Everi Holdings Inc. - Quarter Report: 2013 September (Form 10-Q)

Table of Contents

 

 

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 SEPTEMBER 30, 2013

 

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 October 25, 2013 there were 65,468,305 shares of the Registrant’s $0.001 par value per share common stock outstanding.

 

 

Table of Contents

 

TABLE OF CONTENTS

 

		Page
Part I: Financial Information		3
Item 1:	Condensed Consolidated Financial Statements (Unaudited)	3
	Condensed Consolidated Statements of Income and Comprehensive Income for the three and nine months ended September 30, 2013 and 2012	3
	Condensed Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012	4
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 and 2012	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations		15
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		23
Item 2:  Unregistered Sales of Equity Securities and Use of Proceeds		24
Item 6: Exhibits		25
Signatures		26

 

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PART I: FINANCIAL INFORMATION

 

ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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 September 30,						Nine Months Ended September 30,
		2013			2012			2013			2012
Revenues		$	146,101		$	149,824		$	441,987		$	448,354
Costs and expenses
Cost of revenues (exclusive of depreciation and amortization)		111,106			111,373			333,928			333,566
Operating expenses		19,248			19,463			57,710			55,910
Depreciation		1,908			1,695			5,421			5,260
Amortization		2,419			2,650			6,974			7,317
Total costs and expenses		134,681			135,181			404,033			402,053
Operating income		11,420			14,643			37,954			46,301
Other expenses
Interest expense, net of interest income		2,255			3,586			8,151			12,133
Total other expenses		2,255			3,586			8,151			12,133
Income from operations before tax		9,165			11,057			29,803			34,168
Income tax provision		3,383			3,977			11,109			12,878
Net income		5,782			7,080			18,694			21,290
Foreign currency translation		591			236			79			164
Comprehensive income		$	6,373		$	7,316		$	18,773		$	21,454
Earnings per share
Basic		$	0.09		$	0.11		$	0.28		$	0.32
Diluted		$	0.09		$	0.10		$	0.28		$	0.32
Weighted average common shares outstanding
Basic		65,525			66,108			66,108			65,673
Diluted		66,630			67,601			67,158			67,031

 

 

See notes to unaudited condensed consolidated financial statements.

 

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GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except par value)

(Unaudited)

 

		At September 30,			At December 31,
		2013			2012
ASSETS
Cash and cash equivalents		$	142,990		$	153,020
Restricted cash and cash equivalents		291			200
Settlement receivables		24,418			29,484
Other receivables, net of allowances for doubtful accounts of $4.3 million and $6.9 million, respectively		13,929			11,571
Inventory		8,974			7,126
Prepaid expenses and other assets		19,413			18,254
Property, equipment and leasehold improvements, net		19,132			15,441
Goodwill		180,113			180,141
Other intangible assets, net		32,094			33,994
Deferred income taxes, net		94,328			104,664
Total assets		$	535,682		$	553,895
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Settlement liabilities		$	162,197		$	182,446
Accounts payable and accrued expenses		56,635			51,190
Borrowings		106,500			121,500
Total liabilities		325,332			355,136
Commitments and Contingencies (Note 5)
Stockholders’ Equity
Common stock, $0.001 par value, 500,000 shares authorized and 88,420 and 87,545 shares issued at September 30, 2013 and December 31, 2012, respectively		88			87
Convertible preferred stock, $0.001 par value, 50,000 shares authorized and 0 shares outstanding at September 30, 2013 and December 31, 2012, respectively		-			-
Additional paid-in capital		225,438			217,990
Retained earnings		142,308			123,614
Accumulated other comprehensive income		2,637			2,558
Treasury stock, at cost, 22,857 and 20,724 shares at September 30, 2013 and December 31, 2012, respectively		(160,121)			(145,490)
Total stockholders’ equity		210,350			198,759
Total liabilities and stockholders’ equity		$	535,682		$	553,895

 

 

See notes to unaudited condensed consolidated financial statements.

 

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GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW

(Amounts in thousands)

(Unaudited)

 

		Nine Months Ended September 30,
		2013					2012
Cash flows from operating activities
Net income		$	18,694				$	21,290
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation		5,421					5,260
Amortization of intangibles		6,974					7,317
Amortization of financing costs		1,323					1,081
Loss on sale or disposal of assets		158					112
Provision for bad debts		5,882					2,586
Stock-based compensation		3,702					3,951
Changes in operating assets and liabilities:
Settlement receivables		5,050					(33,676		)
Other receivables, net		(8,264		)			5,682
Inventory		(1,847		)			(6		)
Prepaid and other assets		(1,726		)			(1,329		)
Deferred income taxes		10,335					12,556
Settlement liabilities		(20,127		)			16,509
Accounts payable and accrued expenses		188					86
Net cash provided by operating activities		25,763					41,419
Cash flows from investing activities
Capital expenditures		(9,165		)			(7,353		)
Proceeds from sale of fixed assets		83					448
Changes in restricted cash and cash equivalents		(91		)			255
Net cash used in investing activities		(9,173		)			(6,650		)
Cash flows from financing activities
Issuance costs of amended credit facility		(764		)			(676		)
Repayments against credit facility		(15,000		)			(47,500		)
Proceeds from exercise of stock options		3,776					5,946
Purchase of treasury stock		(14,631		)			(191		)
Net cash used in financing activities		(26,619		)			(42,421		)
Effect of exchange rates on cash		(1		)			(943		)
Cash and cash equivalents
Net decrease for the period		(10,030		)			(8,595		)
Balance, beginning of the period		153,020					55,535
Balance, end of the period		$	142,990				$	46,940
Supplemental cash flow disclosures
Cash paid for interest		$	6,978				$	11,402
Cash paid for income tax, net of refunds		$	538				$	267
Non-cash tenant improvements paid by landlord		$	2,930				$	-
Accrued and unpaid capital expenditures		$	2,339				$	-

 

 

See notes to unaudited condensed consolidated financial statements.

 

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GLOBAL CASH ACCESS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

1.              BUSINESS

 

Overview

 

Global Cash Access Holdings, Inc. (“Holdings”) is a holding company, the principal asset of which is the capital stock of Global Cash Access, Inc. (“GCA”). Unless otherwise indicated, the terms “the Company,” “Holdings,” “we,” “us” and “our” refer to Holdings together with its consolidated subsidiaries.

 

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

 

2.              BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The unaudited condensed consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Some of the information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. In the opinion of management, all adjustments (which include normal recurring adjustments) necessary for a fair presentation of results for the interim periods have been made. The results for the three and nine months ended September 30, 2013 are not necessarily indicative of results to be expected for the full fiscal year.

 

These unaudited condensed consolidated financial statements should be read in conjunction with the annual consolidated financial statements and notes thereto included within the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 (the “2012 10-K”).

 

Use of Estimates

 

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

 

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

 

·                  the valuation and recognition of share-based compensation;

 

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

 

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

 

Principles of Consolidation

 

All intercompany transactions and balances have been eliminated in consolidation.

 

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Cash and Cash Equivalents

 

Cash and cash equivalents include cash and all balances on deposit in banks and financial institutions. The Company considers all highly liquid investments with maturities of three months or less at the time of purchase to be cash and cash equivalents. Such balances may at times exceed the federal insurance limits. However, the Company periodically evaluates the creditworthiness of these institutions to minimize risk.

 

ATM Funding Agreements

 

The Company obtains all of the cash required to operate its ATMs through various ATM funding agreements. Some gaming establishments provide the cash utilized within the ATM (“Site-Funded”). The Site-Funded receivables generated for the amount of cash dispensed from transactions performed at our ATMs are owned by GCA and GCA is liable to the gaming establishment for the face amount of the cash dispensed. On our condensed consolidated balance sheets, the amount of the receivable for transactions processed on these ATM transactions is included within settlement receivables and the amount due to the gaming establishment for the face amount of dispensing transactions is included within settlement liabilities.

 

For our non-Site-Funded locations, the Company’s Contract Cash Solutions Agreement with Wells Fargo allows for the Company to utilize funds owned by Wells Fargo to provide the currency needed for normal operating requirements for the Company’s ATMs. For the use of these funds, the Company pays Wells Fargo a cash usage fee on the average daily balance of funds utilized multiplied by a contractually defined cash usage rate. Under this agreement, all currency supplied by Wells Fargo remains the sole property of Wells Fargo at all times until it is dispensed, at which time Wells Fargo obtains an interest in the corresponding settlement receivable. As the cash is never an asset of ours, supplied cash is not reflected on our condensed consolidated balance sheets. We are charged a cash usage fee for the cash used in these ATMs, which is included as interest expense on our condensed consolidated statements of income and comprehensive income. The Company recognizes the fees as interest expense due to the similar operational characteristics of a revolving line of credit, the fact that the fees are calculated on a financial index and the fees are paid for access to a capital resource.

 

Settlement Receivables and Settlement Liabilities

 

In the credit card cash access and POS debit card cash access transactions provided by GCA, the gaming establishment is reimbursed for the cash disbursed to gaming patrons, in most instances, through the issuance of a negotiable instrument, and, in some instances, through electronic settlement. The unpaid negotiable instrument amounts and electronic settlement amounts owing to gaming establishments are included within settlement liabilities on our condensed consolidated balance sheets.

 

GCA receives reimbursement from the patron’s credit or debit card issuer for the transaction in an amount equal to the amount owing to the gaming establishment plus the fee charged to the patron. This reimbursement is included within the settlement receivables on our condensed consolidated balance sheets.

 

Warranty Receivables

 

If a gaming establishment chooses to have a check warranted, it sends a request to a check warranty service provider, asking whether it would be willing to accept the risk of cashing the check. If the check warranty provider accepts the risk and warrants the check, the gaming establishment negotiates the patron’s check by providing cash for the face amount of the check. If the check is dishonored by the patron’s bank upon presentment, the gaming establishment invokes the warranty, and the check warranty service provider purchases the check from the gaming establishment for the full check amount and then pursues collection activities on its own. In our Central Credit Check Warranty product under our agreement with TeleCheck, we receive all of the check warranty revenue. We are exposed to risk for the losses associated with any warranted items that we cannot collect from patrons issuing the items. Warranty receivables are defined as any amounts paid by TeleCheck to gaming establishments to purchase dishonored checks. Additionally, we pay a fee to TeleCheck for their services.

 

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

 

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Fair Values of Financial Instruments

 

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

 

The carrying amount of cash and cash equivalents, restricted cash and cash equivalents, other receivables, net, settlement receivables, settlement liabilities, accounts payable and accrued expenses approximates fair value due to the short-term maturities of these instruments. The fair value of our borrowings are estimated based on various inputs to determine a market price, such as: market demand and supply, size of tranche, maturity and similar instruments trading in more active markets.

 

The fair values of all other financial instruments approximate their book values as the instruments are short-term in nature or contain market rates of interest.

 

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, 2013
Senior credit facility		2		$	106,833		$	106,500
December 31, 2012
Senior credit facility		2		$	122,715		$	121,500

 

(*) Level 1 indicates that the fair value is determined by using quoted prices in active markets for identical investments. Level 2 indicates that the fair value is determined using pricing inputs other than quoted prices in active markets such as models or other valuation methodologies. Level 3 indicates that the fair value is determined using pricing inputs that are unobservable for the investment and include situations where there is little, if any, market activity for the investment. Significant management estimates and judgment are used in the determination of the fair value of Level 3 pricing inputs.

 

Interest Rate Cap

 

In conjunction with the terms and conditions of the Senior Credit Facility, as described in Note 4, GCA purchased a $150.0 million notional amount interest rate cap with an effective date of January 5, 2012 and a term of three years. GCA purchased this interest rate cap to partially reduce the Company’s exposure to increases in the London Interbank Offer Rate (“LIBOR’) above 1.5% during the term of the interest rate cap with respect to its variable rate debt obligations under the Senior Credit Facility and its obligations under the Contract Cash Solutions Agreement with Wells Fargo. This interest rate cap is recorded in prepaid expenses and other assets on our condensed consolidated balance sheets, and is marked-to-market based on a quoted market price with the effects offset in our condensed consolidated statements of income and comprehensive income. The interest rate cap carrying value and fair value approximate each other and these values are insignificant as of September 30, 2013 and December 31, 2012.

 

Inventory

 

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

 

Goodwill and Other Intangible Assets

 

In accordance with ASC 350, we test goodwill at the reporting unit level for impairment on an annual basis and between annual tests if events and circumstances indicate it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The Company does not believe that any of its goodwill was impaired as of September 30, 2013.

 

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Other intangible assets consist primarily of customer contracts (rights to provide cash access services to gaming establishment customers) acquired through business combinations and acquisitions, capitalized software development costs and the acquisition cost of our patent related to the “3-in-1 rollover” technology acquired in 2005. Customer contracts require the Company to make renewal assumptions, which impact the estimated useful lives of such assets. The acquisition cost of the 3-in-1 rollover patent is being amortized over the term of the patent, which expires in 2018.

 

Revenue Recognition

 

The Company recognizes revenue when evidence of an arrangement exists, services have been rendered, the price is fixed or determinable and collectability is reasonably assured. The Company evaluates its revenue streams for proper timing of revenue recognition. Revenue is recognized as products are delivered and/or services are performed.

 

Cost of Revenues (exclusive of depreciation and amortization)

 

The cost of revenues (exclusive of depreciation and amortization) represents the direct costs required to perform revenue generating transactions. The principal costs included within cost of revenues (exclusive of depreciation and amortization) are commissions paid to gaming establishments, interchange fees paid to credit and debit card networks, transaction processing fees to our transaction processor, cost of cash access devices and associated parts and check cashing warranties.

 

Income Taxes

 

Income tax expense includes U.S. and international income taxes, plus the provision for U.S. taxes on undistributed earnings of international subsidiaries not deemed to be permanently invested. Since it is management’s practice and intent to reinvest the earnings in the international operations of our foreign subsidiaries, U.S. federal income taxes have not been provided on the undistributed earnings of any foreign subsidiaries except for GCA Macau. Some items of income and expense are not reported in tax returns and financial statements in the same year. The tax effect of such temporary differences is reported as deferred income taxes.

 

Foreign Currency Translation

 

Foreign currency denominated assets and liabilities for those foreign entities for which the local currency is the functional currency are translated into U.S. dollars based on exchange rates prevailing at the end of each period. Revenues and expenses are translated at average exchange rates during the year. The effects of foreign exchange gains and losses arising from these translations are included as a component of other comprehensive income on our condensed consolidated statements of income and comprehensive income. Translation adjustments on intercompany balances of a long-term investment nature are recorded as a component of accumulated other comprehensive income on our condensed consolidated balance sheets.

 

Earnings Applicable to Common Stock

 

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

 

Share Based Compensation

 

Share based payment awards result in a cost that is measured at fair value on the award’s grant date. Stock options expected to be exercised currently and in future periods are measured at fair value using the Black Scholes model with the expense associated with these awards being recognized on the straight-line basis over the awards’ vesting period. The expense associated with restricted stock awards is recognized on the straight-line basis over the awards’ vesting period.  Forfeitures are estimated at the time of grant, with such estimate updated periodically and with actual forfeitures recognized currently to the extent they differ from the estimates.

 

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3.              ATM FUNDING AGREEMENTS

 

Wells Fargo Contract Cash Solutions Agreement

 

Our Contract Cash Solutions Agreement with Wells Fargo allows for the Company to utilize funds owned by Wells Fargo to provide the currency needed for normal operating requirements for the Company’s ATMs. For the use of these funds, we pay Wells Fargo a cash usage fee on the average daily balance of funds utilized multiplied by a contractually defined cash usage rate. Under this agreement, all currency supplied by Wells Fargo remains the sole property of Wells Fargo at all times until it is dispensed, at which time Wells Fargo obtains an interest in the corresponding settlement receivable. As the cash is never an asset of ours, supplied cash is not reflected on our condensed consolidated balance sheets.

 

The Contract Cash Solutions Agreement allows for a maximum amount of cash to be provided to GCA of $500.0 million, and the agreement was scheduled to terminate on November 30, 2014; however, on November 4, 2013, we entered into an amendment to the Contract Cash Solutions Agreement to extend the term one year until November 30, 2015.

 

The outstanding balances of ATM cash utilized by GCA from Wells Fargo were $268.5 million and $360.4 million as of September 30, 2013 and December 31, 2012, respectively.

 

Under the terms of the Contract Cash Solutions Agreement, we pay a monthly cash usage fee based upon the product of the average daily dollars outstanding in all ATMs multiplied by a contractually defined cash usage rate. This cash usage rate is determined by an applicable LIBOR plus a mutually agreed upon margin.  We are exposed to interest rate risk to the extent that the applicable LIBOR increases, subject to the interest rate cap.  The cash usage fees incurred by us, reflected as interest expense within our condensed consolidated statements of income and comprehensive income, were $0.6 million and $1.7 million and $0.7 million and $2.5 million for the three and nine months ended September 30, 2013 and 2012, respectively.

 

We are responsible for any losses of cash in the ATMs under our agreement with Wells Fargo and we are self-insured for this risk. We incurred no material losses related to this self-insurance for the three and nine months ended September 30, 2013 and 2012.

 

Site Funded ATMs

 

We operate ATMs at certain customer gaming establishments where the gaming establishments provide the cash required for the ATMs’ operational needs. We are required to reimburse the customer for the amount of cash dispensed from these Site-Funded ATMs. The Site-Funded ATM liability is included within settlement liabilities on our condensed consolidated balance sheets and was $96.2 million and $107.5 million as of September 30, 2013 and December 31, 2012, respectively.

 

4.              BORROWINGS

 

Senior Credit Facility

 

We have a Credit Agreement (“the Credit Agreement”) with certain lenders, Deutsche Bank Trust Company Americas, as Administrative Agent and Wells Fargo Securities, LLC, as Syndication Agent. The Credit Agreement provides for a $210.0 million term loan facility and a $35.0 million revolving credit facility (the “Senior Credit Facility”). The revolving credit facility includes provisions for the issuance of up to $10.0 million of letters of credit and up to $5.0 million in swing-line loans.

 

The term loan requires principal repayments of one quarter of 1% of the aggregate initial principal amount of term loans, adjusted for any non-mandatory prepayments per quarter, as well as annual mandatory prepayment provisions based on an excess cash flow sweep equal to a fixed percentage of excess cash flow (as defined in the Credit Agreement). The remaining principal is due on the maturity date, March 1, 2016. The Credit Agreement contains mandatory prepayment provisions which, under certain circumstances, such as asset or equity sales, obligate us to apply defined portions of our cash flow to prepayment of the Senior Credit Facility.

 

We had $106.5 million of outstanding indebtedness under the Senior Credit Facility, all of which was outstanding under the term loan facility as of September 30, 2013.

 

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In May 2013, we entered into a second amendment to our Credit Agreement, dated March 1, 2011, among Deutsche Bank Trust Company Americas, as administrative agent and the various lenders who are a party thereto (the “Amended Credit Agreement”). The Amended Credit Agreement reduces the interest rate on borrowings under the term loan facility from LIBOR plus a margin of 5.5% (subject to a minimum LIBOR rate of 1.50%) to LIBOR plus a margin of 3.0% (subject to a minimum LIBOR rate of 1.0%). In addition, the original Credit Agreement provided for an increase option permitting us to arrange with existing and/or new lenders for them to provide up to an aggregate of $50.0 million in additional term loan commitments. The Amended Credit Agreement now provides us with an increase option permitting the Company to arrange with existing and/or new lenders additional term loan and/or revolving credit facility loan amounts in excess of $50.0 million so long as our total leverage ratio after giving effect to such additional loan amount does not exceed 2.50:1.00 (as such leverage ratio is calculated and defined under the Amended Credit Agreement).

 

The weighted average interest rate was 4.0% and 5.6% for the three and nine months ended September 30, 2013, respectively. 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, 2013. The Senior Credit Facility is unconditionally guaranteed by Holdings and each direct and indirect domestic subsidiary of GCA. All amounts owing under the Senior Credit Facility are secured by a first priority perfected security interest in all stock (but only 65% of the stock of foreign subsidiaries), other equity interests and promissory notes owned by us and a first priority perfected security interest in all other tangible and intangible assets owned by us and our guarantors.

 

The Credit Agreement contains customary affirmative and negative covenants, financial covenants, representations and warranties and events of defaults. We were in compliance with the required covenants as of September 30, 2013.

 

5.              COMMITMENTS AND CONTINGENCIES

 

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

 

6.              SHAREHOLDERS’ EQUITY

 

Common Stock Repurchase Program

 

Our current share repurchase program grants us the authority to repurchase up to $40.0 million of our outstanding common stock over a two year period, which commenced in the first quarter of 2013. We have repurchased approximately 0.4 million and 2.1 million shares of common stock for cash of $2.8 million and $14.5 million under the share repurchase program during the three and nine months ended September 30, 2013, respectively. We completed the share repurchases with cash on hand and we intend to continue to use cash on hand for these share repurchases. The repurchase program authorizes us to buy our common stock from time to time through open market, privately negotiated or other transactions, including pursuant to trading plans established in accordance with Rules 10b5-1 and 10b-18 of the Securities Exchange Act of 1934, as amended, or by a combination of such methods. The share repurchase program is subject to prevailing market conditions and other considerations and may be suspended or discontinued at any time.

 

Treasury Stock

 

In addition to open market purchases of common stock authorized under the Common Stock Repurchase Program, employees may direct us to withhold vested shares of restricted stock to satisfy the minimum statutory withholding requirements applicable to their restricted stock vesting. We repurchased or withheld from restricted stock awards approximately 1,100 shares and 12,200 shares of common stock at an aggregate purchase price of approximately $8,200 and $86,600 to satisfy the minimum applicable tax withholding obligations incident to the vesting of such restricted stock awards during the three and nine months ended September 30, 2013, respectively.

 

7.              WEIGHTED AVERAGE COMMON SHARES

 

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

 

		Three Months Ended September 30,				Nine Months Ended September 30,
		2013		2012		2013		2012
Weighted average number of common shares outstanding - basic		65,525		66,108		66,108		65,673
Potential dilution from equity grants(1)		1,105		1,493		1,050		1,358
Weighted average number of common shares outstanding - diluted		66,630		67,601		67,158		67,031

 

(1)         The potential dilution excludes the weighted average effect of stock options to acquire 6.1 million and 6.0 million and 5.5 million and 6.9 million of our common stock for the three and nine months ended September 30, 2013 and 2012, respectively, because the application of the treasury stock method, as required, makes them anti-dilutive.

 

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8.              SHARE-BASED COMPENSATION

 

Equity Incentive Awards

 

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

 

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

 

The vesting provisions of restricted stock are similar to those applicable to stock options. Because these restricted shares are issued primarily to employees of the Company, many of the shares issued will be withheld by the Company to satisfy the statutory withholding requirements applicable to the restricted stock grants. Therefore, as these awards vest the actual number of shares outstanding as a result of the restricted stock awards is reduced. These shares will vest over a period of four years.

 

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

 

 

		Stock Options Granted		Restricted Stock Granted		Equity Awards Available for Grant
Outstanding, December 31, 2012		9,449		111		2,629
Additional authorized shares		-		-		3,174
Granted		1,230		370		(1,600)
Exercised options or vested shares		(823)		(53)		-
Canceled or forfeited		(156)		(3)		159
Outstanding, September 30, 2013		9,700		425		4,362

 

 

Stock Options

 

The fair value of options was determined as of the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:

 

		Nine Months Ended September 30,
		2013		2012
Risk-free interest rate		1%		1%
Expected life of options (in years)		4		6
Expected volatility		61%		62%
Expected dividend yield		0%		0%

 

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

 

		Number of Common Shares (in thousands)		Weighted Average Exercise Price (per share)			Weighted Average Life Remaining (years)		Aggregate Intrinsic Value (in thousands)
Outstanding, December 31, 2012		9,449		$	7.19		6.4		$	16,626
Granted		1,230		7.07
Exercised		(823)		4.55
Canceled or forfeited		(156)		7.29
Outstanding, September 30, 2013		9,700		$	7.40		6.2		$	14,486
Vested and expected to vest, September 30, 2013		9,213		$	7.48		6.1		$	13,506
Exercisable, September 30, 2013		6,610		$	8.08		5.1		$	8,655

 

 

There were 15,000 options granted during the three months ended September 30, 2013.  The weighted average grant date fair value per share of the options granted was $3.31 for both the nine months ended September 30, 2013 and 2012.  The total intrinsic value of options exercised was $0.8 million and $2.3 million and $2.9 million and $5.1 million for the three and nine months ended September 30, 2013 and 2012, respectively.

 

As of September 30, 2013, there was $8.3 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 2.6 years.  During the nine months ended September 30, 2013, the Company granted options to acquire approximately 1.2 million shares of common stock, received $3.8 million in proceeds from the exercise of options and recorded $3.2 million in non-cash compensation expense related to options granted that are expected to vest.

 

As of September 30, 2012, 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 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.

 

Restricted Stock

 

The following table presents a summary of non-vested share awards for the Company’s time-based restricted shares:

 

		Shares Outstanding (in thousands)		Weighted Average Grant Date Fair Value (per share)
Outstanding, December 31, 2012		111		$	5.72
Granted		370		7.09
Vested		(53)		4.49
Forfeited		(3)		7.09
Outstanding, September 30, 2013		425		$	7.05

 

 

There was no restricted stock granted during the three months ended September 30, 2013.  The weighted average grant date fair value per share of restricted stock granted was $7.09 for the nine months ended September 30, 2013.  There was no restricted stock granted during the three months ended September 30, 2012. The weighted average grant date fair value per share of restricted stock granted was $6.62 for the nine months ended September 30, 2012.  The total fair value of shares vested were $0.1 million and $0.4 million and $0.3 million and $1.0 million for the three and nine months ended September 30, 2013 and 2012, respectively.

 

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As of September 30, 2013, there was $2.3 million in unrecognized compensation expense related to shares of time-based restricted shares expected to vest.  This cost is expected to be recognized on a straight-line basis over a weighted average period of 3.3 years.  During the nine months ended September 30, 2013, there were 52,560 shares of time-based restricted shares vested, and we recorded $0.5 million in non-cash compensation expense related to the restricted stock granted that is expected to vest.

 

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 was 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 the restricted stock granted that is expected to vest.

 

9.              INCOME TAXES

 

The Company’s effective income tax rate was 36.9% and 37.3% and 36.0% and 37.7% for the three and nine months ended September 30, 2013 and 2012, respectively, all of which were greater than the statutory federal rate of 35.0% due in part to state taxes and the non-cash compensation expenses related to stock options.

 

The Company accounts for uncertain tax positions in accordance with the applicable accounting guidance.  As of September 30, 2013, there has been no material change to the balance of unrecognized tax benefits from December 31, 2012.

 

10.       SEGMENT INFORMATION

 

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

 

We operate in three distinct business segments: (1) cash advance, (2) ATM and (3) check services. These segments are monitored separately by management for performance against its internal forecast and are consistent with our internal management reporting. Other lines of business, none of which exceed the established materiality for segment reporting, include kiosk sales and services and credit reporting services, among others.

 

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

 

Our business is predominantly domestic, with no specific regional concentrations and no significant assets in foreign locations.

 

Major Customers

 

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

 

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

 

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

 

		For the Three Months Ended September 30,						For the Nine Months Ended September 30,
		2013			2012			2013			2012
Revenues
Cash advance		$	58,305		$	57,520		$	174,292		$	172,557
ATM		71,634			76,411			219,881			233,361
Check services		5,385			6,611			16,786			19,731
Other		10,777			9,282			31,028			22,705
Corporate		-			-			-			-
Total revenues		$	146,101		$	149,824		$	441,987		$	448,354
Operating income
Cash advance		$	15,190		$	15,785		$	46,503		$	48,388
ATM		6,114			7,951			19,323			25,620
Check services		3,074			3,822			9,874			11,017
Other		4,399			4,673			14,031			11,563
Corporate		(17,357)			(17,588)			(51,777)			(50,287)
Total operating income		$	11,420		$	14,643		$	37,954		$	46,301
		At
		September 30, 2013			December 31, 2012
Total assets
Cash advance		$	137,015		$	149,113
ATM		61,372			59,781
Check services		29,575			35,216
Other		46,157			39,838
Corporate		261,563			269,947
Total assets		$	535,682		$	553,895

 

 

11.       SUBSEQUENT EVENTS

 

As of November 5, 2013, the Company had not identified, and was not aware of, any subsequent events for the three and nine months ended September 30, 2013.

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Management’s Discussion and Analysis of our Financial Condition and Results of Operations (“MD&A”) begins with an overview of our business and certain trends, risks and challenges.  We then discuss our results of operations for the three and nine months ended September 30, 2013 as compared to the same period for 2012, respectively. This is followed by a description of our liquidity and capital resources, including discussions about sources and uses of cash, our borrowings, deferred tax asset, other liquidity needs and off-balance sheet arrangements. We conclude with a discussion of critical accounting policies and their impact on our unaudited condensed consolidated financial statements.

 

You should read the following discussion together with our condensed consolidated financial statements and the notes to those financial statements included in this Quarterly Report on Form 10-Q and our 2012 Annual Report on Form 10-K (our “2012 10-K”). When reviewing our MD&A, you should also refer to the description of our Critical Accounting Policies and Estimates in our 2012 10-K because understanding these policies and estimates is important in order to fully understand our reported financial results and our business outlook for future periods. In addition to historical information, this discussion contains “forward-looking statements” as defined in the U.S. Private Securities Litigation Reform Act of 1995. In this context, forward-looking statements often address our expected future business and financial performance, and often contain words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” or “will.”  These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected or assumed, including, but not limited to, the following: the timing and the extent of a recovery in the gaming industry, if any; gaming establishment and patron preferences; national and international economic conditions; changes in gaming regulatory, card association and statutory requirements; regulatory and licensing difficulties; competitive pressures; operational limitations; gaming market contraction; changes to tax laws; uncertainty of litigation outcomes; interest rate fluctuations; inaccuracies in underlying operating assumptions; unanticipated expenses or capital needs; technological obsolescence; and employee turnover.  Additional factors that could cause actual results to differ materially are included under the heading “Risk Factors.” These factors include, but are not limited to, those set forth in our press releases, reports and other filings made with the SEC. These cautionary statements qualify all of our forward-looking statements, and you are cautioned not to place undue reliance on these forward-looking statements. All forward-looking statements are subject to various risks and uncertainties that could cause our actual future results to differ materially from those presently anticipated due to a variety of factors, including those discussed in Item 1A of our 2012 10-K.

 

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Overview

 

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

 

Trends

 

Our strategic planning and forecasting processes include the consideration of economic and industry-wide trends that may impact our business. We have identified the more material positive and negative trends affecting our business as the following:

 

·      Although the U.S. gaming sector has experienced revenue declines over the last several years, in 2012, it stabilized and modestly improved.  In 2013, this trend has remained and is expected to continue for the remainder of the year.

 

·      Gaming activity continues to expand into more domestic and international markets.

 

·      There continues to be a migration from the use of traditional paper checks and cash to electronic payments.

 

·      The credit markets in the U.S. and around the world have been volatile and unpredictable.

 

·      The cash access industry in the gaming sector has become increasingly competitive and is having an adverse effect on our business with respect to customer retention and our operating margins.

 

·      There is increasing governmental oversight related to the cost of transaction processing and related fees to the consumer. We expect the financial services and payments industry to respond to these legislative acts by changing other fees and costs, which may negatively impact our business in the future.

 

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Results of Operations

 

Three months ended September 30, 2013 compared to three months ended September 30, 2012

 

The following table presents our unaudited condensed consolidated results of operations (amounts in thousands):

 

							Three Months Ended
		September 30, 2013					September 30, 2012					Sep-13 vs. Sep-12
		$			%		$			%		$ Var			% Var
Revenues
Cash advance		$	58,305		40%		$	57,520		38%		$	785		1%
ATM		71,634			49%		76,411			51%		(4,777)			(6)%
Check services		5,385			4%		6,611			5%		(1,226)			(19)%
Other revenues		10,777			7%		9,282			6%		1,495			16%
Total revenues		146,101			100%		149,824			100%		(3,723)			(2)%
Costs and expenses
Cost of revenues (exclusive of depreciation and amortization)		111,106			76%		111,373			74%		(267)			(0)%
Operating expenses		19,248			13%		19,463			13%		(215)			(1)%
Depreciation		1,908			1%		1,695			1%		213			13%
Amortization		2,419			2%		2,650			2%		(231)			(9)%
Total costs and expenses		134,681			92%		135,181			90%		(500)			(0)%
Operating income		11,420			8%		14,643			10%		(3,223)			(22)%
Other expenses
Interest expense, net of interest income		2,255			2%		3,586			2%		(1,331)			(37)%
Total other expenses		2,255			2%		3,586			2%		(1,331)			(37)%
Income from operations before tax		9,165			6%		11,057			8%		(1,892)			(17)%
Income tax provision		3,383			2%		3,977			3%		(594)			(15)%
Net income		$	5,782		4%		$	7,080		5%		$	(1,298)		(18)%

 

Total Revenues

 

Total revenues decreased by $3.7 million, or 2%, to $146.1 million for the three months ended September 30, 2013 as compared to the same period in the prior year. This was primarily due to lower ATM revenues, partially offset by higher kiosk sales during the three months ended September 30, 2013 as compared to the same period in the prior year.

 

Cash advance revenues increased by $0.8 million, or 1%, to $58.3 million for the three months ended September 30, 2013 as compared to the same period in the prior year.  This was primarily due to higher international cash advance revenues.

 

ATM revenues decreased by $4.8 million, or 6%, to $71.6 million for the three months ended September 30, 2013 as compared to the same period in the prior year. This was primarily due to lost business and lower transaction volume.

 

Check services revenues decreased by $1.2 million, or 19%, to $5.4 million for the three months ended September 30, 2013 as compared to the same period in the prior year. This was primarily due to lost business and a decrease in the number of check services transactions processed.

 

Other revenues increased by $1.5 million, or 16%, to $10.8 million for the three months ended September 30, 2013 as compared to the same period in the prior year. This was primarily due to increased kiosk sales during the three months ended September 30, 2013 as compared to the same period in the prior year.

 

Costs and Expenses

 

Cost of revenues (exclusive of depreciation and amortization) slightly decreased by $0.3 million, or 0%, to $111.1 million for the three months ended September 30, 2013 as compared to the same period in the prior year. This was primarily due to lower variable costs associated with lower revenues in the ATM and check services segments, mostly offset by increased commissions paid to our ATM customers and higher kiosk related variable costs associated with the increased revenues discussed previously.

 

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