Cardtronics, plc.
CARDTRONICS INC (Form: 10-Q, Received: 08/06/2010 16:10:51)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
   
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
For the quarterly period ended June 30, 2010
 
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 Number: 001-33864
________________________________
CARDTRONICS, INC.
(Exact name of registrant as specified in its charter)

Delaware
76-0681190
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)

3250 Briarpark Drive, Suite 400
77042
Houston, TX
(Zip Code)
(Address of principal executive offices)
 

Registrant’s telephone number, including area code: (832) 308-4000

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 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 þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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 o 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 the definitions of “large accelerated filer,” “accelerated filer’’ and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  £
Accelerated filer  R
Non-accelerated filer  £
Smaller reporting company  £
 
(Do not check if a smaller reporting company)

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

Common Stock, par value: $0.0001 per share.  Shares outstanding on August 4, 2010: 41,961,459
 
 
 

 

CARDTRONICS, INC.

TABLE OF CONTENTS

 
 
Page  
 
PART I.  FINANCIAL INFORMATION
Item 1.
Financial Statements (unaudited)
1
 
Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009
1
 
Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2010 and 2009
2
 
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2010 and 2009
3
 
Notes to Consolidated Financial Statements
4
Cautionary Statement Regarding Forward-Looking Statements
28
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
29
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
45
Item 4.
Controls and Procedures
48
     
PART II. OTHER INFORMATION
Item 1.
Legal Proceedings
49
 Item 1A.
Risk Factors
49
 Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
54
 Item 6.
Exhibits
54
 
Signatures
55
 
When we refer to “us,” “we,” “our,” “ours” or “the Company,” we are describing Cardtronics, Inc. and/or our subsidiaries.
 
 
i

 
 
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CARDTRONICS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, excluding share and per share amounts)
 
 
 
June 30, 2010
   
December 31, 2009
 
    (Unaudited)        
ASSETS
Current assets:
           
Cash and cash equivalents
  $ 40,089     $ 10,449  
Accounts and notes receivable, net of allowance of $297 and $560 as of June 30, 2010 and December 31, 2009, respectively
    20,009       27,700  
Inventory
    2,093       2,617  
Restricted cash, short-term
    3,060       3,452  
Prepaid expenses, deferred costs, and other current assets
    10,450       8,850  
Total current assets
    75,701       53,068  
Property and equipment, net
    148,403       147,348  
Intangible assets, net
    79,877       89,036  
Goodwill
    164,121       165,166  
Prepaid expenses, deferred costs, and other assets
    4,545       5,786  
Total assets
  $ 472,647     $ 460,404  
   
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
               
Current portion of long-term debt and notes payable
  $ 2,481     $ 2,122  
Capital lease obligations
          235  
Current portion of other long-term liabilities
    24,599       26,047  
Accounts payable
    19,403       12,904  
Accrued liabilities
    51,379       57,583  
Current portion of deferred tax liability, net
    3,153       3,121  
Total current liabilities
    101,015       102,012  
Long-term liabilities:
               
Long-term debt, net of related discounts
    304,560       304,930  
Deferred tax liability, net
    14,215       12,250  
Asset retirement obligations
    25,341       24,003  
Other long-term liabilities
    29,647       18,499  
Total liabilities
    474,778       461,694  
                 
Commitments and contingencies
               
                 
Stockholders’ deficit:
               
Common stock, $0.0001 par value; 125,000,000 shares authorized;
     47,235,439 and 46,238,028 shares issued as of June 30, 2010 and
     December 31, 2009, respectively; 41,746,143 and 40,900,532 shares
     outstanding as of June 30, 2010 and December 31, 2009, respectively
    4       4  
Additional paid-in capital
    203,571       200,323  
Accumulated other comprehensive loss, net
    (72,541 )     (57,618 )
Accumulated deficit
    (84,754 )     (96,922 )
Treasury stock; 5,489,296 and 5,337,496 shares at cost as of June 30, 2010
     and December 31, 2009, respectively
    (50,342 )     (48,679 )
Total parent stockholders’ deficit
    (4,062 )     (2,892 )
Noncontrolling interests
    1,931       1,602  
Total stockholders’ deficit
    (2,131 )     (1,290 )
Total liabilities and stockholders’ deficit
  $ 472,647     $ 460,404  

See accompanying notes to consolidated financial statements.
 
 
1

 
 
CARDTRONICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, excluding share and per share amounts)
(Unaudited)

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
 
 
2010
   
2009
   
2010
   
2009
 
Revenues:
                       
ATM operating revenues                                                       
  $ 130,560     $ 121,362     $ 256,247     $ 234,942  
ATM product sales and other revenues
    2,388       3,286       4,477       5,051  
Total revenues
    132,948       124,648       260,724       239,993  
Cost of revenues:
                               
Cost of ATM operating revenues (exclusive of
     depreciation, accretion, and amortization shown
     separately below. See Note 1 )
    87,414       83,975       173,293       166,204  
Cost of ATM product sales and other revenues
    2,314       3,153       4,507       4,967  
Total cost of revenues
    89,728       87,128       177,800       171,171  
Gross profit
    43,220       37,520       82,924       68,822  
Operating expenses:
                               
Selling, general, and administrative expenses
    10,272       10,584       21,415       21,439  
Depreciation and accretion expense
    10,264       9,935       20,486       19,574  
Amortization expense                                                       
    3,765       4,504       7,744       9,031  
Loss on disposal of assets                                                       
    1,095       1,676       1,472       3,784  
Total operating expenses
    25,396       26,699       51,117       53,828  
Income from operations
    17,824       10,821       31,807       14,994  
Other expense (income):
                               
Interest expense, net                                                       
    7,314       7,644       14,632       15,355  
Amortization of deferred financing costs and
     bond discounts
    642       603       1,272       1,171  
Other (income) expense
    (332 )     (1,041 )     34       (1,127 )
Total other expense
    7,624       7,206       15,938       15,399  
Income (loss) before income taxes
    10,200       3,615       15,869       (405 )
Income tax expense
    1,952       1,016       3,391       2,033  
Net income (loss)
    8,248       2,599       12,478       (2,438 )
Net income attributable to noncontrolling interests
    45       111       310       142  
Net income (loss) attributable to controlling interests
     and available to common stockholders
  $ 8,203     $ 2,488     $ 12,168     $ (2,580 )
                                 
Net income (loss) per common share – basic
  $ 0.20     $ 0.06     $ 0.29     $ (0.07 )
Net income (loss) per common share – diluted
  $ 0.19     $ 0.06     $ 0.29     $ (0.07 )
                                 
Weighted average shares outstanding – basic
    40,017,215       39,032,087       39,910,928       39,005,202  
Weighted average shares outstanding – diluted
    41,092,258       39,651,363       40,894,506       39,005,202  
 
See accompanying notes to consolidated financial statements.
 
 
2

 
 
CARDTRONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

   
Six Months Ended June 30,
 
   
2010
   
2009
 
Cash flows from operating activities:
           
Net income (loss)
  $ 12,478     $ (2,438 )
Adjustments to reconcile net income (loss) to net cash provided by
     operating activities:
               
Depreciation, accretion, and amortization expense
    28,230       28,605  
Amortization of deferred financing costs and bond discounts
    1,272       1,171  
Stock-based compensation expense
    2,896       2,120  
Deferred income taxes
    1,891       1,891  
Loss on disposal of assets
    1,472       3,784  
Unrealized gain on derivative instruments
    (506 )      
Amortization of accumulated other comprehensive losses associated
     with derivative instruments no longer designated as hedging instruments
    946        
Other reserves and non-cash items
    959       (1,922 )
Changes in assets and liabilities:
               
Decrease in accounts and notes receivable, net
    7,525       2,070  
(Increase) decrease in prepaid, deferred costs, and other current assets
    (2,185 )     6,734  
Decrease (increase) in inventory
    535       (47 )
Decrease in other assets
    1,328       1,192  
Increase (decrease) in accounts payable
    5,646       (5,804 )
Decrease in accrued liabilities
    (7,067 )     (1,906 )
Decrease in other liabilities
    (2,819 )     (2,745 )
Net cash provided by operating activities
    52,601       32,705  
                 
Cash flows from investing activities:
               
Additions to property and equipment
    (20,783 )     (10,712 )
Payments for exclusive license agreements and site acquisition costs
    (229 )     (87 )
Net cash used in investing activities
    (21,012 )     (10,799 )
                 
Cash flows from financing activities:
               
Proceeds from issuance of long-term debt
          27,812  
Repayments of long-term debt and capital leases
    (1,277 )     (46,486 )
Repayments of borrowings under bank overdraft facility, net
          (142 )
Payments received on subscriptions receivable
          34  
Proceeds from exercises of stock options
    301        
Debt issuance and modification costs
          (458 )
Repurchase of capital stock
    (1,390 )     (92 )
Net cash used in financing activities
    (2,366 )     (19,332 )
                 
Effect of exchange rate changes on cash
    417       494  
Net increase in cash and cash equivalents
    29,640       3,068  
                 
Cash and cash equivalents as of beginning of period
    10,449       3,424  
Cash and cash equivalents as of end of period
  $ 40,089     $ 6,492  
                 
Supplemental disclosure of cash flow information:
               
Cash paid for interest, including interest on capital leases
  $ 14,667     $ 15,525  
Cash paid for income taxes
  $ 398     $ 285  
Fixed assets financed by direct debt
  $ 542     $  
 
See accompanying notes to consolidated financial statements.
 
 
3

 

CARDTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(1) General and Basis of Presentation

General

Cardtronics, Inc., along with its wholly- and majority-owned subsidiaries (collectively, the “Company”) provides convenient automated consumer financial services through its network of automated teller machines (“ATMs”) and multi-function financial services kiosks.  As of June 30, 2010, the Company operated over 33,700 devices across its portfolio, which included over 28,000 devices located in all 50 states of the United States (“U.S.”) (including the U.S. territories of Puerto Rico and the U.S. Virgin Islands), approximately 2,800 devices throughout the United Kingdom (“U.K.”), and approximately 2,900 devices throughout Mexico. Included within this number are approximately 2,200 multi-function financial services kiosks deployed in the U.S. that, in addition to traditional ATM functions such as cash dispensing and bank account balance inquiries, perform other consumer financial services, including bill payments, check cashing, remote deposit capture (which is deposit taking at off-premise ATMs using electronic imaging), and money transfers.

Through its network, the Company provides ATM management and equipment-related services (typically under multi-year contracts) to large, nationally-known retail merchants as well as smaller retailers and operators of facilities such as shopping malls and airports. Additionally, the Company operates the largest surcharge-free network of ATMs within the United States (based on the number of participating ATMs) and works with financial institutions to place their logos on the Company’s ATM machines, thus providing convenient surcharge-free access to the financial institutions’ customers. The Company’s surcharge-free network, which operates under the Allpoint brand name, has more than 37,000 participating ATMs, including a majority of the Company’s ATMs in the United States and all of the Company’s ATMs in the United Kingdom. Finally, the Company provides electronic funds transfer (“EFT”) transaction processing services to its network of ATMs as well as approximately 1,900 ATMs owned and operated by third parties.

Basis of Presentation

This Quarterly Report on Form 10-Q (this “Form 10-Q”) has been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) applicable to interim financial information. Because this is an interim period filing presented using a condensed format, it does not include all of the disclosures required by accounting principles generally accepted in the United States (“U.S. GAAP”), although the Company believes that the disclosures are adequate to make the information not misleading. You should read this Form 10-Q along with the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 (“2009 Form 10-K”), which includes a summary of the Company’s significant accounting policies and other disclosures.

The financial statements as of June 30, 2010 and for the three and six month periods ended June 30, 2010 and 2009 are unaudited. The Consolidated Balance Sheet as of December 31, 2009 was derived from the audited balance sheet filed in the Company’s 2009 Form 10-K. In management’s opinion, all normal recurring adjustments necessary for a fair presentation of the Company’s interim and prior period results have been made. The results of operations for the three and six month periods ended June 30, 2010 and 2009 are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year. Additionally, the financial statements for prior periods include certain minor reclassifications. Those reclassifications did not impact the Company’s total reported net income (loss) or stockholders’ deficit.

The unaudited interim consolidated financial statements include the accounts of Cardtronics, Inc. and its wholly- and majority-owned subsidiaries.  All material intercompany accounts and transactions have been eliminated in consolidation.  Because the Company owns a majority (51.0%) interest in and realizes a majority of the earnings and/or losses of Cardtronics Mexico, S.A. de C.V. (“Cardtronics Mexico”), this entity is reflected as a consolidated subsidiary in the accompanying consolidated financial statements, with the remaining ownership interest not held by the Company being reflected as a noncontrolling interest.
 
 
4

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates, and these differences could be material to the financial statements.

Cost of ATM Operating Revenues and Gross Profit Presentation

The Company presents “Cost of ATM operating revenues” and “Gross profit” within its Consolidated Statements of Operations exclusive of depreciation, accretion, and amortization expense related to ATMs and ATM-related assets. The following table sets forth the amounts excluded from Cost of ATM operating revenues and Gross profit for the periods indicated:

 
 
 
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
 
 
2010
   
2009
   
2010
   
2009
 
   
(In thousands)
 
Depreciation and accretion expenses related to ATMs and ATM-related assets
  $ 8,337     $ 8,236     $ 16,636     $ 16,273  
Amortization expense
    3,765       4,504       7,744       9,031  
Total depreciation, accretion, and amortization expenses excluded
    from Cost of ATM operating revenues and Gross profit
  $ 12,102     $ 12,740     $ 24,380     $ 25,304  

Property and Equipment, net

In accounting for property and equipment, the Company is required to make estimates regarding the expected useful lives of its assets, which ranged historically from three to seven years.  To ensure its useful life estimates accurately reflect the economic use of the assets, the Company periodically evaluates whether changes to the assigned estimated useful lives are necessary.  As a result of its most recent evaluation in the first quarter of 2010, which was based on historical information on its existing and disposed assets, the Company revised the estimated useful lives of several asset classes.  Specifically, the Company determined that it was appropriate to extend the estimated useful life of new ATMs by one year and reduce the estimated useful life of used ATMs by two years starting January 1, 2010.  The Company also decreased the estimated useful lives of deployment costs and asset retirement obligations by two years each, to more accurately align the periods over which these assets are depreciated with the average time period an ATM is installed in a location before being deinstalled.  The Company anticipates that the above changes will increase its future depreciation expense amounts slightly relative to prior years, and reduce the frequency and amount of losses on disposals of assets in future periods.

(2) Stock-Based Compensation

The Company calculates the fair value of stock-based awards granted to employees and directors on the date of grant and recognizes the calculated fair value, net of estimated forfeitures, as compensation expense over the requisite service periods of the related awards. The following table reflects the total stock-based compensation expense amounts included in the Company’s Consolidated Statements of Operations for the periods indicated:

 
 
 
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
 
 
2010
   
2009
   
2010
   
2009
 
   
(In thousands)
 
Cost of ATM operating revenues
  $ 169     $ 193     $ 368     $ 384  
Selling, general, and administrative expenses
    1,268       869       2,528       1,736  
Total stock-based compensation expense
  $ 1,437     $ 1,062     $ 2,896     $ 2,120  

The increase in stock-based compensation expense during the three and six month periods ended June 30, 2010 was due to the issuance of additional shares of restricted stock and stock options to certain of the Company’s employees and directors during 2009 and 2010.  Both the restricted shares and the stock options were granted under the Company’s Amended and Restated 2007 Stock Incentive Plan (the “2007 Stock Incentive Plan”).

At the Company’s 2010 Annual Meeting of Shareholders held on June 15, 2010, stockholders approved the amendment and restatement of the 2007 Stock Incentive Plan.  Among other things, changes to the 2007 Stock Incentive Plan included increasing in the maximum number of shares of common stock that may be granted as equity incentive awards under the plan by 2,000,000 shares, from 3,179,393 to 5,179,393.  As a result of the increased number of shares eligible for grant under the 2007 Stock Incentive Plan, in the event the Company makes additional grants under the plan, stock-based compensation expense would increase in future periods.
 
 
5

 

In addition to increasing the number of shares eligible for grant, stockholders voted to (i) adjust the existing provisions regarding performance-based awards granted and conform a number of administration provisions of the 2007 Stock Incentive Plan necessary to effectuate the modified performance-based awards, (ii) modify the annual award limitations for any individual participant of the plan as well as the performance criteria that may be utilized to structure performance-based awards, (iii) increase the term of the plan from a 10-year period beginning on the original adoption date (which was August 22, 2007) to a 10-year period beginning on the adoption of the amendment to the plan, and (iv) add two types of awards eligible for grant under the plan: a restricted stock unit award and an annual incentive award.

Options.   The number of the Company’s outstanding stock options as of June 30, 2010, and changes during the six month period ended June 30, 2010, are presented below:

   
Number
of Shares
   
We ighted
Average
Exercise
Price
 
Options outstanding as of January 1, 2010
    3,803,771     $ 8.34  
Granted
    23,000     $ 10.95  
Exercised
    (267,471 )   $ 1.31  
Forfeited
    (52,500 )   $ 7.73  
Options outstanding as of June 30, 2010
    3,506,800     $ 8.90  
                 
Options vested and exercisable as of June 30, 2010
    2,976,276     $ 8.65  

The options granted during the six month period ended June 30, 2010 had a total grant-date fair value of approximately $126,500, or $5.50 per share.  As of June 30, 2010, the unrecognized compensation expense associated with outstanding options was approximately $1.1 million.

Restricted Stock.   The number of the Company’s outstanding restricted shares as of June 30, 2010, and changes during the six month period ended June 30, 2010, are presented below:

   
Number
of Shares
 
Restricted shares outstanding as of January 1, 2010
    1,114,437  
Granted
    729,940  
Vested
    (354,437 )
Forfeited
    (14,250 )
Restricted shares outstanding as of June 30, 2010
    1,475,690  

The restricted shares granted to employees and directors during the six month period ended June 30, 2010 had a total grant-date fair value of approximately $7.9 million, or $10.89 per share.  As of June 30, 2010, the unrecognized compensation expense associated with restricted share grants was approximately $12.9 million.

(3) Earnings per Share

The Company reports its earnings per share under the two-class method.  Under this method, potentially dilutive securities are excluded from the calculation of diluted earnings per share (as well as their related income statement impacts) when their impact on net income (loss) available to common stockholders is anti-dilutive. For the six month period ended June 30, 2009, the Company incurred a net loss and, accordingly, excluded all potentially dilutive securities from the calculation of diluted earnings per share as their impact on the net loss available to common stockholders was anti-dilutive. Such securities included all outstanding stock options and shares of restricted stock.  However, dilutive securities were included in the calculation of diluted earnings per share for the three and six month periods ended June 30, 2010 and the three month period ended June 30, 2009 as the Company reported net income for these periods.

Additionally, the shares of restricted stock issued by the Company have a non-forfeitable right to cash dividends, if and when declared by the Company.  Accordingly, such restricted shares are considered to be participating securities and as such, the Company has allocated the undistributed earnings for the three and six month periods ended June 30, 2010 and the three month period ended June 30, 2009 among the Company’s outstanding shares of common stock and issued but unvested restricted shares, as follows:
 
 
6

 

Earnings per Share (in thousands, excluding share and per share amounts):

   
Three Months Ended June 30, 2010
   
Six Months Ended June 30, 2010
 
   
Income
   
Weighted
Average Shares
Outstanding
   
Earnings
Per
Share
   
Income
   
Weighted
Average Shares
Outstanding
   
Earnings
Per
Share
 
Basic:
                                   
Net income attributable to controlling
     interests and available to common
     stockholders
  $ 8,203                 $ 12,168              
Less: undistributed earnings allocated
     to unvested restricted shares
    (347 )                 (499 )            
Net income available to common
     stockholders
  $ 7,856       40,017,215     $ 0.20     $ 11,669       39,910,928     $ 0.29  
                                                 
Diluted:
                                               
Effect of dilutive securities:
                                               
Add: Undistributed earnings allocated
     to restricted shares
  $ 347                     $ 499                  
Stock options added to the denominator
     under the treasury stock method
            1,075,043                       983,578          
Less: Undistributed earnings reallocated
     to restricted shares
    (338 )                     (487 )                
Net income available to common
     stockholders and assumed conversions
  $ 7,865       41,092,258     $ 0.19     $ 11,681       40,894,506     $ 0.29  

   
Three Months Ended June 30, 2009
 
   
Income
   
Weighted
Average Shares
Outstanding
   
Earnings
Per
Share
 
Basic:
                 
Net income attributable to controlling interests and available to common stockholders
  $ 2,488              
Less: undistributed earnings allocated to unvested restricted shares
    (90 )            
Net income available to common stockholders
  $ 2,398       39,032,087     $ 0.06  
                         
Diluted:
                       
Effect of dilutive securities:
                       
Add: Undistributed earnings allocated to restricted shares
  $ 90                  
Stock options added to the denominator under the treasury stock method
            619,276          
Less: Undistributed earnings reallocated to restricted shares
    (89 )                
Net income available to common stockholders and assumed conversions
  $ 2,399       39,651,363     $ 0.06  

The computation of diluted earnings per share excluded potentially dilutive common shares related to restricted stock of 558,585 and 339,481 shares for the three and six month periods ended June 30, 2010, respectively, and 5,805 shares for the three month period ended June 30, 2009, because the effect of including these shares in the computation would have been anti-dilutive.
 
 
7

 

(4) Comprehensive Income (Loss)

Total comprehensive income (loss) consisted of the following:

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
   
(In thousands)
 
Net income (loss)
  $ 8,248     $ 2,599     $ 12,478     $ (2,438 )
Unrealized (losses) gains on interest rate swap contracts
    (7,717 )     343       (11,101 )     1,536  
Foreign currency translation adjustments
    (487 )     10,113       (3,822 )     8,697  
Total comprehensive income (loss)
    44       13,055       (2,445 )     7,795  
Less: comprehensive (loss) income attributable to noncontrolling interests
    (25 )     162       329       171  
Comprehensive income (loss) attributable to controlling interests
  $ 69     $ 12,893     $ (2,774 )   $ 7,624  

Accumulated other comprehensive loss is displayed as a separate component of stockholders’ deficit in the Consolidated Balance Sheets and consisted of the following:

   
June 30, 2010
   
December 31, 2009
 
   
(In thousands)
 
Foreign currency translation adjustments
  $ (28,242 )   $ (24,420 )
Unrealized losses on interest rate swap contracts
    (44,299 )     (33,198 )
Total accumulated other comprehensive loss
  $ (72,541 )   $ (57,618 )

The Company currently believes that the unremitted earnings of its United Kingdom and Mexico subsidiaries will be reinvested in the corresponding country of origin for an indefinite period of time. While the Company’s United Kingdom subsidiary has recently begun repaying certain working capital advances provided by the Company’s domestic entities during the past few years, the Company’s original capital investment amounts are not expected to be repaid in the foreseeable future.  Accordingly, no deferred taxes have been provided for on the differences between the Company’s book basis and underlying tax basis in those subsidiaries or on the foreign currency translation adjustment amounts.

Additionally, as a result of the Company’s overall net loss position for tax purposes, the Company has not recorded deferred tax benefits on the unrealized loss amounts related to its interest rate swaps, as management does not currently believe the Company will be able to realize the benefits associated with its net deferred tax asset positions.  However, if the Company continues to generate pre-tax operating profits, as it has during recent periods, its existing and future valuation allowances may no longer be necessary, including those related to the unrealized losses associated with the Company’s interest rate swaps.  Any release of the valuation allowances associated with the Company’s interest rate swap agreements will be accounted for as a reduction of the unrealized loss amounts currently reflected in the accumulated other comprehensive loss line item within stockholders’ deficit in the accompanying Consolidated Balance Sheets.

(5) Intangible Assets

Intangible Assets with Indefinite Lives

The following table presents the net carrying amount of the Company’s intangible assets with indefinite lives as of June 30, 2010, as well as the changes in the net carrying amounts for the six month period ended June 30, 2010, by segment:
 
 
8

 

   
Goodwill
   
Trade Name
       
   
U.S.
   
U.K.
   
Mexico
   
U.S.
   
U.K.
   
Total
 
   
(In thousands)
 
Balance as of January 1, 2010:
                                   
Gross balance                    
  $ 150,461     $ 63,994     $ 714     $ 200     $ 3,243     $ 218,612  
Accumulated impairment loss
          (50,003 )                       (50,003 )
    $ 150,461     $ 13,991     $ 714     $ 200     $ 3,243     $ 168,609  
                                                 
Foreign currency translation adjustments
          (1,043 )     (2 )           (242 )     (1,287 )
                                                 
Balance as of June 30, 2010:
                                               
Gross balance                                                    
  $ 150,461     $ 62,951     $ 712     $ 200     $ 3,001     $ 217,325  
Accumulated impairment loss
          (50,003 )                       (50,003 )
    $ 150,461     $ 12,948     $ 712     $ 200     $ 3,001     $ 167,322  

Intangible Assets with Definite Lives

The following is a summary of the Company’s intangible assets that are subject to amortization as of June 30, 2010:

   
Gross Carrying
Amount
   
Accumulated
Amortization
   
Net Carrying
Amount
 
   
(In thousands)
 
Customer and branding contracts/relationships
  $ 156,264     $ (87,783 )   $ 68,481  
Deferred financing costs
    14,535       (8,555 )     5,980  
Exclusive license agreements
    5,545       (3,627 )     1,918  
Non-compete agreements
    509       (212 )     297  
Total
  $ 176,853     $ (100,177 )   $ 76,676  

 (6) Accrued Liabilities

Accrued liabilities consisted of the following:

   
June 30, 2010
   
December 31, 2009
 
   
(In thousands)
 
Accrued merchant commissions
  $ 12,581     $ 11,470  
Accrued interest expense
    10,406       10,406  
Accrued compensation
    4,017       8,470  
Accrued armored fees
    3,265       5,234  
Accrued merchant settlement amounts
    3,203       3,603  
Accrued cash rental and management fees
    2,824       2,866  
Accrued interest rate swap payments
    2,119       1,937  
Accrued maintenance fees
    1,794       4,133  
Accrued ATM telecommunications costs
    1,243       1,169  
Accrued processing costs
    1,084       1,556  
Other accrued expenses
    8,843       6,739  
Total
  $ 51,379     $ 57,583  
 
(7) Long-Term Debt

The Company’s long-term debt consisted of the following:

   
June 30, 2010
   
December 31, 2009
 
   
(In thousands)
 
Senior subordinated notes due August 2013 (net of unamortized discounts of
     $2.4 million and $2.8 million as of June 30, 2010 and December 31, 2009)
  $ 297,567     $ 297,242  
Other
    9,474       9,810  
Total
    307,041       307,052  
Less: current portion
    2,481       2,122  
Total long-term debt, excluding current portion
  $ 304,560     $ 304,930  
 
 
9

 
 
Revolving Credit Facility

As of June 30, 2010 and December 31, 2009, no borrowings were outstanding under the Company’s $175.0 million revolving credit facility.  However, as of June 30, 2010, the Company had a $4.3 million letter of credit posted under the facility to secure borrowings under the Company’s United Kingdom subsidiary’s overdraft facility (discussed below). This letter of credit, which may be drawn upon in the event the Company defaults under the overdraft facility, reduces the Company’s borrowing capacity under its revolving credit facility. As of June 30, 2010, the Company’s available borrowing capacity under the facility, as determined under the earnings before interest expense, income taxes, depreciation and accretion expense, and amortization expense (“EBITDA”) and interest expense covenants contained in the credit agreement, totaled $170.7 million, and the Company was in compliance with all applicable covenants and ratios under the facility.

In July 2010, in conjunction with entering into a new $175.0 million revolving credit facility, the Company terminated its previous $175.0 million credit facility.  Additionally, the Company announced its plans to redeem all $100.0 million of its existing outstanding 9.25% Senior Subordinated Notes – Series B due August 2013 (the “Series B Notes”).  See Note 17, Subsequent Events , for additional details on the new revolving credit facility, the termination of the previous facility, and the Company’s bond redemption plans.

Other Facilities

Cardtronics Mexico equipment financing agreements.   As of June 30, 2010, other long-term debt consisted of 10 separate equipment financing agreements entered into by Cardtronics Mexico. These agreements, each of which had an original term of five-years, are denominated in Mexican pesos and bear interest at an average fixed rate of 10.49%.  Proceeds from these agreements were utilized for the purchase of additional ATMs to support the Company’s Mexico operations. Pursuant to the terms of the equipment financing agreements, the Company has issued guarantees for 51.0% of the obligations under such agreements (consistent with its ownership percentage in Cardtronics Mexico.) As of June 30, 2010, the total amount of the guarantees was $62.0 million pesos (or approximately $4.8 million U.S.).

Bank Machine overdraft facility.   Bank Machine, Ltd., the Company’s wholly-owned subsidiary operating in the United Kingdom, currently has a £1.0 million overdraft facility in place. This facility, which bears interest at 1.75% over the Bank of England’s base rate (0.5% as of June 30, 2010) and is secured by a letter of credit posted under the Company’s corporate revolving credit facility, is utilized for general corporate purposes for the Company’s United Kingdom operations. As of June 30, 2010, no amount was outstanding under this facility.

(8) Asset Retirement Obligations
 
 
Asset retirement obligations consist primarily of costs to deinstall the Company’s ATMs and costs to restore the ATM sites to their original condition. In most cases, the Company is legally required to perform this deinstallation and restoration work. For each group of ATMs, the Company has recognized the fair value of the asset retirement obligation as a liability on its balance sheet and capitalized that cost as part of the cost basis of the related asset. The related assets are being depreciated on a straight-line basis over five years, which is the average time period an ATM is installed in a location before being deinstalled, and the related liabilities are being accreted to their full value over the same period of time.

The following table is a summary of the changes in the Company’s asset retirement obligation liability for the six month period ended June 30, 2010 (in thousands) :

Asset retirement obligation as of January 1, 2010
  $ 24,003  
Additional obligations
    1,967  
Accretion expense
    1,252  
Change in estimate
    61  
Payments
    (1,341 )
Foreign currency translation adjustments
    (601 )
Asset retirement obligation as of June 30, 2010
  $ 25,341  

The change in estimate during the six month period ended June 30, 2010 related to the Company’s most recent evaluation of the useful lives of its various asset classes.  For additional information on this change, see Note 1, General and Basis of Presentation – Property and Equipment, net .  Additionally, see Note 11, Fair Value Measurements for additional disclosures on the Company’s asset retirement obligations in respect to its fair value measurements.
 
 
10

 

(9) Other Liabilities

Other liabilities consisted of the following:

   
June 30, 2010
   
December 31, 2009
 
   
(In thousands)
 
Current Portion of Other Long-Term Liabilities:
           
Interest rate swaps
  $ 22,409     $ 23,423  
Deferred revenue
    2,030       2,464  
Other
    160       160  
Total
  $ 24,599     $ 26,047  
                 
Other Long-Term Liabilities:
               
Interest rate swaps
  $ 24,850     $ 12,656  
Deferred revenue
    1,781       2,393  
Other
    3,016       3,450  
Total
  $ 29,647     $ 18,499  

The increase in the non-current portion of other long-term liabilities was attributable to the Company’s interest rate swaps, the liabilities for which increased as a result of additional swap agreements entered into this quarter.  Also contributing to the increase was a significant flattening of the forward interest rate curve, which was utilized to value the interest rate swap contracts and resulted in an increase in the Company’s estimated future liabilities under such contracts.

(10) Derivative Financial Instruments

Accounting Policy

The Company recognizes all of its derivative instruments as either assets or liabilities in the accompanying Consolidated Balance Sheets at fair value.  The accounting for changes in the fair value (e.g., gains or losses) of those derivative instruments depends on (i) whether these instruments have been designated (and qualify) as part of a hedging relationship and (ii) the type of hedging relationship actually designated. For derivative instruments that are designated and qualify as hedging instruments, the Company designates the hedging instrument, based upon the exposure being hedged, as a cash flow hedge, a fair value hedge, or a hedge of a net investment in a foreign operation.

The Company is exposed to certain risks relating to its ongoing business operations, including interest rate risk associated with its vault cash rental obligations and, to a lesser extent, borrowings under its revolving credit facility, if and when outstanding.  The Company is also exposed to foreign currency rate risk with respect to its investments in its foreign subsidiaries, most notably its investment in Bank Machine, Ltd. in the United Kingdom.  While the Company does not currently utilize derivative instruments to hedge its foreign currency rate risk, it does utilize interest rate swap contracts to manage the interest rate risk associated with its vault cash rental obligations in the United States and the United Kingdom.  The Company does not currently utilize any derivative instruments to manage the interest rate risk associated with its vault cash rental obligations in Mexico, nor does it utilize derivative instruments to manage the interest rate risk associated with borrowings outstanding under its revolving credit facility.
 
 
11

 

The notional amounts, weighted average fixed rates, and terms associated with the Company’s interest rate swap contracts accounted for as cash flow hedges that are currently in place are as follows:

Notional Amounts
United States
   
Notional Amounts
United Kingdom
   
Notional Amounts
Consolidated (1)
   
Weighted Average Fixed Rate
   
Terms  
(In thousands)
           
$ 600,000     £ 75,000     $ 712,585       3.77 %  
July 1, 2010 – December 31, 2010
$ 625,000     £ 75,000     $ 737,585       3.44 %  
January 1, 2011 – December 31, 2011
$ 525,000     £ 50,000     $ 600,057       3.56 %  
January 1, 2012 – December 31, 2012
$ 275,000     £ 25,000     $ 312,528       3.53 %  
January 1, 2013 – December 31, 2013
$ 100,000     £     $ 100,000       3.61 %  
January 1, 2014 – December 31, 2014

(1)
United Kingdom pound sterling amounts have been converted into United States dollars at approximately $1.50 to £1.00, which was the exchange rate in effect as of June 30, 2010.

The Company has designated a majority of its interest rate swap contracts as cash flow hedges of the Company’s forecasted vault cash rental obligations.  Accordingly, changes in the fair values of the related interest rate swap contracts have been reported in accumulated other comprehensive loss in the Consolidated Balance Sheets. As a result of the Company’s overall net loss position for tax purposes, the Company has not recorded any deferred tax benefits on the loss amounts related to these interest rate swap contracts, as management does not currently believe that it is more likely than not that the Company will be able to realize the benefits associated with its net deferred tax asset positions.  However, if the Company continues to generate substantial pre-tax operating profits, as it has during recent periods, its existing and future valuation allowances may no longer be necessary, including those related to the unrealized losses associated with the Company’s interest rate swaps.  Any release of the valuation allowances associated with the Company’s interest rate swap agreements will be accounted for as a reduction of the unrealized loss amounts currently reflected in the accumulated other comprehensive loss line item within stockholders’ deficit in the accompanying Consolidated Balance Sheets.

Cash Flow Hedging Strategy

For each derivative instrument that is designated and qualifies as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income/loss (“OCI”) and reclassified into earnings in the same line item associated with the forecasted transaction and in the same period or periods during which the hedge transaction affects earnings.  Gains and losses on the derivative instrument representing either hedge ineffectiveness or hedge components that are excluded from the assessment of effectiveness are recognized in earnings.  However, because the Company currently only utilizes fixed-for-floating interest rate swaps in which the underlying pricing terms agree, in all material respects, with the pricing terms of the Company’s vault cash rental obligations, the amount of ineffectiveness associated with such interest rate swap contracts has historically been immaterial.  Accordingly, no ineffectiveness amounts associated with the Company’s cash flow hedges have been recorded in the Company’s consolidated financial statements. For derivative instruments not designated as hedging instruments, the gain or loss is recognized in the Consolidated Statements of Operations during the current period.

The interest rate swap contracts entered into with respect to the Company’s vault cash rental obligations effectively modify the Company’s exposure to interest rate risk by converting a portion of the Company’s monthly floating rate vault cash rental obligations to a fixed rate.  Such contracts are in place through December 31, 2014 for the Company’s United States vault cash rental obligations, and December 31, 2013 for the Company’s United Kingdom vault cash rental obligations.  By converting such amounts to a fixed rate, the impact of future interest rate changes (both favorable and unfavorable) on the Company’s monthly vault cash rental expense amounts has been reduced.  The interest rate swap contracts typically involve the receipt of floating rate amounts from the Company’s counterparties that match, in all material respects, the floating rate amounts required to be paid by the Company to its vault cash providers for the portions of the Company’s outstanding vault cash obligations that have been hedged.  In return, the Company typically pays the interest rate swap counterparties a fixed rate amount per month based on the same notional amounts outstanding.  At no point is there an exchange of the underlying principal or notional amounts associated with the interest rate swaps.   Additionally, none of the Company’s existing interest rate swap contracts contain credit-risk-related contingent features.
 
 
12

 

The Company is also a party to certain derivative instruments that were originally, but are no longer, designated as cash flow hedges.  Specifically, during 2009, the Company entered into a number of interest rate swaps to hedge its exposure to changes in market rates of interest on its vault cash rental expense in the United Kingdom.  During the fourth quarter of 2009, the Company’s vault cash provider in that market exercised its rights under the contract to modify the pricing terms and changed the target vault cash rental rate within the agreement.  As a result of this change, the Company was no longer able to apply cash flow hedge accounting treatment to the underlying interest rate swap agreements.  In December 2009, the Company entered into a series of additional trades, the effects of which were to offset the existing swaps and establish new swaps to match the modified underlying vault cash rental rate.  Since the underlying swaps were not deemed to be effective hedges of the Company’s underlying vault cash rental costs, during the three and six months ended June 30, 2010, an unrealized gain and a corresponding realized loss of $0.3 million and $0.5 million, respectively, related to these swaps have been reflected in the other expense (income) line item in the accompanying Consolidated Statements of Operations.
 
Tabular Disclosures

The following tables depict the effects of the use of the Company’s derivative contracts on its Consolidated Balance Sheets and Consolidated Statements of Operations.
 
 
13

 

Balance Sheet Data
   
June 30, 2010
 
December 31, 2009
 
   
Balance Sheet
Location
 
Fair Value
 
Balance Sheet
Location
 
Fair Value
 
Asset Derivative Instruments:
 
(In thousands)
 
                   
Derivatives Designated as Hedging Instruments:
                 
Interest rate swap contracts
 
Prepaid expenses, deferred costs, and other assets
  $  
Prepaid expenses, deferred costs, and other assets
  $ 1,445  
                       
Derivatives Not Designated as Hedging Instruments:
                     
Interest rate swap contracts
 
Prepaid expenses, deferred costs, and other current assets
  $ 807  
Prepaid expenses, deferred costs, and other current assets
  $  
Interest rate swap contracts
 
Prepaid expenses, deferred costs, and other assets
    400  
Prepaid expenses, deferred costs, and other current assets
     
Total
      $ 1,207       $  
                       
Liability Derivative Instruments:
     
       
Derivatives Designated as Hedging Instruments:
     
Interest rate swap contracts
 
Current portion of other long-term liabilities
  $ 20,573  
Current portion of other long-term liabilities
  $ 22,286  
Interest rate swap contracts
 
Other long-term liabilities
    23,527  
Other long-term liabilities
    11,139  
Total
      $ 44,100       $ 33,425  
                       
Derivatives Not Designated as Hedging Instruments:
                     
Interest rate swap contracts
 
Current portion of other long-term liabilities
  $ 1,836  
Current portion of other long-term liabilities
  $ 1,137  
Interest rate swap contracts
 
Other long-term liabilities
    1,323  
Other long-term liabilities
    1,517  
Total
      $ 3,159       $ 2,654  
                       
Total Derivatives:
      $ 46,052       $ 34,634  

The Asset Derivative Instruments reflected in the table above relate to the current portion of certain derivative instruments that were in an overall liability position, for which the non-current portion is reflected in the Liability Derivative Instruments portion above.
 
 
14

 

Statements of Operations Data

   
Three Months Ended June 30,
 
Derivatives in Cash Flow
Hedging Relationships  
 
Amount of Loss Recognized
in OCI on Derivative
Instruments (Effective
Portion)
 
Location of Gain
(Loss) Reclassified
from Accumulated
OCI into Income
(Effective Portion)  
 
Amount of Loss Reclassified
from Accumulated OCI
into Income
(Effective Portion)
 
 
2010
   
2009
   
2010
   
2009
 
   
(In thousands)
     
(In thousands)
 
Interest rate swap contracts
  $ (14,359 )   $ (5,248 )
Cost of ATM
operating revenues
  $ (6,339 )   $ (5,591 )

   
Six Months Ended June 30,
 
Derivatives in Cash Flow
Hedging Relationships  
 
Amount of Loss Recognized
in OCI on Derivative
Instruments (Effective
Portion)
 
Location of Gain
(Loss) Reclassified
from Accumulated
OCI into Income
(Effective Portion)  
 
Amount of Loss Reclassified
from Accumulated OCI
into Income
(Effective Portion)
 
 
2010
   
2009
   
2010
   
2009
 
   
(In thousands)
     
(In thousands)
 
Interest rate swap contracts
  $ (24,506 )   $ (9,502 )
Cost of ATM
operating revenues
  $ (12,786 )   $ (11,038 )


       
Three Months Ended June 30,
 
Derivatives Not
Designated as Hedging
Instruments  
 
Location of Loss Recognized
into Income on Derivative  
 
Amount of Loss Recognized
into Income on Derivative
 
 
2010
   
2009
 
     
(In thousands)
 
Interest rate swap contracts
 
Other expense (income)
  $ (309 )   $  

       
Six Months Ended June 30,
 
Derivatives Not
Designated as Hedging
Instruments  
 
Location of Loss Recognized
into Income on Derivative  
 
Amount of Loss Recognized
into Income on Derivative
 
 
2010
   
2009
 
     
(In thousands)
 
Interest rate swap contracts
 
Other expense (income)
  $ (650 )   $  

The Company does not currently have any derivative instruments that have been designated as fair value or net investment hedges.  The Company has not historically, and does not currently anticipate, discontinuing its existing derivative instruments prior to their expiration date.  If the Company concludes that it is no longer probable that the anticipated future vault cash rental obligations that have been hedged will occur, or if changes are made to the underlying terms and conditions of the Company’s vault cash rental agreements, thus creating some amount of ineffectiveness associated with the Company’s current interest rate swap contracts, as occurred during the fourth quarter of 2009, any resulting gains or losses will be recognized within the Other expense (income) line item of the Company’s Consolidated Statements of Operations.

As of June 30, 2010, the Company expects to reclassify $21.2 million of net derivative-related losses contained within accumulated OCI to earnings during the next twelve months concurrent with the recording of the related vault cash rental expense amounts.

See Note 11, Fair Value Measurements for additional disclosures on the Company’s interest rate swap contracts in respect to its fair value measurements.

(11) Fair Value Measurements

The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value. Level 1 refers to fair values determined based on quoted prices in active markets for identical assets. Level 2 refers to fair values estimated using significant other observable inputs, and Level 3 includes fair values estimated using significant non-observable inputs. An asset’s or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
 
 
15

 
 
The following tables provide the assets and liabilities carried at fair value measured on a recurring basis using the fair value hierarchy prescribed by U.S. GAAP.

   
Fair Value Measurements at June 30, 2010
 
   
Total
   
Level 1
   
Level 2
   
Level 3
 
Assets:
 
(In thousands)
 
Assets associated with interest rate swaps
  $ 1,207     $     $ 1,207     $  
                                 
Liabilities:
                               
Liabilities associated with interest rate swaps
  $ 47,259     $     $ 47,259     $  

   
Fair Value Measurements at December 31, 2009
 
   
Total
   
Level 1
   
Level 2
   
Level 3
 
Assets:
 
(In thousands)
 
Assets associated with interest rate swaps
  $ 1,445     $     $ 1,445     $  
                                 
Liabilities:
                               
Liabilities associated with interest rate swaps
  $ 36,079     $     $ 36,079     $  

Liabilities added to the asset retirement obligations line in the Company’s Consolidated Balance Sheets are measured at fair value on a non-recurring basis using Level 3 inputs.  The liabilities added during the six month periods ended June 30, 2010 and 2009 were $2.0 million and $1.5 million, respectively.

Additionally, below are descriptions of the Company’s valuation methodologies for assets and liabilities measured at fair value.  The methods described below may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

Cash and cash equivalents, accounts and notes receivable, net of the allowance for doubtful accounts, other current assets, accounts payable, accrued expenses, and other current liabilities. These financial instruments are not carried at fair value, but are carried at amounts that approximate fair value due to their short-term nature and generally negligible credit risk.

Interest rate swaps. The fair value of the Company’s interest rate swaps was a net liability of $46.1 million as of June 30, 2010.  These financial instruments are carried at fair value, calculated as the present value of amounts estimated to be received or paid to a marketplace participant in a selling transaction. These derivatives are valued using pricing models based on significant other observable inputs (Level 2 inputs), while taking into account the creditworthiness of the party that is in the liability position with respect to each trade.

Additions to asset retirement obligation liability.   The Company estimates the fair value of additions to its asset retirement obligation liability using expected future cash outflows discounted at the Company’s credit-adjusted risk-free interest rate.

Long-term debt.   The carrying amount of the long-term debt balance related to borrowings under the Company’s revolving credit facility, if and when there is an amount outstanding, approximates fair value due to the fact that any borrowings are subject to short-term floating market interest rates.  As of June 30, 2010, the fair value of the Company’s $300.0 million senior subordinated notes (see Note 7, Long-Term Debt ) totaled $303.0 million, based on the quoted market price for such notes as of that date.
 
 
16

 

(12) Commitments and Contingencies

Legal Matters

In June 2004, the Company acquired from E*Trade Access, Inc. (“E*Trade”) a portfolio of several thousand ATMs.  In connection with that acquisition, the Company assumed E*Trade’s position in a lawsuit in the United States District Court for the District of Massachusetts (the “Court”) wherein the Commonwealth of Massachusetts (the “Commonwealth”) and the National Federation of the Blind (the “NFB”) had sued E*Trade alleging that E*Trade had the obligation to make its ATMs accessible to blind patrons via voice guidance.  In June 2007, the Company, the Commonwealth, and the NFB entered into a class action settlement agreement (the “June 2007 Settlement Agreement”) regarding this matter.  The Court approved the Settlement Agreement in December 2007. In 2009, the Company requested a modification to the Settlement Agreement so as to permit it to complete the upgrading or replacement of approximately 2,200 non-voice-guided ATMs by June 30, 2010, with respect to that portion of the non-voice-guided ATMs located in the Commonwealth, and by December 31, 2010, with respect to that portion of the non-voice-guided ATMs located in other states.  The Commonwealth, the NFB, and the Company have reached an agreement on a proposed modification to the Settlement Agreement and have submitted a joint motion to the Court requesting its approval.  The material terms of the proposed modification include that the Company must: (i) ensure all Company-owned ATMs in the state of Massachusetts are voice-guided no later than June 30, 2010, which the Company has accomplished; (ii) ensure all of its Company-owned ATMs located anywhere but in 7-Eleven locations are voice-guided by December 31, 2010; (iii) ensure all of its ATMs located in 7-Eleven locations are voice-guided by March 31, 2011; (iv) affix Braille signage on all Company-owned ATMs; (v) distribute Braille signage to non-Company-owned voice-guided ATMs in its portfolio that have not previously been provided such signage by the Company;  (vi) keep the Company’s internet-based ATM Locator updated as to the location of the Company’s voice-guided ATMs; and (vii) ensure that all voice-guided ATMs in its portfolio have tactilely discernable controls, a headphone jack, and a voice script that enables the consumer to complete an ATM transaction.  Currently, the Company expects the proposed modification to the Settlement Agreement to be approved by both the class of plaintiffs indentified in the lawsuit and the Court within the next 120 days.  As the proposed settlement modification does not impact the Company’s obligations under the June 2007 Settlement Agreement but rather only the timing of fulfilling its obligations, the Company does not believe that the proposed settlement modification, if approved, will have a material impact on its financial condition or results of operations.

In addition to the above item, the Company is subject to various legal proceedings and claims arising in the ordinary course of its business. The Company has provided reserves where necessary for all claims and the Company’s management does not expect the outcome in any of these legal proceedings, individually or collectively, to have a material adverse impact on the Company’s financial condition or results of operations.

Regulatory Matters

Financial Regulatory Reform in the United States.   The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”), which contains broad measures aimed at overhauling existing financial regulations within the United States, was signed into law on July 21, 2010.  Among many other things, the Act includes provisions that (i) call for the establishment of a new Bureau of Consumer Financial Protection, (ii) limit the activities that banking entities may engage in, and (iii) give the Federal Reserve the authority to regulate interchange transaction fees charged by electronic funds transfer networks for electronic debit transactions.  Many of the detailed regulations required under the Act have yet to be finalized and will likely not be finalized for some time.  Accordingly, at this point, the Company does not believe that the regulations that are likely to arise from the Act will have a material impact on the Company’s operations.  However, based on the current language contained within the Act, it is uncertain whether the regulation of interchange fees for electronic debit transactions will apply to ATM cash withdrawal transactions.  If ATM cash withdrawal transactions were to fall under the proposed regulatory framework, and the related interchange fees were reduced from their current levels, such change would likely have a negative impact on the Company’s future revenues and operating profits.  Conversely, additional proposed regulations contained within the Act are aimed at providing merchants with additional flexibility in terms of allowing certain point-of-sale transactions to be paid for in cash rather than with debit or credit cards.  Such a change could result in the increased use of cash at the point-of-sale for some merchants, and thus, could positively impact the Company’s future revenues and operating profits (through increased transaction levels at the Company’s ATMs).
 
 
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Change in Mexico Fee Structure.   In October 2009, the Central Bank of Mexico adopted new rules regarding how ATM operators disclose and levy fees to consumers who use their ATMs.  These rules, which became effective in May 2010, require ATM operators to elect between receiving an interchange fee from the consumer’s card issuer or a surcharge fee from the consumer.  The Company’s majority-owned subsidiary, Cardtronics Mexico, elected to assess a surcharge fee on the consumer rather than select the interchange fee-only option, and subsequently raised the level of its surcharge fees in order to recoup the interchange fees it is no longer receiving.  Because these changes were just recently enacted, the Company cannot be certain what impact such fee changes will have on the long-term withdrawal transaction levels in that market.  However, based on very early indications, withdrawal transaction levels in Mexico have declined by amounts greater than those originally anticipated.  If such initial transaction declines continue or worsen from their current levels, the additional surcharge fee amounts may not be sufficient to offset the lost interchange revenues, resulting in lower revenues and profitability per ATM in that market.

As a result of the above developments, the Company has decided to reduce the number of planned ATM deployments in Mexico for the remainder of 2010 in order to gauge the impact of the above rules on its ATM transaction levels and related profits.  If transaction levels continue to worsen, and if the Company is unsuccessful in its efforts to implement certain measures to mitigate the effects of such transaction declines, the Company’s overall profitability in that market will decline.  If such declines are significant, the Company may be required to record an impairment charge in future periods to write-down the carrying value of certain existing tangible and intangible assets associated with that operation.

Other Commitments

Asset Retirement Obligations. The Company’s asset retirement obligations consist primarily of deinstallation costs of the ATM and costs to restore the ATM site to its original condition. In most cases, the Company is legally required to perform this deinstallation and restoration work. The Company had $25.3 million accrued for these liabilities as of June 30, 2010.  For additional information, see Note 8, Asset Retirement Obligations .

Other Contingencies

On or about February 8, 2010, the United States government arrested on a charge of conspiring to commit bank fraud the President and principal owner of Mount Vernon Money Center (“MVMC”), one of the Company’s third-party armored service providers in the Northeast United States.  On or about February 12, 2010, United States’ law enforcement personnel seized all vault cash in the possession of MVMC, and the U.S. District Court for the Southern District of New York (the “SDNY”) appointed a receiver (the “Receiver”) to, among other things, immediately take possession and control of all the assets and property of MVMC and affiliated entities.  As a result of these events, by on or about February 12, 2010, MVMC ceased substantially all of its operations.  Accordingly, the Company was required to convert over 1,000 ATMs that were being serviced by MVMC to another third-party armored service provider, resulting in a minor amount of downtime being experienced by those ATMs.  Further, based upon a federal indictment in the SDNY of MVMC’s President and of its Chief Operating Officer (the “Indictment”), it appears that all or some of the cash which was delivered to MVMC’s vaults for the sole purpose of loading such cash into the Company’s ATMs was misappropriated by MVMC.  The Company estimates that, immediately prior to the cessation of MVMC’s operations, the amount of vault cash that MVMC should have been holding for loading into the Company’s ATMs totaled approximately $16.2 million.

The Indictment alleges that the defendants defrauded multiple financial institutions and seeks the forfeiture to the United States government from the defendants in an amount of at least $75 million.  If the defendants are convicted and forfeiture directed, it is the belief of the Company that it is highly likely that the U.S. government will distribute forfeited assets it obtains to the victims. The Company intends to seek recovery from such forfeited assets.  Additionally, on May 27, 2010, MVMC, under the control of the Receiver, filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code.  Accordingly, at this point, it is uncertain what amount, if any, may ultimately be made available to the Company from the vault cash seized by law enforcement authorities, other assets that may be forfeited to the United States government, other assets controlled by the Receiver or in the MVMC bankruptcy estate, or from other potential sources of recovery, including proceeds from any insurance policies held by MVMC and/or its owner.  Regardless, the Company currently believes that its existing insurance policies will cover any residual cash losses resulting from this incident, less related deductible payments.  Because the Company cannot reasonably estimate the amount of residual cash losses that may ultimately result from this incident at this point in time, no contingent loss has been reflected in the accompanying Consolidated Statements of Operations.  If new information comes to light and the recovery of any resulting cash losses is no longer deemed to be probable, the Company may be required to recognize such losses without a corresponding insurance receivable.
 
 
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(13) Income Taxes

Income tax expense based on the Company’s income (loss) before income taxes was as follows:

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
   
(In thousands)
 
Income tax expense
  $ 1,952     $ 1,016     $ 3,391     $ 2,033  
Effective tax rate
    19.1 %     28.1 %     21.4 %     (502.0 )%

The Company has established valuation allowances for its net deferred tax asset positions in all of its jurisdictions as it currently believes it is more likely than not that such benefits will not be realized.  In addition, during each of the three and six month periods ended June 30, 2010, the Company increased its domestic valuation allowance by approximately $0.9 million and $1.8 million, respectively; and during each of the three and six month periods ended June 30, 2009, the Company increased its domestic valuation allowance by approximately $0.9 million and $1.9 million, respectively.  The recording of such valuation allowances, along with current state income tax amounts, resulted in the negative effective tax rate reflected above for the six month period ended June 30, 2009.

Although the Company continued to establish valuation allowances in all of its operating segments during the three and six month periods ended June 30, 2010, if the Company continues to generate substantial pre-tax operating profits, as it has during recent periods, its existing and future valuation allowances may no longer be necessary.  It should also be noted that as of December 31, 2009, the Company had approximately $38.0 million in federal net operating loss carryforwards that can be utilized to reduce the Company’s taxable income in future periods, subject to certain restrictions and limitations.  The anticipated utilization of a portion of such carryforwards has been factored into the income tax provision estimate reflected above for the three and six month periods ended June 30, 2010.

(14) Segment Information

As of June 30, 2010, the Company’s operations consisted of its United States, United Kingdom, and Mexico segments.  The Company’s operations in Puerto Rico and the U.S. Virgin Islands are included in its United States segment. While each of these reporting segments provides similar kiosk-based and/or ATM-related services, each segment is currently managed separately as they require different marketing and business strategies.

Management uses EBITDA to assess the operating results and effectiveness of its segments.  Management believes EBITDA is useful because it allows them to more effectively evaluate the Company’s operating performance and compare the results of its operations from period to period without regard to its financing methods or capital structure. Additionally, the Company excludes depreciation, accretion, and amortization expense as these amounts can vary substantially from company to company within its industry depending upon accounting methods and book values of assets, capital structures and the method by which the assets were acquired. EBITDA, as defined by the Company, may not be comparable to similarly titled measures employed by other companies and is not a measure of performance calculated in accordance with U.S. GAAP.  In evaluating the Company’s performance as measured by EBITDA, management recognizes and considers the limitations of this measurement.  EBITDA does not reflect the Company’s obligations for the payment of income taxes, interest expense or other obligations such as capital expenditures. Accordingly, EBITDA is only one of the measurements that management utilizes.  Therefore, EBITDA should not be considered in isolation or as a substitute for operating income, net income, cash flows from operating, investing, and financing activities or other income or cash flow statement data prepared in accordance with U.S. GAAP.
 
 
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Below is a reconciliation of EBITDA to net income (loss) attributable to controlling interests:

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
   
(In thousands)
 
EBITDA
  $ 32,140     $ 26,190     $ 59,693     $ 44,584  
Depreciation and accretion expense
    10,264       9,935       20,486       19,574  
Amortization expense
    3,765       4,504       7,744       9,031  
Interest expense, net, including amortization of deferred
     financing costs and bond discounts
    7,956       8,247       15,904       16,526  
Income tax expense
    1,952       1,016       3,391       2,033  
Net income (loss) attributable to controlling interests
  $ 8,203     $ 2,488     $ 12,168     $ (2,580 )

The following tables reflect certain financial information for each of the Company’s reporting segments for the three and six month periods ended June 30, 2010 and 2009.  All intercompany transactions between the Company’s reporting segments have been eliminated.
 
 
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For the Three Month Period Ended June 30, 2010
 
   
U.S.
   
U.K.
   
Mexico
   
Eliminations
   
Total
 
   
(In thousands)
 
Revenue from external customers
  $ 105,651     $ 20,343     $ 6,954     $     $ 132,948  
Intersegment revenues                                                    
    775                   (775 )      
Cost of revenues                                                    
    70,045       14,901       5,557       (775 )     89,728  
Selling, general, and administrative expenses
    8,648       1,207       417             10,272  
Loss on disposal of assets                                                    
    634       461                   1,095  
                                         
EBITDA                                                    
    27,475       3,750       960       (45 )     32,140  
                                         
Depreciation and accretion expense
    6,714       2,943       612       (5 )     10,264  
Amortization expense                                                    
    3,336       424       5             3,765  
Interest expense, net                                                    
    6,900       805       251             7,956  
                                         
Capital expenditures (1)                                                     
  $ 8,507     $ 2,308     $ 2,134     $     $ 12,949  

   
For the Three Month Period Ended June 30, 2009
 
   
U.S.
   
U.K.
   
Mexico
   
Eliminations
   
Total
 
   
(In thousands)
 
Revenue from external customers
  $ 102,270     $ 18,031     $ 4,347     $