Cardtronics, plc.
CARDTRONICS INC (Form: 10-Q, Received: 04/28/2011 16:15:07)


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 March 31, 2011
 
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 April 25, 2011: 43,068,122
 
 
 

 

CARDTRONICS, INC.

TABLE OF CONTENTS

 
 
Page  
 
PART I.  FINANCIAL INFORMATION
Item 1.
Financial Statements (unaudited)
1
 
Consolidated Balance Sheets as of March 31, 2011 and December 31, 2010
1
 
Consolidated Statements of Operations for the three Months Ended March 31, 2011 and 2010
2
 
Consolidated Statements of Cash Flows for the three Months Ended March 31, 2011 and 2010
3
 
Notes to Consolidated Financial Statements
4
Cautionary Statement Regarding Forward-Looking Statements
26
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
27
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
42
Item 4.
Controls and Procedures
45
     
PART II. OTHER INFORMATION
Item 1.
Legal Proceedings
46
Item 1A.
Risk Factors
46
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
46
Item 6.
Exhibits
46
 
Signatures
47
 
When we refer to “us,” “we,” “our,” “ours” or “the Company,” we are describing Cardtronics, Inc. and/or our subsidiaries.
 
 
 

 
 
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

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

 
 
March 31, 2011
   
December 31, 2010
 
   
( Unaudited )
       
ASSETS
 
Current assets:
           
Cash and cash equivalents
  $ 3,684     $ 3,189  
Accounts and notes receivable, net of allowance of $449 and $507 as of March 31, 2011 and December 31, 2010, respectively
    23,784       20,270  
Inventory
    1,659       1,795  
Restricted cash, short-term
    3,220       4,466  
Current portion of deferred tax asset, net
    13,011       15,017  
Prepaid expenses, deferred costs, and other current assets
    11,394       10,222  
Total current assets
    56,752       54,959  
Property and equipment, net
    161,355       156,465  
Intangible assets, net
    72,657       74,799  
Goodwill
    165,030       164,558  
Deferred tax asset, net
    741       715  
Prepaid expenses, deferred costs, and other assets
    5,197       3,819  
Total assets
  $ 461,732     $ 455,315  
   
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
Current liabilities:
               
Current portion of long-term debt and notes payable
  $ 3,345     $ 3,076  
Current portion of other long-term liabilities
    23,497       24,493  
Accounts payable
    17,291       20,167  
Accrued liabilities
    43,903       50,543  
Current portion of deferred tax liability, net
    741       715  
Total current liabilities
    88,777       98,994  
Long-term liabilities:
               
Long-term debt, net of related discounts
    252,041       251,757  
Deferred tax liability, net
    14,546       10,268  
Asset retirement obligations
    27,687       26,657  
Other long-term liabilities
    19,257       23,385  
Total liabilities
    402,308       411,061  
                 
Commitments and contingencies
               
                 
Stockholders’ equity:
               
Common stock, $0.0001 par value; 125,000,000 shares authorized; 48,692,735 and 48,396,134 shares issued as of March 31, 2011 and December 31, 2010, respectively; 43,063,122 and 42,833,342 shares outstanding as of March 31, 2011 and December 31, 2010, respectively
    4       4  
Additional paid-in capital
    218,617       213,754  
Accumulated other comprehensive loss, net
    (60,416 )     (65,053 )
Accumulated deficit
    (49,483 )     (55,963 )
Treasury stock; 5,629,613 and 5,562,792 shares at cost as of March 31, 2011 and December 31, 2010, respectively
    (51,312 )     (50,351 )
Total parent stockholders’ equity
    57,410       42,391  
Noncontrolling interests
    2,014       1,863  
Total stockholders’ equity
    59,424       44,254  
     Total liabilities and stockholders’ equity
  $ 461,732     $ 455,315  

See accompanying notes to consolidated financial statements.
 
 

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

   
Three Months Ended March 31,
 
 
 
2011
   
2010
 
Revenues:
           
ATM operating revenues                                                                                         
  $ 133,099     $ 125,687  
ATM product sales and other revenues                                                                                         
    4,942       2,089  
Total revenues
    138,041       127,776  
Cost of revenues:
               
Cost of ATM operating revenues (excludes depreciation, accretion, and amortization shown separately below.  See Note 1 )
    88,786       85,879  
Cost of ATM product sales and other revenues
    4,347       2,193  
Total cost of revenues
    93,133       88,072  
Gross profit
    44,908       39,704  
Operating expenses:
               
Selling, general, and administrative expenses
    13,004       11,143  
Depreciation and accretion expense                                                                                         
    11,370       10,222  
Amortization expense                                                                                         
    3,627       3,979  
Loss on disposal of assets                                                                                         
    77       377  
Total operating expenses
    28,078       25,721  
Income from operations
    16,830       13,983  
Other (income) expense:
               
Interest expense, net                                                                                         
    4,813       7,318  
Amortization of deferred financing costs and bond discounts
    211       630  
Other (income) expense                                                                                         
    (199 )     366  
Total other expense
    4,825       8,314  
Income before income taxes
    12,005       5,669  
Income tax expense
    5,447       1,439  
Net income
    6,558       4,230  
Net income attributable to noncontrolling interests
    78       265  
Net income attributable to controlling interests and available to common stockholders
  $ 6,480     $ 3,965  
                 
Net income per common share – basic
  $ 0.15     $ 0.10  
Net income per common share – diluted
  $ 0.15     $ 0.09  
                 
Weighted average shares outstanding – basic                                                                                           
    41,512,171       39,850,122  
Weighted average shares outstanding – diluted                                                                                           
    42,269,940       40,721,310  
 
See accompanying notes to consolidated financial statements.
 
 
2

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

    Three Months Ended March 31,  
   
2011
   
2010
 
Cash flows from operating activities:
           
Net income
  $ 6,558     $ 4,230  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation, accretion, and amortization expense
    14,997       14,201  
Amortization of deferred financing costs and bond discounts
    211       630  
Stock-based compensation expense
    2,230       1,459  
Deferred income taxes
    5,063       945  
Loss on disposal of assets
    77       377  
Unrealized gain on derivative instruments
    (267 )     (248 )
Amortization of accumulated other comprehensive losses associated with derivative instruments no longer designated as hedging instruments
    154       493  
Other reserves and non-cash items
    394       475  
Changes in assets and liabilities:
               
(Increase) decrease in accounts and notes receivable, net
    (3,379 )     623  
Decrease (increase) in prepaid, deferred costs, and other current assets
    837       (845 )
(Increase) decrease in inventory
    (8 )     460  
(Increase) decrease in other assets
    (3,443 )     980  
(Decrease) increase in accounts payable
    (2,550 )     1,969  
Decrease in accrued liabilities
    (4,700 )     (15,199 )
Decrease in other liabilities
    (1,219 )     (1,364 )
Net cash provided by operating activities
    14,955       9,186  
                 
Cash flows from investing activities:
               
Additions to property and equipment
    (13,601 )     (8,526 )
Payments for exclusive license agreements, site acquisition costs and other intangible assets
    (1,448 )     (79 )
Net cash used in investing activities
    (15,049 )     (8,605 )
                 
Cash flows from financing activities:
               
Proceeds from borrowings of long-term debt
    52,600        
Repayments of long-term debt and capital leases
    (52,373 )     (647 )
Repayments of borrowings under bank overdraft facility, net
    (1,051 )      
Proceeds from exercises of stock options
    2,635       110  
Repurchase of capital stock
    (962 )     (260 )
Net cash provided by (used in) financing activities
    849       (797 )
                 
Effect of exchange rate changes on cash
    (260 )     461  
Net increase in cash and cash equivalents
    495       245  
                 
Cash and cash equivalents as of beginning of period
    3,189       10,449  
Cash and cash equivalents as of end of period
  $ 3,684     $ 10,694  
                 
Supplemental disclosure of cash flow information:
               
Cash paid for interest, including interest on capital leases
  $ 9,132     $ 14,271  
Cash paid for income taxes
  $ 921     $ 100  
 
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 March 31, 2011, the Company provided services to approximately 37,200 devices across its portfolio, which included approximately 31,200 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 3,100 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 4,000 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. The Company also partners with leading national financial institutions to brand selected ATMs and financial services kiosks within its network. As of March 31, 2011, over 12,000 of the Company’s devices were under contract with financial institutions to place their logos on those machines, thus providing convenient surcharge-free access for their banking customers. Additionally, the Company owns and operates the Allpoint network, the largest surcharge-free ATM network within the United States (based on the number of participating ATMs). The Allpoint network, which has more than 43,000 participating ATMs, provides surcharge-free ATM access to customers of participating financial institutions that lack a significant ATM network. The Allpoint network includes a majority of the Company’s ATMs in the United States, Puerto Rico and Mexico, all of the Company’s ATMs in the United Kingdom, and over 5,000 locations in Australia through a partnership with a local ATM owner and operator in that market. Finally, the Company owns and operates an electronic funds transfer (“EFT”) transaction processing platform that provides transaction processing services to its network of ATMs and financial services kiosks as well as 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, 2010 (“2010 Form 10-K”), which includes a summary of the Company’s significant accounting policies and other disclosures.

The financial statements as of March 31, 2011 and for the three month periods ended March 31, 2011 and 2010 are unaudited. The Consolidated Balance Sheet as of December 31, 2010 was derived from the audited balance sheet filed in the Company’s 2010 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 month periods ended March 31, 2011 and 2010 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.
 
 
4

 

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.

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 three month periods ended March 31:

   
2011
   
2010
 
   
(In thousands)
 
Depreciation and accretion expense related to ATMs and ATM-related assets
  $ 9,787     $ 8,299  
Amortization expense
    3,627       3,979  
Total depreciation, accretion, and amortization expense excluded from Cost of ATM operating revenues and Gross profit
  $ 13,414     $ 12,278  

(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 three month periods ended March 31:

   
2011
   
2010
 
   
(In thousands)
 
Cost of ATM operating revenues
  $ 265     $ 199  
Selling, general, and administrative expenses
    1,965       1,260  
Total stock-based compensation expense
  $ 2,230     $ 1,459  

The increase in stock-based compensation expense during the three month periods ended March 31, 2011 was due to the issuance of additional shares of restricted stock awards (“RSAs”) and stock options to certain of the Company’s employees and directors during 2010 and 2011.  All grants during the periods above were granted under the Company’s Amended and Restated 2007 Stock Incentive Plan (the “2007 Stock Incentive Plan”).
 
In addition to RSAs, during the three months ended March 31, 2011, the Company granted Restricted Stock Units (“RSUs”) under the Company’s 2011 Long Term Incentive Plan (the “2011 LTIP”), which is covered under the 2007 Stock Incentive Plan.  A base pool of 273,411 RSUs has been set aside for the 2011 LTIP.  From this amount, the Compensation Committee of the Company’s Board of Directors (the “Committee”) granted RSUs totaling 264,750, which could result in the issuance of up to 546,822 shares of common stock in the future, depending on the Company’s achievement of certain performance levels during calendar year 2011. The fair value of an individual RSU granted under the 2011 LTIP was $16.82 on the date of the grant. These grants have both a performance-based and a service-based vesting schedule; accordingly, the number of RSUs potentially earned by an individual will be based on the level of performance achieved during calendar year 2011.  Once the performance-based vesting requirements are determined to be met by the Committee, the RSUs will be earned by the individual and will vest 50% on the second anniversary of the grant date and 25% each on the third and fourth anniversaries of the grant date.  Although the RSUs will not be considered earned and outstanding until at least the minimum performance metrics are met, the Company recognizes the related compensation expense over the requisite service period using a graded vesting methodology, based on the estimated performance levels that management believes will ultimately be met.
 
 
5

 

Options.   The number of the Company’s outstanding stock options as of March 31, 2011, and changes during the three month period ended March 31, 2011, are presented below:

   
Number
of Shares
   
Weighted
Average
Exercise Price
 
Options outstanding as of January 1, 2011
    2,511,105     $ 9.63    
Exercised
    (277,917 )   $ 9.45    
Forfeited
    (5,000 )   $ 8.96    
Options outstanding as of March 31, 2011
    2,228,188     $ 9.65    
                   
Options vested and exercisable as of March 31, 2011
    2,064,639     $ 9.84    

As of March 31, 2011, the unrecognized compensation expense associated with outstanding options was approximately $0.4 million.

Restricted Stock Awards.   The number of the Company’s outstanding RSAs as of March 31, 2011, and changes during the three month period ended March 31, 2011, are presented below:

   
Number
of Shares
 
RSAs outstanding as of January 1, 2011
    1,558,315  
Granted
    18,684  
Vested
    (204,940 )
Forfeited
    (12,500 )
RSAs outstanding as of March 31, 2011
    1,359,559  

The restricted shares granted during the three month period ended March 31, 2011 had a total grant-date fair value of approximately $0.4 million, or $18.95 per share.  As of March 31, 2011, the unrecognized compensation expense associated with restricted share grants was approximately $11.9 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 impacts to the statements of operations) when their impact on net income available to common stockholders is anti-dilutive. Potentially dilutive securities for the three month periods ended March 31, 2011 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 month periods ended March 31, 2011 and 2010 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 March 31, 2011
   
Three Months Ended March 31, 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
  $ 6,480                 $ 3,965              
Less: undistributed earnings allocated to unvested restricted shares
    (213 )                 (157 )            
Net income available to common stockholders
  $ 6,267       41,512,171     $ 0.15     $ 3,808       39,850,122     $ 0.10  
                                                 
Diluted:
                                               
Effect of dilutive securities:
                                               
Add: Undistributed earnings allocated to restricted shares
  $ 213                     $ 157                  
Stock options added to the denominator under the treasury stock method
            757,769                       871,188          
Less: Undistributed earnings reallocated to restricted shares
    (209 )                     (154 )                
Net income available to common stockholders and assumed conversions
  $ 6,271       42,269,940     $ 0.15     $ 3,811       40,721,310     $ 0.09  

The computation of diluted earnings per share excluded potentially dilutive common shares related to restricted stock of 508,736 and 422,090 shares for the three month periods ended March 31, 2011 and 2010, respectively, because the effect of including these shares in the computation would have been anti-dilutive.

(4) Comprehensive Income (Loss)

Total comprehensive income (loss) consisted of the following:

   
Three Months Ended
March 31,
 
   
2011
   
2010
 
   
(In thousands)
 
Net income
  $ 6,558     $ 4,230  
Unrealized gains (losses) on interest rate swap contracts, net of income taxes of $1.2 million for the three months ended March 31, 2011
    3,023       (3,384 )
Foreign currency translation adjustments
    1,614       (3,335 )
Total comprehensive income (loss)
    11,195       (2,489 )
Less: comprehensive income attributable to noncontrolling interests
    151       354  
Comprehensive income (loss) attributable to controlling interests
  $ 11,044     $ (2,843 )

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

   
March 31, 2011
   
December 31, 2010
 
   
(In thousands)
 
Foreign currency translation adjustments
  $ (24,955 )   $ (26,569 )
Unrealized losses on interest rate swap contracts, net of income tax benefit of $0.2 million and $1.4 million as of March 31, 2011 and December 31, 2010, respectively
    (35,461 )     (38,484 )
Total accumulated other comprehensive loss, net
  $ (60,416 )   $ (65,053 )

The Company 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 in the accompanying Consolidated Balance Sheets since it is more likely than not that it will be able to realize the benefits associated with its net deferred tax asset positions in the future.
 
 
7

 

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 March 31, 2011, as well as the changes in the net carrying amounts for the three month period ended March 31, 2011, by segment:

   
Goodwill
 
   
U.S.
   
U.K.
   
Mexico
   
Total
 
   
(In thousands)
 
Balance as of January 1, 2011:
                       
Gross balance                                                    
  $ 150,461     $ 63,393     $ 707     $ 214,561  
Accumulated impairment loss                                                    
          (50,003 )           (50,003 )
    $ 150,461     $ 13,390     $ 707     $ 164,558  
                                 
Foreign currency translation adjustments
          477       (5 )     472  
                                 
Balance as of March 31, 2011:
                               
Gross balance                                                    
  $ 150,461     $ 63,870     $ 702     $ 215,033  
Accumulated impairment loss                                                    
          (50,003 )           (50,003 )
    $ 150,461     $ 13,867     $ 702     $ 165,030  

   
Trade Name
 
   
U.S.
   
U.K.
   
Total
 
   
(In thousands)
 
Balance as of January 1, 2011
  $ 200     $ 3,105     $ 3,305  
Foreign currency translation adjustments
          111       111  
Balance as of March 31, 2011
  $ 200     $ 3,216     $ 3,416  

Intangible Assets with Definite Lives

The following is a summary of the Company’s intangible assets that are subject to amortization as of March 31, 2011:

   
Gross Carrying
Amount
   
Accumulated
Amortization
   
Net Carrying
Amount
 
   
(In thousands)
 
Customer and branding contracts/relationships
  $ 160,055     $ (98,877 )   $ 61,178  
Deferred financing costs
    8,514       (2,696 )     5,818  
Exclusive license agreements
    6,407       (4,223 )     2,184  
Non-compete agreements
    166       (105 )     61  
Total
  $ 175,142     $ (105,901 )   $ 69,241  

 
8

 
(6) Accrued Liabilities

Accrued liabilities consisted of the following:

   
March 31, 2011
   
December 31, 2010
 
   
(In thousands)
 
Accrued merchant fees
  $ 14,941     $ 12,310  
Accrued armored fees
    5,418       4,322  
Accrued merchant settlement amounts
    3,201       4,583  
Accrued compensation
    3,089       7,038  
Accrued cash rental and management fees
    2,397       2,411  
Accrued interest rate swap payments
    2,092       2,199  
Accrued maintenance fees
    1,826       949  
Accrued interest expense
    1,511       5,740  
Accrued processing costs
    981       764  
Accrued ATM telecommunications costs
    927       1,402  
Accrued purchases
    687       2,046  
Other accrued expenses
    6,833       6,779  
Total
  $ 43,903     $ 50,543  
 
(7) Long-Term Debt

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

   
March 31, 2011
   
December 31, 2010
 
   
(In thousands)
 
8.25% Senior subordinated notes due September 2018
  $ 200,000     $ 200,000  
Revolving credit facility, including swing-line credit facility (weighted-average combined rate of 3.1% as of March 31, 2011 and December 31, 2010)
    47,100       46,200  
Equipment financing notes
    8,286       8,633  
Total
    255,386       254,833  
Less: current portion
    3,345       3,076  
Total long-term debt, excluding current portion
  $ 252,041     $ 251,757  

Revolving Credit Facility

The Company’s revolving credit facility, which was refinanced on July 15, 2010, provides for $175.0 million in borrowings and letters of credit (subject to the covenants contained within the facility) and has a termination date of July 2015. This facility includes a $15.0 million swing line facility, a $60.0 million foreign currency sub-limit, a $20.0 million letter of credit sub-limit, and contains a feature that allows the Company to expand the facility up to $250 million, subject to the availability of additional bank commitments by existing or new syndicate participants. Borrowings under the facility bear interest at a variable rate, based upon the London Interbank Offered Rate (“LIBOR”) or Base Rate (as defined in the agreement) at the Company’s option. Additionally, the Company is required to pay a commitment fee of 0.375% per annum on the unused portion of the revolving credit facility. Substantially all of the Company’s assets, including the stock of its wholly-owned domestic subsidiaries and 66% of the stock of its foreign subsidiaries, are pledged to secure borrowings made under the revolving credit facility. Furthermore, each of the Company’s domestic subsidiaries has guaranteed the Company’s obligations under such facility. There are currently no restrictions on the ability of the Company’s wholly-owned subsidiaries to declare and pay dividends directly to us.

The primary restrictive covenants within the facility include (i) limitations on the amount of senior debt and total debt that the Company can have outstanding at any given point in time and (ii) the maintenance of a set ratio of earnings to fixed charges, as computed quarterly on a trailing 12-month basis. Additionally, the Company is limited on the amount of restricted payments, including dividends, which it can make pursuant to the terms of the facility. These limitations are generally governed by a fixed charge ratio covenant and amounts outstanding under the revolving credit facility.

 
9

 
 
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 March 31, 2011, the Company was in compliance with all applicable covenants and ratios under the facility.

As of March 31, 2011, $47.1 million of borrowings were outstanding under the revolving credit facility.  Additionally, as of March 31, 2011, 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 March 31, 2011, 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 $123.6 million, and the Company was in compliance with all applicable covenants and ratios under the facility.

$200.0 Million 8.25% Senior Subordinated Notes Due 2018

In August 2010, 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 previously issued senior subordinated notes.  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 March 31, 2011, the Company was in compliance with all applicable covenants required under the 2018 Notes.

Other Facilities

Cardtronics Mexico equipment financing agreements.   As of March 31, 2011, other long-term debt consisted of 10 separate equipment financing agreements entered into by Cardtronics Mexico, the Company’s majority-owned (51.0%) subsidiary. Each of these agreements have an original term of five years and are denominated in Mexican pesos, and bore interest at an average fixed rate of 10.40% as of March 31, 2011.  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 March 31, 2011, the total amount of the guarantees was $50.4 million pesos (or approximately $4.2 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 1.0% over the Bank of England’s base rate (0.5% as of March 31, 2011) and is secured by a letter of credit posted under the Company’s corporate revolving credit facility, is utilized for general purposes for the Company’s United Kingdom operations. As of March 31, 2011, 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.
 
 
10

 

The following table is a summary of the changes in the Company’s asset retirement obligation liability for the three month period ended March 31, 2011 (in thousands) :

Asset retirement obligation as of January 1, 2011
  $ 26,657  
Additional obligations
    1,307  
Accretion expense
    692  
Change in estimate
    (699 )
Payments
    (672 )
Foreign currency translation adjustments
    402  
Asset retirement obligation as of March 31, 2011
  $ 27,687  

The change in estimate during the three month period ended March 31, 2011 was the result of updating certain cost assumptions based on the actual deinstallation costs experienced by the Company in recent periods.  In the United States, recent actual costs incurred were lower than the previously-estimated costs, and as a result, the Company determined that the liability should be reduced by approximately $2.0 million to account for the lower costs incurred to date and to reduce estimated future costs.  In the United Kingdom, actual recent costs were higher than the previously-estimated costs, and as a result, the Company determined that the liability should be increased by approximately $1.3 million to account for higher expected costs in the future. 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:

   
March 31, 2011
   
December 31, 2010
 
   
(In thousands)
 
Current Portion of Other Long-Term Liabilities:
           
Interest rate swaps
  $ 22,231     $ 22,955  
Deferred revenue
    1,238       1,512  
Other current liabilities
    28       26  
Total
  $ 23,497     $ 24,493  
                 
Other Long-Term Liabilities:
               
Interest rate swaps
  $ 15,975     $ 19,831  
Deferred revenue
    1,464       1,591  
Other long-term liabilities
    1,818       1,963  
Total
  $ 19,257     $ 23,385  

The decrease in the non-current portion of other long-term liabilities was attributable to the Company’s interest rate swaps, the liabilities for which decreased due to the movement of the forward interest rate curve, which was utilized to value the interest rate swap contracts and resulted in a decrease 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 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.
 
 
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)
           
$ 625,000     £ 75,000     $ 745,575       3.43 %  
April 1, 2011 – December 31, 2011
$ 750,000     £ 50,000     $ 830,384       3.45 %  
January 1, 2012 – December 31, 2012
$ 750,000     £ 25,000     $ 790,192       3.35 %  
January 1, 2013 – December 31, 2013
$ 750,000     £     $ 750,000       3.29 %  
January 1, 2014 – December 31, 2014
$ 550,000     £     $ 550,000       3.27 %  
January 1, 2015 – December 31, 2015
$ 350,000     £     $ 350,000       3.28 %  
January 1, 2016 – December 31, 2016
____________
(1)
United Kingdom pound sterling amounts have been converted into United States dollars at approximately $1.61 to £1.00, which was the exchange rate in effect as of March 31, 2011.

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 in the accompanying Consolidated Balance Sheets.

The Company believes that it is more likely than not that it would be able to realize the benefits associated with its net deferred tax asset positions in the future.  Therefore, the Company 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 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, 2016 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 mostly 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, the Company was required to record an unrealized gain of $0.3 million and a corresponding realized loss of $0.3 million for the three months ended March 31, 2011 and a $0.2 million unrealized gain and $0.3 million realized loss for the three months ended March 31, 2010 related to these swaps, which 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.

Balance Sheet Data

 
March 31, 2011
 
December 31, 2010
 
 
Balance Sheet
Location
 
Fair Value
 
Balance Sheet
Location
 
Fair Value
 
Asset Derivative Instruments:
(In thousands)
 
                 
Derivatives Not Designated as Hedging Instruments:
               
Interest rate swap contracts
Prepaid expenses, deferred costs, and other current assets
  $ 649  
Prepaid expenses, deferred costs, and other current assets
  $ 834  
Interest rate swap contracts
Prepaid expenses, deferred costs, and other assets
     
Prepaid expenses, deferred costs, and other assets
    109  
Total
    $ 649       $ 943  
                     
Liability Derivative Instruments:
   
     
Derivatives Designated as Hedging Instruments:
   
Interest rate swap contracts
Current portion of other long-term liabilities
  $ 20,685  
Current portion of other long-term liabilities
  $ 21,083  
Interest rate swap contracts
Other long-term liabilities
    15,525  
Other long-term liabilities
    19,202  
Total
    $ 36,210       $ 40,285  
                     
Derivatives Not Designated as Hedging Instruments:
                   
Interest rate swap contracts
Current portion of other long-term liabilities
  $ 1,546  
Current portion of other long-term liabilities
  $ 1,872  
Interest rate swap contracts
Other long-term liabilities
    450  
Other long-term liabilities
    629  
Total
    $ 1,996       $ 2,501  
                     
Total Derivatives:
    $ 37,557       $ 41,843  

 
13

 
 
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.

Statements of Operations Data

   
Three Months Ended March 31,
 
Derivatives in Cash Flow Hedging Relationships  
 
Amount of Loss
Recognized in OCI on Derivative Instruments (Effective Portion)
 
Location of Loss Reclassified from Accumulated OCI into Income
(Effective Portion)  
 
Amount of Loss Reclassified from Accumulated OCI into Income
(Effective Portion)
 
 
2011
   
2010
   
2011
   
2010
 
   
(In thousands)
     
(In thousands)
 
Interest rate swap contracts
  $ (2,893 )   $ (10,147 )
Cost of ATM operating revenues
  $ (5,762 )   $ (6,270 )


     
Three Months Ended March 31,
 
Derivatives Not Designated
as Hedging Instruments  
Location of Loss Recognized
into Income on Derivative  
 
Amount of Loss Recognized into Income on Derivative
 
     
2011
   
2010
 
     
(In thousands)
 
Interest rate swap contracts
Cost of ATM operating revenues
  $ (154 )   $ (493 )
Interest rate swap contracts
Other (income) expense
    (14 )     (25 )
      $ (168 )   $ (518 )

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 March 31, 2011, the Company expects to reclassify $20.5 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.
 
 
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 March 31, 2011
 
   
Total
   
Level 1
   
Level 2
   
Level 3
 
Assets:
 
(In thousands)
 
Assets associated with interest rate swaps
  $ 649     $     $ 649     $  
                                 
Liabilities:
                               
Liabilities associated with interest rate swaps
  $ 38,206     $     $ 38,206     $  

 
14

 
 
   
Fair Value Measurements at December 31, 2010
 
   
Total
   
Level 1
   
Level 2
   
Level 3
 
Assets:
 
(In thousands)
 
Assets associated with interest rate swaps
  $ 943     $     $ 943     $  
                                 
Liabilities:
                               
Liabilities associated with interest rate swaps
  $ 42,786     $     $ 42,786     $  

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 three month periods ended March 31, 2011 and 2010 were $1.3 million and $0.8 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.

C ash 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 $37.6 million as of March 31, 2011. 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 interest rates.  As of March 31, 2011, the fair value of the Company’s $200.0 million senior subordinated notes (see Note 7, Long-Term Debt ) totaled $216.0 million, based on the quoted market price for such notes as of that date.

Fair Value Option. In February 2007, the FASB issued a statement that provided companies the option to measure certain financial instruments and other items at fair value. The Company elected not to adopt the fair value option provisions of this statement.

(12) Commitments and Contingencies
 
Legal Matters

Automated Transactions.   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. 10 Civ 0691 (D. Del.) (the “2010 Lawsuit”) . The 2010 Lawsuit names the Company’s wholly-owned subsidiary, Cardtronics USA, Inc., as one of the defendants. The 2010 Lawsuit alleges that the Company’s subsidiary and the other defendants have infringed seven of the plaintiff’s, Automated Transactions LLC’s, patents by providing retail transactions to consumers through their ATMs. The plaintiff is seeking a permanent injunction, damages, treble damages and costs, including attorney’s fees and expenses. The allegations raised by the plaintiff in this suit are similar to the allegations made by the same plaintiff in a suit filed in 2006 against 7-Eleven, Inc. (the “2006 Lawsuit”) concerning six of the same seven patents. In July 2007, when the Company acquired the 7-Eleven portfolio, the Company became subject to the 2006 Lawsuit; the ATM supplier in that case agreed to indemnify 7-Eleven, Inc. against the plaintiff’s claims. That indemnity was assigned by 7-Eleven to the Company, and the supplier acknowledged that assignment.
 
 
15

 

In the 2010 Form 10-K, the Company stated its belief that it had meritorious defenses to the plaintiff’s claims in both cases and that upon agreement of all parties involved in this matter, the Court agreed to stay the 2010 Lawsuit until resolution of the major issues involved in the 2006 Lawsuit. In addition, on January 28, 2011 the United States Patent and Trademark Office ("USPTO") Board of Patent Appeals and Interferences ("BPAI") issued a decision affirming the rejection on the grounds of obviousness of all the claims of one of the patents asserted by plaintiff in both the 2006 and 2010 Lawsuits.  The plaintiff has appealed this decision.
 
Following a motion for summary judgment filed by the Company and the other co-defendants (collectively the “Defendants”) on March 9, 2011, the Court ruled in favor of the Defendants with respect to the infringement issues (the “March 9 th Decision”). The Court found that the Defendants did not infringe the claims asserted in any of the plaintiff’s five patents (the allegations as to the sixth patent having been dismissed earlier). In addition, the Court granted the Defendants partial summary judgment that the plaintiff’s patent claims were, in part, invalid and rendered other findings so as to materially weaken the plaintiff’s case.   As of this date, the Court has not yet entered a judgment with respect to these rulings, after which the plaintiff may or may not choose to appeal. Regardless of any appeal, the Company has asserted additional grounds of invalidity which would have to be determined by the district court before the plaintiff could be successful. Absent such an appeal by the plaintiff, the March 9 th Decision will effectively terminate the 2006 Lawsuit in favor of the Company and co-defendants.  Additionally, if left unchallenged, the March 9 th Decision should also resolve in the Company’s favor the plaintiff’s claims in the 2010 Lawsuit on the same five patents asserted and ruled in the March 9 th Decision and effectively resolve in the Company’s favor the claims attempted to be asserted in the 2010 Lawsuit on the seventh asserted patent.  The Company also believes it has meritorious defenses in the 2010 Lawsuit to the sixth patent not ruled upon in the 2006 Lawsuit.

Should the plaintiff appeal the March 9 th Decision in the 2006 Lawsuit, the Company will continue to vigorously defend itself, or have its suppliers defend, in the 2006 Lawsuit and the 2010 Lawsuit, when the stay is lifted. If the March 9 th Decision is overturned in the 2006 Lawsuit, the Company cannot currently predict the outcome of either lawsuit, nor can it predict the amount of time and expense that will be required to resolve these lawsuits. An unfavorable resolution of this litigation could adversely impact the Company’s financial condition or results of operation.

Regulation E.   EFT networks in the United States are subject to extensive regulations that are applicable to various aspects of the Company’s operations and the operations of other ATM network operators. The major source of EFT network regulations is the Electronic Funds Transfer Act (“EFTA”), commonly known as Regulation E. The federal regulations promulgated under Regulation E establish the basic rights, liabilities, and responsibilities of consumers who use EFT services and of financial institutions that offer these services, including, among other services, ATM transactions. Generally, Regulation E: (i) requires ATM network operators to provide not only a surcharge notice on the ATM screens, but also on the ATM machine itself; (ii) requires the establishment of limits on the consumer’s liability for unauthorized use of his or her card; (iii) requires all ATM operators to provide receipts to consumers who use their ATMs; and, (iv) establishes protest procedures for consumers. During the last year, the number of putative class action lawsuits filed nationwide in connection with Regulation E disclosures against various financial institutions and ATM operators alike appears to have increased dramatically.  As of today, the following lawsuits have been filed against the Company alleging one or more violations of Regulation E on a small number of specific ATMs operated by the Company in three states:

 
·
Sheryl Johnson, individually and on behalf of all others similarly situated v. Cardtronics USA, Inc. ; In the United States District Court of Tennessee-Western District; instituted September 2010;
 
·
Sheryl Johnson, individually and on behalf of all others similarly situated v. Cardtronics USA, Inc. ; In the United States District Court of Mississippi-Northern District; instituted September 2010;
 
·
Joshua Sandoval; individually and on behalf of all others similarly situated v. Cardtronics USA, Inc., Cardtronics, Inc., and Does 1-10, inclusive ; In the United States District Court of California-Southern District; instituted February 2011; and
 
·
Gini Christensen, individually and on behalf of all other similarly situated v. Cardtronics USA, Inc., Cardtronics, Inc., and Does 1-10, inclusive ; In the United States District Court of California-Southern District; instituted February 2011.

 
16

 
 
In each of the above cases, the plaintiffs allege that one or more of the Company’s ATMs were missing notices posted on or near the ATM itself, which plaintiffs allege is a violation of EFTA and Regulation E and thereby entitles all users of the ATMs to certain statutory damages provided for within the EFTA regulations.  In each lawsuit, the plaintiffs are seeking an order certifying a class-action of previous users of each of the ATMs at issue, statutory damages pursuant to 15 USC 1693m, costs of suit and attorney’s fees, and a permanent injunction. The Company believes that, among other things, the plaintiffs are misreading the EFTA regulations and that the Company is in material compliance with the requirements of EFTA and Regulation E. Accordingly, the Company believes that it has good defenses to each of these lawsuits. Further, the Company believes that certain affirmative defenses provided for by the EFTA and Regulation E insulates the Company from liability in each lawsuit. In particular, the EFTA and Regulation E provide two “safe-harbor” defenses: (i) under the “safe harbor” defense, the ATM operator posted disclosure notices on each ATM, but the notice were removed by someone other than the operator; and (ii) under the “bone fide error” defense, the ATM operator has had a system in place to ensure compliance with the EFTA and Regulation E.  Since the Company’s defense in each of these lawsuits is substantially the same, on March 30, 2011, the Company filed a motion with the United States Judicial Panel on Multidistrict Litigation pursuant to 28 U.S.C. § 1407, to consolidate all of the above cases and any similar case hereafter filed to a single case under the United States district court and otherwise consolidating these actions for coordinated pretrial proceedings, as permitted pursuant to 28 U.S.C. Section 1407.  A ruling on this motion is expected within the next 60-90 days.  Regardless of whether the consolidation motion is granted, the Company believes its defenses to these actions will prevent any of these cases from having a material adverse impact on its business, and that none of these currently filed lawsuits, either individually or in the aggregate, will materially adversely affect the Company’s financial condition or results or operations. However, if the Company’s defenses are not successful, these and other similarly filed lawsuits could have a material adverse effect.
 
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. Additionally, the Company currently expenses all legal costs as they are incurred.

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 are currently required to be finalized on or before July 31, 2011.  Based on the Company’s interpretation of the current language contained within the Act, it appears that the regulation of interchange fees for electronic debit transactions will not apply to ATM cash withdrawal transactions. Accordingly, at this point, the Company does not believe that the regulations that are likely to arise from the Dodd-Frank Act will have a material impact on its operations. However, 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 may 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).  Finally, the Dodd-Frank Act requires debit cards to be recognized (or authorized) over at least two non-affiliated networks and provides for rules that would allow merchants greater flexibility in routing transactions across networks that are more economical for the merchant.  The Federal Reserve requested comments as to whether these network and routing provisions should apply to ATM transactions.  If the final rules provide that the network exclusivity and routing rules do apply to ATM transactions, the Company and other ATM operators may be able to conduct ATM transactions in a more economically beneficial manner.
 
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.
 
 
17

 
 
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 mitigate the negative effects of these events, such as a bank branding agreement that was signed during the first quarter of 2011 with Grupo Financiero Banorte (“Banorte”) to brand up to 2,000 machines in that market.  If the Company is unsuccessful in such efforts, its 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 $27.7 million accrued for these liabilities as of March 31, 2011.  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.  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.  

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 or its owner.  The Company currently believes that its existing insurance policies would cover any cash losses resulting from this incident, less related deductible payments.  Because the Company cannot reasonably estimate the amount of 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 a loss without a corresponding insurance receivable.
 
 
18

 

(13) Income Taxes

Income tax expense based on the Company’s income before income taxes was as follows for the three month periods ended March 31:

   
2011
   
2010
 
   
(In thousands)
 
Income tax expense
  $ 5,447     $ 1,439  
Effective tax rate
    45.4 %     25.4 %

The Company’s effective tax rate during the three months ended March 31, 2011 is higher than the U.S. federal statutory rate of 35% and the Company’s estimated effective state tax rate of 3.5%, primarily due to operating losses in the Company’s United Kingdom operations, for which the Company did not report a tax benefit for financial reporting purposes. The lower effective tax rate in the same period in 2010 was due to the Company’s valuation allowance position in the United States and as a result, the Company recorded an estimate for state tax expense, U.S. alternative minimum tax and deferred taxes excluded from its valuation allowance position in the United States. The valuation allowance in the United States was subsequently released in the third quarter of 2010.

At this time, the Company does not expect that its United Kingdom and Mexico operations will be in a position in the near future to be able to more likely than not fully utilize their deferred tax assets, including their net operating loss carryforwards.  As a result, the deferred tax benefits associated with the United Kingdom and Mexico operations, to the extent they are not offset by deferred tax liabilities, have been fully reserved through a valuation allowance.
 
The deferred taxes associated with the Company’s unrealized gains and losses on derivative instruments have been reflected within the accumulated other comprehensive loss balance in the accompanying Consolidated Balance Sheets.

(14) Segment Information

As of March 31, 2011, 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.
 
Below is a reconciliation of EBITDA to net income attributable to controlling interests for the three month periods ended March 31:
 
    2011     2010  
    (In thousands)  
EBITDA
  $ 31,948     $ 27,553  
Less:
               
Interest expense, net, including amortization of deferred financing costs and bond discounts
    5,024       7,948  
Income tax expense
    5,447       1,439  
Depreciation and accretion expense
    11,370       10,222  
Amortization expense
    3,627       3,979  
Net income attributable to controlling interests
  $ 6,480     $ 3,965  
 
 
19

 
 
The following tables reflect certain financial information for each of the Company’s reporting segments for the three month periods ended March 31, 2011 and 2010.  All intercompany transactions between the Company’s reporting segments have been eliminated.

   
For the Three Month Period Ended March 31, 2011
 
   
U.S.
   
U.K.
   
Mexico
   
Eliminations
   
Total
 
   
(In thousands)
 
Revenue from external customers
  $ 110,345     $ 21,058     $ 6,638     $     $ 138,041  
Intersegment revenues
    860             9       (869 )      
Cost of revenues
    72,610       16,439       4,953       (869 )     93,133  
Selling, general, and administrative expenses
    11,086       1,392       526             13,004  
Loss (gain) on disposal of assets
    16       79       (18 )           77  
                                         
EBITDA
    28,131       2,744       1,151       (78 )     31,948  
                                         
Depreciation and accretion expense
    7,011       3,591       773       (5 )     11,370  
Amortization expense
    3,141       480       6             3,627  
Interest expense, net
    3,743       1,067       214             5,024  
Income tax expense
    5,447                         5,447  
                                         
Capital expenditures (2)
  $ 9,834     $ 5,211     $ 4     $     $ 15,049  

   
For the Three Month Period Ended March 31, 2010
 
   
U.S.
   
U.K.
   
Mexico
   
Eliminations
   
Total
 
   
(In thousands)
 
Revenue from external customers
  $ 101,909     $ 18,621     $ 7,246     $     $ 127,776  
Intersegment revenues
    678                   (678 )      
Cost of revenues
    69,149       14,351       5,250       (678 )     88,072  
Selling, general, and administrative expenses (1)
    9,275       1,305       563             11,143  
Loss (gain) on disposal of assets
    161       223       (7 )           377  
                                         
EBITDA
    23,652       2,713       1,453       (265 )     27,553  
                                         
Depreciation and accretion expense
    6,626       2,943       658       (5 )     10,222  
Amortization expense
    3,329       643       7             3,979  
Interest expense, net
    6,575       1,127       246             7,948  
Income tax expense
    1,439                         1,439  
                                         
Capital expenditures (2)
  $ 6,001     $ 2,251     $ 353     $     $ 8,605  
____________
 
(1)
Selling, general, and administrative expenses for the three months ended March 31, 2010 include $0.6 million of costs associated with the preparation and filing of a shelf registration statement and the completion of a secondary equity offering, which negatively impacted the Company’s EBITDA during the period.
   
(2)
Capital expenditure amounts include payments made for exclusive license agreements and site acquisition costs, and capital expenditures financed by direct debt.  Additionally, capital expenditure amounts for Mexico are reflected gross of any noncontrolling interest amounts.

 
20

 
 
Identifiable Assets:
   
March 31, 2011
   
December 31, 2010
 
   
(In thousands)
 
United States
  $ 495,903     $ 469,045  
United Kingdom
    74,784       70,750  
Mexico
    18,052       17,674  
Eliminations
    (127,007 )     (102,154 )
Total
  $ 461,732     $ 455,315  

(15) New Accounting Pronouncements

Adopted

Multiple-Deliverable Revenue Arrangements. In October 2009, the FASB issued ASU 2009-13, which amends ASC 605, Revenue Recognition . This update removes the criterion that entities must use objective and reliable evidence of fair value in accounting for each deliverable separately. Instead, ASU 2009-13 requires entities to allocate revenue in an arrangement using estimated selling prices of the delivered goods and services based on a selling price hierarchy. The Company adopted ASU 2009-13 as of January 1, 2011, which did not have a material impact on its consolidated financial position or results of operations.

Disclosures about Fair Value Measurements. In January 2010, the FASB issued ASU 2010-06, which amended ASC 820, Fair Value Measurements and Disclosures . This update added new requirements for disclosures about transfers into and out of Level 1 and 2 of the fair value hierarchy and activity in Level 3 of the hierarchy.  Additionally, it clarified existing fair value measurement disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. The Company adopted the provisions of ASU 2010-06 on January 1, 2010, except for the disclosures about the activity in Level 3 fair value measurements, which the Company adopted as of January 1, 2011.  The Company’s adoption of ASU 2010-06 did not have a material impact on the Company’s consolidated financial position or results of operations.

Goodwill Impairment Test. In December 2010, the FASB issued ASU 2010-28, Intangibles – Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts .  The ASU does not prescribe a specific method of calculating the carrying value of a reporting unit in the performance of step 1 of the goodwill impairment test (i.e. equity-value-based method or enterprise-value-based method).  However, it requires entities with a zero or negative carrying value to assess, considering qualitative factors such as those used to determine whether a triggering event would require an interim goodwill impairment test (listed in ASC 350-20-35-30, Intangibles – Goodwill and Other – Subsequent Measurement ), whether it is more likely than not that a goodwill impairment exists and perform step 2 of the goodwill impairment test if so concluded.  The Company adopted ASU 2010-28 as of January 1, 2011, which did not have a material impact on its consolidated financial position or results of operations.

 (16) Supplemental Guarantor Financial Information

The Company’s $200.0 million senior subordinated notes are guaranteed on a full and unconditional basis by all of the Company’s domestic subsidiaries. The following information sets forth the condensed consolidating statements of operations and cash flows for the three month periods ended March 31, 2011 and 2010 and the condensed consolidating balance sheets as of March 31, 2011 and December 31, 2010 of (1) Cardtronics, Inc., the parent company and issuer of the senior subordinated notes (“Parent”); (2) the Company’s domestic subsidiaries on a combined basis (collectively, the “Guarantors”); and (3) the Company’s international subsidiaries on a combined basis (collectively, the “Non-Guarantors”):
 
 
21

 

Condensed Consolidating Statements of Operations

   
Three Months Ended March 31, 2011
 
   
Parent
   
 Guarantors
   
Non-  Guarantors
   
Eliminations
   
Total
 
   
(In thousands)
 
Revenues
  $     $ 111,205     $ 27,705     $ (869 )   $ 138,041  
Operating costs and expenses
    2,301       91,563       28,221       (874 )     121,211  
Operating (loss) income
    (2,301 )     19,642       (516 )     5       16,830  
Interest expense, net, including amortization of deferred financing costs and bond discounts
    361       3,382       1,281             5,024  
Equity in earnings of subsidiaries
    (14,068 )                 14,068        
Other (income) expense, net
    (128 )     (511 )     440             (199 )
Income (loss) before income taxes
    11,534       16,771       (2,237 )     (14,063 )     12,005  
Income tax expense
    4,981       466                   5,447  
Net income (loss)
    6,553       16,305       (2,237 )     (14,063 )     6,558  
Net income attributable to noncontrolling interests
                      78       78  
Net income (loss) attributable to controlling interests and available to common stockholders
  $ 6,553     $ 16,305     $ (2,237 )   $ (14,141 )   $ 6,480  

   
Three Months Ended March 31, 2010
 
   
Parent
   
Guarantors
   
Non-  Guarantors
   
Eliminations
   
Total
 
   
(In thousands)
 
Revenues
  $     $ 102,587     $ 25,867     $ (678 )   $ 127,776  
Operating costs and expenses
    1,543       86,997       25,936       (683 )     113,793  
Operating (loss) income
    (1,543 )     15,590       (69 )     5       13,983  
Interest expense, net, including amortization of deferred financing costs and bond discounts
    1,779       4,796       1,373             7,948  
Equity in earnings of subsidiaries
    (9,027 )                 9,027        
Other expense (income), net
    380       (30 )     16             366  
Income (loss) before income taxes
    5,325       10,824       (1,458 )     (9,022 )     5,669  
Income tax expense
    1,100       339                   1,439  
Net income (loss)
    4,225       10,485       (1,458 )     (9,022 )     4,230  
Net income attributable to noncontrolling interests
                      265