Cardtronics, plc.
CARDTRONICS INC (Form: 10-Q, Received: 11/05/2010 18:04:27)


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 September 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 November 3, 2010: 42,251,255
 
 

 

CARDTRONICS, INC.

TABLE OF CONTENTS

 
 
Page  
 
PART I.  FINANCIAL INFORMATION
     
Item 1.
Financial Statements (unaudited)
3
     
 
Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009
3
     
 
Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2010 and 2009
4
     
 
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2009
5
     
 
Notes to Consolidated Financial Statements
6
   
Cautionary Statement Regarding Forward-Looking Statements
30
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
31
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
47
     
Item 4.
Controls and Procedures
50
     
PART II. OTHER INFORMATION
     
Item 1.
Legal Proceedings
51
     
Item 1A.
Risk Factors
51
     
Item 6.
Exhibits
53
     
 
Signatures
54


When we refer to “us,” “we,” “our,” “ours” or “the Company,” we are describing Cardtronics, Inc. and/or our subsidiaries.
 
 
2

 
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CARDTRONICS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, excluding share and per share amounts)

 
 
September 30, 2010
   
December 31, 2009
 
   
( Unaudited )
       
ASSETS
 
Current assets:
           
Cash and cash equivalents
  $ 2,623     $ 10,449  
Accounts and notes receivable, net of allowance of $241 and $560 as of September 30, 2010 and December 31, 2009, respectively
    23,254       27,700  
Inventory
    2,170       2,617  
Restricted cash, short-term
    3,091       3,452  
Current portion of deferred tax asset, net
    1,682        
Prepaid expenses, deferred costs, and other current assets
    9,569       8,850  
Total current assets
    42,389       53,068  
Property and equipment, net
    157,077       147,348  
Intangible assets, net
    78,856       89,036  
Goodwill
    164,858       165,166  
Deferred tax asset, net
    9,270        
Prepaid expenses, deferred costs, and other assets
    4,459       5,786  
Total assets
  $ 456,909     $ 460,404  
   
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
 
Current liabilities:
               
Current portion of long-term debt and notes payable
  $ 2,829     $ 2,122  
Capital lease obligations
          235  
Current portion of other long-term liabilities
    25,374       26,047  
Accounts payable
    19,218       12,904  
Accrued liabilities
    46,046       57,583  
Current portion of deferred tax liability, net
    80       3,121  
Total current liabilities
    93,547       102,012  
Long-term liabilities:
               
Long-term debt, net of related discounts
    279,362       304,930  
Deferred tax liability, net
    30       12,250  
Asset retirement obligations
    25,682       24,003  
Other long-term liabilities
    33,080       18,499  
Total liabilities
    431,701       461,694  
                 
Commitments and contingencies
               
                 
Stockholders’ equity (deficit):
               
Common stock, $0.0001 par value; 125,000,000 shares authorized; 47,643,240 and 46,238,028 shares issued as of September 30, 2010 and December 31, 2009, respectively; 42,119,444 and 40,900,532 shares outstanding as of September 30, 2010 and December 31, 2009, respectively
    4       4  
Additional paid-in capital
    206,730       200,323  
Accumulated other comprehensive loss, net
    (69,068 )     (57,618 )
Accumulated deficit
    (63,991 )     (96,922 )
Treasury stock; 5,523,796 and 5,337,496 shares at cost as of September 30, 2010 and December 31, 2009, respectively
    (50,342 )     (48,679 )
Total parent stockholders’ equity (deficit)
    23,333       (2,892 )
Noncontrolling interests
    1,875       1,602  
Total stockholders’ equity (deficit)
    25,208       (1,290 )
Total liabilities and stockholders’ equity (deficit)
  $ 456,909     $ 460,404  
 
See accompanying notes to consolidated financial statements.

 
3

 

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

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
 
 
2010
   
2009
   
2010
   
2009
 
Revenues:
                       
ATM operating revenues
  $ 134,090     $ 126,194     $ 390,337     $ 361,136  
ATM product sales and other revenues
    2,515       2,409       6,992       7,460  
Total revenues
    136,605       128,603       397,329       368,596  
Cost of revenues:
                               
Cost of ATM operating revenues (exclusive of depreciation, accretion, and amortization shown separately below.  See Note 1 )
    89,026       85,083       262,319       251,287  
Cost of ATM product sales and other revenues
    2,425       2,678       6,932       7,645  
Total cost of revenues
    91,451       87,761       269,251       258,932  
Gross profit
    45,154       40,842       128,078       109,664  
Operating expenses:
                               
Selling, general, and administrative expenses
    11,519       9,210       32,934       30,649  
Depreciation and accretion expense
    10,865       9,986       31,351       29,560  
Amortization expense
    3,823       4,405       11,567       13,436  
Loss on disposal of assets
    368       1,047       1,840       4,831  
Total operating expenses
    26,575       24,648       77,692       78,476  
Income from operations
    18,579       16,194       50,386       31,188  
Other expense:
                               
Interest expense, net
    7,064       7,473       21,696       22,828  
Amortization of deferred financing costs and bond discounts
    546       606       1,818       1,777  
Write-off of deferred financing costs and bond discounts
    7,296             7,296        
Redemption costs for early extinguishment of debt
    7,193             7,193        
Other (income) expense
    (207 )     339       (173 )     (788 )
Total other expense
    21,892       8,418       37,830       23,817  
(Loss) income before income taxes
    (3,313 )     7,776       12,556       7,371  
Income tax (benefit) expense
    (23,968 )     1,251       (20,577 )     3,284  
Net income
    20,655       6,525       33,133       4,087  
Net (loss) income attributable to noncontrolling interests
    (108 )     127       202       269  
Net income attributable to controlling interests and available to common stockholders
  $ 20,763     $ 6,398     $ 32,931     $ 3,818  
                                 
Net income per common share – basic
  $ 0.49     $ 0.16     $ 0.79     $ 0.09  
Net income per common share – diluted
  $ 0.49     $ 0.15     $ 0.78     $ 0.09  
                                 
Weighted average shares outstanding – basic
    40,529,280       39,356,013       40,119,310       39,123,738  
Weighted average shares outstanding – diluted
    41,207,238       40,117,598       40,790,504       39,768,708  
 
See accompanying notes to consolidated financial statements.

 
4

 

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

   
Nine Months Ended September 30,
 
   
2010
   
2009
 
Cash flows from operating activities:
           
Net income
  $ 33,133     $ 4,087  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation, accretion, and amortization expense
    42,918       42,996  
Amortization of deferred financing costs and bond discounts
    1,818       1,777  
Write-off of deferred financing costs and bond discounts
    7,296        
Redemption costs for early extinguishment of debt
    7,193        
Stock-based compensation expense
    4,603       3,376  
Deferred income taxes
    (21,371 )     2,836  
Loss on disposal of assets
    1,840       4,831  
Unrealized gain on derivative instruments
    (744 )      
Amortization of accumulated other comprehensive losses associated with derivative instruments no longer designated as hedging instruments
    1,316        
Other reserves and non-cash items
    1,251       (3,241 )
Changes in assets and liabilities:
               
Decrease in accounts and notes receivable, net
    4,430       83  
(Increase) decrease in prepaid, deferred costs, and other current assets
    (1,107 )     4,286  
Decrease (increase) in inventory
    307       (109 )
Decrease in other assets
    1,582       1,406  
Increase (decrease) in accounts payable
    5,427       (4,063 )
Decrease in accrued liabilities
    (12,641 )     (6,806 )
Decrease in other liabilities
    (4,258 )     (3,575 )
Net cash provided by operating activities
    72,993       47,884  
                 
Cash flows from investing activities:
               
Additions to property and equipment
    (37,410 )     (18,953 )
Payments for exclusive license agreements, site acquisition costs and other intangible assets
    (2,549 )     (121 )
Net cash used in investing activities
    (39,959 )     (19,074 )
                 
Cash flows from financing activities:
               
Proceeds from issuance of long-term debt
    345,000       47,312  
Repayments of long-term debt and capital leases
    (381,013 )     (74,092 )
Repayments of borrowings under bank overdraft facility, net
    (47 )     (142 )
Debt issuance and modification costs
    (5,227 )     (458 )
Payments received on subscriptions receivable
          34  
Proceeds from exercises of stock options
    1,802       1,219  
Repurchase of capital stock
    (1,663 )     (439 )
Net cash used in financing activities
    (41,148 )     (26,566 )
                 
Effect of exchange rate changes on cash
    288       473  
Net (decrease) increase in cash and cash equivalents
    (7,826 )     2,717  
                 
Cash and cash equivalents as of beginning of period
    10,449       3,424  
Cash and cash equivalents as of end of period
  $ 2,623     $ 6,141  
                 
Supplemental disclosure of cash flow information:
               
Cash paid for interest, including interest on capital leases
  $ 30,336     $ 30,073  
Cash paid for income taxes
  $ 831     $ 285  
Fixed assets financed by direct debt
  $ 542     $ 443  
 
See accompanying notes to consolidated financial statements.

 
5

 

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 September 30, 2010, the Company provided services to over 36,400 devices across its portfolio, which included approximately 30,600 devices located in all 50 states of the United States (“U.S.”) as well as in the U.S. territories of Puerto Rico and the U.S. Virgin Islands, approximately 2,900 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.  Also included within this number are approximately 2,900 devices for which the Company provides various forms of managed services solutions, which may include services such as transaction processing, monitoring, maintenance, cash management, and customer service.

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 40,000 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 and other ATMs under managed services arrangements.

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 September 30, 2010 and for the three and nine month periods ended September 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 nine month periods ended September 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 or stockholders’ equity (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 interests not held by the Company being reflected as noncontrolling interests.

 
6

 
 
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 September 30,
   
Nine Months Ended September 30,
 
 
 
2010
   
2009
   
2010
   
2009
 
   
(In thousands)
 
Depreciation and accretion expense related to ATMs and ATM-related assets
  $ 9,208     $ 8,289     $ 25,844     $ 24,562  
Amortization expense
    3,823       4,405       11,567       13,436  
Total depreciation, accretion, and amortization expense excluded from Cost of ATM operating revenues and Gross profit
  $ 13,031     $ 12,694     $ 37,411     $ 37,998  

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 but 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 September 30,
   
Nine Months Ended September 30,
 
 
 
2010
   
2009
   
2010
   
2009
 
   
(In thousands)
 
Cost of ATM operating revenues
  $ 226     $ 207     $ 594     $ 590  
Selling, general, and administrative expenses
    1,481       1,050       4,009       2,786  
Total stock-based compensation expense
  $ 1,707     $ 1,257     $ 4,603     $ 3,376  

The increase in stock-based compensation expense during the three and nine month periods ended September 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”).

 
7

 
 
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 an increase 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, of which 2,398,316 shares had been granted as of September 30, 2010.  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.

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 September 30, 2010, and changes during the nine month period ended September 30, 2010, are presented below:

   
Number
of Shares
   
Weighted Average
Exercise Price
 
Options outstanding as of January 1, 2010
    3,803,771     $ 8.34  
Granted
    23,000     $ 10.95  
Exercised
    (667,772 )   $ 2.70  
Forfeited
    (52,500 )   $ 7.73  
Options outstanding as of September 30, 2010
    3,106,499     $ 9.58  
                 
Options vested and exercisable as of September 30, 2010
    2,740,070     $ 9.58  

The options granted during the nine month period ended September 30, 2010 had a total grant-date fair value of approximately $126,500, or $5.50 per share.  As of September 30, 2010, the unrecognized compensation expense associated with outstanding options was approximately $0.9 million.

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

   
Number
of Shares
 
Restricted shares outstanding as of January 1, 2010
    1,114,437  
Granted
    737,440  
Vested
    (354,437 )
Forfeited
    (48,750 )
Restricted shares outstanding as of September 30, 2010
    1,448,690  

The restricted shares granted during the nine month period ended September 30, 2010 had a total grant-date fair value of approximately $8.1 million, or $10.92 per share.  As of September 30, 2010, the unrecognized compensation expense associated with restricted share grants was approximately $11.1 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 impacts to the statements of operations) when their impact on net income (loss) available to common stockholders is anti-dilutive. Potentially dilutive securities for the three and nine month periods ended September 30, 2009 and 2010 included all outstanding stock options and shares of restricted stock, which were included in the calculation of diluted earnings per share 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 nine month periods ended September 30, 2009 and 2010 among the Company’s outstanding shares of common stock and issued but unvested restricted shares, as follows:

 
8

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

   
Three Months Ended September 30, 2010
   
Nine Months Ended September 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
  $ 20,763                 $ 32,931              
Less: undistributed earnings allocated to unvested restricted shares
    (723 )                 (1,281 )            
Net income available to common stockholders
  $ 20,040       40,529,280     $ 0.49     $ 31,650       40,119,310     $ 0.79  
                                                 
Diluted:
                                               
Effect of dilutive securities:
                                               
Add: Undistributed earnings allocated to restricted shares
  $ 723                     $ 1,281                  
Stock options added to the denominator under the treasury stock method
            677,958                       671,194          
Less: Undistributed earnings reallocated to restricted shares
    (712 )                     (1,261 )                
Net income available to common stockholders and assumed conversions
  $ 20,051       41,207,238     $ 0.49     $ 31,670       40,790,504     $ 0.78  

   
Three Months Ended September 30, 2009
   
Nine Months Ended September 30, 2009
 
   
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
  $ 6,398                 $ 3,818              
Less: undistributed earnings allocated to unvested restricted shares
    (191 )                 (133 )            
Net income available to common stockholders
  $ 6,207       39,356,013     $ 0.16     $ 3,685       39,123,738     $ 0.09  
                                                 
Diluted:
                                               
Effect of dilutive securities:
                                               
Add: Undistributed earnings allocated to restricted shares
  $ 191                     $ 133                  
Stock options added to the denominator under the treasury stock method
            761,585                       644,970          
Less: Undistributed earnings reallocated to restricted shares
    (187 )                     (131 )                
Net income available to common stockholders and assumed conversions
  $ 6,211       40,117,598     $ 0.15     $ 3,687       39,768,708     $ 0.09  

The computation of diluted earnings per share excluded potentially dilutive common shares related to restricted stock of 395,985 and 427,695 shares for the three and nine month periods ended September 30, 2010, respectively, and 83,416 and 15,339 shares for the three and nine month periods ended September 30, 2009, respectively, because the effect of including these shares in the computation would have been anti-dilutive.

 
9

 
 
(4) Comprehensive Income (Loss)

Total comprehensive income (loss) consisted of the following:

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2010
   
2009
   
2010
   
2009
 
   
(In thousands)
 
Net income
  $ 20,655     $ 6,525     $ 33,133     $ 4,087  
Unrealized gains (losses) on interest rate swap contracts, net
    805       (5,287 )     (10,296 )     (3,751 )
Foreign currency translation adjustments
    2,668       (1,682 )     (1,154 )     7,015  
Total comprehensive income (loss)
    24,128       (444 )     21,683       7,351  
Less: comprehensive (loss) income attributable to noncontrolling interests
    (56 )     104       273       275  
Comprehensive income (loss) attributable to controlling interests
  $ 24,184     $ (548 )   $ 21,410     $ 7,076  

Accumulated other comprehensive loss, net is displayed as a separate component of stockholders’ equity (deficit) in the accompanying Consolidated Balance Sheets and consisted of the following:

   
September 30, 2010
   
December 31, 2009
 
   
(In thousands)
 
Foreign currency translation adjustments
  $ (25,574 )   $ (24,420 )
Unrealized losses on interest rate swap contracts, net of income taxes of $4.8 million as of September 30, 2010
    (43,494 )     (33,198 )
Total accumulated other comprehensive loss, net
  $ (69,068 )   $ (57,618 )

During the third quarter of 2010, the Company determined that it was more likely than not that it would be able to realize the benefits associated with its net deferred tax asset positions in the future.  Consequently, $23.7 million of previously-recognized valuation allowances related to its United States segment were released during the quarter, of which $12.6 million related to the deferred tax benefits on the unrealized loss amounts associated with its interest rate swaps in the United States.  Although the valuation allowances associated with the Company’s interest rate swap contracts were initially established by a charge against other comprehensive income, in accordance with U.S. GAAP, the release of the beginning of the year valuation allowance amount has been reflected as an income tax benefit within the accompanying Consolidated Statements of Operations.  As a result, the Company now records the unrealized loss amounts related to its domestic interest rate swaps net of estimated taxes in the Accumulated other comprehensive loss, net line item within Stockholders’ equity (deficit) in the accompanying Consolidated Balance Sheets.

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 is not expected to be repaid in the foreseeable future.  Accordingly, no deferred taxes have been provided for the differences between the Company’s book basis and underlying tax basis in those subsidiaries or on the foreign currency translation adjustment amounts.

 (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 September 30, 2010, as well as the changes in the net carrying amounts for the nine month period ended September 30, 2010, by segment:
 
 
10

 

   
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
          (302 )     (6 )           (69 )     (377 )
                                                 
Balance as of September 30, 2010:
                                               
Gross balance
  $ 150,461     $ 63,692     $ 708     $ 200     $ 3,174     $ 218,235  
Accumulated impairment loss
          (50,003 )                       (50,003 )
    $ 150,461     $ 13,689     $ 708     $ 200     $ 3,174     $ 168,232  

Intangible Assets with Definite Lives

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

   
Gross Carrying
Amount
   
Accumulated
Amortization
   
Net Carrying
Amount
 
   
(In thousands)
 
Customer and branding contracts/relationships
  $ 158,764     $ (91,825 )   $ 66,939  
Deferred financing costs
    8,318       (2,274 )     6,044  
Exclusive license agreements
    6,057       (3,837 )     2,220  
Non-compete agreements
    511       (232 )     279  
Total
  $ 173,650     $ (98,168 )   $ 75,482  

 (6) Accrued Liabilities

Accrued liabilities consisted of the following:

   
September 30, 2010
   
December 31, 2009
 
   
(In thousands)
 
Accrued merchant commissions
  $ 12,580     $ 11,470  
Accrued compensation
    6,081       8,470  
Accrued armored fees
    5,157       5,234  
Accrued merchant settlement amounts
    3,259       3,603  
Accrued cash rental and management fees
    2,290       2,866  
Accrued interest rate swap payments
    2,156       1,937  
Accrued interest expense
    1,795       10,406  
Accrued ATM telecommunications costs
    1,410       1,169  
Accrued maintenance fees
    1,393       4,133  
Accrued processing costs
    1,232       1,556  
Other accrued expenses
    8,693       6,739  
Total
  $ 46,046     $ 57,583  

(7) Long-Term Debt

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

   
September 30, 2010
   
December 31, 2009
 
   
(In thousands)
 
Revolving credit facility
  $ 73,000     $  
Senior subordinated notes due September 2018
    200,000        
Senior subordinated notes due August 2013 (net of unamortized discounts of $2.8 million as of December 31, 2009)
          297,242  
Other
    9,191       9,810  
Total
    282,191       307,052  
Less: current portion
    2,829       2,122  
Total long-term debt, excluding current portion
  $ 279,362     $ 304,930  

 
11

 

Revolving Credit Facility

On July 15, 2010, the Company refinanced its $175.0 million revolving credit agreement.  Under the terms of the new agreement, outstanding borrowings bear interest at either the London Interbank Offered Rate (“LIBOR”) or Base Rate (as defined in the agreement), at the Company’s election, plus an applicable margin, based on the Company’s Total Leverage Ratio (as defined in the agreement).  The facility, which includes a $15.0 million swing line facility, a $60.0 million foreign currency sub-limit, and a $20.0 million letter of credit sub-limit, provides for $175.0 million in borrowings and letters of credit, but also contains a feature that allows the Company to expand the facility up to an amount of $250.0 million, subject to the availability of additional bank commitments.  The facility has a termination date of July 2015, which was extended during the third quarter from the initial termination date of February 2013 as a result of the refinancing of the Company’s senior subordinated notes (discussed below).

 The credit agreement contains representations, warranties and covenants that are customary for similar credit arrangements, including, among other things, covenants relating to (i) financial reporting and notification, (ii) payment of obligations, (iii) compliance with applicable laws and (iv) notification of certain events.   Financial covenants in the facility require the Company to maintain:

 
·
A ratio of (i) the sum of (a) Consolidated Funded Indebtedness (as defined in the agreement) as of such date minus (b) subordinated indebtedness as of such date to (ii) Consolidated Adjusted Pro Forma EBITDA (as defined in the agreement) for the four quarter period then ended (the “Senior Leverage Ratio”) of no more than 2.25 to 1.00;
 
·
A Total Leverage Ratio of no more than 4.00 to 1.00; and
 
·
A ratio of (i) the sum of (a) Consolidated Adjusted Pro Forma EBITDA for the four quarter period then ended, minus (b) capital expenditures of the Company and the restricted subsidiaries for such period, minus (c) dividends and distributions in respect of its equity interests paid by the Company and the restricted subsidiaries during such period (excluding any such dividends and distributions paid to an obligor or restricted subsidiary), minus (d) consideration paid by the Company for repurchase or redemption of its equity interests held by its employees, directors and officers during such period in excess of $5.0 million minus (e) consideration paid by the Company for repurchase or redemption of its equity interests held by other persons during such period in excess of $10.0 million, minus (f) cash taxes paid by the Company and the restricted subsidiaries during such period, to (ii) cash interest expense (the “Fixed Charge Coverage Ratio”) of at least 1.50 to 1.00.

In addition to the above financial covenants, the credit agreement also contains various customary restrictive covenants, subject to certain exceptions that prohibit the Company from, among other things, incurring additional indebtedness or guarantees, creating liens or other encumbrances on property or granting negative pledges, entering into a merger or similar transaction, selling or transferring certain property, making certain restricted payments and entering into transactions with affiliates.

The failure to comply with the covenants will constitute an event of default (subject, in the case of certain covenants, to applicable notice and/or cure periods) under the agreement.  Other events of default under the agreement include, among other things, (i) the failure to timely pay principal, interest, fees or other amounts due and owing, (ii) the inaccuracy of representations or warranties in any material respect, (iii) the occurrence of certain bankruptcy or insolvency events, (iv) loss of lien perfection or priority and (v) the occurrence of a change in control.  The occurrence and continuance of an event of default could result in, among other things, termination of the lenders’ commitments and acceleration of all amounts outstanding.  The Company’s obligations under the credit agreement are guaranteed by certain of the Company’s existing and future domestic subsidiaries, subject to certain limitations.  In addition, the Company’s obligations under the agreement, subject to certain exceptions, are secured on a first-priority basis by liens on substantially all of the tangible and intangible assets of the Company and the guarantors.

As of September 30, 2010, $73.0 million of borrowings were outstanding under the revolving credit facility.  Additionally, as of September 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 September 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 $97.7 million, and the Company was in compliance with all applicable covenants and ratios under the facility.

 
12

 
 
Termination of Previous Credit Facility

Concurrent with entering into its new revolving credit facility on July 15, 2010, the Company terminated its previous $175.0 million revolving credit facility, under which no amounts were outstanding as of December 31, 2009 or as of the date of the termination.  No material termination fees or penalties were incurred by the Company in connection with the termination of the previously-existing credit facility, which was due to mature in May 2012.  However, the Company recorded a $0.4 million pre-tax charge during the third quarter of 2010 to write off certain deferred financing costs associated with this facility, which is included in the Write-off of deferred financing costs and bond discounts line item in the accompanying Consolidated Statements of Operations.

Redemption of $100.0 Million Senior Subordinated Notes – Series B

  On July 21, 2010, the Company issued a “Notice of Redemption” for its $100.0 million 9.25% senior subordinated notes – Series B (the “Series B Notes”), which were redeemed on August 20, 2010, at a price of 102.313% of the principal amount, plus accrued but unpaid interest through August 20, 2010.  The redemption of the Series B Notes was funded with approximately $35.0 million of available cash on hand and $65.0 million of borrowings under the Company’s recently-executed revolving credit facility (discussed above).  In connection with the redemption, the Company recorded a $3.2 million pre-tax charge during the third quarter of 2010 to write off the remaining unamortized original issue discount and deferred financing costs associated with the Series B Notes and a $2.3 million pre-tax charge related to the call premium, which are included in the Write-off of deferred financing costs and bond discounts and the Redemption costs for early extinguishment of debt line items, respectively, in the accompanying Consolidated Statements of Operations.

Redemption of $200.0 Million Senior Subordinated Notes – Series A

On August 12, 2010, the Company commenced a tender offer for its $200.0 million 9.25% senior subordinated notes (the “Series A Notes”), of which approximately $97.8 million were tendered by August 25, 2010 at the tender offer price of 102.563% of the principal amount, plus accrued but unpaid interest through September 9, 2010.  The remaining $102.2 million of the Series A Notes were redeemed on September 27, 2010 pursuant to a Notice of Redemption at a price of 102.313% of the principal amount, plus accrued but unpaid interest through September 27, 2010.  The redemption of the Series A Notes was funded with proceeds from the Company’s issuance of $200.0 million 8.25% senior subordinated notes due 2018 (discussed below) and borrowings under the Company’s credit facility.  In connection with the tender offer and the redemption, the Company recorded a $3.7 million pre-tax charge during the third quarter of 2010 to write off the remaining unamortized original issue discount and deferred financing costs associated with the Series A Notes and a $4.9 million pre-tax charge related to the call premium, which are included in the Write-off of deferred financing costs and bond discounts and the Redemption costs for early extinguishment of debt line items, respectively, in the accompanying Consolidated Statements of Operations.

Issuance of $200.0 Million 8.25% Senior Subordinated Notes Due 2018

In August, concurrent with the commencement of the tender offer for its Series A Notes, the Company launched a public offering of, and priced, $200.0 million 8.25% senior subordinated notes due September 2018 (the “2018 Notes”). The 2018 Notes were issued at par, and the proceeds from the offering were used to fund the redemption of the Series A Notes (discussed above).  Interest under the 2018 Notes is paid semi-annually in arrears on March 1st and September 1st of each year. The 2018 Notes, which are guaranteed by the Company’s domestic subsidiaries, contain no maintenance covenants and only limited incurrence covenants, under which the Company has considerable flexibility.  As of September 30, 2010, the Company was in compliance with all applicable covenants required under the 2018 Notes.

Other Facilities

Cardtronics Mexico equipment financing agreements.   As of September 30, 2010, other long-term debt consisted of 10 separate equipment financing agreements entered into by Cardtronics Mexico, the Company’s majority-owned (51.0%) subsidiary. 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 10.47% as of September 30, 2010.  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 September 30, 2010, the total amount of the guarantees was $58.5 million pesos (or approximately $4.7 million U.S.).

 
13

 
 
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 September 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 September 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 contractually 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 nine month period ended September 30, 2010 (in thousands) :

Asset retirement obligation as of January 1, 2010
  $ 24,003  
Additional obligations
    3,646  
Accretion expense
    1,920  
Change in estimate
    (1,230 )
Payments
    (2,575 )
Foreign currency translation adjustments
    (82 )
Asset retirement obligation as of September 30, 2010
  $ 25,682  

The change in estimate during the nine month period ended September 30, 2010 primarily related to decreased deinstallation cost assumptions for the Company’s ATMs placed in 7-Eleven stores based on an analysis performed by the Company during the third quarter.  See Note 11, Fair Value Measurements for additional disclosures on the Company’s asset retirement obligations in respect to its fair value measurements.

(9) Other Liabilities

Other liabilities consisted of the following:

   
September 30, 2010
   
December 31, 2009
 
   
(In thousands)
 
Current Portion of Other Long-Term Liabilities:
           
Interest rate swaps
  $ 23,186     $ 23,423  
Deferred revenue
    2,027       2,464  
Other
    161       160  
Total
  $ 25,374     $ 26,047  
                 
Other Long-Term Liabilities:
               
Interest rate swaps
  $ 28,527     $ 12,656  
Deferred revenue
    1,684       2,393  
Other
    2,869       3,450  
Total
  $ 33,080     $ 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 during the nine months ended 2010.  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.

 
14

 
 
(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 exchange 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 exchange 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.

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     $ 719,030       3.76 %
October 1, 2010 – December 31, 2010
$ 625,000     £ 75,000     $ 744,030       3.43 %
January 1, 2011 – December 31, 2011
$ 525,000     £ 50,000     $ 604,353       3.55 %
January 1, 2012 – December 31, 2012
$ 275,000     £ 25,000     $ 314,677       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 $1.59 to £1.00, which was the exchange rate in effect as of September 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 the Accumulated other comprehensive loss, net line item within stockholders’ equity (deficit) in the accompanying Consolidated Balance Sheets.

During the third quarter of 2010, the Company determined that it was more likely than not that it would be able to realize the benefits associated with its net deferred tax asset positions in the future.  Consequently, $23.7 million of previously-recognized valuation allowances related to its United States segment were released during the quarter, of which $12.6 million related to the deferred tax benefits on the unrealized loss amounts associated with its interest rate swaps in the United States.  Although the valuation allowances associated with the Company’s interest rate swap contracts were initially established by a charge against other comprehensive income, in accordance with U.S. GAAP, the release of the beginning of the year valuation allowance amount has been reflected as an income tax benefit within the accompanying Consolidated Statements of Operations.  As a result, the Company now records the unrealized loss amounts related to its domestic interest rate swaps net of estimated taxes in the Accumulated other comprehensive loss, net line item within Stockholders’ equity (deficit) in the accompanying Consolidated Balance Sheets.

 
15

 
 
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.

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 nine months ended September 30, 2010, an unrealized gain and a corresponding realized loss of $0.3 million and $0.7 million, respectively, related to these swaps have been reflected in the Other (income) expense 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.

 
16

 
 
Balance Sheet Data

 
September 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
  $ 890  
Prepaid expenses, deferred costs, and other current assets
  $  
Interest rate swap contracts
Prepaid expenses, deferred costs, and other assets
    495  
Prepaid expenses, deferred costs, and other assets
     
Total
    $ 1,385       $  
                     
Liability Derivative Instruments:
   
     
Derivatives Designated as Hedging Instruments:
   
Interest rate swap contracts
Current portion of other long-term liabilities
  $ 21,207  
Current portion of other long-term liabilities
  $ 22,286  
Interest rate swap contracts
Other long-term liabilities
    27,299  
Other long-term liabilities
    11,139  
Total
    $ 48,506       $ 33,425  
                     
Derivatives Not Designated as Hedging Instruments:
                   
Interest rate swap contracts
Current portion of other long-term liabilities
  $ 1,979  
Current portion of other long-term liabilities
  $ 1,137  
Interest rate swap contracts
Other long-term liabilities
    1,228  
Other long-term liabilities
    1,517  
Total
    $ 3,207       $ 2,654  
                     
Total Derivatives:
    $ 50,328       $ 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.

 
17

 
 
Statements of Operations Data

   
Three Months Ended September 30,
 
Derivatives in Cash Flow Hedging Relationships  
 
Amount of Gain (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
  $ (5,856 )   $ (11,019 )
Cost of ATM operating revenues
  $ (6,422 )   $ (5,732 )

   
Nine Months Ended September 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
  $ (30,362 )   $ (20,521 )
Cost of ATM operating revenues
  $ (19,208 )   $ (16,770 )

       
Three Months Ended September 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
 
Cost of ATM operating revenues
  $ (239 )   $  
Interest rate swap contracts
 
Other (income) expense
    (40 )      
        $ (279 )   $  

       
Nine Months Ended September 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
 
Cost of ATM operating revenues
  $ (858 )   $  
Interest rate swap contracts
 
Other (income) expense
    (71 )      
        $ (929 )   $  

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 (income) expense line item of the Company’s Consolidated Statements of Operations.

As of September 30, 2010, the Company expects to reclassify $21.5 million of net derivative-related losses contained within accumulated OCI into earnings during the next 12 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.
 
 
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The following tables summarize the Company’s 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 September 30, 2010
 
   
Total
   
Level 1
   
Level 2
   
Level 3
 
Assets:
 
(In thousands)
 
Assets associated with interest rate swaps
  $ 1,385     $     $ 1,385     $  
                                 
Liabilities:
                               
Liabilities associated with interest rate swaps
  $ 51,713     $     $ 51,713     $  

   
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 item in the accompanying Consolidated Balance Sheets are measured at fair value on a non-recurring basis using Level 3 inputs.  The liabilities added during the nine month periods ended September 30, 2010 and 2009 were $3.6 million and $2.4 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 $50.3 million as of September 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 September 30, 2010, the fair value of the Company’s $200.0 million senior subordinated notes (see Note 7, Long-Term Debt ) totaled $211.0 million, based on the quoted market price for such notes as of that date.

 
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(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 June 2007 Settlement Agreement in December 2007. In 2009, the Company requested a modification to the June 2007 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 June 2007 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.  The proposed modification to the June 2007 Settlement Agreement was approved by the Court on November 3, 2010.  As the 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 settlement modification will have a material impact on its financial condition or results of operations.

On August 16, 2010, a lawsuit was filed in the United States District Court for the District of Delaware entitled Automated Transactions LLC v. IYG Holding Co., et al. The lawsuit names the Company’s wholly-owned subsidiary, Cardtronics USA, Inc. (“CATM-USA”), as one of the defendants. The lawsuit alleges that the Company’s subsidiary and the other defendants have infringed on certain of the plaintiff’s patents by providing retail transactions to consumers through its automated teller machines. The allegations raised by the plaintiff in this suit appear to be similar to the allegations made in a suit filed in 2006. The Company’s supplier in that case agreed to indemnify the Company against the plaintiff’s claims and has agreed to indemnify the Company in this case to the extent the plaintiff’s claims relate to that supplier’s ATMs.  The plaintiff is seeking a permanent injunction, damages, treble damages and costs, including attorney’s fees and expenses. The Company believes that it has meritorious defenses to the plaintiff’s claims and further believes that it is entitled to indemnification from its suppliers under statutory law. While the Company intends to defend the lawsuit vigorously, it cannot currently predict the outcome of this lawsuit, nor can it predict the amount of time and expense that will be required to resolve the lawsuit. An unfavorable resolution of this litigation could adversely impact the Company’s financial condition or results of operation.

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.

 
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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 until the summer of 2011 at the earliest.  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).

Change in Mexico Fee Structure.   In May 2010, as supplemented in October 2010, rules promulgated by the Central Bank of Mexico became effective that require ATM operators to choose between receiving an interchange fee from the consumer’s card issuing bank or a surcharge fee from the consumer.  When a surcharge is received by the ATM operator, the rules prohibit a bank from charging its cardholder an additional fee.  The rules also prohibit a bank from charging its cardholders a surcharge fee when those cardholders use its ATMs.

The Company’s majority-owned subsidiary, Cardtronics Mexico, elected to assess a surcharge fee rather than selecting the interchange fee-only option, and subsequently increased the amount of its surcharge fees to compensate for the loss of interchange fees that it previously earned on such ATM transactions.  Although the total cost to the consumer (including bank fees) of an ATM transaction at a Cardtronics Mexico ATM has stayed approximately the same, average transaction counts, revenues, and profit per machine have declined.  As a result of the above developments, the Company has reduced its ATM deployments in Mexico and is working on strategies to reverse or offset the negative effects of these events.  If the Company is unsuccessful in such efforts, 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 $25.7 million accrued for these liabilities as of September 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.

 
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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.  On September 15, 2010, MVMC’s President pled guilty to counts one through seven of the Indictment and agreed to the entry of a $70 million judgment against him, representing the amount of proceeds obtained as a result of the bank fraud and wire fraud offenses alleged in the Indictment.   A “Consent Order of Forfeiture” in that amount was entered against MVMC’s President on that same date.  With this conviction and forfeiture order in place, the Company believes that the U.S. government will distribute the forfeited assets it obtains to the victims and the Company intends to seek recovery from such forfeited assets, which includes approximately $19 million in cash.  The other defendant named in the indictment, MVMC’s Chief Operating Officer, has not yet entered any plea.

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.

(13) Income Taxes

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

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2010
   
2009
   
2010
   
2009
 
   
(In thousands)
 
Income tax (benefit) expense
  $ (23,968 )   $ 1,251     $ (20,577 )   $ 3,284  
Effective tax rate
    (723.5 )%     16.1 %     (163.9 )%     44.6 %

The effective tax rates for the three and nine month periods ended September 30, 2010, were impacted by the release of certain valuation allowances in the Company’s United States’ segment.  During the third quarter of 2010, the Company determined that it was more likely than not that it would be able to realize the benefits associated with its net deferred tax asset positions in the future.  Consequently, $23.7 million of previously-recognized valuation allowances related to its United States segment were released during the quarter, and the Company expects to release an additional $3.5 million during the remainder of the year.  The Company continues to maintain valuation allowances for its net deferred tax asset positions in the United Kingdom and Mexico, as management currently believes that it is more likely than not that these benefits will not be realized.

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 estimates for the three and nine month periods ended September 30, 2010.

(14) Segment Information

As of September 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. During the three and nine month periods ended September 30, 2010, as a result of certain financing activities, the Company recorded a $7.3 million charge to write off certain unamortized deferred financing costs and bond discounts and a $7.2 million charge associated with the early extinguishment of debt, which the Company has also excluded from EBITDA.  These charges have been excluded from EBITDA as the Company views these charges as non-recurring events that were specifically related to its decision to improve its capital structure and financial flexibility, and are not related to the Company’s ongoing operations.  Furthermore, management feels the inclusion of such charges in EBITDA would not contribute to management’s understanding of the operating results and effectiveness of its business. 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 attributable to controlling interests:

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2010
   
2009
   
2010
   
2009
 
   
(In thousands)
 
EBITDA
  $ 33,582     $ 30,119     $ 93,275     $ 74,703  
Interest expense, net, including amortization of deferred financing costs and bond discounts
    7,610       8,079       23,514       24,605  
Write-off of deferred financing costs and bond discounts
    7,296             7,296        
Redemption costs for early extinguishment of debt
    7,193             7,193        
Income tax (benefit) expense
    (23,968 )     1,251       (20,577 )     3,284  
Depreciation and accretion expense
    10,865       9,986       31,351       29,560  
Amortization expense
    3,823       4,405       11,567       13,436  
Net income attributable to controlling interests
  $ 20,763     $ 6,398     $ 32,931     $ 3,818  

The following tables reflect certain financial information for each of the Company’s reporting segments for the three and nine month periods ended September 30, 2010 and 2009.  All intercompany transactions between the Company’s reporting segments have been eliminated.

 
For the Three Month Period Ended September 30, 2010
 
 
U.S.
   
U.K.
   
Mexico
   
Eliminations
   
Total
 
 
(In thousands)
 
Revenue from external customers
$ 108,785     $ 21,737     $ 6,083     $     $ 136,605  
Intersegment revenues
  816                   (816 )      
Cost of revenues
  71,055       16,506       4,706       (816 )     91,451  
Selling, general, and administrative expenses (1)
  9,743       1,260       516             11,519  
Loss on disposal of assets
  134       222       12             368  
                                       
EBITDA
  28,886