GLOBAL CASH ACCESS HOLDINGS, INC., 10-Q filed on 11/7/2012
Quarterly Report
Document and Entity Information
9 Months Ended
Sep. 30, 2012
Oct. 29, 2012
Document and Entity Information
 
 
Entity Registrant Name
Global Cash Access Holdings, Inc. 
 
Entity Central Index Key
0001318568 
 
Document Type
10-Q 
 
Document Period End Date
Sep. 30, 2012 
 
Amendment Flag
false 
 
Current Fiscal Year End Date
--12-31 
 
Entity Current Reporting Status
Yes 
 
Entity Filer Category
Accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
66,596,777 
Document Fiscal Year Focus
2012 
 
Document Fiscal Period Focus
Q3 
 
CONDENSED CONSOLIDATED BALANCE SHEETS (USD $)
In Thousands, unless otherwise specified
Sep. 30, 2012
Dec. 31, 2011
ASSETS
 
 
Cash and cash equivalents
$ 46,940 
$ 55,535 
Restricted cash and cash equivalents
200 
455 
Settlement receivables
113,989 
80,246 
Other receivables, net
10,076 
16,885 
Inventory
7,266 
7,087 
Prepaid expenses and other assets
16,564 
15,406 
Property, equipment and leasehold improvements, net
14,357 
15,577 
Goodwill, net
180,152 
180,122 
Other intangible assets, net
33,327 
38,216 
Deferred income taxes, net
106,484 
119,538 
Total assets
529,355 
529,067 
Liabilities:
 
 
Settlement liabilities
158,438 
141,827 
Accounts payable
34,809 
32,223 
Accrued expenses
18,608 
21,159 
Borrowings
126,500 
174,000 
Total liabilities
338,355 
369,209 
COMMITMENTS AND CONTINGENCIES (Note 5)
   
   
Stockholders' Equity:
 
 
Common stock, $0.001 par value, 500,000 shares authorized and 87,375 and 85,651 shares issued at September 30, 2012 and December 31, 2011, respectively
87 
86 
Convertible preferred stock, $0.001 par value, 50,000 shares authorized and 0 shares outstanding at September 30, 2012 and December 31, 2011, respectively
   
   
Additional paid-in capital
214,612 
204,735 
Retained earnings
119,216 
97,925 
Accumulated other comprehensive income
2,504 
2,340 
Treasury stock, at cost, 20,714 and 20,686 shares at September 30, 2012 and December 31, 2011, respectively
(145,419)
(145,228)
Total stockholders' equity
191,000 
159,858 
Total liabilities and stockholders' equity
$ 529,355 
$ 529,067 
CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
In Thousands, except Per Share data, unless otherwise specified
Sep. 30, 2012
Dec. 31, 2011
CONDENSED CONSOLIDATED BALANCE SHEETS
 
 
Common stock, par value (in dollars per share)
$ 0.001 
$ 0.001 
Common stock, shares authorized
500,000 
500,000 
Common stock, shares issued
87,375 
85,651 
Convertible preferred stock, par value (in dollars per share)
$ 0.001 
$ 0.001 
Convertible preferred stock, shares authorized
50,000 
50,000 
Convertible preferred stock, shares outstanding
Treasury stock, shares
20,714 
20,686 
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2012
Sep. 30, 2011
Sep. 30, 2012
Sep. 30, 2011
Revenues
 
 
 
 
Total revenues
$ 149,824 
$ 136,888 
$ 448,354 
$ 406,330 
Cost of revenues
111,373 
106,953 
333,566 
317,900 
Operating expenses
19,463 
18,529 
55,910 
51,922 
Amortization
2,650 
1,929 
7,317 
6,250 
Depreciation
1,695 
1,867 
5,260 
6,201 
Operating income
14,643 
7,610 
46,301 
24,057 
Interest expense, net of interest income
3,586 
4,414 
12,133 
14,167 
Loss on early extinguishment of debt
 
 
 
943 
Interest expense, net
3,586 
4,414 
12,133 
15,110 
Income before income tax provision
11,057 
3,196 
34,168 
8,947 
Income tax provision
3,977 
1,356 
12,878 
4,356 
Net income
7,080 
1,840 
21,290 
4,591 
Foreign currency translation
236 
(218)
164 
(191)
Comprehensive income
7,316 
1,622 
21,454 
4,400 
Basic earnings per share:
 
 
 
 
Net income per share - basic (in dollars per share)
$ 0.11 
$ 0.03 
$ 0.32 
$ 0.07 
Diluted earnings per share:
 
 
 
 
Net income per share - diluted (in dollars per share)
$ 0.10 
$ 0.03 
$ 0.32 
$ 0.07 
Weighted average number of common shares outstanding:
 
 
 
 
Basic (in shares)
66,108 
64,712 
65,673 
64,597 
Diluted (in shares)
67,601 
64,751 
67,031 
64,708 
Cash advance
 
 
 
 
Revenues
 
 
 
 
Total revenues
57,520 
50,913 
172,557 
152,036 
ATM
 
 
 
 
Revenues
 
 
 
 
Total revenues
76,411 
71,044 
233,361 
213,450 
Check services
 
 
 
 
Revenues
 
 
 
 
Total revenues
6,611 
6,479 
19,731 
19,813 
Other revenues
 
 
 
 
Revenues
 
 
 
 
Total revenues
$ 9,282 
$ 8,452 
$ 22,705 
$ 21,031 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (USD $)
In Thousands, unless otherwise specified
9 Months Ended
Sep. 30, 2012
Sep. 30, 2011
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
Net income
$ 21,290 
$ 4,591 
Adjustments to reconcile net income to cash provided by operating activities:
 
 
Amortization of financing costs
1,081 
988 
Amortization of intangibles
7,317 
6,250 
Depreciation
5,260 
6,201 
Loss on sale or disposal of assets
112 
216 
Provision for bad debts
2,586 
4,016 
Loss on early extinguishment of debt
 
943 
Stock-based compensation
3,951 
5,238 
Changes in operating assets and liabilities:
 
 
Settlement receivables
(33,676)
10,266 
Other receivables, net
5,682 
(829)
Inventory
(6)
(2,575)
Prepaid and other assets
(1,329)
(3,477)
Deferred income taxes
12,556 
4,092 
Settlement liabilities
16,509 
(12,221)
Accounts payable
2,582 
505 
Accrued expenses
(2,496)
(4,030)
Net cash provided by operating activities
41,419 
20,174 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
Purchase of property, equipment, leasehold improvements and other intangibles
(7,353)
(6,227)
Proceeds from sale of fixed assets
448 
 
Changes in restricted cash and cash equivalents
255 
(14)
Net cash used in investing activities
(6,650)
(6,241)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
Repayments against old credit facility
 
(208,750)
Securing of new credit facility
 
214,000 
Issuance costs of new credit facility
(676)
(7,099)
Repayments against new credit facility
(47,500)
(35,000)
Proceeds from exercise of stock options
5,946 
591 
Purchase of treasury stock
(191)
(156)
Net cash used in financing activities
(42,421)
(36,414)
NET EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
(943)
191 
NET DECREASE IN CASH AND CASH EQUIVALENTS
(8,595)
(22,290)
CASH AND CASH EQUIVALENTS - Beginning of Period
55,535 
60,636 
CASH AND CASH EQUIVALENTS - End of Period
46,940 
38,346 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
 
 
Cash paid for interest
11,402 
15,202 
Cash paid for taxes, net of refunds
$ 267 
$ 336 
BUSINESS AND BASIS OF PRESENTATION
BUSINESS AND BASIS OF PRESENTATION

1.         BUSINESS AND BASIS OF PRESENTATION

 

Overview

 

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

 

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

 

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

 

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

 

Basis of Presentation

 

The unaudited condensed consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Some of the information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. In the opinion of management, all adjustments (which include normal recurring adjustments) necessary for a fair presentation of results for the interim periods have been made. The results for the three and nine months ended September 30, 2012 are not necessarily indicative of results to be expected for the full fiscal year.

 

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

 

Use of Estimates

 

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

 

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

 

·                  the valuation and recognition of share-based compensation;

 

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

 

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

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

2.         SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

 

The unaudited condensed consolidated interim financial statements presented include the accounts of Holdings and its subsidiaries.  All significant intercompany transactions and balances have been eliminated in consolidation.

 

Earnings Applicable to Common Stock

 

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

 

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

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

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

 

66,108

 

64,712

 

65,673

 

64,597

 

Potential dilution from equity grants(2)

 

1,493

 

39

 

1,358

 

111

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding - diluted

 

67,601

 

64,751

 

67,031

 

64,708

 

 

(1)         Included in the calculation of weighted average common shares outstanding — basic are 70 and 40 and 16 and 44 unvested shares of restricted common stock of Holdings granted in share-based payment transactions for the three and nine months ended September 30, 2012 and 2011, respectively, that are participating securities because such shares have voting rights as well as the right to participate in dividend distributions made by the Company to its common stockholders.

 

(2)         The potential dilution excludes the weighted average effect of stock options to acquire 5.5 million and 6.9 million and 9.0 million and 8.2 million shares of common stock of Holdings for the three and nine months ended September 30, 2012 and 2011, respectively, because the application of the treasury stock method, as required, makes them anti-dilutive.

 

Warranty Receivables

 

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

 

A summary of the activity for the check warranty reserve for the nine months ended September 30, 2012, is as follows (amounts in thousands):

 

 

 

Amount

 

 

 

 

 

Balance, December 31, 2011

 

  $

6,756

 

 

 

 

 

Warranty expense provision

 

2,633

 

Charge offs against reserve

 

(3,896

)

 

 

 

 

Balance, September 30, 2012

 

  $

5,493

 

 

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 GCA’s borrowings are estimated based on quoted market prices for the same issue. The fair values of all other financial instruments, including amounts outstanding under the ATM funding agreements approximate their book values as the instruments are short-term in nature or contain market rates of interest.

 

GCA uses the market approach when measuring the fair value of an asset or liability for recurring and nonrecurring fair value measurements categorized within Levels 1 and 2 of the fair value hierarchy.  Level 1 inputs are quoted market prices in active markets for identical assets or liabilities. Level 2 inputs are inputs other than quoted market prices that are directly or indirectly observable for the asset or liability.  The market approach uses prices and other relevant information from market transactions involving identical or comparable assets or liabilities to measure fair value.  Level 3 inputs indicate that the fair value is determined using pricing inputs that are unobservable for the investment and include situations where there is little, if any, market activity for the investment.  Significant management estimates and judgment are used in the determination of the fair value of Level 3 pricing inputs.

 

Interest Rate Cap

 

In conjunction with the terms and conditions of the New Senior Credit Facility, as described in Note 6, GCA purchased a $150.0 million notional amount interest rate cap with an effective date of January 5, 2012 and a term of three years. GCA purchased this interest rate cap to partially reduce the Company’s exposure to increases in the London Interbank Offer Rate (“LIBOR’) above 1.5% during the term of the interest rate cap with respect to its variable rate debt obligations under the New Senior Credit Facility and its obligations under the Contract Cash Solutions Agreement with Wells Fargo.  This interest rate cap is recorded in other assets in the balance sheet, and is marked-to-market based on a quoted market price with the effects offset in the income statement.  The interest rate cap carrying value and fair value approximate each other and these values are considered insignificant as of September 30, 2012.

 

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

 

 

 

Level of
Hierarchy

 

Fair
Value

 

Carrying
Value

 

 

 

 

 

 

 

 

 

September 30, 2012

 

 

 

 

 

 

 

New senior secured credit facility

 

1

 

  $

128,398

 

  $

126,500

 

 

 

 

 

 

 

 

 

December 31, 2011

 

 

 

 

 

 

 

New senior secured credit facility

 

1

 

  $

173,565

 

  $

174,000

 

 

Inventory

 

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

 

Statement of Cash Flows Correction

 

Subsequent to the issuance of our Interim Quarterly report filed on Form 10-Q for the period ended September 30, 2011, we determined that our Unaudited Condensed Consolidated Statement of Cash Flows for this period should have reported a use of cash for the purchase of fixed assets, an investing activity, rather than a use of cash as inventory purchases, an operating activity. As a result, net cash provided by operating activities and net cash used in investing activities in the Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2011 were adjusted from amounts previously reported, as indicated in the table below.

 

Management has determined that adjusting amounts previously reported for net cash provided by operating activities and net cash used in investing activities in 2011 are not material corrections of the interim financial statements.  These amounts were presented correctly in our 2011 Annual Report on Form 10-K filed on March 12, 2012.

 

 

 

Nine months ended September 30, 2011

 

 

 

As previously
reported

 

As corrected

 

 

 

 

 

 

 

Operating activities:

 

 

 

 

 

Changes in inventory

 

  $

(5,307)

 

  $

(2,575

)

Net cash provided by operating activities

 

  $

17,442

 

  $

20,174

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

Purchase of property, equipment, leasehold improvements and other intangibles

 

  $

(3,495)

 

  $

(6,227

)

Net cash used in investing activities

 

  $

(3,509)

 

  $

(6,241

)

 

Recently Issued Accounting Pronouncements

 

In July 2012, the FASB issued ASU 2012-02, which provides amendments stating that an entity has the option first to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired.  If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action.  However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification 350 - Goodwill and Other.  An entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test.  An entity will be able to resume performing the qualitative assessment in any subsequent period.  These amendments are intended to reduce cost and complexity by providing an entity with the option to make a qualitative assessment about the likelihood that an indefinite-lived intangible asset is impaired to determine whether it should perform a quantitative test.  The amendments also enhance the consistency of impairment testing guidance among long-lived asset categories by permitting an entity to assess qualitative factors to determine whether it is necessary to calculate the asset’s fair value when testing an indefinite-lived intangible asset for impairment, which is equivalent to the impairment testing requirements for other long-lived assets.  We will assess the impairment of our intangible assets and determine the most appropriate form of action, whether to perform a qualitative assessment to ascertain the validity of a quantitative measure or to bypass the qualitative assessment and conduct a quantitative impairment test.  Adoption of this amended guidance is not expected to have an impact on the Company’s financial position, results of operations or cash flows.

ATM FUNDING AGREEMENTS
ATM FUNDING AGREEMENTS

3.         ATM FUNDING AGREEMENTS

 

The Company’s Contract Cash Solutions Agreement with Wells Fargo allows for the Company to utilize funds owned by Wells Fargo to provide the currency needed for normal operating requirements for the Company’s ATMs. For the use of these funds, the Company pays Wells Fargo a cash usage fee on the average daily balance of funds utilized multiplied by a contractually defined cash usage rate.

 

Under this agreement, all currency supplied by Wells Fargo remains the sole property of Wells Fargo at all times until it is dispensed, at which time Wells Fargo obtains an interest in the corresponding settlement receivable.  As the cash is never an asset of ours, supplied cash is not reflected on our balance sheet.

 

In June 2012, the Company and Wells Fargo amended the Contract Cash Solutions Agreement to increase the maximum amount of cash to be provided to GCA from $400.0 million to $500.0 million, and the initial term of the Contract Cash Solutions Agreement was extended from November 30, 2013 until November 30, 2014.

 

As of September 30, 2012 and December 31, 2011, the outstanding balances of ATM cash utilized by GCA from Wells Fargo were $327.2 million and $467.8 million, respectively.  For the three and nine months ended September 30, 2012 and 2011, the cash usage fees incurred by the Company were $0.7 million and $2.5 million and $0.6 million and $1.9 million, respectively, and are reflected as interest expense within the condensed consolidated statements of income.

 

The Company is responsible for any losses of cash in the ATMs under its agreement with Wells Fargo.  The Company is self-insured related to this risk.  For the nine months ended September 30, 2012 and 2011, the Company incurred no material losses related to this self-insurance.

 

Site Funded ATMs

 

The Company operates ATMs at certain customer gaming establishments where the gaming establishment provides the cash required for the ATM operational needs. GCA is required to reimburse the customer for the amount of cash dispensed from these Site-Funded ATMs. The Site-Funded ATM liability is included within settlement liabilities in the accompanying condensed consolidated balance sheets and was $96.7 million and $85.9 million as of September 30, 2012 and December 31, 2011, respectively.

BENEFIT PLANS
BENEFIT PLANS

4.         BENEFIT PLANS

 

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

 

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

 

A summary of stock option award activity under the 2005 Plan as of September 30, 2012 and changes during the nine months ended is as follows:

 

 

 

Number of
Common Shares

 

Weighted Average
Exercise Price
(Per Share)

 

Weighted
Average Life
Remaining
(Years)

 

Aggregate
Intrinsic Value

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Balance outstanding - December 31, 2011

 

9,227,541

 

  $

6.87

 

6.9

 

  $

5,186

 

 

 

 

 

 

 

 

 

 

 

Granted

 

2,260,000

 

 

 

 

 

 

 

Exercised

 

(1,464,507)

 

 

 

 

 

 

 

Canceled or forfeited

 

(340,761)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance outstanding - September 30, 2012

 

9,682,273

 

  $

7.07

 

6.8

 

  $

19,602

 

 

 

 

 

 

 

 

 

 

 

Balance exercisable - September 30, 2012

 

5,662,015

 

  $

8.49

 

5.4

 

  $

7,578

 

 

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 for the nine months ended September 30, 2012 and 2011, respectively.

 

 

 

Nine Months Ended September 30,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Risk-free interest rate

 

1.0%

 

2.5%

 

Expected life of options (in years)

 

6.3

 

6.3

 

Expected volatility

 

62.2%

 

62.9%

 

Expected dividend yield

 

0.0%

 

0.0%

 

 

As of September 30, 2012, there was $10.2 million in unrecognized compensation expense related to options expected to vest.  This cost is expected to be recognized on a straight-line basis over a weighted average period of 2.7 years.  During the nine months ended September 30, 2012, the Company granted options to acquire approximately 2.3 million shares of common stock, received $5.9 million in proceeds from the exercise of options and recorded $3.7 million in non-cash compensation expense related to options granted that are expected to vest.  There were no options granted during the three months ended September 30, 2012.  The weighted average grant date fair value of options granted during the nine months ended September 30, 2012 was $3.31.  The total intrinsic value of options exercised during the three and nine months ended September 30, 2012 were $2.9 million and $5.1 million, respectively.

 

As of September 30, 2011, there was $8.2 million in unrecognized compensation expense related to options expected to vest.  This cost was expected to be recognized on a straight-line basis over a weighted average period of 0.9 years.  During the nine months ended September 30, 2011, the Company granted options to acquire approximately 2.1 million shares of common stock, received $0.6 million in proceeds from the exercise of options and recorded $5.4 million in non-cash compensation expense related to options granted that are expected to vest.

 

Restricted Stock

 

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

 

A summary of all non-vested awards for the Company’s time-based restricted stock awards as of September 30, 2012 is as follows:

 

 

 

Shares
Outstanding

 

Weighted
Average Grant
Date Fair Value
(Per Share)

 

 

 

 

 

 

 

Balance outstanding - December 31, 2011

 

198,279

 

  $

2.20

 

 

 

 

 

 

 

Granted

 

65,000

 

 

 

Vested

 

(126,332)

 

 

 

Forfeited

 

(3,509)

 

 

 

 

 

 

 

 

 

Balance outstanding - September 30, 2012

 

133,438

 

  $

4.35

 

 

As of September 30, 2012, there was $0.5 million in unrecognized compensation expense related to shares of time-based restricted shares expected to vest.  This cost is expected to be recognized on a straight-line basis over a weighted average period of 2.6 years.  During the nine months ended September 30, 2012, there were 126,332 shares of time-based restricted shares vested, and we recorded $0.3 million in non-cash compensation expense related to restricted stock granted that is expected to vest.  The total fair value of shares vested during the three and nine months ended September 30, 2012 were $0.3 million and $1.0 million, respectively.

 

As of September 30, 2011, there was $0.6 million in unrecognized compensation expense related to shares of time-based restricted shares expected to vest.  This cost was expected to be recognized on a straight-line basis over a weighted average period of 0.5 years.  During the nine months ended September 30, 2011, there were 201,991 shares of time-based restricted shares vested, and we recorded a credit of $0.1 million in non-cash compensation expense related to the restricted stock granted that is expected to vest.

COMMITMENTS AND CONTINGENCIES
COMMITMENTS AND CONTINGENCIES

5.         COMMITMENTS AND CONTINGENCIES

 

Litigation Claims and Assessments

 

Automated Systems America, Inc.

 

On July 7, 2010, an action was commenced by Automated Systems America, Inc. in the United States District Court, Central District of California, against Holdings, GCA and certain current employees of GCA. The complaint seeks a declaratory judgment of invalidity, unenforceability and non-infringement of certain patents owned by the Company and alleges antitrust violations of Section 2 of the Sherman Act, unfair competition violations under the Lanham Act and tortuous interference and defamation per se. The plaintiff seeks damages in excess of $2.0 million, punitive damages, and a trebling of damages associated with the allegations under Section 2 of the Sherman Act. On March 3, 2011, the Company filed a motion to dismiss this action. In February 2012, the District Court entered an order granting the Company’s motion to dismiss this action without prejudice, allowing the plaintiff to file a new complaint if it elected to do so. The plaintiff subsequently filed an amended complaint alleging substantially similar claims to those contained in the original complaint, and the Company has filed a motion to dismiss the amended complaint. The Company has not accrued any amounts related to this matter as the Company does not believe it is probable that a loss has been incurred and has meritorious defenses and will vigorously defend this action.

 

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

BORROWINGS
BORROWINGS

6.         BORROWINGS

 

On March 1, 2011, GCA, together with its sole stockholder, Holdings entered into a Credit Agreement (“the Credit Agreement”) with certain lenders, Deutsche Bank Trust Company Americas, as Administrative Agent and Wells Fargo Securities, LLC, as Syndication Agent. The Credit Agreement provides for a $210.0 million term loan facility and a $35.0 million revolving credit facility (the “New Senior Credit Facility”). The revolving credit facility includes provisions for the issuance of up to $10.0 million of letters of credit and up to $5.0 million in swing-line loans. We used the proceeds from the New Senior Credit Facility to repay all outstanding indebtedness under our existing senior secured credit facility under the Second Amended and Restated Credit Agreement and to defease our senior subordinated notes.

 

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

 

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

 

Borrowings under the New Senior Credit Facility bear interest at either (x) a specified base rate plus a 4.50% margin, or (y) LIBOR plus a 5.50% margin.  The base rate minimum is 2.50% and the LIBOR minimum is 1.50%.  Interest in respect of base rate loans is payable quarterly in arrears and interest in respect of LIBOR loans is payable in arrears at the end of the applicable interest period and every three months in the case of interest periods in excess of three months. Interest is also payable at the time of repayment of any loans and at maturity.  As of September 30, 2012, we had $126.5 million of outstanding indebtedness under the New Senior Credit Facility, all of which is outstanding under the term loan facility.

 

The weighted average interest rate, inclusive of the applicable margin of 550 basis points, was 7.0%.  We also had no amounts outstanding under our letter of credit sub facility that is part of our revolving credit facility as of September 30, 2012.  The New Senior Credit Facility is unconditionally guaranteed by Holdings and each direct and indirect domestic subsidiary of GCA.  All amounts owing under the New Senior Credit Facility are secured by a first priority perfected security interest in all stock (but only 65% of the stock of foreign subsidiaries), other equity interests and promissory notes owned by GCA and a first priority perfected security interest in all other tangible and intangible assets owned by GCA and the guarantors.

 

On September 24, 2012, the Company entered into an amendment to its Credit Agreement.  The amendment modifies certain financial covenants contained in the Credit Agreement with respect to the Company’s ability to make capital expenditures, dividends and stock repurchases. Specifically, the Company, together with its 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 the Company could make certain dividends or stock repurchases if, among other things, the Company’s total leverage ratio (as calculated under the Credit Agreement) was less than 2.0 to 1. The amendment provides that the Company may now make certain dividends and stock repurchases if, among other things, its total leverage ratio is less than 2.5 to 1.

 

The Credit Agreement contains customary affirmative and negative covenants, financial covenants, representations and warranties and events of defaults.  As of September 30, 2012, the Company is in compliance with the required covenants.

RELATED PARTY TRANSACTIONS
RELATED PARTY TRANSACTIONS

7.         RELATED PARTY TRANSACTIONS

 

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

 

In October 2012, the Company entered into a long-term lease agreement related to office space for its corporate headquarters.  Voit Real Estate Services (“Voit”) acted as the Company’s broker in connection with this transaction.  Kevin J. Higgins is an Executive Vice President of Voit, and is the brother of Mary E. Higgins, our Chief Financial Officer.  The total estimated rental payments owing by the Company under the lease agreement total $11.8 million and Voit is entitled to receive approximately $0.4 million as compensation for acting as the Company’s broker.

INCOME TAX
INCOME TAX

8.         INCOME TAX

 

The Company’s effective income tax rate for the three and nine months ended September 30, 2012 was 36.0% and 37.7% respectively, both of which were greater than the statutory federal rate of 35.0% due in part to state taxes and the non-deductible, non-cash compensation expenses related to incentive stock options.  The Company’s effective income tax rate for the three and nine months ended September 30, 2011 was 42.4% and 48.7% respectively, both of which were greater than the statutory federal rate of 35.0% due in part to state taxes, the non-deductible, non-cash compensation expenses related to incentive stock options and the cancellation or forfeiture of non-qualified stock options.

 

The Company accounts for uncertain tax positions in accordance with the applicable accounting guidance.  As of September 30, 2012, there has been no material change to the balance of unrecognized tax benefits reported at December 31, 2011.

SEGMENT INFORMATION
SEGMENT INFORMATION

9.         SEGMENT INFORMATION

 

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

 

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

 

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

 

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

 

Major Customers

 

For the three and nine months ended September 30, 2012, none of our customers had combined revenues from all segments equal to or exceeding 10.0%.  For the three and nine months ended September 30, 2012 and 2011, our five largest customers accounted for approximately 32.8% and 31.9% and 29.1% and 29.1%, respectively, of our total revenue.

 

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

 

The tables below present the results of operations by operating segment for the three and nine months ended September 30, 2012 and 2011, respectively (amounts in thousands):

 

 

 

Cash

 

 

 

Check

 

 

 

 

 

 

 

 

 

Advance

 

ATM

 

Services

 

Other

 

Corporate

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

  $

57,520

 

  $

76,411

 

  $

6,611

 

  $

9,282

 

  $

-

 

  $

149,824

 

Operating income

 

15,785

 

7,951

 

3,822

 

4,673

 

(17,588)

 

14,643

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

  $

50,913

 

  $

71,044

 

  $

6,479

 

  $

8,452

 

  $

-

 

  $

136,888

 

Operating income

 

7,789

 

8,659

 

3,579

 

4,393

 

(16,810)

 

7,610

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

  $

172,557

 

  $

233,361

 

  $

19,731

 

  $

22,705

 

  $

-

 

  $

448,354

 

Operating income

 

48,388

 

25,620

 

11,017

 

11,563

 

(50,287)

 

46,301

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

  $

152,036

 

  $

213,450

 

  $

19,813

 

  $

21,031

 

  $

-

 

  $

406,330

 

Operating income

 

23,375

 

27,157

 

11,168

 

10,029

 

(47,672)

 

24,057

 

 

The table below presents total assets by operating segment as of September 30, 2012 and December 31, 2011, respectively (amounts in thousands):

 

 

 

September 30, 2012

 

December 31, 2011

 

 

 

 

 

 

 

Cash Advance

 

  $

169,133

 

  $

164,515

 

ATM

 

117,925

 

98,418

 

Check services

 

33,842

 

37,231

 

Other

 

35,231

 

39,570

 

Corporate

 

173,224

 

189,333

 

 

 

 

 

 

 

Total Assets

 

  $

529,355

 

  $

529,067

 

SUBSEQUENT EVENTS
SUBSEQUENT EVENTS

10.  SUBSEQUENT EVENTS

 

The Board of Directors of the Company has authorized and approved a new share repurchase program granting the Company the authority to repurchase up to $40.0 million of outstanding Company common stock over a two year period which is expected to commence in the first quarter of 2013.  The Company intends to finance the share repurchases with cash on hand.  The repurchase program authorizes the Company to buy its 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, and supersedes all other outstanding share repurchase programs of the Company.

 

In October 2012, the Company entered into a long-term lease agreement related to office space for its corporate headquarters.  The total estimated rental payments owing by the Company under the lease agreement total $11.8 million.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

Principles of Consolidation

 

The unaudited condensed consolidated interim financial statements presented include the accounts of Holdings and its subsidiaries.  All significant intercompany transactions and balances have been eliminated in consolidation.

Earnings Applicable to Common Stock

 

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

 

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

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

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

 

66,108

 

64,712

 

65,673

 

64,597

 

Potential dilution from equity grants(2)

 

1,493

 

39

 

1,358

 

111

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding - diluted

 

67,601

 

64,751

 

67,031

 

64,708

 

 

(1)         Included in the calculation of weighted average common shares outstanding — basic are 70 and 40 and 16 and 44 unvested shares of restricted common stock of Holdings granted in share-based payment transactions for the three and nine months ended September 30, 2012 and 2011, respectively, that are participating securities because such shares have voting rights as well as the right to participate in dividend distributions made by the Company to its common stockholders.

 

(2)         The potential dilution excludes the weighted average effect of stock options to acquire 5.5 million and 6.9 million and 9.0 million and 8.2 million shares of common stock of Holdings for the three and nine months ended September 30, 2012 and 2011, respectively, because the application of the treasury stock method, as required, makes them anti-dilutive.

Warranty Receivables

 

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

 

A summary of the activity for the check warranty reserve for the nine months ended September 30, 2012, is as follows (amounts in thousands):

 

 

 

Amount

 

 

 

 

 

Balance, December 31, 2011

 

  $

6,756

 

 

 

 

 

Warranty expense provision

 

2,633

 

Charge offs against reserve

 

(3,896

)

 

 

 

 

Balance, September 30, 2012

 

  $

5,493

 

 

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 GCA’s borrowings are estimated based on quoted market prices for the same issue. The fair values of all other financial instruments, including amounts outstanding under the ATM funding agreements approximate their book values as the instruments are short-term in nature or contain market rates of interest.

 

GCA uses the market approach when measuring the fair value of an asset or liability for recurring and nonrecurring fair value measurements categorized within Levels 1 and 2 of the fair value hierarchy.  Level 1 inputs are quoted market prices in active markets for identical assets or liabilities. Level 2 inputs are inputs other than quoted market prices that are directly or indirectly observable for the asset or liability.  The market approach uses prices and other relevant information from market transactions involving identical or comparable assets or liabilities to measure fair value.  Level 3 inputs indicate that the fair value is determined using pricing inputs that are unobservable for the investment and include situations where there is little, if any, market activity for the investment.  Significant management estimates and judgment are used in the determination of the fair value of Level 3 pricing inputs.

 

Interest Rate Cap

 

In conjunction with the terms and conditions of the New Senior Credit Facility, as described in Note 6, GCA purchased a $150.0 million notional amount interest rate cap with an effective date of January 5, 2012 and a term of three years. GCA purchased this interest rate cap to partially reduce the Company’s exposure to increases in the London Interbank Offer Rate (“LIBOR’) above 1.5% during the term of the interest rate cap with respect to its variable rate debt obligations under the New Senior Credit Facility and its obligations under the Contract Cash Solutions Agreement with Wells Fargo.  This interest rate cap is recorded in other assets in the balance sheet, and is marked-to-market based on a quoted market price with the effects offset in the income statement.  The interest rate cap carrying value and fair value approximate each other and these values are considered insignificant as of September 30, 2012.

 

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

 

 

 

Level of
Hierarchy

 

Fair
Value

 

Carrying
Value

 

 

 

 

 

 

 

 

 

September 30, 2012

 

 

 

 

 

 

 

New senior secured credit facility

 

1

 

  $

128,398

 

  $

126,500

 

 

 

 

 

 

 

 

 

December 31, 2011

 

 

 

 

 

 

 

New senior secured credit facility

 

1

 

  $

173,565

 

  $

174,000

 

Inventory

 

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

Statement of Cash Flows Correction

 

Subsequent to the issuance of our Interim Quarterly report filed on Form 10-Q for the period ended September 30, 2011, we determined that our Unaudited Condensed Consolidated Statement of Cash Flows for this period should have reported a use of cash for the purchase of fixed assets, an investing activity, rather than a use of cash as inventory purchases, an operating activity. As a result, net cash provided by operating activities and net cash used in investing activities in the Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2011 were adjusted from amounts previously reported, as indicated in the table below.

 

Management has determined that adjusting amounts previously reported for net cash provided by operating activities and net cash used in investing activities in 2011 are not material corrections of the interim financial statements.  These amounts were presented correctly in our 2011 Annual Report on Form 10-K filed on March 12, 2012.

 

 

 

Nine months ended September 30, 2011

 

 

 

As previously
reported

 

As corrected

 

 

 

 

 

 

 

Operating activities:

 

 

 

 

 

Changes in inventory

 

  $

(5,307)

 

  $

(2,575

)

Net cash provided by operating activities

 

  $

17,442

 

  $

20,174

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

Purchase of property, equipment, leasehold improvements and other intangibles

 

  $

(3,495)

 

  $

(6,227

)

Net cash used in investing activities

 

  $

(3,509)

 

  $

(6,241

)

Recently Issued Accounting Pronouncements

 

In July 2012, the FASB issued ASU 2012-02, which provides amendments stating that an entity has the option first to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired.  If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action.  However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification 350 - Goodwill and Other.  An entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test.  An entity will be able to resume performing the qualitative assessment in any subsequent period.  These amendments are intended to reduce cost and complexity by providing an entity with the option to make a qualitative assessment about the likelihood that an indefinite-lived intangible asset is impaired to determine whether it should perform a quantitative test.  The amendments also enhance the consistency of impairment testing guidance among long-lived asset categories by permitting an entity to assess qualitative factors to determine whether it is necessary to calculate the asset’s fair value when testing an indefinite-lived intangible asset for impairment, which is equivalent to the impairment testing requirements for other long-lived assets.  We will assess the impairment of our intangible assets and determine the most appropriate form of action, whether to perform a qualitative assessment to ascertain the validity of a quantitative measure or to bypass the qualitative assessment and conduct a quantitative impairment test.  Adoption of this amended guidance is not expected to have an impact on the Company’s financial position, results of operations or cash flows.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Tables)

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

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

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

 

66,108

 

64,712

 

65,673

 

64,597

 

Potential dilution from equity grants(2)

 

1,493

 

39

 

1,358

 

111

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding - diluted

 

67,601

 

64,751

 

67,031

 

64,708

 

 

(1)         Included in the calculation of weighted average common shares outstanding — basic are 70 and 40 and 16 and 44 unvested shares of restricted common stock of Holdings granted in share-based payment transactions for the three and nine months ended September 30, 2012 and 2011, respectively, that are participating securities because such shares have voting rights as well as the right to participate in dividend distributions made by the Company to its common stockholders.

 

(2)         The potential dilution excludes the weighted average effect of stock options to acquire 5.5 million and 6.9 million and 9.0 million and 8.2 million shares of common stock of Holdings for the three and nine months ended September 30, 2012 and 2011, respectively, because the application of the treasury stock method, as required, makes them anti-dilutive.

 

 

 

Amount

 

 

 

 

 

Balance, December 31, 2011

 

  $

6,756

 

 

 

 

 

Warranty expense provision

 

2,633

 

Charge offs against reserve

 

(3,896

)

 

 

 

 

Balance, September 30, 2012

 

  $

5,493

 

 

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

 

 

 

Level of
Hierarchy

 

Fair
Value

 

Carrying
Value

 

 

 

 

 

 

 

 

 

September 30, 2012

 

 

 

 

 

 

 

New senior secured credit facility

 

1

 

  $

128,398

 

  $

126,500

 

 

 

 

 

 

 

 

 

December 31, 2011

 

 

 

 

 

 

 

New senior secured credit facility

 

1

 

  $

173,565

 

  $

174,000

 

 

 

 

Nine months ended September 30, 2011

 

 

 

As previously
reported

 

As corrected

 

 

 

 

 

 

 

Operating activities:

 

 

 

 

 

Changes in inventory

 

  $

(5,307)

 

  $

(2,575

)

Net cash provided by operating activities

 

  $

17,442

 

  $

20,174

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

Purchase of property, equipment, leasehold improvements and other intangibles

 

  $

(3,495)

 

  $

(6,227

)

Net cash used in investing activities

 

  $

(3,509)

 

  $

(6,241

)

 

BENEFIT PLANS (Tables)

 

 

 

Number of
Common Shares

 

Weighted Average
Exercise Price
(Per Share)

 

Weighted
Average Life
Remaining
(Years)

 

Aggregate
Intrinsic Value

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Balance outstanding - December 31, 2011

 

9,227,541

 

  $

6.87

 

6.9

 

  $

5,186

 

 

 

 

 

 

 

 

 

 

 

Granted

 

2,260,000

 

 

 

 

 

 

 

Exercised

 

(1,464,507)

 

 

 

 

 

 

 

Canceled or forfeited

 

(340,761)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance outstanding - September 30, 2012

 

9,682,273

 

  $

7.07

 

6.8

 

  $

19,602

 

 

 

 

 

 

 

 

 

 

 

Balance exercisable - September 30, 2012

 

5,662,015

 

  $

8.49

 

5.4

 

  $

7,578

 

 

 

 

Nine Months Ended September 30,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Risk-free interest rate

 

1.0%

 

2.5%

 

Expected life of options (in years)

 

6.3

 

6.3

 

Expected volatility

 

62.2%

 

62.9%

 

Expected dividend yield

 

0.0%

 

0.0%

 

 

 

 

Shares
Outstanding

 

Weighted
Average Grant
Date Fair Value
(Per Share)

 

 

 

 

 

 

 

Balance outstanding - December 31, 2011

 

198,279

 

  $

2.20

 

 

 

 

 

 

 

Granted

 

65,000

 

 

 

Vested

 

(126,332)

 

 

 

Forfeited

 

(3,509)

 

 

 

 

 

 

 

 

 

Balance outstanding - September 30, 2012

 

133,438

 

  $

4.35

 

SEGMENT INFORMATION (Tables)

 

 

 

Cash

 

 

 

Check

 

 

 

 

 

 

 

 

 

Advance

 

ATM

 

Services

 

Other

 

Corporate

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

  $

57,520

 

  $

76,411

 

  $

6,611

 

  $

9,282

 

  $

-

 

  $

149,824

 

Operating income

 

15,785

 

7,951

 

3,822

 

4,673

 

(17,588)

 

14,643

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

  $

50,913

 

  $

71,044

 

  $

6,479

 

  $

8,452

 

  $

-

 

  $

136,888

 

Operating income

 

7,789

 

8,659

 

3,579

 

4,393

 

(16,810)

 

7,610

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

  $

172,557

 

  $

233,361

 

  $

19,731

 

  $

22,705

 

  $

-

 

  $

448,354

 

Operating income

 

48,388

 

25,620

 

11,017

 

11,563

 

(50,287)

 

46,301

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

  $

152,036

 

  $

213,450

 

  $

19,813

 

  $

21,031

 

  $

-

 

  $

406,330

 

Operating income

 

23,375

 

27,157

 

11,168

 

10,029

 

(47,672)

 

24,057

 

 

 

 

 

September 30, 2012

 

December 31, 2011

 

 

 

 

 

 

 

Cash Advance

 

  $

169,133

 

  $

164,515

 

ATM

 

117,925

 

98,418

 

Check services

 

33,842

 

37,231

 

Other

 

35,231

 

39,570

 

Corporate

 

173,224

 

189,333

 

 

 

 

 

 

 

Total Assets

 

  $

529,355

 

  $

529,067

 

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details) (USD $)
In Thousands, except Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2012
Sep. 30, 2011
Sep. 30, 2012
Sep. 30, 2011
Weighted-average number of common shares outstanding used in the computation of basic and diluted earnings per share
 
 
 
 
Weighted average number of common shares outstanding - basic
66,108,000 
64,712,000 
65,673,000 
64,597,000 
Potential dilution from equity grants (in shares)
1,493,000 
39,000 
1,358,000 
111,000 
Weighted average number of common shares outstanding - diluted
67,601,000 
64,751,000 
67,031,000 
64,708,000 
Unvested shares of restricted common stock of Holdings granted in share-based payment transactions
70 
16 
40 
44 
Anti-dilutive stock options excluded from computation of earnings per share (in shares)
5,500,000 
9,000,000 
6,900,000 
8,200,000 
Warranty Receivables
 
 
 
 
Minimum age after which warranty receivables are written off
 
 
1 year 
 
Summary of the activity for the check warranty reserve
 
 
 
 
Balance at the beginning of the period
 
 
$ 6,756 
 
Warranty expense provision
 
 
2,633 
 
Charge offs against reserve
 
 
(3,896)
 
Balance at the end of the period
$ 5,493 
 
$ 5,493 
 
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details 2) (USD $)
1 Months Ended 9 Months Ended
Jan. 31, 2012
Sep. 30, 2012
Jan. 5, 2012
Sep. 30, 2012
Carrying Value
Dec. 31, 2011
Carrying Value
Sep. 30, 2012
Fair Value, Level 1
Dec. 31, 2011
Fair Value, Level 1
Interest rate cap
 
 
 
 
 
 
 
Notional amount of interest rate cap
 
 
$ 150,000,000 
 
 
 
 
Term of interest rate cap
3 years 
 
 
 
 
 
 
Variable rate basis
 
LIBOR 
 
 
 
 
 
Increase in LIBOR which is covered by interest rate cap (as a percent)
 
 
1.50% 
 
 
 
 
Fair value and carrying value of borrowings and interest rate cap
 
 
 
 
 
 
 
New senior secured credit facility
 
 
 
$ 126,500,000 
$ 174,000,000 
$ 128,398,000 
$ 173,565,000 
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details 3) (USD $)
In Thousands, unless otherwise specified
9 Months Ended
Sep. 30, 2012
Sep. 30, 2011
Operating activities:
 
 
Changes in inventory
$ (6)
$ (2,575)
Net cash used in operating activities
41,419 
20,174 
Investing activities:
 
 
Purchase of property, equipment, leasehold improvement and other intangibles
(7,353)
(6,227)
Net cash used in investing activities
(6,650)
(6,241)
As previously reported |
Reclassification of cash used for purchase of fixed assets from operating activity to investing activity
 
 
Operating activities:
 
 
Changes in inventory
 
(5,307)
Net cash used in operating activities
 
17,442 
Investing activities:
 
 
Purchase of property, equipment, leasehold improvement and other intangibles
 
(3,495)
Net cash used in investing activities
 
$ (3,509)
ATM FUNDING AGREEMENTS (Details) (USD $)
In Millions, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2012
Dec. 31, 2011
Sep. 30, 2012
Indemnification guarantee
Contract Cash Solutions Agreement
Wells Fargo owned funds
Sep. 30, 2011
Indemnification guarantee
Contract Cash Solutions Agreement
Wells Fargo owned funds
Sep. 30, 2012
Indemnification guarantee
Contract Cash Solutions Agreement
Wells Fargo owned funds
Sep. 30, 2011
Indemnification guarantee
Contract Cash Solutions Agreement
Wells Fargo owned funds
Dec. 31, 2011
Indemnification guarantee
Contract Cash Solutions Agreement
Wells Fargo owned funds
Jun. 30, 2012
Indemnification guarantee
Second Amendment, Contract Cash Solutions Agreement
Wells Fargo owned funds
Minimum
Jun. 30, 2012
Indemnification guarantee
Second Amendment, Contract Cash Solutions Agreement
Wells Fargo owned funds
Maximum
ATM Funding Agreements
 
 
 
 
 
 
 
 
 
Maximum amount
 
 
 
 
 
 
 
$ 400.0 
$ 500.0 
Outstanding balance of ATM cash utilized
 
 
327.2 
 
327.2 
 
467.8 
 
 
Cash usage fees incurred
 
 
0.7 
0.6 
2.5 
1.9 
 
 
 
Site-Funded ATM liability
$ 96.7 
$ 85.9 
 
 
 
 
 
 
 
BENEFIT PLANS (Details) (USD $)
3 Months Ended 9 Months Ended 12 Months Ended
Sep. 30, 2012
Sep. 30, 2012
Sep. 30, 2011
Dec. 31, 2011
Additional disclosures
 
 
 
 
Proceeds from exercise of options (in dollars)
 
$ 5,946,000 
$ 591,000 
 
Stock options
 
 
 
 
Benefits Plans
 
 
 
 
Vesting rate (as a percent)
 
25.00% 
 
 
Vesting period for 25% of shares
 
1 year 
 
 
Vesting period for remaining shares
 
36 months 
 
 
Vesting period
 
4 years 
 
 
Expiration period
 
10 years 
 
 
Summary of stock option award activity and changes
 
 
 
 
Balance outstanding at the beginning of the period (in shares)
 
9,227,541 
 
 
Granted (in shares)
 
2,260,000 
2,100,000 
 
Exercised (in shares)
 
(1,464,507)
 
 
Canceled or forfeited (in shares)
 
(340,761)
 
 
Balance outstanding at the end of the period (in shares)
9,682,273 
9,682,273 
 
9,227,541 
Balance exercisable at the end of the period (in shares)
5,662,015 
5,662,015 
 
 
Weighted Average Exercise Price
 
 
 
 
Balance outstanding at the beginning of the period (in dollars per share)
 
$ 6.87 
 
 
Balance outstanding at the end of the period (in dollars per share)
$ 7.07 
$ 7.07 
 
$ 6.87 
Balance exercisable at the end of the period (in dollars per share)
$ 8.49 
$ 8.49 
 
 
Weighted Average Life Remaining
 
 
 
 
Balance outstanding at the beginning of the period
 
6 years 9 months 18 days 
 
6 years 10 months 24 days 
Balance outstanding at the end of the period
 
6 years 9 months 18 days 
 
6 years 10 months 24 days 
Balance exercisable at the end of the period
 
5 years 4 months 24 days 
 
 
Aggregate Intrinsic Value
 
 
 
 
Balance outstanding at the beginning of the period (in dollars)
 
5,186,000 
 
 
Balance outstanding at the end of the period (in dollars)
19,602,000 
19,602,000 
 
5,186,000 
Balance exercisable at the end of the period (in dollars)
7,578,000 
7,578,000 
 
 
Weighted-average assumption for determining the fair value of options
 
 
 
 
Risk-free interest rate (as a percent)
 
1.00% 
2.50% 
 
Expected life of options
 
6 years 3 months 18 days 
6 years 3 months 18 days 
 
Expected volatility (as a percent)
 
62.20% 
62.90% 
 
Expected dividend yield (as a percent)
 
0.00% 
0.00% 
 
Additional disclosures
 
 
 
 
Unrecognized compensation expense (in dollars)
10,200,000 
10,200,000 
8,200,000 
 
Weighted-average period for recognition of unrecognized compensation expense
 
2 years 8 months 12 days 
10 months 24 days 
 
Proceeds from exercise of options (in dollars)
 
5,900,000 
600,000 
 
Non-cash compensation expense (in dollars)
 
3,700,000 
5,400,000 
 
Weighted average grant date fair value (in dollars per share)
 
$ 3.31 
 
 
Total intrinsic value of options exercised
2,900,000 
5,100,000 
 
 
Restricted stock, time-based
 
 
 
 
Benefits Plans
 
 
 
 
Vesting rate (as a percent)
 
25.00% 
 
 
Vesting period for 25% of shares
 
1 year 
 
 
Vesting period for remaining shares
 
36 months 
 
 
Vesting period
 
4 years 
 
 
Additional disclosures
 
 
 
 
Unrecognized compensation expense (in dollars)
500,000 
500,000 
600,000 
 
Weighted-average period for recognition of unrecognized compensation expense
 
2 years 7 months 6 days 
6 months 
 
Non-cash compensation expense (in dollars)
 
300,000 
100,000 
 
Total fair value of shares vested
$ 300,000 
$ 1,000,000 
 
 
Summary of all non-vested awards for the company's time-based restricted stock awards
 
 
 
 
Balance outstanding at the beginning of the period (in shares)
 
198,279 
 
 
Granted (in shares)
 
65,000 
 
 
Vested (in shares)
 
(126,332)
(201,991)
 
Forfeited (in shares)
 
(3,509)
 
 
Balance outstanding at the end of the period (in shares)
133,438 
133,438 
 
 
Weighted Average Grant Date Fair Value (in dollars per share)
 
 
 
 
Balance outstanding at the beginning of the period (in dollars per share)
 
$ 2.20 
 
 
Balance outstanding at the end of the period (in dollars per share)
$ 4.35 
$ 4.35 
 
 
COMMITMENTS AND CONTINGENCIES (Details) (Automated Systems America, Inc., Minimum, USD $)
In Millions, unless otherwise specified
1 Months Ended
Jul. 31, 2010
Automated Systems America, Inc. |
Minimum
 
Litigation Claims and Assessments
 
Damages sought by plaintiff in legal matter
$ 2.0 
BORROWINGS (Details) (USD $)
0 Months Ended 9 Months Ended 9 Months Ended 1 Months Ended 9 Months Ended 1 Months Ended
Sep. 24, 2012
Sep. 30, 2012
Dec. 31, 2011
Sep. 30, 2012
New Senior Credit Facility
Sep. 30, 2012
New Senior Credit Facility
Specified base rate
Sep. 30, 2012
New Senior Credit Facility
Specified base rate
Minimum
Sep. 30, 2012
New Senior Credit Facility
LIBOR
Sep. 30, 2012
New Senior Credit Facility
LIBOR
Minimum
Mar. 31, 2011
Term loan
Sep. 30, 2012
Term loan
Sep. 30, 2012
Increase option, additional term loan commitments
Mar. 31, 2011
Revolving credit facility
Sep. 30, 2012
Revolving credit facility
Sep. 30, 2012
Letters of credit
Sep. 30, 2012
Swingline loans
BORROWINGS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Maximum borrowing capacity
 
 
 
 
 
 
 
 
 
$ 210,000,000 
$ 50,000,000 
 
$ 35,000,000 
$ 10,000,000 
$ 5,000,000 
Amount borrowed
 
 
 
 
 
 
 
 
210,000,000 
 
 
4,000,000 
 
 
 
Percentage of the aggregate initial principal amount required to be repaid
 
 
 
 
 
 
 
 
 
0.25% 
 
 
 
 
 
Variable rate basis
 
 
 
 
specified base rate 
 
LIBOR 
 
 
 
 
 
 
 
 
Interest rate margin (as a percent)
 
 
 
5.50% 
4.50% 
 
5.50% 
 
 
 
 
 
 
 
 
Variable rate of debt (as a percent)
 
 
 
 
 
2.50% 
 
1.50% 
 
 
 
 
 
 
 
Number of months to each required periodic interest payment for interest payment periods in excess of three months
 
 
 
 
 
 
3 months 
 
 
 
 
 
 
 
 
Borrowing interest period requiring interest payments every three months
 
 
 
 
 
 
3 months 
 
 
 
 
 
 
 
 
Outstanding indebtedness
 
126,500,000 
174,000,000 
126,500,000 
 
 
 
 
 
 
 
 
 
 
 
Weighted average interest rate (as a percent)
 
 
 
7.00% 
 
 
 
 
 
 
 
 
 
 
 
Percentage of the stock of foreign subsidiaries by which the amounts under the credit facility are secured
 
 
 
65.00% 
 
 
 
 
 
 
 
 
 
 
 
Additional capital expenditure allowed under amended financial covenants
$ 15,000,000 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total leverage ratio before amendment
 
2.0