Lease Obligations

We lease office facilities and operating equipment under cancelable and non-cancelable agreements. Total rent expense was approximately $1.8 million, $0.7 million and $0.7 million for the years ended December 31, 2013, 2012 and 2011, respectively.

In October 2012, we entered into a long-term lease agreement related to office space for our new corporate headquarters located in Las Vegas, Nevada, which we occupied in the first half of 2013.

As of December 31, 2013, the minimum aggregate rental commitment under all non-cancelable operating leases were as follows (in thousands):

 
  Amount  

2014

  $ 1,252  

2015

    1,115  

2016

    1,107  

2017

    1,091  

2018

    1,381  

Thereafter

    4,672  
       

Total

  $ 10,618  
       
       

Litigation Claims and Assessments

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.

SHAREHOLDERS' EQUITY
SHAREHOLDERS' EQUITY

10. SHAREHOLDERS' EQUITY

Preferred Stock.    Our amended and restated certificate of incorporation allows our Board of Directors, without further action by stockholders, to issue up to 50,000,000 shares of preferred stock in one or more series and to fix the designations, powers, preferences, privileges and relative participating, optional, or special rights as well as the qualifications, limitations or restrictions of the preferred stock, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences. As of December 31, 2013, we had no shares of preferred stock outstanding.

Common Stock.    Subject to the preferences that may apply to shares of preferred stock that may be outstanding at the time, the holders of outstanding shares of common stock are entitled to receive dividends out of assets legally available at the times and in the amounts as our Board of Directors may from time to time determine. All dividends are non-cumulative. In the event of the liquidation, dissolution or winding up of the Company, the holders of common stock are entitled to share ratably in all assets remaining after the payment of liabilities, subject to the prior distribution rights of preferred stock, if any, then outstanding. Each stockholder is entitled to one vote for each share of common stock held on all matters submitted to a vote of stockholders. Cumulative voting for the election of directors is not provided for. The common stock is not entitled to preemptive rights and is not subject to conversion or redemption. There are no sinking fund provisions applicable to the common stock. Each outstanding share of common stock is fully paid and non-assessable. As of December 31, 2013, we had 89,233,374 shares of common stock issued.

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 2.6 million shares of common stock for cash of $18.2 million under the share repurchase program for the year ended December 31, 2013. We did not have any common stock repurchases under the program for the year ended December 31, 2012. 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 14,901 and 38,331 shares of common stock at an aggregate purchase price of $0.1 million and $0.3 million, for the years ended December 31, 2013 and 2012, respectively, to satisfy the minimum applicable tax withholding obligations incident to the vesting of such restricted stock awards.

The following table provides the treasury stock activity that occurred in 2013 (number of shares and cost in thousands):

 
  Total Number of
Shares Purchased
or Withheld
(in thousands)
  Average
Price
Purchased or
Withheld
(per share)
  Cost of Shares
Purchased or
Withheld
(in thousands)
 

Outstanding, December 31, 2012

    20,724   $ 7.02   $ 145,490  

Shares repurchased under current plan

    2,564   $ 7.11     18,241  

Shares withheld from restricted stock vesting

    15   $ 7.27     109  
               

Outstanding, December 31, 2013

    23,303   $ 7.03   $ 163,840  
               
               
WEIGHTED AVERAGE COMMON SHARES
WEIGHTED AVERAGE COMMON SHARES

11. 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):

 
  At December 31,  
 
  2013   2012   2011  

Weighted average number of common shares outstanding—basic

    66,014     65,933     64,673  

Potential dilution from equity grants(1)

    1,191     1,404     186  
               

Weighted average number of common shares outstanding—diluted

    67,205     67,337     64,859  
               
               

(1)
The potential dilution excludes the weighted average effect of stock options to acquire 5.9 million, 5.1 million and 8.1 million of our common stock at December 31, 2013, 2012 and 2011, respectively, because the application of the treasury stock method, as required, makes them anti-dilutive.
SHARE-BASED COMPENSATION
SHARE-BASED COMPENSATION

12. 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

    1,230     370     (1,600 )

Exercised options or vested shares

    (1,618 )   (70 )    

Canceled or forfeited

    (189 )   (7 )   196  
               

Outstanding, December 31, 2013

    8,872     404     4,399  
               
               

We have reserved 21,353,584 shares of common stock for the grant of stock options and other equity incentive awards under the 2005 Plan as of December 31, 2013. On the first business day of each fiscal year beginning with the fiscal year commencing on January 1, 2006, annual increases will be added to the 2005 Plan equal to 3% of all outstanding shares of our common stock immediately prior to such increase, or a lesser amount determined by our Board of Directors. We increased the shares under the 2005 Plan by 3.2 million shares during the years ended December 31, 2013 and 2012.

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:

 
  Year Ended
December 31,
 
 
  2013   2012   2011  

Risk-free interest rate

    1 %   1 %   2 %

Expected life of options (in years)

    4     6     6  

Expected volatility

    61 %   62 %   63 %

Expected dividend yield

    0 %   0 %   0 %

The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. The expected volatility for options granted in 2013 is based upon our historical volatility. The expected dividend yield is based on our historical practice of not paying dividends.

The following tables summarize additional information regarding the options that have been granted 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

    1,230     7.07              

Exercised

    (1,618 )   5.22              

Canceled or forfeited

    (189 )   7.09              
                         

Outstanding, December 31, 2013

    8,872   $ 7.54     5.9   $ 27,301  
                         
                         

Vested and expected to vest, December 31, 2013

    8,448   $ 7.62     5.8   $ 25,538  
                         
                         

Exercisable, December 31, 2013

    6,160   $ 8.23     4.8   $ 16,370  
                         
                         


 

 
   
   
  Options Outstanding   Options Exercisable  
 
  Range of Exercise Prices   Number
Outstanding
(000's)
  Weighted
Average
Remaining
Contract
Life (Years)
  Weighted
Average
Exercise
Prices
  Number
Exercisable
(000's)
  Weighted
Average
Exercise
Price
 
    $   $ 5.99     3,135     7.4   $ 4.46     1,811   $ 4.22  
      6.00     8.99     3,505     6.7     7.14     2,117     7.19  
      9.00     12.99     1,000     3.8     9.99     1,000     9.99  
      13.00     13.99     785     1.1     13.98     785     13.98  
      14.00     14.99     160     2.4     14.22     160     14.22  
      15.00     15.99     152     2.2     15.22     152     15.22  
      16.00     18.99     135     2.7     16.80     135     16.80  
                                         
                  8,872                 6,160        
                                         
                                         

There were 1.2 million, 2.4 million and 2.1 million options granted for the years ended December 31, 2013, 2012 and 2011, respectively. The weighted average grant date fair value per share of the options granted was $3.31, $2.93 and $2.04 for the years ended December 31, 2013, 2012 and 2011, respectively. The total intrinsic value of options exercised was $4.6 million, $6.3 million and $0.4 million for the years ended December 31, 2013, 2012 and 2011, respectively.

There was $7.1 million in unrecognized compensation expense related to options expected to vest as of December 31, 2013. This cost was expected to be recognized on a straight-line basis over a weighted average period of 2.4 years. We granted options to acquire 1.2 million shares of common stock, received $8.4 million in proceeds from the exercise of options and recorded $4.4 million in non-cash compensation expense related to options granted that were expected to vest for the year ended and as of December 31, 2013.

We recorded $6.2 million and $6.8 million in non-cash compensation expense related to options granted that were expected to vest as of December 31, 2012 and 2011, respectively. We received $6.7 million and $0.8 million in cash from the exercise of 2.4 million and 0.4 million options for the years ended December 31, 2012 and 2011, respectively.

Restricted Stock

The following is a summary of non-vested share awards for our 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

    (70 )   5.15  

Forfeited

    (7 )   7.09  
             

Outstanding, December 31, 2013

    404   $ 7.05  
             
             

There were 369,641 and 85,000 shares of restricted stock granted for the years ended December 31, 2013 and 2012, respectively. The weighted average grant date fair value per share of restricted stock granted was $7.09 and $6.80 for the years ended December 31, 2013 and 2012, respectively. There was no restricted stock granted for the year ended December 31, 2011. The total fair value of restricted shares vested was $0.7 million, $1.3 million and $1.1 million for the years ended December 31, 2013, 2012 and 2011, respectively.

There was $2.1 million in unrecognized compensation expense related to time-based restricted shares expected to vest as of December 31, 2013. This cost was expected to be recognized on a straight-line basis over a weighted average period of 3.1 years. We recorded $0.7 million in non-cash compensation expense related to the restricted stock granted that was expected to vest as of December 31, 2013.

We recorded approximately $0.4 million and $0 in non-cash compensation expense related to the restricted stock granted that were expected to vest as of December 31, 2012 and 2011, respectively.

EMPLOYEE BENEFIT PLAN
EMPLOYEE BENEFIT PLAN

13. EMPLOYEE BENEFIT PLAN

Defined Contribution Plan

We have a retirement savings plan (the "401(k) Plan") under Section 401(k) of the Internal Revenue Code covering our employees. The 401(k) Plan allows employees to defer up to the lesser of the Internal Revenue Code prescribed maximum amount or 100% of their income on a pre-tax basis through contributions to the plan. As a benefit to employees, we match a percentage of these employee contributions. Expenses related to the matching portion of the contributions to the 401(k) Plan were $0.5 million, $0.3 million and $0.2 million for the years ended December 31, 2013, 2012 and 2011, respectively.

INCOME TAXES
INCOME TAXES

14. INCOME TAXES

The following presents consolidated income before tax for domestic and foreign operations (in thousands):

 
  Year Ended December 31,  
 
  2013   2012   2011  

Consolidated income before tax

                   

Domestic

  $ 35,473   $ 39,280   $ 18,705  

Foreign

    3,412     1,183     10  
               

Total

  $ 38,885   $ 40,463   $ 18,715  
               
               

The income tax provision attributable to income from operations before tax consists of the following components (in thousands):

 
  Year Ended December 31,  
 
  2013   2012   2011  

Income tax provision

                   

Domestic

  $ 13,626   $ 14,358   $ 9,528  

Foreign

    861     416     58  
               

Total income tax provision

  $ 14,487   $ 14,774   $ 9,586  
               
               

Income tax provision components

                   

Current

  $ 844   $ 430   $ 334  

Deferred

    13,643     14,344     9,252  
               

Total income tax provision

  $ 14,487   $ 14,774   $ 9,586  
               
               

A reconciliation of the federal statutory rate and the effective income tax rate is as follows:

 
  Year Ended December 31,  
 
  2013   2012   2011  

Income tax reconciliation

                   

Federal statutory rate

    35.0 %   35.0 %   35.0 %

Foreign provision

    (1.0 )%   (0.4 )%   0.1 %

State/province income tax

    1.3 %   1.7 %   2.4 %

Non-deductible compensation cost

    1.1 %   0.2 %   7.8 %

Change in valuation allowance

    0.2 %   1.0 %   2.1 %

Adjustment to carrying value

    0.3 %   (2.2 )%   3.6 %

Foreign dividends and IRC Sec. 956 inclusions, net of foreign tax deduction

    0.1 %   1.1 %   0.2 %

Non-deductible expenses and other items

    0.3 %   0.1 %   0.0 %
               

Effective tax rate

    37.3 %   36.5 %   51.2 %
               
               

The major tax-effected components of the deferred tax assets and liabilities are as follows (in thousands):

 
  Year Ended December 31,  
 
  2013   2012   2011  

Deferred income tax assets related to:

                   

Intangibles

  $ 44,845   $ 63,899   $ 82,088  

Net operating losses

    37,333     32,171     29,733  

Stock compensation expense

    7,066     6,775     5,412  

Accounts receivable allowances

    1,703     1,968     2,770  

Accrued and prepaid expenses

    1,331     1,279     702  

Borrowings

    348          

Other

    406     367     492  

Property, equipment and leasehold improvements

    333     312      

Valuation allowance

    (1,379 )   (1,307 )   (905 )
               

Total deferred income tax assets

  $ 91,986   $ 105,464   $ 120,292  
               

Deferred income tax liabilities related to:

                   

Property, equipment and leasehold improvements

  $   $   $ 242  

Other

    942     800     512  
               

Total deferred income tax liabilities

  $ 942   $ 800   $ 754  
               

Deferred income taxes, net

  $ 91,044   $ 104,664   $ 119,538  
               
               

For all of our investments in foreign subsidiaries, except for GCA (Macau), deferred taxes have not been provided on unrepatriated foreign earnings. Unrepatriated earnings were approximately $6.2 million as of December 31, 2013. These earnings were considered permanently reinvested, as it was management's intention to reinvest foreign earnings in foreign operations. We project sufficient cash flow in the U.S. and we do not need to repatriate these foreign earnings to finance U.S. operations.

As a result of certain realization requirements under the accounting guidance on share-based payments, the table of deferred tax assets and liabilities shown above does not include certain deferred tax assets that arose directly from tax deductions related to equity compensation in excess of compensation recognized for financial reporting at December 31, 2013, 2012 and 2011, respectively. Equity will be increased by $4.1 million if, and when, such deferred tax assets are ultimately realized. We use the accounting guidance on income taxes ordering for purposes of determining when excess tax benefits have been realized.

We had $109.8 million, or $38.4 million tax-effected, of accumulated federal net operating losses as of December 31, 2013. The net operating losses can be carried forward and applied to offset taxable income for 20 years and will expire starting in 2025.

We had tax-effected state net operating loss carry forwards of approximately $2.9 million as of December 31, 2013. The state net operating loss carry forwards will expire between 2014 and 2032. The determination and utilization of these state net operating loss carry forwards are dependent upon apportionment percentages and other respective state laws, which can change from year to year. As of December 31, 2013, $1.2 million of our valuation allowance related to certain state net operating loss carry forwards which are expected to expire before utilization, due to shorter carry forward periods and decreased apportionment percentages in those states.

We had a net deferred income tax asset of $91.0 million as of December 31, 2013. We recognized a deferred tax asset upon our conversion from a limited liability company to a corporation on May 14, 2004. Prior to that time, all tax attributes flowed through to the members of the limited liability company. The principal component of the deferred tax asset is a difference between our assets for financial accounting and tax purposes. This difference results from a significant balance of acquired goodwill of approximately $687.4 million that was generated as part of the conversion to a corporation plus approximately $97.6 million in pre-existing goodwill carried over from periods prior to the conversion. Both of these assets are recorded for tax purposes but not for accounting purposes. This asset is amortized over 15 years for tax purposes, resulting in annual pretax income being $52.3 million lower for tax purposes than for financial accounting purposes. At an estimated blended domestic statutory tax rate of 36.4%, this results in tax payments being approximately $19.0 million less than the annual provision for income taxes shown on the income statement for financial accounting purposes, or the amount of the annual provision, if less. There is an expected aggregate of $101.5 million in cash savings over the remaining life of the portion of our deferred tax asset related to the conversion. This deferred tax asset may be subject to certain limitations. We believe that it is more likely than not that we will be able to utilize our deferred tax asset. However, the utilization of this tax asset is subject to many factors including, but not limited to, a change of control of the Company and future earnings.

We have analyzed filing positions in all of the federal, state and foreign jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. We believe that our income tax filing positions and deductions will be sustained upon audit and we do not anticipate any adjustments that will result in a material change to our financial position. We may from time to time be assessed interest or penalties by tax jurisdictions, although any such assessments historically have been minimal and immaterial to our financial results. Our policy for recording interest and penalties associated with audits and unrecognized tax benefits is to record such items as a component of income tax expense.

During the year ended December 31, 2013, we were under audit by the U.S. Internal Revenue Service for the tax years ended December 31, 2011 and 2010. The audit field work was completed and we agreed to the audit report. The audit report did not materially affect our deferred taxes or the income tax provision as of and for the year ended December 31, 2013. We are subject to taxation in the U.S. and various states and foreign jurisdictions. We have a number of federal and state income tax years still open for examination as a result of our net operating loss carry forwards. Accordingly, we are subject to examination for both U.S. federal and a few state tax returns for the years 2005 to present. For the remaining state, local and foreign jurisdictions, with few exceptions, we are no longer subject to examination by tax authorities for years before 2010.

RELATED PARTY TRANSACTIONS
RELATED PARTY TRANSACTIONS

15. RELATED PARTY TRANSACTIONS

A member of our Board of Directors served as a member of the board of directors of a gaming company until April 2013 for which we provide various cash access products and services that are insignificant to our net income. Our Board Member received both cash and equity compensation from this gaming company in consideration for serving on its board of directors, however, none of this consideration was tied in any manner to our performance or obligations under our cash access agreements with the gaming company. In addition, our Board member was not involved in the negotiation of our cash access agreements with this gaming company.

In October 2012, we entered into a long-term lease agreement related to office space for our corporate headquarters that we moved into during the first half of 2013, for which we engaged a brokerage firm. An executive officer of this brokerage firm is the brother of our former Chief Financial Officer. This brokerage firm received approximately $0.4 million as compensation for acting as our broker.

SEGMENT INFORMATION
SEGMENT INFORMATION

16. 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. Our 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 that can be, and often are, sold separately to our customers.

We operate in the following business segments: (1) Cash Advance, (2) ATM, (3) Check Services and (4) Other. Each of these segments is monitored separately by our management for performance against its internal forecast and is consistent with our internal management reporting. The Other segment consists of certain lines of business, none of which exceeds the established materiality for segment reporting, which includes: Kiosk Sales, Kiosk Parts and Services, Central Credit reporting services and Casino Marketing 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 years ended December 31, 2013, 2012 and 2011, no single customer accounted for more than 10% of our revenues. Our five largest customers accounted for approximately 33%, 34% and 28% of our total revenue in 2013, 2012 and 2011, respectively.

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

The following tables present segment information (in thousands):

 
  For and At the Year Ended
December 31,
 
 
  2013   2012   2011  

Revenues

                   

Cash advance

  $ 231,134   $ 227,517   $ 203,869  

ATM

    286,049     303,159     283,727  

Check services

    21,611     25,401     26,269  

Other

    43,650     28,409     30,198  

Corporate

             
               

Total revenues

  $ 582,444   $ 584,486   $ 544,063  
               
               

Operating income

                   

Cash advance

  $ 60,977   $ 63,785   $ 38,468  

ATM

    25,347     32,333     34,832  

Check services

    12,365     13,930     14,197  

Other

    19,631     14,457     14,808  

Corporate

    (69,170 )   (68,523 )   (64,009 )
               

Total operating income

  $ 49,150   $ 55,982   $ 38,296  
               
               

Total assets

                   

Cash advance

  $ 145,939   $ 149,113        

ATM

    69,627     59,781        

Check services

    30,930     35,216        

Other

    56,946     39,838        

Corporate

    223,885     269,947        
                 

Total assets

  $ 527,327   $ 553,895        
                 
                 
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The unaudited selected quarterly results of operations are as follows (in thousands, except for per share amounts):

 
  Quarter  
 
  First   Second   Third   Fourth   Year  

2013

                               

Revenues

  $ 146,822   $ 149,065   $ 146,101   $ 140,456   $ 582,444  

Operating income

    12,901     13,633     11,420     11,196     49,150  

Net income

    6,136     6,776     5,782     5,704     24,398  

Net income

   
 
   
 
   
 
   
 
   
 
 

Basic earnings per share

  $ 0.09   $ 0.10   $ 0.09   $ 0.09   $ 0.37  

Diluted earnings per share

  $ 0.09   $ 0.10   $ 0.09   $ 0.08   $ 0.36  

Weighted average common shares outstanding

   
 
   
 
   
 
   
 
   
 
 

Basic

    66,697     66,116     65,525     65,730     66,014  

Diluted

    67,882     66,993     66,630     67,394     67,205  

2012

   
 
   
 
   
 
   
 
   
 
 

Revenues

  $ 151,065   $ 147,465   $ 149,824   $ 136,132   $ 584,486  

Operating income

    15,696     15,963     14,642     9,681     55,982  

Net income

    7,128     7,084     7,079     4,398     25,689  

Net income

   
 
   
 
   
 
   
 
   
 
 

Basic earnings per share

  $ 0.11   $ 0.11   $ 0.11   $ 0.07   $ 0.39  

Diluted earnings per share

  $ 0.11   $ 0.11   $ 0.10   $ 0.06   $ 0.38  

Weighted average common shares outstanding

   
 
   
 
   
 
   
 
   
 
 

Basic

    65,134     65,774     66,108     66,739     65,933  

Diluted

    66,190     67,383     67,601     67,996     67,337  
SUBSEQUENT EVENTS
SUBSEQUENT EVENTS

18. SUBSEQUENT EVENTS

As of March 11, 2014, we had not identified, and were not aware of, any subsequent events for the year ended December 31, 2013.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

Principles of Consolidation

All significant 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. We consider all highly liquid investments with maturities of three months or less at the time of purchase to be cash and cash equivalents. Such balances generally exceed the federal insurance limits. However, we periodically evaluate the creditworthiness of these institutions to minimize risk.

Restricted Cash and Cash Equivalents

As part of our Internet cash access activity, we hold deposits on behalf of lottery patrons. These funds can be utilized by lottery patrons for the purchase of lottery tickets. We reflect this cash as restricted cash and maintain a liability for these funds in accounts payable and accrued expenses. In addition, we have a sponsorship agreement that requires us to maintain a minimum deposit as collateral for any potential chargeback loss activity occurring as a result of the sponsorship arrangement. All interest received on this deposit is recorded to restricted cash and cash equivalents. The total balance of restricted cash and cash equivalents was $0.3 million and $0.2 million, at December 31, 2013 and 2012, respectively.

ATM Funding Agreements

We obtain all of the cash required to operate our 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 us and we are liable to the gaming establishment for the face amount of the cash dispensed. In the 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 the Non-Site-Funded locations, our Contract Cash Solutions Agreement with Wells Fargo allows us to use funds owned by Wells Fargo to provide the currency needed for normal operating requirements for our 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 balance sheet. We are charged a cash usage fee for the cash used in these ATMs, which is included as interest expense in the consolidated statements of income and comprehensive income. We recognize 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 us, 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. We receive 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 the consolidated balance sheets. The amounts owed to gaming establishments are included within settlement liabilities on the consolidated balance sheets.

Warranty Receivables

If a gaming establishment chooses to have a check warranted, it sends a request to our third party 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 the third party service provider, we receive all of the check warranty revenue. We are exposed to risk for the losses associated with any warranted items that cannot be collected from patrons issuing the items. Warranty receivables are defined as any amounts paid by the third party check warranty service provider to gaming establishments to purchase dishonored checks. Additionally, we pay a fee to the third party check warranty service provider for its services.

The warranty receivables amount is recorded in other receivables, net on our 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 consolidated statements of income and comprehensive income.

Unamortized Debt Issuance Costs

Debt issuance costs incurred in connection with long-term borrowings are capitalized and amortized to interest expense based upon the related debt agreements using the straight-line method, which approximates the effective interest method. Unamortized debt issuance costs are included in prepaid and other assets on the consolidated balance sheets.

Property, Equipment and Leasehold Improvements

Property, equipment and leasehold improvements are stated at cost, less accumulated depreciation, computed using the straight-line method over the lesser of the estimated life of the related assets, generally three to five years, or the related lease term.

Repairs and maintenance costs are expensed as incurred.

Upon sale or retirement, the costs and related accumulated depreciation are eliminated from the accounts and any resulting gain or loss is reflected in the consolidated statements of income and comprehensive income.

Property, equipment and leasehold improvements are reviewed for impairment whenever events or circumstances indicate that their carrying amounts may not be recoverable. Impairment is indicated when undiscounted future cash flows do not exceed the asset's carrying value. There was no impairment for any of our property, equipment, or leasehold improvements for the years ended December 31, 2013, 2012 and 2011.

Goodwill

Goodwill represents the excess of the purchase price over the identifiable tangible and intangible assets acquired plus liabilities assumed arising from business combinations.

We test for impairment annually on a reporting unit basis, at the beginning of our fourth fiscal quarter, or more often under certain circumstances. The annual impairment test is completed using either: a qualitative Step 0 assessment based on reviewing relevant events and circumstances; or a quantitative Step 1 assessment, which determines the fair value of the reporting unit, using an income approach that discounts future cash flows based on the estimated future results of our reporting units and a market approach that compares market multiples of comparable companies to determine whether or not any impairment exists. If the fair value of a reporting unit is less than its carrying amount, we use the Step 2 assessment to determine the impairment.

Other Intangible Assets

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 us to make renewal assumptions, which impact the estimated useful lives of such assets. Capitalized software development costs require us to make certain judgments as to the stages of development and costs eligible for capitalization. Capitalized software costs placed in service are amortized over their useful lives, generally not to exceed three years. The acquisition cost of the 3-in-1 rollover patent is being amortized over the term of the patent, which expires in 2018. Other intangible assets are reviewed annually for impairment based on the fair value of our reporting units as compared to the carrying amounts, or whenever events or circumstances indicate that the carrying amounts may not be recoverable. This assessment requires the use of estimates about future operating results. Changes in forecasted operations can materially affect these estimates, which could materially affect our results of operations.

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.

Interest Rate Cap

In conjunction with the terms and conditions of the Senior Credit Facility, as described in Note 8, we purchased a $150.0 million notional amount interest rate cap with an effective date of January 5, 2012 and a term of three years. We purchased this interest rate cap to partially reduce our exposure to increases in the London Interbank Offer Rate ("LIBOR") above 1.5% during the term of the interest rate cap with respect to our variable rate debt obligations under the Senior Credit Facility and our obligations under the Contract Cash Solutions Agreement with Wells Fargo. This interest rate cap is recorded in other assets in our consolidated balance sheets, and is marked-to-market based on a quoted market price with the effects offset in the 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 December 31, 2013.

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

 
  Level of
Hierarchy(*)
  Fair
Value
  Carrying
Value
 

December 31, 2013

                   

Senior credit facility

    2   $ 104,030   $ 103,000  

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.

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.

Revenue Recognition

We recognize revenue when evidence of an arrangement exists, services have been rendered, the price is fixed or determinable and collectability is reasonably assured. We evaluate our 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, inventory costs associated with the sale of our kiosks and check cashing warranties.

Advertising, Marketing and Promotional Costs

We expense advertising, marketing and promotional costs as incurred. Total advertising, marketing and promotional costs, included in operating expenses in the consolidated statements of income and comprehensive income, were $0.7 million, $0.7 million and $0.6 million for the years ended December 31, 2013, 2012 and 2011, respectively.

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 the consolidated 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 year. 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 the 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 consolidated balance sheets.

Use of Estimates

We have 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 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;

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

the budgets for future performance, weighted average cost of capital ("WACC") and growth rates as well as other factors used in our annual goodwill and other intangible assets impairment evaluations;

the renewal assumptions used for customer contracts to estimate the useful lives of such assets; and

the judgments used to determine the stages of development and costs eligible for capitalization as internally developed software.

Earnings Applicable to Common Stock

Basic earnings per share is 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 assumed stock option exercises and vesting of restricted stock.

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 and restricted stock expected to be vested currently and in future periods are measured at grant date 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. 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.

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
 

December 31, 2013

                   

Senior credit facility

    2   $ 104,030   $ 103,000  

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.
WARRANTY RESERVES (Tables)
Schedule of the activity for the check warranty reserve

A summary activity of the reserve for warranty losses is as follows (in thousands):

 
  Amount  

Balance, December 31, 2011

  $ 6,756  

Warranty expense provision

    5,226  

Charge offs against reserve

    (5,074 )
       

Balance, December 31, 2012

    6,908  

Warranty expense provision

    7,874  

Charge offs against reserve

    (12,005 )
       

Balance, December 31, 2013

  $ 2,777  
       
       
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS (Tables)
Schedule of property, equipment and leasehold improvements

Property, equipment and leasehold improvements consist of the following (amounts in thousands):

 
   
  At December 31,  
 
  Useful Life
(years)
 
 
  2013   2012  

Cash advance equipment

  3   $ 3,178   $ 3,461  

ATM equipment

  5     28,394     29,512  

Office, computer and other equipment

  3     11,729     8,562  

Leasehold and building improvements

  Lease Term     6,362     4,308  
               

Sub-total

        49,663     45,843  

Less: accumulated depreciation

        (30,953 )   (30,402 )
               

Total

      $ 18,710   $ 15,441  
               
               
GOODWILL AND OTHER INTANGIBLE ASSETS (Tables)

The changes in the carrying amount of goodwill are as follows (in thousands):

 
  Cash Advance   ATM   Check Services   Other   Total  

Goodwill

                               

Balance, December 31, 2011

  $ 100,918   $ 33,051   $ 23,281   $ 22,872   $ 180,122  

Foreign translation adjustment

    19                 19  
                       

Balance, December 31, 2012

  $ 100,937   $ 33,051   $ 23,281   $ 22,872   $ 180,141  
                       
                       

Foreign translation adjustment

    (57 )               (57 )
                       

Balance, December 31, 2013

  $ 100,880   $ 33,051   $ 23,281   $ 22,872   $ 180,084  
                       
                       

Other intangible assets consist of the following (in thousands):

 
   
  At December 31,  
 
  Useful Life
(years)
 
 
  2013   2012  

Intangible assets

                 

Computer software

  Up to 3 Years   $ 26,386   $ 26,007  

Patents and trademarks

  17     11,223     11,149  

Customer contracts

  7 - 14     39,142     39,142  

Non-compete agreements

  3     1,200     1,200  
               

Gross carrying amount

        77,951     77,498  

Less: accumulated amortization

        (46,416 )   (43,504 )
               

Net carrying amount

      $ 31,535   $ 33,994  
               
               

The anticipated amortization expense related to other intangible assets, assuming no subsequent impairment of the underlying assets, is as follows (in thousands):

 
  Amount  

2014

  $ 9,867  

2015

    9,404  

2016

    7,944  

2017

    2,791  

2018

    550  

Thereafter

    979  
       

Total

  $ 31,535  
       
       
BORROWINGS (Tables)
Schedule of the maturities of borrowings (excluding excess cash flow payments)

The maturities of our borrowings at December 31, 2013 (excluding excess cash flow payments) are as follows (in thousands):

 
  Amount  

2014

  $ 1,030  

2015

    1,030  

2016

    100,940  

2017

     
       

Total

  $ 103,000  
       
       
COMMITMENTS AND CONTINGENCIES (Tables)
Schedule of minimum aggregate rental commitment under all non-cancelable operating leases

As of December 31, 2013, the minimum aggregate rental commitment under all non-cancelable operating leases were as follows (in thousands):

 
  Amount  

2014

  $ 1,252  

2015

    1,115  

2016

    1,107  

2017

    1,091  

2018

    1,381  

Thereafter

    4,672  
       

Total

  $ 10,618  
       
       
SHAREHOLDERS' EQUITY (Tables)
Schedule of treasury stock activity

The following table provides the treasury stock activity that occurred in 2013 (number of shares and cost in thousands):

 
  Total Number of
Shares Purchased
or Withheld
(in thousands)
  Average
Price
Purchased or
Withheld
(per share)
  Cost of Shares
Purchased or
Withheld
(in thousands)
 

Outstanding, December 31, 2012

    20,724   $ 7.02   $ 145,490  

Shares repurchased under current plan

    2,564   $ 7.11     18,241  

Shares withheld from restricted stock vesting

    15   $ 7.27     109  
               

Outstanding, December 31, 2013

    23,303   $ 7.03   $ 163,840  
               
               
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):

 
  At December 31,  
 
  2013   2012   2011  

Weighted average number of common shares outstanding—basic

    66,014     65,933     64,673  

Potential dilution from equity grants(1)

    1,191     1,404     186  
               

Weighted average number of common shares outstanding—diluted

    67,205     67,337     64,859  
               
               

(1)
The potential dilution excludes the weighted average effect of stock options to acquire 5.9 million, 5.1 million and 8.1 million of our common stock at December 31, 2013, 2012 and 2011, 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

    1,230     370     (1,600 )

Exercised options or vested shares

    (1,618 )   (70 )    

Canceled or forfeited

    (189 )   (7 )   196  
               

Outstanding, December 31, 2013

    8,872     404     4,399  
               
               

 


Year Ended
December 31,

2013 2012 2011

Risk-free interest rate

1 % 1 % 2 %

Expected life of options (in years)

4 6 6

Expected volatility

61 % 62 % 63 %

Expected dividend yield

0 % 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

(1,618 ) 5.22

Canceled or forfeited

(189 ) 7.09

Outstanding, December 31, 2013

8,872 $ 7.54 5.9 $ 27,301

Vested and expected to vest, December 31, 2013

8,448 $ 7.62 5.8 $ 25,538

Exercisable, December 31, 2013

6,160 $ 8.23 4.8 $ 16,370

 




Options Outstanding Options Exercisable

Range of Exercise Prices Number
Outstanding
(000's)
Weighted
Average
Remaining
Contract
Life (Years)
Weighted
Average
Exercise
Prices
Number
Exercisable
(000's)
Weighted
Average
Exercise
Price
$ $ 5.99 3,135 7.4 $ 4.46 1,811 $ 4.22
6.00 8.99 3,505 6.7 7.14 2,117 7.19
9.00 12.99 1,000 3.8 9.99 1,000 9.99
13.00 13.99 785 1.1 13.98 785 13.98
14.00 14.99 160 2.4 14.22 160 14.22
15.00 15.99 152 2.2 15.22 152 15.22
16.00 18.99 135 2.7 16.80 135 16.80
8,872 6,160

Shares
Outstanding
(in thousands)
Weighted
Average Grant
Date Fair Value
(per share)

Outstanding, December 31, 2012

111 $ 5.72

Granted

370 7.09

Vested

(70 ) 5.15

Forfeited

(7 ) 7.09

Outstanding, December 31, 2013

404 $ 7.05
INCOME TAXES (Tables)

The following presents consolidated income before tax for domestic and foreign operations (in thousands):

 
  Year Ended December 31,  
 
  2013   2012   2011  

Consolidated income before tax

                   

Domestic

  $ 35,473   $ 39,280   $ 18,705  

Foreign

    3,412     1,183     10  
               

Total

  $ 38,885   $ 40,463   $ 18,715  
               
               

The income tax provision attributable to income from operations before tax consists of the following components (in thousands):

 
  Year Ended December 31,  
 
  2013   2012   2011  

Income tax provision

                   

Domestic

  $ 13,626   $ 14,358   $ 9,528  

Foreign

    861     416     58  
               

Total income tax provision

  $ 14,487   $ 14,774   $ 9,586  
               
               

Income tax provision components

                   

Current

  $ 844   $ 430   $ 334  

Deferred

    13,643     14,344     9,252  
               

Total income tax provision

  $ 14,487   $ 14,774   $ 9,586  
               
               

 


Year Ended December 31,

2013 2012 2011

Income tax reconciliation

Federal statutory rate

35.0 % 35.0 % 35.0 %

Foreign provision

(1.0 )% (0.4 )% 0.1 %

State/province income tax

1.3 % 1.7 % 2.4 %

Non-deductible compensation cost

1.1 % 0.2 % 7.8 %

Change in valuation allowance

0.2 % 1.0 % 2.1 %

Adjustment to carrying value

0.3 % (2.2 )% 3.6 %

Foreign dividends and IRC Sec. 956 inclusions, net of foreign tax deduction

0.1 % 1.1 % 0.2 %

Non-deductible expenses and other items

0.3 % 0.1 % 0.0 %

Effective tax rate

37.3 % 36.5 % 51.2 %

The major tax-effe