GLOBAL CASH ACCESS HOLDINGS, INC., 10-Q filed on 11/9/2011
Quarterly Report
CONDENSED CONSOLIDATED BALANCE SHEETS (USD $)
In Thousands
Sep. 30, 2011
Dec. 31, 2010
ASSETS
 
 
Cash and cash equivalents
$ 38,346 
$ 60,636 
Restricted cash and cash equivalents
455 
455 
Settlement receivables
10,412 
10,374 
Other receivables, net
16,885 
15,211 
Inventory
6,516 
3,845 
Prepaid and other assets
16,882 
8,200 
Property, equipment and leasehold improvements, net
15,619 
16,648 
Goodwill
180,112 
185,110 
Other intangibles, net
28,572 
26,368 
Deferred income taxes
124,758 
131,547 
Total assets
438,557 
458,394 
LIABILITIES:
 
 
Settlement liabilities
57,767 
59,741 
Accounts payable
29,064 
28,562 
Accrued expenses
19,175 
17,863 
Borrowings
179,000 
208,750 
Total liabilities
285,006 
314,916 
COMMITMENTS AND CONTINGENCIES (NOTE 5)
 
 
STOCKHOLDERS' EQUITY
 
 
Common stock, $0.001 par value, 500,000 shares authorized and 85,478 and 85,006 shares issued at September 30, 2011 and December 31, 2010, respectively.
85 
85 
Convertible preferred stock, $0.001 par value, 0 shares authorized and 0 shares outstanding at September 30, 2011 and December 31, 2010, respectively.
 
 
Additional paid in capital
202,876 
197,048 
Retained earnings
93,387 
88,796 
Accumulated other comprehensive income
2,397 
2,587 
Treasury stock, at cost, 20,676 and 20,626 shares at September 30, 2011 and December 31, 2010, respectively.
(145,194)
(145,038)
Total stockholders' equity
153,551 
143,478 
Total liabilities and stockholders' equity
$ 438,557 
$ 458,394 
CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
In Thousands, except Per Share data
Sep. 30, 2011
Dec. 31, 2010
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
85,478 
85,006 
Convertible preferred stock, par value (in dollars per share)
$ 0.001 
$ 0.001 
Convertible preferred stock, shares authorized
Convertible preferred stock, shares outstanding
Treasury stock, shares
20,676 
20,626 
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (USD $)
In Thousands, except Per Share data
3 Months Ended
Sep. 30,
9 Months Ended
Sep. 30,
2011
2010
2011
2010
REVENUES
 
 
 
 
Total revenues
$ 136,888 
$ 152,121 
$ 406,330 
$ 467,783 
Cost of revenues (exclusive of depreciation and amortization)
(106,953)
(116,077)
(317,900)
(355,744)
Operating expenses
(18,529)
(18,740)
(51,922)
(57,036)
Amortization
(1,929)
(1,729)
(6,250)
(5,418)
Depreciation
(1,867)
(2,252)
(6,201)
(7,011)
OPERATING INCOME
7,610 
13,323 
24,057 
42,574 
INTEREST INCOME (EXPENSE)
 
 
 
 
Interest income
24 
44 
83 
123 
Interest expense
(4,438)
(3,977)
(14,250)
(12,517)
Loss on early extinguishment of debt
 
 
(943)
 
Total interest expense
(4,414)
(3,933)
(15,110)
(12,394)
INCOME BEFORE INCOME TAX PROVISION
3,196 
9,390 
8,947 
30,180 
INCOME TAX PROVISION
(1,356)
(4,471)
(4,356)
(12,371)
NET INCOME
1,840 
4,919 
4,591 
17,809 
PLUS: NET LOSS ATTRIBUTABLE TO MINORITY INTEREST
 
 
 
(56)
NET INCOME ATTRIBUTABLE TO GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES
1,840 
4,919 
4,591 
17,753 
Foreign currency translation, net of tax
(218)
376 
(191)
196 
COMPREHENSIVE INCOME
1,622 
5,295 
4,400 
17,949 
Earnings per share
 
 
 
 
Basic (in dollars per share)
$ 0.03 
$ 0.08 
$ 0.07 
$ 0.27 
Diluted (in dollars per share)
$ 0.03 
$ 0.07 
$ 0.07 
$ 0.26 
Weighted average number of common shares outstanding:
 
 
 
 
Basic (in shares)
64,712 
65,384 
64,597 
66,543 
Diluted (in shares)
64,751 
66,240 
64,708 
68,186 
Cash Advance
 
 
 
 
REVENUES
 
 
 
 
Total revenues
50,913 
60,546 
152,036 
190,514 
ATM
 
 
 
 
REVENUES
 
 
 
 
Total revenues
71,044 
79,727 
213,450 
242,136 
Check Services
 
 
 
 
REVENUES
 
 
 
 
Total revenues
6,479 
6,442 
19,813 
22,030 
Central Credit and other revenues
 
 
 
 
REVENUES
 
 
 
 
Total revenues
$ 8,452 
$ 5,406 
$ 21,031 
$ 13,103 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (USD $)
In Thousands
9 Months Ended
Sep. 30,
2011
2010
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
Net income
$ 4,591 
$ 17,809 
Adjustments to reconcile net income to cash provided by operating activities:
 
 
Amortization of financing costs
988 
729 
Amortization of intangibles
6,250 
5,418 
Depreciation
6,201 
7,011 
Loss on sale or disposal of assets
216 
28 
Provision for bad debts
4,016 
3,793 
Loss on early extinguishment of debt
943 
 
Stock-based compensation
5,238 
6,414 
Changes in operating assets and liabilities:
 
 
Settlement receivables
10,266 
7,774 
Other receivables, net
(829)
2,646 
Inventory
(5,307)
368 
Prepaid and other assets
(3,477)
1,105 
Deferred income taxes
4,092 
11,796 
Settlement liabilities
(12,221)
(29,828)
Accounts payable
505 
1,908 
Accrued expenses
(4,030)
(1,978)
Net cash provided by operating activities
17,442 
34,993 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
Acquisition of Western Money Systems, net of cash
(14)
(15,354)
Purchase of property, equipment and leasehold improvements
(1,312)
(7,787)
Purchase of other intangibles
(2,183)
 
Changes in restricted cash and cash equivalents
 
(100)
Net cash used in investing activities
(3,509)
(23,241)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
Repayments of old credit facility
(208,750)
(25,750)
Securing of new credit facility
214,000 
 
Issuance costs of new credit facility
(7,099)
 
Repayments on new credit facility
(35,000)
 
Proceeds from exercise of stock options
591 
5,599 
Purchase of treasury stock
(156)
(33,157)
Net cash used in financing activities
(36,414)
(53,308)
NET EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
191 
37 
NET DECREASE IN CASH AND CASH EQUIVALENTS
(22,290)
(41,519)
CASH AND CASH EQUIVALENTS - Beginning of period
60,636 
84,768 
CASH AND CASH EQUIVALENTS - End of period
38,346 
43,249 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
 
 
Cash paid for interest
15,202 
15,081 
Cash paid for taxes, net of refunds
$ 336 
$ 497 
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.

 

The Company is a provider in the United States and several international jurisdictions of cash access products 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, the Company also provides products and services that improve credit decision-making, automate cashier operations and enhance patron marketing activities for gaming establishments.  These services are provided either directly by GCA or through one of its subsidiaries.

 

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

 

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

 

Innovative Funds Transfer, LLC (“IFT”), formerly known as QuikPlay, LLC, was a joint venture that was formed on December 6, 2000, and owned 60% by GCA and 40% by International Game Technology (“IGT”).  IGT is one of the largest manufacturers of gaming equipment in the United States. GCA was the managing member of this entity. IFT was consolidated in the Company’s consolidated financial statements prior to April 19, 2010, at which time GCA and IGT dissolved IFT.  The dissolution of IFT did not have a material impact on the condensed consolidated financial statements of the Company.

 

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, 2011 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, 2010 (the “2010 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. The significant accounting estimates incorporated into the Company’s unaudited condensed consolidated financial statements include:

 

·                  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 tax asset;

 

·                  the estimated effective income tax rate; and

 

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

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

2.                                      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

 

The unaudited condensed consolidated financial statements presented for the three and nine months ended September 30, 2011 and 2010 and as of September 30, 2011 and December 31, 2010 include the accounts of Holdings and its subsidiaries.  All significant intercompany transactions and balances have been eliminated in consolidation.

 

Earnings Applicable to Common Stock

 

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

 

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,

 

 

 

2011

 

2010

 

2011

 

2010

 

Weighted average common shares outstanding - basic (1)

 

64,712

 

65,384

 

64,597

 

66,543

 

Potential dilution from equity grants (2)(3)

 

39

 

856

 

111

 

1,643

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding - diluted

 

64,751

 

66,240

 

64,708

 

68,186

 

 

 

(1)          Included in the calculation of weighted average common shares outstanding — basic are 16 and 44 and 220 and 470 unvested shares of restricted common stock of Holdings granted in share-based payment transactions for the three and nine months ended September 30, 2011 and 2010, 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 20 and 61 and 618 and 7,533 shares of common stock of Holdings for the three and nine months ended September 30, 2011 and 2010, respectively, because the application of the treasury stock method, as required, makes them anti-dilutive.

 

(3)          The potential dilution excludes the weighted average effect of shares of time-based shares of restricted common stock of Holdings of 20 and 49 and 238 and 477 shares for the three and nine months ended September 30, 2011 and 2010, respectively, because the application of the treasury stock method, as required, makes them anti-dilutive.

 

Warranty Receivables

 

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

 

A summary of the activity for the check warranty reserve for the nine months ended September 30, 2011, is as follows (amounts in thousands):

 

 

 

Balance at
Beginning of
Period

 

Additions
Charged to
Expense

 

Deductions

 

Balance at
End of
Period

 

Nine months ended September 30, 2011

 

$

 7,036

 

$

 6,816

 

$

 (7,258

)

$

 6,594

 

 

Fair Values of Financial Instruments

 

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

 

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

 

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

 

 

 

Level of

 

Fair

 

Carrying

 

 

 

Hierarchy

 

Value

 

Value

 

September 30, 2011

 

 

 

 

 

 

 

New senior secured credit facility

 

1

 

175,420

 

179,000

 

 

 

 

 

 

 

 

 

December 31, 2010

 

 

 

 

 

 

 

Old senior secured credit facility

 

2

 

81,000

 

81,000

 

Senior subordinated notes

 

1

 

128,229

 

127,750

 

 

Inventory

 

Inventory consists of finished goods such as redemption kiosk devices, work-in-progress and raw materials and is stated at lower of cost or market.  The cost of inventory includes cost of materials, labor, overhead and freight.  Inventory is accounted for using the average cost method.  Inventory as of September 30, 2011 and December 31, 2010 was $6.5 million and $3.8 million, respectively.  All inventory was acquired as part of the Western Money acquisition in May 2010.

 

Acquisitions

 

The Company accounts for business combinations in accordance with the accounting standards, which require that the assets acquired and liabilities assumed be recorded at their estimated fair values.  The Company completed its acquisition of Western Money in May 2010, in which 100 percent of the outstanding common shares of Western Money were acquired for a purchase price net of cash of $15.4 million.  This acquisition did not have a material impact on the consolidated financial statements of the Company as of and for the year ended December 31, 2010.  During the quarter ended June 30, 2011, the Company completed its determination of the estimated fair values of assets acquired and liabilities assumed in the Western Money acquisition.

 

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition for Western Money (in thousands):

 

Net working capital

 

$

3,516

 

Property, plant and equipment

 

2,320

 

Intangible assets

 

6,284

 

Goodwill

 

5,745

 

Deferred income tax liabilities

 

(2,498

)

Net assets acquired (excluding cash)

 

$

15,367

 

 

In connection with the acquisition, the Company acquired $6.3 million of intangible assets, of which $4.0 million was assigned to customer contracts, which will be amortized over eleven years on an accelerated basis as illustrated below.  The adjustments to the preliminary fair value amounts have not been applied retrospectively to the condensed consolidated balance sheet as of December 31, 2010 or the condensed consolidated statements of income and comprehensive income for the three and nine months ended September 30, 2010, as the impact of the final purchase price allocations was not material to previously reported financial statements.

 

The following table shows the amortization of the customer contracts (in thousands):

 

 

 

Amount

 

2010

 

2011

 

2012

 

2013

 

2014

 

Thereafter

 

Customer contracts

 

$

3,962

 

$

256

 

$

516

 

$

583

 

$

556

 

$

494

 

$

1,557

 

 

Other intangibles acquired include $0.7 million of trademarks which will be amortized on a straight-line basis over 10 years and $1.4 million of developed technology and $0.2 million of non-compete agreements both of which will be amortized on a straight-line basis over their useful lives of 5 years and 2 years, respectively.

ATM FUNDING AGREEMENTS
ATM FUNDING AGREEMENTS

3.                                 ATM FUNDING AGREEMENTS

 

On December 19, 2007, GCA entered into the Treasury Services Agreement with Bank of America to utilize up to $360 million in funds owned by Bank of America to provide currency needed for normal operating requirements for the Company’s ATMs.  For the use of these funds, the Company paid Bank of America a cash usage fee equal to the average daily balance of funds utilized multiplied by the one-month LIBOR plus a contractually defined margin.

 

In December 2010, the Company terminated the Treasury Services Agreement with Bank of America, and began utilizing funds of up to $400 million owned by Wells Fargo pursuant to a Contract Cash Solutions Agreement entered into with Wells Fargo on November 12, 2010.  The Contract Cash Solutions Agreement provides essentially the same services as provided under the Treasury Services Agreement.

 

As of September 30, 2011 and December 31, 2010, the outstanding balances of ATM cash utilized by GCA from Wells Fargo and Bank of America were $339.7 million and $368.4 million, respectively.  For the three and nine months ended September 30, 2011 and 2010, the cash usage fees incurred by the Company were $0.6 million and $1.9 million and $0.5 million and $1.4 million, respectively, and is 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 agreements with Wells Fargo and Bank of America.  The Company is self-insured related to this risk.  For the three and nine months ended September 30, 2011 and 2010, the Company incurred no material losses related to this self-insurance.

 

Site Funded ATMs

 

The Company operates some ATMs at customer locations where the customer provides the cash required for the ATM operational needs. The Company 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 $36.2 million and $28.6 million as of September 30, 2011 and December 31, 2010, respectively.

BENEFIT PLANS
BENEFIT PLANS

4.                                 BENEFIT PLANS

 

The Company has issued stock options to acquire shares of the common stock of the Company to directors, officers and key employees under the Company’s 2005 Stock Incentive Plan (the “2005 Plan”). Options 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.  Options are issued at the current market price on the date of grant, with a contractual term of 10 years.

 

A summary of award activity under the 2005 Plan as of September 30, 2011 and changes during the nine months ended is as follows:

 

 

 

Options

 

Weighted
Average
Exercise
Prices

 

Weighted
Average Life
Remaining

 

Aggregate
Intrinsic Value

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Outstanding - December 31, 2010

 

8,756,110

 

$

 7.50

 

7.3 years

 

$

 2,336

 

 

 

 

 

 

 

 

 

 

 

Granted

 

2,066,150

 

 

 

 

 

 

 

Exercised

 

(269,359

)

 

 

 

 

 

 

Forfeited

 

(1,081,469

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding - September 30, 2011

 

9,471,432

 

$

 6.81

 

7.1 years

 

$

 1,768

 

 

 

 

 

 

 

 

 

 

 

Exercisable - September 30, 2011

 

5,669,345

 

$

 8.43

 

6.2 years

 

$

 981

 

 

The fair value of options was determined as of the date of grant using Black-Scholes option pricing model with the following weighted-average assumption in the period ended September 30, 2011 and 2010, respectively.

 

 

 

2011

 

2010

 

Risk-free interest rate

 

2.5

%

2.1

%

Expected life of options (in years)

 

6.3

 

6.3

 

Expected volatility of GCA’s stock price

 

62.9

%

61.6

%

Expected dividend yield

 

0.0

%

0.0

%

 

As of September 30, 2011, there was $8.2 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 0.9 years.  During the nine months ended September 30, 2011, the Company granted options to acquire 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.

 

As of September 30, 2010, there was $12.6 million in unrecognized compensation expense related to options expected to vest.  This cost was expected to be recognized on a straight-line basis over a weighted average period of 1.1 years.  During the nine months ended September 30, 2010, the Company granted options to acquire 1.8 million shares of common stock, received $5.6 million in proceeds from the exercise of options and recorded $5.1 million in non-cash compensation expense related to options granted that are expected to vest.

 

Restricted Stock

 

The Company began issuing shares of restricted common stock of the Company to directors, officers and key employees in the first quarter of 2006.  The vesting provisions are similar to those applicable to options. Because these shares of restricted stock are issued primarily to employees of the Company, some of the shares issued will be withheld by the Company to satisfy the minimum statutory tax withholding requirements applicable to such restricted stock awards.  Therefore, as these awards vest the actual number of shares outstanding as a result of the restricted stock awards is reduced and the number of shares included within treasury stock is increased by the amount of shares withheld.  During the nine months ended September 30, 2011, the Company withheld 49,447 shares of restricted stock from employees with a cumulative vesting commencement date fair value of $0.2 million.  These amounts have been included as part of the total treasury stock repurchased during the period.

 

A summary of all non-vested awards for the Company’s time-based restricted stock awards as of September 30, 2011 is as follows:

 

 

 

 

 

Weighted Average

 

 

 

 

 

Shares

 

Grant Date Fair

 

Aggregate

 

 

 

Outstanding

 

Value

 

Fair Value

 

 

 

 

 

 

 

(in thousands)

 

Balance, December 31, 2010

 

481,050

 

$

2.55

 

$

1,227

 

 

 

 

 

 

 

 

 

Granted

 

 

 

 

Vested

 

(201,991

)

3.01

 

(608

)

Canceled

 

(36,316

)

2.21

 

(80

)

 

 

 

 

 

 

 

 

Balance - September 30, 2011

 

242,743

 

$

2.22

 

$

539

 

 

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 is 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 restricted stock granted that is expected to vest.

 

As of September 30, 2010, there was $1.7 million in unrecognized compensation expense related to shares of time-based restricted shares expected to vest.  This cost was expected to be recognized on a straight-line basis over a weighted average period of 1.0 years.  During the nine months ended September 30, 2010, there were 394,023 shares of time-based restricted shares vested, and we recorded $1.3 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

 

Sightline Payments, LLC

 

On March 22, 2010, an action was commenced by Sightline Payments, LLC in the United States District Court, District of Nevada, against Holdings and GCA (the “Federal Court Action”).  The complaint alleged antitrust violations of Sections 1 and 2 of the Sherman Act and Section 7 of the Clayton Act.  The plaintiff sought damages in the amount of $300 million and that such damages be trebled.  On August 9, 2010, the District Court issued an Order and Judgment granting the Company’s motion to dismiss this action.  On August 13, 2010, Sightline Payments, LLC filed a Notice of Appeal of the Order and Judgment granting the Company’s Motion to Dismiss (the “Appellate Action”).

 

On April 16, 2010, the Company commenced an action in the District Court of Nevada, Clark County, against the three current principals of Sightline Payments, LLC, all of whom are former executives of the Company (the “State Court Action”).  The Company alleged misappropriation of trade secrets, breach of contract, breach of duty of good faith and fair dealing and sought damages and declaratory and injunctive relief.  The Company has received a temporary restraining order barring the defendants in this action from making any continued disclosure of the Company’s proprietary and confidential information.

 

On August 9, 2011, GCA and Holdings entered into a settlement agreement with Sightline Payments, LLC and the three current principals of Sightline Payments, LLC pursuant to which GCA agreed to release its claims against Sightline, and its principals, arising in connection with the State Court Action, and Sightline Payments, LLC agreed to release its claims against GCA and Holdings arising in connection with the Federal Court Action and the Appellate Action.  The United States Court of Appeals dismissed the Appellate Action with prejudice on August 18, 2011 and the District Court of Nevada, Clark County dismissed the State Court Action with prejudice on September 21, 2011.

 

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 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.  The Company maintains insurance that may provide for reimbursement of some of the expenses associated with this action.  At this stage of the litigation, the Company is unable to make an evaluation of whether the likelihood of an unfavorable outcome is either probable or remote or the amount or range of potential loss; however, the Company believes it has meritorious defenses and will vigorously defend this action.

 

Commitments

 

TSYS Acquiring Solutions, Inc. (“TSYS”) Processing Commitments. The Company obtains transaction processing services from TSYS.  Under terms of this agreement, GCA is obligated to pay TSYS monthly processing and hosting fees during the term of this Agreement which expires in June 2013.

BORROWINGS
BORROWINGS

6.                                      BORROWINGS

 

On March 1, 2011, the Company refinanced all of its indebtedness outstanding under the Second Amended and Restated Credit Agreement (as described below) and repaid its obligations under the senior subordinated notes with proceeds from the New Senior Credit Facility as described below.

 

New Senior Credit Facility

 

As of December 31, 2010, we had total indebtedness of $208.8 million in principal amount (of which $127.8 million consisted of senior subordinated notes described below and $81.0 million consisted of senior secured debt under the Second Amended and Restated Credit Agreement described below).  On March 1, 2011, we entered into a new $245 million senior secured credit facility, consisting of a $210.0 million term loan and a $35.0 million revolving credit facility (the “New Senior Credit Facility”).  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.

 

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 New Senior Credit Facility established by the Credit Agreement provides for a $210.0 million term loan facility and a $35.0 million revolving credit facility.  The revolving credit facility includes provisions for the issuance of up to $10.0 million of letters of credit and up to $5.0 million in swingline loans.  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 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 reborrowed.  In addition, $4 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 reborrowed.

 

The term loan requires principal repayments of one quarter of 1% of the aggregate initial principal amount of term loans, or $525,000 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, 2011, we had $179.0 million of outstanding indebtedness under the New Senior Credit Facility, consisting of $179.0 million 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 a balance of $2.8 million under our letter of credit sub facility that is part of our revolving credit facility as of September 30, 2011.

 

The New Senior Credit Facility is unconditionally guaranteed by Holdings and each direct and indirect domestic subsidiary of GCA.  All amounts owing under the New Senior Credit Facility are secured by a first priority perfected security interest in all stock (but only 65% of the stock of foreign subsidiaries), other equity interests and promissory notes owned by GCA and a first priority perfected security interest in all other tangible and intangible assets owned by GCA and the guarantors.

 

The Credit Agreement contains customary affirmative and negative covenants, financial covenants, representations and warranties and events of defaults.  As of September 30, 2011, the Company is in compliance with the required covenants.

 

Second Amended and Restated Credit Agreement

 

On November 1, 2006, GCA and Holdings entered into the Second Amended and Restated Credit Agreement with certain lenders, Bank of America, N.A., as Administrative Agent and Wachovia Bank, N.A., as Syndication Agent.

 

The Second Amended and Restated Credit Agreement significantly amended and restated the terms of GCA’s existing senior secured credit facilities to provide for a $100.0 million term loan facility and a $100.0 million five-year revolving credit facility, with a $25.0 million letter of credit sublimit and a $5.0 million swingline loan sublimit.

 

Borrowings under the Second Amended and Restated Credit Agreement bore interest at LIBOR plus an applicable margin, which was based on the Company’s Senior Leverage Ratio (as defined under the Second Amended and Restated Credit Agreement).  As of December 31, 2010, the applicable margin was 112.5 basis points and the effective rate of interest was 1.39%.  Principal, together with accrued and unpaid interest, was due on the maturity date, November 1, 2011.  As of December 31, 2010, the balance of this financial instrument was $81.0 million with $0 under the revolving portion.

 

Senior Subordinated Notes

 

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

 

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

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”), formerly Herbst Gaming, LLC.  The Company provides various cash access products and services to Affinity.  Mr. Rumbolz receives both cash and equity compensation from Affinity in consideration for serving on the board of directors of Affinity, however, none of this consideration is tied in any manner to the Company’s performance or obligations under its cash access agreements with Affinity.  In addition, Mr. Rumbolz was not involved in the negotiation of the Company’s cash access agreements with Affinity.

INCOME TAXES
INCOME TAXES

8.                                      INCOME TAXES

 

The Company’s effective income tax rate from continuing operations for the three and nine months ended September 30, 2011 and 2010 was 42.4%, 48.7% and 47.6% and 41.0%, respectively.

 

The following table presents the recorded income tax expense for the three and nine months ended September 30, 2011 and 2010, respectively (amounts in thousands):

 

 

 

Three Months Ended

 

Nine months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

$

1,356

 

$

4,471

 

$

4,356

 

$

12,371

 

Benefit for income taxes, minority loss

 

 

 

 

(31

)

Provision for income taxes, GCA Holdings, Inc.

 

$

1,356

 

$

4,471

 

$

4,356

 

$

12,340

 

 

The Company accounts for uncertain tax positions in accordance with the accounting guidance issued in July 2006, which clarifies the accounting and disclosure for uncertainty in tax positions.  As of September 30, 2011, there has been no material change to the balance of unrecognized tax benefits reported at December 31, 2010.

SEGMENT INFORMATION
SEGMENT INFORMATION

9.                                      SEGMENT INFORMATION

 

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

 

The Company operates in three distinct business segments: (1) cash advance transactions, (2) ATM transactions, and (3) check services.  These segments are monitored separately by management for performance against its internal forecasts and are consistent with the Company’s internal management reporting.

 

Other lines of business, none of which exceed the established materiality for segment reporting, include Western Money, Arriva, credit reporting services, Western Union and Casino Marketing Services, among others.

 

The Company’s internal management reporting does not allocate overhead or depreciation and amortization expenses to the respective business segments.

 

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, 2011, 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, 2010, the combined revenues from our largest customer, Caesars Entertainment Corporation (“Caesars”) (formerly Harrah’s Operating Company, Inc.) and its subsidiaries and affiliates, was approximately $21.3 million and $64.3 million, respectively, representing 14.2% and 13.8% of the Company’s total consolidated revenues, respectively.  For the three and nine months ended September 30, 2011 and 2010, our five largest customers accounted for approximately 29.1% and 29.1% and 35.5% and 34.8%, respectively, of our total revenue.

 

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

 

The tables below present the results of operations by operating segment for the three and nine months ended September 30, 2011 and 2010, respectively (amounts in thousands):

 

 

 

Cash
Advance

 

ATM

 

Check
Services

 

Other

 

Corporate

 

Total

 

Three Months Ended September 30, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

50,913

 

$

71,044

 

$

6,479

 

$

8,452

 

$

 

$

136,888

 

Operating Income (1)

 

$

7,789

 

$

8,659

 

$

3,579

 

$

4,393

 

$

(16,810

)

$

7,610

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

60,546

 

$

79,727

 

$

6,442

 

$

5,406

 

$

 

$

152,121

 

Operating Income (1)

 

$

12,008

 

$

10,656

 

$

3,863

 

$

3,154

 

$

(16,358

)

$

13,323

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months Ended September 30, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

152,036

 

$

213,450

 

$

19,813

 

$

21,031

 

$

 

$

406,330

 

Operating Income (1)

 

$

23,375

 

$

27,157

 

$

11,168

 

$

10,029

 

$

(47,672

)

$

24,057

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months Ended September 30, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

190,514

 

$

242,136

 

$

22,030

 

$

13,103

 

$

 

$

467,783

 

Operating Income (1)

 

$

39,386

 

$

31,202

 

$

13,068

 

$

9,754

 

$

(50,836

)

$

42,574

 

 

 

(1)  Depreciation and amortization expense for segment presentation purposes have been included within the Corporate segment, and have not been allocated to individual operating segments.

 

The table below presents total assets by operating segment as of September 30, 2011 and December 31, 2010, respectively (amounts in thousands):

 

 

 

September 30,

 

December 31,

 

Total Assets

 

2011

 

2010

 

 

 

 

 

 

 

Cash advance

 

$

131,166

 

$

138,631

 

ATM

 

52,549

 

52,424

 

Check services

 

34,568

 

33,816

 

Other

 

38,620

 

38,003

 

Corporate

 

181,654

 

195,520

 

 

 

 

 

 

 

Total assets

 

$

438,557

 

$

458,394

SUBSEQUENT EVENTS
SUBSEQUENT EVENTS

10.          SUBSEQUENT EVENTS

 

On November 3, 2011, the Company entered into a definitive agreement to acquire substantially all of the assets of MCA Processing LLC, the terms of which have not been disclosed.  MCA is a provider of ATM, debit card, and credit card cash access services to gaming establishments and also manufactures, sells, licenses and services redemption kiosk devices.  The Company anticipates that that the acquisition will close in the fourth quarter of 2011 and is subject to the fulfillment of customary closing conditions.  The Company does not believe that the acquisition of MCA will have a material impact on the results of operations and financial condition of the Company for the year ended December 31, 2011.

Document and Entity Information
9 Months Ended
Sep. 30, 2011
Nov. 3, 2011
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, 2011 
 
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
 
64,821,010 
Document Fiscal Year Focus
2011 
 
Document Fiscal Period Focus
Q3