Everi Holdings Inc. - Quarter Report: 2012 June (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark one)

 

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2012

 

OR

 

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE TRANSITION PERIOD FROM          TO          

 

Commission file no 001 — 32622

 

GLOBAL CASH ACCESS HOLDINGS, INC.

(Exact name of Registrant as specified in its charter)

 

 

Registrant’s telephone number, including area code:

(800) 833-7110

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

 

As of July 31, 2012 there were 65,872,553 shares of the Registrant’s $0.001 par value per share common stock outstanding.

 

 

 

TABLE OF CONTENTS

 

		Page
Part I: Financial Information		3
Item 1: Unaudited Condensed Consolidated Financial Statements		3
Unaudited Condensed Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011		3
Unaudited Condensed Consolidated Statements of Income and Comprehensive Income for the three and six months ended June 30, 2012 and 2011		4
Unaudited Condensed Consolidated Statements of Cash Flows for six months ended June 30, 2012 and 2011		5
Notes to Unaudited Condensed Consolidated Financial Statements		6
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations		14
Item 3: Quantitative and Qualitative Disclosures about Market Risk		22
Item 4: Controls and Procedures		23
Part II: Other Information		23
Item 1: Legal Proceedings		23
Item 1A: Risk Factors		24
Item 2:  Unregistered Sales of Equity Securities and Use of Proceeds		24
Item 6: Exhibits		25
Signatures		26

 

2

 

PART I: FINANCIAL INFORMATION

 

ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except par value)

(unaudited)

 

		June 30,					December 31,
		2012					2011
ASSETS
Cash and cash equivalents		$	39,961				$	55,535
Restricted cash and cash equivalents		200					455
Settlement receivables		67,388					80,246
Other receivables, net		11,613					16,885
Inventory		7,924					7,087
Prepaid expenses and other assets		16,156					15,406
Property, equipment and leasehold improvements, net		14,882					15,577
Goodwill, net		180,118					180,122
Other intangible assets, net		35,504					38,216
Deferred income taxes, net		110,861					119,538
Total assets		$	484,607				$	529,067
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Settlement liabilities		$	116,608				$	141,827
Accounts payable		33,794					32,223
Accrued expenses		20,636					21,159
Borrowings		134,000					174,000
Total liabilities		305,038					369,209
COMMITMENTS AND CONTINGENCIES (Note 5)
Stockholders’ Equity:
Common stock, $0.001 par value, 500,000 shares authorized and 86,549 and 85,651 shares issued at June 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 June 30, 2012 and December 31, 2011, respectively		-					-
Additional paid-in capital		210,428					204,735
Retained earnings		112,137					97,925
Accumulated other comprehensive income		2,268					2,340
Treasury stock, at cost, 20,705 and 20,686 shares at June 30, 2012 and December 31, 2011, respectively		(145,351		)			(145,228		)
Total stockholders’ equity		179,569					159,858
Total liabilities and stockholders’ equity		$	484,607				$	529,067

 

 

See notes to unaudited condensed consolidated financial statements.

 

3

 

GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(amounts in thousands, except per share)

(unaudited)

 

		Three Months Ended June 30,										Six Months Ended June 30,
		2012					2011					2012					2011
Revenues
Cash advance		$	56,675				$	50,250				$	115,036				$	101,123
ATM		76,603					71,214					156,950					142,405
Check services		6,605					6,924					13,121					13,335
Other revenues		7,582					6,664					13,423					12,578
Total revenues		147,465					135,052					298,530					269,441
Cost of revenues		108,378					105,714					222,193					210,947
Operating expenses		18,958					17,289					36,446					33,394
Amortization		2,346					2,695					4,667					4,320
Depreciation		1,820					2,212					3,564					4,333
Operating income		15,963					7,142					31,660					16,447
Interest expense, net of interest income		4,063					4,607					8,547					9,754
Loss on early extinguishment of debt		-					-					-					943
Interest expense, net		4,063					4,607					8,547					10,697
Income before income tax provision		11,900					2,535					23,113					5,750
Income tax provision		4,816					1,526					8,901					2,999
Net income		7,084					1,009					14,212					2,751
Foreign currency translation		(217		)			7					(72		)			28
Comprehensive income		$	6,867				$	1,016				$	14,140				$	2,779
Basic earnings per share:
Net income per share - basic		$	0.11				$	0.02				$	0.22				$	0.04
Diluted earnings per share:
Net income per share - diluted		$	0.11				$	0.02				$	0.21				$	0.04
Weighted average number of common shares outstanding:
Basic		65,774					63,969					65,470					63,961
Diluted		67,383					64,094					66,786					64,117

 

 

See notes to unaudited condensed consolidated financial statements.

 

4

 

GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW

(amounts in thousands)

(unaudited)

 

		Six Months Ended June 30,
		2012					2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	14,212				$	2,751
Adjustments to reconcile net income to cash provided by (used in) operating activities:
Amortization of financing costs		710					633
Amortization of intangibles		4,667					4,320
Depreciation		3,564					4,333
Loss on sale or disposal of assets		177					-
Provision for bad debts		2,027					2,741
Loss on early extinguishment of debt		-					943
Stock-based compensation		2,109					3,336
Changes in operating assets and liabilities:
Settlement receivables		12,838					18,301
Other receivables, net		3,150					1,099
Inventory		(837		)			(1,276		)
Prepaid and other assets		(1,445		)			(2,269		)
Deferred income taxes		8,678					2,755
Settlement liabilities		(25,198		)			(33,755		)
Accounts payable		1,572					152
Accrued expenses		(455		)			(6,105		)
Net cash provided by (used in) operating activities		25,769					(2,041		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, equipment, leasehold improvements and other intangibles		(5,001		)			(4,065		)
Changes in restricted cash and cash equivalents		255					-
Acquisitions, net of cash		-					(14		)
Net cash used in investing activities		(4,746		)			(4,079		)
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		-					(7,099		)
Repayments against new credit facility		(40,000		)			(27,000		)
Proceeds from exercise of stock options		3,602					351
Purchase of treasury stock		(123		)			(109		)
Net cash used in financing activities		(36,521		)			(28,607		)
NET EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS		(76		)			(653		)
NET DECREASE IN CASH AND CASH EQUIVALENTS		(15,574		)			(35,380		)
CASH AND CASH EQUIVALENTS - Beginning of Period		55,535					60,636
CASH AND CASH EQUIVALENTS - End of Period		$	39,961				$	25,256
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest		$	5,821				$	11,252
Cash paid for taxes, net of refunds		$	201				$	280

 

 

See notes to unaudited condensed consolidated financial statements.

 

5

 

GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

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 six months ended June 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.

 

6

 

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 June 30,				Six Months Ended June 30,
		2012		2011		2012		2011
Weighted average number of common shares outstanding - basic(1)		65,774		63,969		65,470		63,961
Potential dilution from equity grants(2)		1,609		125		1,316		156
Weighted average number of common shares outstanding - diluted		67,383		64,094		66,786		64,117

 

(1)               Included in the calculation of weighted average common shares outstanding — basic are 39,557 and 40,775 and 5 and 18 unvested shares of restricted common stock of Holdings granted in share-based payment transactions for the three and six months ended June 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 5.6 million and 6.6 million and 8.5 million and 8.0 million shares of common stock of Holdings for the three and six months ended June 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.  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 six months ended June 30, 2012, is as follows (amounts in thousands):

 

		Amount
Balance, December 31, 2011		$	6,756
Warranty expense provision		1,949
Charge offs against reserve		(2,584)
Balance, June 30, 2012		$	6,121

 

7

 

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 categorized within Level 2 or 3 of the fair value hierarchy.

 

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

 

		Level of Hierarchy		Fair Value			Carrying Value
June 30, 2012
New senior secured credit facility		1		$	135,340		$	134,000
Interest rate cap		1		$	194		$	194
December 31, 2011
New senior secured credit facility		1		$	173,565		$	174,000

 

Inventory

 

Inventory, which consists primarily of finished goods such as redemption kiosk devices, as well as work-in-progress and parts, 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.

 

Statement of Cash Flows Correction

 

Subsequent to the issuance of our Interim Quarterly report filed on Form 10-Q for the period ended June 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 used in operating activities and net cash used in investing activities in the Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2011 were adjusted from amounts previously reported, as indicated in the table below.

 

8

 

Management has determined that adjusting amounts previously reported for net cash used in 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.

 

		Six months ended June 30, 2011
		As previously reported			As corrected
Operating activities:
Changes in inventory		$	(4,008)		$	(1,276)
Net cash used in operating activities		$	(4,773)		$	(2,041)
Investing activities:
Purchase of property, equipment, leasehold improvements and other intangibles		$	(1,333)		$	(4,065)
Net cash used in investing activities		$	(1,347)		$	(4,079)

 

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 June 30, 2012 and December 31, 2011, the outstanding balances of ATM cash utilized by GCA from Wells Fargo were $394.0 million and $467.8 million, respectively.  For the three and six months ended June 30, 2012 and 2011, the cash usage fees incurred by the Company were $0.9 million and $1.8 million and $0.7 million and $1.3 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 six months ended June 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 consolidated balance sheets and was $72.1 million and $85.9 million as of June 30, 2012 and December 31, 2011, respectively.

 

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.

 

9

 

A summary of stock option award activity under the 2005 Plan as of June 30, 2012 and changes during the six 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		$	6,118
Granted		2,260,000
Exercised		(812,704)
Canceled or forfeited		(194,455)
Balance outstanding - June 30, 2012		10,480,382		$	6.82		7.1		$	19,050
Balance exercisable - June 30, 2012		5,974,747		$	8.21		5.7		$	8,363

 

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 for the six months ended June 30, 2012 and 2011, respectively.

 

		Six Months Ended June 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 June 30, 2012, there was $10.9 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 2.1 years.  During the six months ended June 30, 2012, the Company granted options to acquire approximately 2.3 million shares of common stock, received $3.6 million in proceeds from the exercise of options and recorded $1.9 million in non-cash compensation expense related to options granted that are expected to vest.

 

As of June 30, 2011, there was $10.2 million in unrecognized compensation expense related to options expected to vest.  This cost was expected to be recognized on a straight-line basis over a weighted average period of 1.2 years.  During the six months ended June 30, 2011, the Company granted options to acquire approximately 2.0 million shares of common stock, received $0.4 million in proceeds from the exercise of options and recorded $3.6 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.

 

10

 

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

 

		Shares Outstanding		Weighted Average Grant Date Fair Value (Per Share)			Aggregate Fair Value
							(in thousands)
Balance outstanding - December 31, 2011		198,279		$	2.20		$	437
Granted		65,000					430
Vested		(84,954)					(189		)
Forfeited		(2,206)					(3		)
Balance outstanding - June 30, 2012		176,119		$	3.83		$	675

 

As of June 30, 2012, there was $0.6 million in unrecognized compensation expense related to shares of time-based restricted shares expected to vest.  This cost is expected to be recognized on a straight-line basis over a weighted average period of 1.0 year.  During the six months ended June 30, 2012, there were 84,954 shares of time-based restricted shares vested, and we recorded $0.2 million in non-cash compensation expense related to restricted stock granted that is expected to vest.

 

As of June 30, 2011, there was $0.8 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 0.7 years.  During the six months ended June 30, 2011, there were 135,321 shares of time-based restricted shares vested, and we recorded a $0.3 million in non-cash compensation expense related to the restricted stock granted that is expected to vest.

 

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 believes it 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.

 

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 swingline 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.

 

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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 June 30, 2012, we had $134.0 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 June 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.

 

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

 

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.

 

8.              INCOME TAX

 

The Company’s effective income tax rate for the three and six months ended June 30, 2012 was 40.5% and 38.5% respectively, both of which were greater than the statutory federal rate of 35% 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 six months ended June 30, 2011 was 60.2% and 52.2% respectively, both of which were greater than the statutory federal rate of 35% 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 June 30, 2012, there has been no material change to the balance of unrecognized tax benefits reported at December 31, 2011.

 

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.

 

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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 six months ended June 30, 2012, none of our customers had combined revenues from all segments equal to or exceeding 10.0%.  For the three and six months ended June 30, 2012 and 2011, our five largest customers accounted for approximately 31.9% and 31.5% and 28.5% 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 six months ended June 30, 2012 and 2011, respectively (amounts in thousands):

 

		Cash						Check
		Advance			ATM			Services			Other			Corporate			Total
Three Months Ended June 30, 2012
Revenues		$	56,675		$	76,603		$	6,605		$	7,582		$	-		$	147,465
Operating income		16,755			8,715			3,781			3,778			(17,066)			15,963
Three Months Ended June 30, 2011
Revenues		$	50,250		$	71,214		$	6,924		$	6,664		$	-		$	135,052
Operating income		7,412			9,807			4,160			2,855			(17,092)			7,142
Six Months Ended June 30, 2012
Revenues		$	115,036		$	156,950		$	13,121		$	13,423		$	-		$	298,530
Operating income		32,602			17,669			7,196			6,890			(32,697)			31,660
Six Months Ended June 30, 2011
Revenues		$	101,123		$	142,405		$	13,335		$	12,578		$	-		$	269,441
Operating income		15,587			18,498			7,589			5,636			(30,863)			16,447

 

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

 

		June 30, 2012			December 31, 2011
Cash Advance		$	151,804		$	164,515
ATM		92,430			98,418
Check services		34,390			37,231
Other		39,941			39,570
Corporate		166,042			189,333
Total Assets		$	484,607		$	529,067

 

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