Cardtronics, plc.
CARDTRONICS INC (Form: 10-Q, Received: 08/07/2009 13:02:11)
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2009
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 Identification No.)
incorporation or organization)    
     
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 o   Accelerated filer þ   Non-accelerated filer o   Smaller reporting company o
        (Do not check if a smaller reporting company)    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
Common Stock, par value: $0.0001 per share. Shares outstanding on August 3, 2009: 40,432,445
 
 

 

 


 

CARDTRONICS, INC.
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  Exhibit 10.1
  Exhibit 31.1
  Exhibit 31.2
  Exhibit 32.1
When we refer to “us,” “we,” “our,” “ours” or “the Company,” we are describing Cardtronics, Inc. and/or our subsidiaries.

 

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PART I. FINANCIAL INFORMATION
Item 1.   Financial Statements
CARDTRONICS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, excluding share and per share amounts)
(Unaudited)
                 
    June 30, 2009     December 31, 2008  
ASSETS
Current assets:
               
Cash and cash equivalents
  $ 6,492     $ 3,424  
Accounts and notes receivable, net of allowance of $526 and $504 as of June 30, 2009 and December 31, 2008, respectively
    23,384       25,317  
Inventory
    2,903       3,011  
Restricted cash, short-term
    3,833       2,423  
Prepaid expenses, deferred costs, and other current assets
    11,110       17,273  
 
           
Total current assets
    47,722       51,448  
Property and equipment, net
    150,676       153,430  
Intangible assets, net
    99,942       108,327  
Goodwill
    165,483       163,784  
Prepaid expenses, deferred costs, and other assets
    4,313       3,839  
 
           
Total assets
  $ 468,136     $ 480,828  
 
           
 
               
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
               
Current portion of long-term debt and notes payable
  $ 1,748     $ 1,373  
Current portion of capital lease obligations
    605       757  
Current portion of other long-term liabilities
    25,855       24,302  
Accounts payable
    12,202       17,212  
Accrued liabilities
    57,426       55,174  
 
           
Total current liabilities
    97,836       98,818  
Long-term liabilities:
               
Long-term debt, net of related discounts
    326,698       344,816  
Capital lease obligations
          235  
Deferred tax liability, net
    13,564       11,673  
Asset retirement obligations
    22,777       21,069  
Other long-term liabilities
    17,512       23,967  
 
           
Total liabilities
    478,387       500,578  
 
           
 
               
Commitments and contingencies
               
 
               
Stockholders’ deficit:
               
Common stock, $0.0001 par value; 125,000,000 shares authorized; 45,750,333 and 45,642,282 shares issued as of June 30, 2009 and December 31, 2008, respectively; 40,440,310 and 40,636,533 shares outstanding as of June 30, 2009 and December 31, 2008, respectively
    4       4  
Subscriptions receivable (at face value)
          (34 )
Additional paid-in capital
    196,221       194,101  
Accumulated other comprehensive loss, net
    (53,792 )     (64,025 )
Accumulated deficit
    (104,779 )     (102,199 )
Treasury stock; 5,310,023 and 5,005,749 shares at cost as of June 30, 2009 and December 31, 2008, respectively
    (48,612 )     (48,221 )
 
           
Total parent stockholders’ deficit
    (10,958 )     (20,374 )
Noncontrolling interests
    707       624  
 
           
Total stockholders’ deficit
    (10,251 )     (19,750 )
 
           
Total liabilities and stockholders’ deficit
  $ 468,136     $ 480,828  
 
           
See accompanying notes to consolidated financial statements.

 

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CARDTRONICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, excluding share and per share amounts)
(Unaudited)
                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
    2009     2008     2009     2008  
Revenues:
                               
ATM operating revenues
  $ 121,362     $ 122,868     $ 234,942     $ 239,165  
ATM product sales and other revenues
    3,286       4,107       5,051       8,385  
 
                       
Total revenues
    124,648       126,975       239,993       247,550  
Cost of revenues:
                               
Cost of ATM operating revenues (excludes depreciation, accretion, and amortization shown separately below. See Note 1 )
    83,975       93,904       166,204       183,336  
Cost of ATM product sales and other revenues
    3,153       3,662       4,967       7,826  
 
                       
Total cost of revenues
    87,128       97,566       171,171       191,162  
Gross profit
    37,520       29,409       68,822       56,388  
Operating expenses:
                               
Selling, general, and administrative expenses
    10,584       9,800       21,439       18,351  
Depreciation and accretion expense
    9,935       9,978       19,574       19,010  
Amortization expense
    4,504       4,501       9,031       9,004  
Loss on disposal of assets
    1,676       1,115       3,784       2,435  
 
                       
Total operating expenses
    26,699       25,394       53,828       48,800  
Income from operations
    10,821       4,015       14,994       7,588  
Other expense (income):
                               
Interest expense, net
    7,644       7,722       15,355       15,354  
Amortization of deferred financing costs and bond discounts
    603       530       1,171       1,038  
Other (income) expense
    (1,041 )     17       (1,127 )     (115 )
 
                       
Total other expense
    7,206       8,269       15,399       16,277  
Income (loss) before income taxes
    3,615       (4,254 )     (405 )     (8,689 )
Income tax expense (benefit)
    1,016       (633 )     2,033       (181 )
 
                       
Net income (loss)
    2,599       (3,621 )     (2,438 )     (8,508 )
Net income attributable to noncontrolling interests
    111             142        
 
                       
Net income (loss) attributable to controlling interests and available to common stockholders
  $ 2,488     $ (3,621 )   $ (2,580 )   $ (8,508 )
 
                       
 
                               
Net income (loss) per common share — basic
  $ 0.06     $ (0.09 )   $ (0.07 )   $ (0.22 )
 
                       
Net income (loss) per common share — diluted
  $ 0.06     $ (0.09 )   $ (0.07 )   $ (0.22 )
 
                       
 
                               
Weighted average shares outstanding — basic
    39,032,087       38,735,027       39,005,202       38,662,452  
 
                       
Weighted average shares outstanding — diluted
    39,651,363       38,735,027       39,005,202       38,662,452  
 
                       
See accompanying notes to consolidated financial statements.

 

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CARDTRONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
                 
    Six Months Ended June 30,  
    2009     2008  
Cash flows from operating activities:
               
Net loss
  $ (2,438 )   $ (8,508 )
Adjustments to reconcile net loss to net cash provided by operating activities:
               
Depreciation, accretion, and amortization expense
    28,605       28,014  
Amortization of deferred financing costs and bond discounts
    1,171       1,038  
Stock-based compensation expense
    2,120       811  
Deferred income taxes
    1,891       (317 )
Loss on disposal of assets
    3,784       2,435  
Other reserves and non-cash items
    (1,922 )     (3,805 )
Changes in assets and liabilities, net of acquisitions:
               
Decrease in accounts and notes receivable, net
    2,070       1,534  
Decrease (increase) in prepaid, deferred costs, and other current assets
    6,734       (1,621 )
(Increase) decrease in inventory
    (47 )     157  
Decrease in other assets
    1,192       394  
Decrease in accounts payable and accrued liabilities
    (7,710 )     (10,335 )
Decrease in other liabilities
    (2,745 )     (2,371 )
 
           
Net cash provided by operating activities
    32,705       7,426  
 
           
 
               
Cash flows from investing activities:
               
Additions to property and equipment
    (10,712 )     (42,456 )
Payments for exclusive license agreements and site acquisition costs
    (87 )     (497 )
Principal payments received under direct financing leases
          17  
 
           
Net cash used in investing activities
    (10,799 )     (42,936 )
 
           
 
               
Cash flows from financing activities:
               
Proceeds from issuance of long-term debt
    27,812       76,236  
Repayments of long-term debt and capital leases
    (46,486 )     (43,829 )
Repayments of borrowings under bank overdraft facility, net
    (142 )     (3,881 )
Payments received on subscriptions receivable
    34       101  
Proceeds from exercises of stock options
          286  
Equity offering costs
          (1,489 )
Debt issuance and modification costs
    (458 )     (54 )
Repurchase of common stock
    (92 )      
 
           
Net cash (used in) provided by financing activities
    (19,332 )     27,370  
 
           
 
               
Effect of exchange rate changes on cash
    494       (144 )
 
           
Net increase (decrease) in cash and cash equivalents
    3,068       (8,284 )
 
               
Cash and cash equivalents as of beginning of period
    3,424       13,439  
 
           
Cash and cash equivalents as of end of period
  $ 6,492     $ 5,155  
 
           
 
               
Supplemental disclosure of cash flow information:
               
Cash paid for interest, including interest on capital leases
  $ 15,525     $ 16,096  
Cash paid for income taxes
  $ 285     $ 220  
See accompanying notes to consolidated financial statements.

 

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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”) owns or operates approximately 32,880 automated teller machines (“ATMs”) located in all 50 states of the United States, including 2,530 ATMs located throughout the United Kingdom, and 2,100 ATMs located throughout Mexico. 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. This surcharge-free network, which operates under the Allpoint brand name, has more than 37,000 participating ATMs, including a majority of the Company’s ATMs in the United States and all of the Company’s ATMs in United Kingdom. Finally, the Company provides electronic funds transfer (“EFT”) transaction processing services to its network of ATMs as well as over 1,500 ATMs owned and operated by third parties.
Basis of Presentation
This Quarterly Report on Form 10-Q (this “Form 10-Q”) has been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) applicable to interim financial information. Because this is an interim period filing presented using a condensed format, it does not include all of the disclosures required by accounting principles generally accepted in the United States (“U.S. GAAP”), although the Company believes that the disclosures are adequate to make the information not misleading. You should read this Form 10-Q along with the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 (“2008 Form 10-K”), which includes a summary of the Company’s significant accounting policies and other disclosures.
The financial statements as of June 30, 2009 and for the three and six month periods ended June 30, 2009 and 2008 are unaudited. The Consolidated Balance Sheet as of December 31, 2008 was derived from the audited balance sheet filed in the Company’s 2008 Form 10-K. In management’s opinion, all adjustments necessary for a fair presentation of the Company’s interim and prior period results have been made, including those described in Note 2 Revision of Prior Period Financial Statements . The results of operations for the three and six month periods ended June 30, 2009 and 2008 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 reclassifications that were made to conform to the current period presentation. Those reclassifications did not impact the Company’s total reported net loss or stockholders’ deficit.
The unaudited interim consolidated financial statements include the accounts of Cardtronics, Inc. and its wholly- and majority-owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. Because the Company owns a majority (51.0%) interest in and realizes a majority of the earnings and/or losses of Cardtronics Mexico, S.A. de C.V. (“Cardtronics Mexico”), this entity is reflected as a consolidated subsidiary in the accompanying consolidated financial statements, with the remaining ownership interest not held by the Company being reflected as a noncontrolling interest. See Note 16 for additional information on the presentation of noncontrolling interests in the Company’s financial statements and the Company’s adoption of Statement of Financial Accounting Standards (“SFAS”) No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 5 , which the Company adopted effective January 1, 2009.
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.

 

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The Company has evaluated subsequent events through August 7, 2009, which represents the date the financial statements were issued.
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 and six month periods ended June 30:
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2009     2008     2009     2008  
    (In thousands)  
Depreciation and accretion expenses related to ATMs and ATM-related assets
  $ 8,237     $ 8,673     $ 16,274     $ 16,585  
Amortization expense
    4,503       4,501       9,030       9,004  
 
                       
Total depreciation, accretion, and amortization expenses excluded from Cost of ATM operating revenues and Gross profit
  $ 12,740     $ 13,174     $ 25,304     $ 25,589  
 
                       
     
(2) Revision of Prior Period Financial Statements
During the second quarter of 2009, the Company identified an error related to certain capitalized costs associated with its United Kingdom operation. Upon analysis of the Company’s fixed asset records, management identified certain assets primarily related to previously cancelled ATM sites that should have been expensed in prior periods. The impact of such error was an overstatement of fixed assets and depreciation expense, and an understatement of cost of sales and loss on disposal of assets for the years ended December 31, 2007 and 2008, including the related quarterly periods contained therein. The cumulative impact of such error on the statement of operations for the years affected would have been a total additional expense of approximately $1.7 million. In accordance with Staff Accounting Bulletin No. 108 (“SAB 108”), as issued by the Securities and Exchange Commission (“SEC”), management determined that the effects of the misstatement were not material to any previously reported quarterly or annual period. As such, the related corrections will be made to the applicable prior periods as such financial information is included in future filings with the SEC.
The Company’s prior period financial statements included in this filing have been revised to reflect these adjustments, the effects of which have been summarized below.
Consolidated Balance Sheet:
                         
    December 31, 2008  
    As Reported     Adjustments     As Adjusted  
    (In thousands)  
 
                       
Property and equipment, net
  $ 154,829     $ (1,399 )   $ 153,430  
Total assets
    482,227       (1,399 )     480,828  
Accumulated other comprehensive loss, net
    (64,355 )     330       (64,025 )
Accumulated deficit
    (100,470 )     (1,729 )     (102,199 )
Total parent stockholders’ deficit
    (18,975 )     (1,399 )     (20,374 )
Total stockholders’ deficit
    (18,351 )     (1,399 )     (19,750 )
Total liabilities and stockholders’ deficit
    482,227       (1,399 )     480,828  

 

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Consolidated Statements of Operations:
                                                 
    Three Months Ended     Six Months Ended  
    June 30, 2008     June 30, 2008  
    As Reported     Adjustments     As Adjusted     As Reported     Adjustments     As Adjusted  
    (In thousands, excluding per share amounts)  
 
                                               
Cost of ATM operating revenues
  $ 93,601     $ 303     $ 93,904     $ 182,702     $ 634     $ 183,336  
Total cost of revenues
    97,263       303       97,566       190,528       634       191,162  
Gross profit
    29,712       (303 )     29,409       57,022       (634 )     56,388  
Depreciation and accretion expense
    10,039       (61 )     9,978       19,121       (111 )     19,010  
Loss on disposal of assets (1)
          1,115       1,115             2,435       2,435  
Total operating expenses (2)
    24,340       1,054       25,394       46,476       2,324       48,800  
Income from operations (2)
    5,372       (1,357 )     4,015       10,546       (2,958 )     7,588  
Other expense (2)
    1,042       (1,025 )     17       2,103       (2,218 )     (115 )
Total other expense (2)
    9,294       (1,025 )     8,269       18,495       (2,218 )     16,277  
Loss before income taxes
    (3,922 )     (332 )     (4,254 )     (7,949 )     (740 )     (8,689 )
Income tax (benefit) expense
    (540 )     (93 )     (633 )     25       (206 )     (181 )
Net loss
    (3,382 )     (239 )     (3,621 )     (7,974 )     (534 )     (8,508 )
Net loss attributable to controlling interests and available to common stockholders
    (3,382 )     (239 )     (3,621 )     (7,974 )     (534 )     (8,508 )
Net loss per common share — basic and diluted
    (0.09 )           (0.09 )     (0.21 )     (0.01 )     (0.22 )
     
(1)   Previously reported as a component of “Other expense”.
 
(2)   Of the Adjustments presented above, $1,025,000 and $2,218,000 for the three and six months ended June 30, 2008, respectively, relates to the reclassification of “Loss on disposal of assets” from a component of “Other expense”.
                                                 
    Year Ended December 31, 2008     Year Ended December 31, 2007  
    As Reported     Adjustments     As Adjusted     As Reported     Adjustments     As Adjusted  
    (In thousands, excluding per share amounts)  
 
Cost of ATM operating revenues
  $ 361,902     $ 1,014     $ 362,916     $ 281,351     $ 354     $ 281,705  
Total cost of revenues
    377,527       1,014       378,541       293,293       354       293,647  
Gross profit
    115,487       (1,014 )     114,473       85,005       (354 )     84,651  
Depreciation and accretion expense
    39,414       (250 )     39,164       26,859       (78 )     26,781  
Loss on disposal of assets (1)
          5,807       5,807             2,485       2,485  
Total operating expenses (2)
    147,034       5,557       152,591       75,086       2,407       77,493  
(Loss) Income from operations (2)
    (31,547 )     (6,571 )     (38,118 )     9,919       (2,761 )     7,158  
Minority interest in subsidiary (3)
    (1,022 )     1,022             (376 )     376        
Other expense (income) (2)
    5,377       (5,284 )     93       1,585       (2,211 )     (626 )
Total other expense (2) (3)
    37,552       (4,262 )     33,290       32,373       (1,835 )     30,538  
Loss before income taxes
    (69,099 )     (2,309 )     (71,408 )     (22,454 )     (926 )     (23,380 )
Income tax (benefit) expense
    938       51       989       4,636       (159 )     4,477  
Net loss
    (70,037 )     (2,360 )     (72,397 )     (27,090 )     (767 )     (27,857 )
Net loss attributable to noncontrolling interests
          (1,022 )     (1,022 )           (376 )     (376 )
Net loss attributable to controlling interests and available to common stockholders
    (70,037 )     (1,338 )     (71,375 )     (63,362 )     (391 )     (63,753 )
Net loss per common share — basic and diluted
    (1.81 )     (0.03 )     (1.84 )     (4.11 )     (0.02 )     (4.13 )
     
(1)   Previously reported as a component of “Other expense”.
 
(2)   Of the Adjustments presented above, $5,284,000 and $2,211,000 for the years ended December 31, 2008 and 2007, respectively, relates to the reclassification of “Loss on disposal of assets” from a component of “Other expense”.
 
(3)   Of the Adjustments presented above, $1,022,000 and $376,000 for the years ended December 31, 2008 and 2007, respectively, relates to the reclassification of “Minority interest in subsidiary” to “Net loss attributable to noncontrolling interests”.

 

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Consolidated Statement of Cash Flows:
                         
    Six Months Ended June 30, 2008  
    As Reported     Adjustments     As Adjusted  
    (In thousands)  
 
Cash flows from operating activities:
                       
Net loss
  $ (7,974 )   $ (534 )   $ (8,508 )
Adjustments to reconcile net loss to net cash provided by operating activities:
                       
Depreciation, accretion, and amortization expense
    28,125       (111 )     28,014  
Deferred income taxes
    (111 )     (206 )     (317 )
Loss on disposal of assets (1)
    2,056       379       2,435  
Other reserves and non-cash items (1)
    (3,643 )     (162 )     (3,805 )
Net cash provided by operating activities
    8,060       (634 )     7,426  
Cash flows from investing activities:
                       
Additions to property and equipment
    (43,090 )     634       (42,456 )
Net cash used in investing activities
    (43,570 )     634       (42,936 )
     
(1)   Of the Adjustments presented above, $162,000 relates to the reclassification of certain non-cash items previously included in “Loss on disposal of assets” to “Other reserves and non-cash items”.
     
(3) Stock-Based Compensation
The Company accounts for stock-based compensation arrangements under SFAS No. 123 (revised 2004), Share-Based Payment, which requires a company to calculate the fair value of stock-based instruments awarded to employees on the date of grant and recognize 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 Consolidated Statements of Operations for the three and six month periods ended June 30:
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2009     2008     2009     2008  
    (In thousands)  
Cost of ATM operating revenues
  $ 193     $ 132     $ 384     $ 197  
Selling, general, and administrative expenses
    869       413       1,736       614  
 
                       
Total stock-based compensation expense
  $ 1,062     $ 545     $ 2,120     $ 811  
 
                       
The increase in stock-based compensation expense during the three and six months ended June 30, 2009 was due to the issuance of 1,782,750 shares of restricted stock and 293,000 stock options to certain of its employees during 2008 and 2009. Both the restricted shares and the stock options were granted under the Company’s 2007 Stock Incentive Plan.
Options. A summary of the Company’s outstanding stock options as of June 30, 2009 and changes during the six months ended June 30, 2009 are presented below:
                 
            Weighted  
    Number     Average  
    of Shares     Exercise Price  
Options outstanding as of January 1, 2009
    4,288,942     $ 7.96  
Granted
    40,000     $ 2.11  
Exercised
    (8,051 )   $ 0.03  
Forfeited
    (44,807 )   $ 10.02  
 
             
Options outstanding as of June 30, 2009
    4,276,084     $ 7.90  
 
             
 
               
Options vested and exercisable as of June 30, 2009
    3,416,352     $ 7.20  
The options granted in 2009 had a total grant-date fair value of approximately $41,600, or $1.04 per share.

 

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Restricted Stock. A summary of the Company’s outstanding restricted shares as of June 30, 2009 and changes during the six months ended June 30, 2009 are presented below:
         
    Number  
    of Shares  
Restricted shares outstanding as of January 1, 2009
    1,679,250  
Granted
    100,000  
Forfeited
    (195,000 )
Vested
    (375,438 )
 
     
Restricted shares outstanding as of June 30, 2009
    1,208,812  
 
     
During the second quarter of 2009, the Company granted 100,000 restricted shares to certain members of its board of directors with a total grant-date fair value of $290,000, or $2.90 per share. Compensation expense associated with the restricted stock grants totaled approximately $74,000 during the three and six month periods ended June 30, 2009, leaving approximately $216,000 of unrecognized compensation cost associated with these shares as of June 30, 2009. Such amount will be amortized over the remainder of 2009. Additionally, as of June 30, 2009, there was approximately $8.9 million in unrecognized compensation expense associated with prior restricted share grants.
(4) Earnings per Share
The Company reports its earnings per share in accordance with SFAS No. 128, Earnings per Share . Potentially dilutive securities are excluded from the calculation of diluted earnings per share (as well as their related income statement impacts) when their impact on net income (loss) available to common stockholders is anti-dilutive. Such securities include all outstanding stock options and all shares of restricted stock. For the three month period ended June 30, 2008, and for the six month periods ended June 30, 2009 and 2008, the Company incurred net losses and, accordingly, excluded all potentially dilutive securities from the calculation of diluted earnings per share as their impact on the net loss available to common stockholders was anti-dilutive. Dilutive securities were included in the calculation of diluted earnings per share for the three month period ended June 30, 2009 since the Company reported net income for the period.
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 pursuant to Financial Accounting Standards Board (“FASB”) Staff Position (“FSP”) Emerging Issues Task Force (“EITF”) 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities . The Company has allocated the undistributed earnings for the three months ended June 30, 2009 among the Company’s outstanding common shares and issued but unvested restricted shares as follows:
Earnings per Share (in thousands, excluding share and per share amounts):
                 
    Three months ended June 30, 2009  
            Unvested  
    Common Stock     Restricted Shares  
Net income attributed to each class of common stock and participating security
  $ 2,398     $ 90  
Weighted-average shares outstanding — Basic
    39,032,087       1,487,744  
Weighted-average shares outstanding — Diluted
    39,651,363       1,487,744  
Earnings per share — Basic and Diluted
  $ 0.06     $ 0.06  
For the three months ended June 30, 2009, 5,805 potentially dilutive common shares related to restricted stock were excluded from the computation of diluted EPS for common shares as their effect was antidulutive.

 

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(5) Comprehensive Income (Loss)
SFAS No. 130, Reporting Comprehensive Income , establishes standards for reporting comprehensive income (loss) and its components in the financial statements. Total comprehensive income (loss) consisted of the following:
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2009     2008     2009     2008  
    (In thousands)  
Net income (loss)
  $ 2,599     $ (3,621 )   $ (2,438 )   $ (8,508 )
Unrealized gains on interest rate hedges, net of taxes
    343       18,421       1,536       4,956  
Foreign currency translation adjustments
    10,113       157       8,697       (1,249 )
 
                       
Total comprehensive income (loss)
    13,055       14,957       7,795       (4,801 )
Less: comprehensive income (loss) attributable to noncontrolling interests
    162       (14 )     171       10  
 
                       
Comprehensive income (loss) attributable to controlling interests
  $ 12,893     $ 14,971     $ 7,624     $ (4,811 )
 
                       
Accumulated other comprehensive loss is displayed as a separate component of stockholders’ deficit in the Consolidated Balance Sheets and consisted of the following:
                 
    June 30, 2009     December 31, 2008  
    (In thousands)  
Unrealized losses on interest rate hedges
  $ (30,616 )   $ (32,152 )
Foreign currency translation adjustments
    (23,176 )     (31,873 )
 
           
Total accumulated other comprehensive loss
  $ (53,792 )   $ (64,025 )
 
           
The Company currently believes that a majority of the unremitted earnings of its foreign subsidiaries will be reinvested in the foreign countries in which those subsidiaries operate for an indefinite period of time. Accordingly, no deferred taxes have been provided for the differences between the Company’s book basis and underlying tax basis in those subsidiaries or the foreign currency translation adjustment amounts reflected in the tables above. Additionally, as a result of the Company’s overall net loss position for tax purposes, the Company has not recorded deferred tax benefits on the loss amounts related to its interest rate swaps, as management does not currently believe the Company will be able to realize the benefits associated with its net deferred tax asset positions.
(6) Intangible Assets
Intangible Assets with Indefinite Lives
The following table presents the net carrying amount of the Company’s intangible assets with indefinite lives as of June 30, 2009, as well as the changes in the net carrying amounts for the six months ended June 30, 2009, by segment:
                                                 
    Goodwill     Trade Name        
    U.S.     U.K.     Mexico     U.S.     U.K.     Total  
    (In thousands)  
Balance as of January 1, 2009
  $ 150,461     $ 12,603     $ 720     $ 200     $ 2,922     $ 166,906  
Foreign currency translation adjustments
          1,704       (5 )           395       2,094  
 
                                   
Balance as of June 30, 2009
  $ 150,461     $ 14,307     $ 715     $ 200     $ 3,317     $ 169,000  
 
                                   
Intangible Assets with Definite Lives
The following is a summary of the Company’s intangible assets that are subject to amortization as of June 30, 2009:
                         
    Gross              
    Carrying     Accumulated     Net Carrying  
    Amount     Amortization     Amount  
    (In thousands)  
Customer and branding contracts/relationships
  $ 158,585     $ (72,895 )   $ 85,690  
Deferred financing costs
    14,535       (6,694 )     7,841  
Exclusive license agreements
    5,475       (2,885 )     2,590  
Non-compete agreements
    432       (128 )     304  
 
                 
Total
  $ 179,027     $ (82,602 )   $ 96,425  
 
                 

 

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(7) Accrued Liabilities
Accrued liabilities consisted of the following:
                 
    June 30, 2009     December 31, 2008  
    (In thousands)  
Accrued merchant fees
  $ 11,588     $ 10,291  
Accrued interest expense
    10,565       10,643  
Accrued maintenance fees
    6,663       4,273  
Accrued armored fees
    5,229       5,372  
Accrued compensation
    4,919       3,396  
Accrued merchant settlement amounts
    3,856       3,111  
Accrued cash rental and management fees
    2,943       3,693  
Accrued processing costs
    2,403       1,804  
Accrued purchases
    1,872       1,085  
Accrued interest rate swap payments
    1,847       1,836  
Accrued ATM telecommunications costs
    1,249       1,916  
Other accrued expenses
    4,292       7,754  
 
           
Total
  $ 57,426     $ 55,174  
 
           
(8) Long-Term Debt
The Company’s long-term debt consisted of the following:
                 
    June 30, 2009     December 31, 2008  
    (In thousands)  
Revolving credit facility
  $ 24,500     $ 43,500  
Senior subordinated notes due August 2013 (net of unamortized discounts of $3.1 million and $3.4 million as of June 30, 2009 and December 31, 2008)
    296,932       296,637  
Other
    7,014       6,052  
 
           
Total
    328,446       346,189  
Less: current portion
    1,748       1,373  
 
           
Total long-term debt, excluding current portion
  $ 326,698     $ 344,816  
 
           
Revolving Credit Facility
In February 2009, the Company amended its revolving credit facility to (i) authorize the repurchase of common stock up to an aggregate of $10.0 million; (ii) increase the amount of aggregate “Investments” (as such term is defined in the revolving credit facility) that the Company may make in non wholly-owned subsidiaries from $10.0 million to $20.0 million and correspondingly increase the aggregate amount of Investments that may be made in subsidiaries that are not Loan Parties (as such term is defined in the revolving credit facility) from $25.0 million to $35.0 million; (iii) increase the maximum amount of letters of credit that may be issued under the revolving credit facility from $10.0 million to $15.0 million; and (iv) modify the amount of capital expenditures that may be incurred on a rolling 12-month basis, as measured on a quarterly basis.
As of June 30, 2009, $24.5 million of borrowings were outstanding under the Company’s $175.0 million revolving credit facility. Additionally, the Company had posted $2.7 million in letters of credit under the facility in favor of the lessors under the Company’s ATM equipment leases and $4.3 million in letters of credit to secure the Company’s borrowing under its United Kingdom subsidiary’s overdraft facility (as further discussed below). These letters of credit, which the applicable third parties may draw upon in the event the Company defaults on the related obligations, further reduce the Company’s borrowing capacity under its revolving credit facility. As of June 30, 2009, 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 agreement, totaled approximately $143.5 million. As of June 30, 2009, the Company was in compliance with all applicable covenants and ratios under the facility.

 

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Other Facilities
Cardtronics Mexico equipment financing agreements. As of June 30, 2009, other long-term debt consisted of seven separate equipment financing agreements entered into by Cardtronics Mexico. These agreements, which are denominated in Mexican pesos and bear interest at an average fixed rate of 10.98%, 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 a guaranty for 51.0% of the obligations under these agreements (consistent with its ownership percentage in Cardtronics Mexico.) As of June 30, 2009, the total amount of the guaranty was $47.2 million pesos (approximately $3.6 million U.S.).
Bank Machine overdraft facility. In addition to Cardtronics, Inc.’s $175.0 million revolving credit facility, Bank Machine Ltd., the Company’s wholly-owned subsidiary operating in the United Kingdom, has a £1.0 million overdraft facility. This facility, which bears interest at 1.75% over the bank’s base rate (0.5% as of June 30, 2009) and is secured by a letter of credit posted under the Company’s corporate revolving credit facility, is utilized for general corporate purposes for the Company’s United Kingdom operations. As of June 30, 2009, no amounts were outstanding under this facility.
(9) Asset Retirement Obligations
Asset retirement obligations consist primarily of costs to deinstall the Company’s ATMs and costs to restore the ATM sites to their original condition. In most cases, the Company is legally required to perform this deinstallation and restoration work. In accordance with SFAS No. 143, Asset Retirement Obligations, for each group of ATMs, the Company has recognized the fair value of a liability for an asset retirement obligation 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 the estimated useful lives of the underlying ATMs, 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 Company’s asset retirement obligation liability for the six months ended June 30, 2009 (in thousands) :
         
Asset retirement obligation as of January 1, 2009
  $ 21,069  
Additional obligations
    1,522  
Accretion expense
    973  
Payments
    (1,783 )
Foreign currency translation adjustments
    996  
 
     
Asset retirement obligation as of June 30, 2009
  $ 22,777  
 
     
See Note 12 for additional disclosures on the Company’s asset retirement obligations required by SFAS No. 157, Fair Value Measurements .
(10) Other Liabilities
Other liabilities consisted of the following:
                 
    June 30, 2009     December 31, 2008  
    (In thousands)  
Current Portion of Other Long-Term Liabilities:
               
Interest rate swaps
  $ 19,834     $ 13,788  
Obligations associated with acquired unfavorable contracts
    3,677       8,203  
Deferred revenue
    1,954       1,879  
Other
    390       432  
 
           
Total
  $ 25,855     $ 24,302  
 
           
 
               
Other Long-Term Liabilities:
               
Interest rate swaps
  $ 10,782     $ 18,364  
Deferred revenue
    2,922       3,604  
Other long-term liabilities
    3,808       1,999  
 
           
Total
  $ 17,512     $ 23,967  
 
           
The decline in the non-current portion of other long-term liabilities was primarily the result of the reclassification of unrealized losses on the Company’s interest rate swap transactions from long-term to current.

 

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(11) Derivative Financial Instruments
Accounting Policy
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended (“SFAS No. 133”), requires that the Company recognize all of its derivative instruments as either assets or liabilities in the balance sheet at fair value. The accounting for changes in the fair value (e.g., gains or losses) of those derivative instruments depends on (i) whether such instruments have been designated (and qualify) as part of a hedging relationship and (ii) on the type of hedging relationship actually designated. For derivative instruments that are designated and qualify as hedging instruments, the Company must designate 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. In addition to SFAS No. 133, SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS No. 161”), requires that the Company provide expanded qualitative and quantitative disclosures about its derivative instruments. The Company adopted SFAS No. 161 effective January 1, 2009 and has provided the additional disclosures required by such statement below.
The Company is exposed to certain risks relating to its ongoing business operations, including interest rate risk associated with the Company’s vault cash rental obligations and, to a lesser extent, outstanding borrowings under the Company’s revolving credit facility. The Company is also exposed to foreign currency rate risk with respect to its investments in its foreign subsidiaries, most notably its investment in Bank Machine in the United Kingdom. While the Company does not currently utilize derivative instruments to hedge its foreign currency rate risk, it does utilize interest rate swap contracts to manage the interest rate risk associated with its vault cash rental obligations in the United States and the United Kingdom. The Company does not currently utilize any derivative instruments to manage the interest rate risk associated with its vault cash rental obligations in Mexico, nor does it utilize derivative instruments to manage the interest rate risk associated with the borrowings outstanding under its revolving credit facility.
As of June 30, 2009, the notional amounts, weighted-average fixed rates, and terms associated with the Company’s interest rate swap contracts were as follows:
                                   
                      Weighted        
Notional Amounts   Notional Amounts     Notional Amounts     Average Fixed        
United States   United Kingdom     Consolidated (1)     Rate     Term  
    (In thousands)                    
$
550,000
  £     $ 550,000       4.30 %   July 1, 2009 – December 31, 2009  
$
600,000
  £ 50,000     $ 682,936       3.92 %   January 1, 2010 – December 31, 2010  
$
550,000
  £ 50,000     $ 632,936       3.66 %   January 1, 2011 – December 31, 2011  
$
350,000
  £ 25,000     $ 391,468       3.82 %   January 1, 2012 – December 31, 2012  
$
100,000
  £     $ 100,000       4.11 %   January 1, 2013 – December 31, 2013  
     
(1)   United Kingdom pound sterling amounts have been converted into United States dollars at $1.65873 to £1.00, which was the exchange rate in effect as of June 30, 2009.
In accordance with SFAS No. 133, the Company has designated its interest rate swap contracts as cash flow hedges of the Company’s forecasted vault cash rental obligations. Accordingly, changes in the fair values of the related interest rate swap contracts have been reported in accumulated other comprehensive loss in the Consolidated Balance Sheets. As a result of the Company’s overall net loss position for tax purposes, the Company has not recorded deferred tax benefits on the loss amounts related to these interest rate swap contracts as management does not currently believe that the Company will be able to realize the benefits associated with its net deferred tax asset positions.
Cash Flow Hedging Strategy
For derivative instruments that are designated and qualify 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 domestic vault cash rental obligations, the amount of ineffectiveness associated with such interest rate swap contracts has historically been immaterial. Accordingly, no ineffectiveness amounts have been recorded in the Company’s consolidated financial statements.

 

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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, 2012 for the Company’s United Kingdom vault cash rental obligations, and December 31, 2013 for the Company’s United States 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 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 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.
Tabular Disclosures
The following tables depict the effects of the use of derivative contracts on the Company’s Consolidated Balance Sheets and Consolidated Statements of Operations.
Balance Sheet Data
                                 
    Liability Derivative Instruments  
    June 30, 2009     December 31, 2008  
Derivatives Designated as Hedging   Balance Sheet             Balance Sheet        
Instruments Under SFAS No. 133   Location     Fair Value     Location     Fair Value  
    (In thousands)  
Interest rate swap contracts
  Current portion of other long-term liabilities   $ 19,834     Current portion of other long-term liabilities   $ 13,788  
Interest rate swap contracts
  Other long-term liabilities     10,782     Other long-term liabilities     18,364  
 
                           
Total
          $ 30,616             $ 32,152  
 
                           
The Company does not currently have any derivative instruments that are not designated as hedging instruments under SFAS No. 133. Additionally, all of the Company’s derivative instruments that were designated as hedging instruments under SFAS No. 133 were in a liability position as of June 30, 2009 and December 31, 2008. Accordingly, no asset derivative instrument positions have been reflected in the table above.
Statements of Operations Data
                                         
    Three Months Ended June 30,  
                    Location of Gain (Loss)        
    Amount of Gain (Loss)     Reclassified from     Amount of Loss Reclassified from  
Derivatives in SFAS No. 133   Recognized in OCI on Derivative     Accumulated OCI into     Accumulated OCI into Income  
Cash Flow Hedging   Instruments (Effective Portion)     Income (Effective     (Effective Portion)  
Relationships   2009     2008     Portion)     2009     2008  
    (In thousands)           (In thousands)  
Interest rate swap contracts
  $ 5,934     $ 21,551     Cost of ATM operating revenues     $ (5,591 )   $ (3,130 )

 

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    Six Months Ended June 30,  
                    Location of Gain (Loss)        
    Amount of Gain (Loss)     Reclassified from     Amount of Loss Reclassified from  
Derivatives in SFAS No. 133   Recognized in OCI on Derivative     Accumulated OCI into     Accumulated OCI into Income  
Cash Flow Hedging   Instruments (Effective Portion)     Income (Effective     (Effective Portion)  
Relationships   2009     2008     Portion)     2009     2008  
    (In thousands)           (In thousands)  
Interest rate swap contracts
  $ 12,574     $ 9,973     Cost of ATM operating revenues     $ (11,038 )   $ (5,017 )
The Company does not currently have any derivative instruments that have been designated as fair value or net investment hedges pursuant to SFAS No. 133. Additionally, the Company does not recognize any gains or losses related to the ineffective portion of its interest rate swaps as such amounts have historically been, and, based on the Company’s analysis as of June 30, 2009, are expected to continue to be, immaterial. Furthermore, the Company has not historically, and does not currently anticipate, discontinuing its existing derivative instruments prior to their expiration date. However, 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, any resulting gains or losses will be recognized within the Other expense (income) line item of the Company’s Consolidated Statements of Operations.
As of June 30, 2009, the Company expects to reclassify $19.8 million of net derivative-related losses contained within accumulated OCI to earnings during the next twelve months concurrent with the recording of the related vault cash rental expense amounts.
See Note 12 for additional disclosures on the Company’s interest rate swap contracts required by SFAS No. 157, Fair Value Measurements .
(12) Fair Value Measurements
The Company adopted the provisions of SFAS No. 157, Fair Value Measurements , on January 1, 2008, with the exception of the application of the statement to non-financial assets and non-financial liabilities measured at fair value on a nonrecurring basis. Effective January 1, 2009, in accordance with FSP No. 157-2, Effective Date of Financial Accounting Standards Board (“FASB”) Statement No. 157 , the Company adopted the provisions of SFAS No. 157 for non-financial assets and non-financial liabilities, which include those measured at fair value in goodwill impairment testing, indefinite-lived intangible assets measured at fair value for impairment assessment, non-financial long-lived assets measured at fair value for impairment assessment, asset retirement obligations initially measured at fair value, and those initially measured at fair value in a business combination. The adoption did not have an impact on the Company’s financial statements.
The following table provides the liabilities carried at fair value measured on a recurring basis as of June 30, 2009:
                                 
    Fair Value Measurements  
    Total Carrying                    
    Value     Level 1     Level 2     Level 3  
    (In thousands)  
Liabilities associated with interest rate swaps
  $ 30,616     $     $ 30,616     $  
The following table provides the liabilities measured at fair value on a non-recurring basis at June 30, 2009. These items are included in the “asset retirement obligations” line in the Company’s Consolidated Balance Sheet:
                                 
    Fair Value Measurements  
    Total Carrying                    
    Value     Level 1     Level 2     Level 3  
    (In thousands)  
Asset retirement obligations — liabilities added during the six months ended June 30, 2009
  $ 1,522     $     $     $ 1,522  

 

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The following is a description of the Company’s valuation methodology for assets and liabilities measured at fair value:
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. 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.
The methods described above 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.
SFAS No. 107, Disclosures about Fair Value of Financial Instruments , requires the disclosure of the estimated fair value of the Company’s financial instruments. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. SFAS No. 107 does not require the disclosure of the fair value of lease financing arrangements and non-financial instruments, including intangible assets such as goodwill and the Company’s merchant contracts/relationships.
In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments. This FSP amends SFAS No. 107, Disclosures about Fair Value of Financial Instruments , to require publicly-traded companies, as defined in APB Opinion No. 28, Interim Financial Reporting , to provide disclosures on the fair value of financial instruments in interim financial statements. The Company adopted this standard effective June 30, 2009 and has provided the additional disclosures required below.
The carrying amount of the Company’s cash and cash equivalents and other current assets and liabilities approximates fair value due to the relatively short maturities of these instruments. The fair value of the Company’s interest rate swaps was a liability of $30.6 million as of June 30, 2009. Please refer to Note 11 for information on how the fair value of these swaps was calculated. The carrying amount of the long-term debt balance related to borrowings under the Company’s revolving credit facility approximates fair value due to the fact that such borrowings are subject to short-term floating market interest rates. As of June 30, 2009, the fair value of the Company’s $300.0 million senior subordinated notes (see Note 8 ) totaled $271.5 million, based on the quoted market price for such notes as of June 30, 2009.
(13) Commitments and Contingencies
Legal and Other Regulatory Matters
In June 2006, Duane Reade, Inc. (“Customer”), one of the Company’s merchant customers filed a complaint in the New York State Supreme Court alleging that the Company had breached its ATM operating agreement with the Customer by failing to pay the Customer the proper amount of fees under the agreement. Cardtronics denied any improper payment of fees. On May 8, 2009, Cardtronics and Duane Reade settled this lawsuit. In connection with that settlement, under which neither side admitted any wrongdoing, the Company agreed to terminate its ATM placement agreement with Duane Reade no later than October 31, 2009, and the related bank branding agreement associated with those ATMs. In connection with these terminations, Cardtronics made a termination payment to Duane Reade and received a termination payment from the associated bank branding partner, the net effect of which was not material to the Company’s financial condition or results of operations.

 

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In the fall of 2008, the Company was made a party to Nathanson v. Cardtronics, Inc. et. al., a lawsuit concerning balance inquiry transactions at the Company’s ATMs located in California. The plaintiff alleged that the ATMs of the companies named in the lawsuit violated California state laws by not disclosing the possibility that consumers’ financial institutions would impose fees for balance inquiry transactions conducted through the Company’s ATMs. The plaintiff sought unspecified damages and injunctive relief for himself and a class of other consumers who allegedly paid such fees without notice in the four-year period prior to the filing of the lawsuit. The lawsuit was originally filed on or about October 21, 2008 in the Superior Court of California, County of Los Angeles, and the Company removed the lawsuit to the United States District Court, Central District of California. On July 24, 2009, the Company and the plaintiff entered into a settlement agreement wherein all claims were dismissed without the Company admitting any liability. Under the settlement agreement, the Company made a one-time payment to the plaintiff, which did not have a material impact upon the Company’s operations.
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 that lawsuit in the United States District Court for the District of Massachusetts wherein the Commonwealth of Massachusetts (the “Commonwealth”) and the National Federation of the Blind (the “NFB”) has 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 regarding this matter. The Court approved the settlement in December 2007. The Company has requested a modification to the settlement agreement so as to permit it to upgrade or replace approximately 2,200 non-voice guided ATMs that it acquired in July 2007 over a period of time longer than originally contemplated by the 2007 settlement agreement. The Commonwealth and NFB are considering our proposal, but as of this date have not yet indicated whether they will accept it. If they demand a quicker conversion of these ATMs to voice-guidance and the Company agrees (or is ordered by the Court to comply with such demands), the Company’s capital budget for 2009 and 2010 may have to be increased.
In addition to the above items, 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 effect on the Company’s financial condition or results of operations.
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 $22.8 million accrued for these liabilities as of June 30, 2009. For additional information on the Company’s asset retirement obligations, see Note 9 .
(14) Income Taxes
Income tax expense based on the Company’s loss before income taxes was as follows for the three month periods ended June 30:
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2009     2008     2009     2008  
    (In thousands)     (In thousands)  
Income tax expense (benefit)
  $ 1,016     $ (633 )   $ 2,033     $ (181 )
Effective tax rate
    28.1 %     14.9 %     (502.0 )%     2.1 %
The Company has established valuation allowances for its net deferred tax asset positions in all of its jurisdictions and is currently not recording any income tax benefits on current losses in those jurisdictions as it believes it is more likely than not that such benefits will not be realized. In addition, during the three and six month periods ended June 30, 2009, the Company increased its domestic valuation allowance by approximately $0.9 million and $1.9 million, respectively, resulting in the negative effective tax rate reflected above for the six month period ended June 30, 2009. The lower effective tax rates in 2008 were due to the recognition of certain deferred tax benefits in the Company’s United Kingdom jurisdiction as the Company did not begin establishing valuation allowances in that jurisdiction until the fourth quarter of 2008. Finally, the Company is in a taxable income position with respect to its domestic state income taxes, which further contributed to the negative effective tax rate reflected above for the six month period ended June 30, 2009.

 

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(15) Segment Information
As of June 30, 2009, the Company’s operations consisted of its United States, United Kingdom, and Mexico segments. 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. 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 loss attributable to controlling interests for the three and six month periods ended June 30, 2009 and 2008:
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2009     2008     2009     2008  
    (In thousands)     (In thousands)  
EBITDA
  $ 26,190     $ 18,477     $ 44,584     $ 35,717  
Depreciation and accretion expense
    9,935       9,978       19,574       19,010  
Amortization expense
    4,504       4,501       9,031       9,004  
Interest expense, net, including amortization of deferred financing costs and bond discounts
    8,247       8,252       16,526       16,392  
Income tax expense (benefit)
    1,016       (633 )     2,033       (181 )
 
                       
Net income (loss) attributable to controlling interests
  $ 2,488     $ (3,621 )   $ (2,580 )   $ (8,508 )
 
                       
The following tables reflect certain financial information for each of the Company’s reporting segments for the three and six month periods ended June 30, 2009 and 2008. All intercompany transactions between the Company’s reporting segments have been eliminated.
                                         
    For the Three Month Period Ended June 30, 2009  
    United States     United Kingdom     Mexico     Eliminations     Total  
    (In thousands)  
Revenue from external customers
  $ 102,270     $ 18,031     $ 4,347     $     $ 124,648  
Intersegment revenues
    512                   (512 )      
Cost of revenues
    71,248       13,085       3,307       (512 )     87,128  
Selling, general, and administrative expenses (1)
    9,050       1,268       266             10,584  
Loss on disposal of assets
    995       681                   1,676  
 
                                       
EBITDA
    22,393       3,057       850       (110 )     26,190  
 
                                       
Depreciation and accretion expense
    6,768       2,727       445       (5 )     9,935  
Amortization expense
    4,051       443       10             4,504  
Interest expense, net
    6,817       1,260       170             8,247  
 
                                       
Capital expenditures, excluding acquisitions (2)
  $ 3,257     $ 2,106     $ 460     $     $ 5,823  

 

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    For the Three Month Period Ended June 30, 2008  
    United States     United Kingdom     Mexico     Eliminations     Total  
    (In thousands)  
Revenue from external customers
  $ 104,051     $ 19,701     $ 3,223     $     $ 126,975  
Intersegment revenues
    365                   (365 )      
Cost of revenues
    77,343       17,843 (1)     2,745       (365 )     97,566  
Selling, general, and administrative expenses
    7,985       1,538       277             9,800  
Loss on disposal of assets
    656       459                   1,115  
 
                                       
EBITDA
    18,683       (255 ) (1)     49             18,477  
 
                                       
Depreciation and accretion expense
    6,583       2,994       406       (5 )     9,978  
Amortization expense
    3,952       536       13             4,501  
Interest expense, net
    6,607       1,432       213             8,252  
 
                                       
Capital expenditures, excluding acquisitions (2)
  $ 6,115     $ 8,376     $ 2,696     $     $ 17,187  
                                         
    For the Six Month Period Ended June 30, 2009  
    United States     United Kingdom     Mexico     Eliminations     Total  
    (In thousands)  
Revenue from external customers
  $ 199,037     $ 32,808     $ 8,148     $     $ 239,993  
Intersegment revenues
    886                   (886 )      
Cost of revenues
    142,030       23,792       6,235       (886 )     171,171  
Selling, general, and administrative expenses (3)
    18,686       2,285       468             21,439  
Loss on disposal of assets
    1,390       2,394                   3,784  
 
                                       
EBITDA
    38,901       4,348       1,467       (132 )     44,584  
 
                                       
Depreciation and accretion expense
    13,573       5,163       848       (10 )     19,574  
Amortization expense
    8,170       842       19             9,031  
Interest expense, net
    13,739       2,476       311             16,526  
 
                                       
Capital expenditures, excluding acquisitions (2)
  $ 6,312     $ 3,873     $ 614     $     $ 10,799  
                                         
    For the Six Month Period Ended June 30, 2008  
    United States     United Kingdom     Mexico     Eliminations     Total  
    (In thousands)  
Revenue from external customers
  $ 204,404     $ 37,341     $ 5,805     $     $ 247,550  
Intersegment revenues
    365                   (365 )      
Cost of revenues
    154,029       32,566 (1)     4,932       (365 )     191,162  
Selling, general, and administrative expenses
    15,310       2,466       575             18,351  
Loss on disposal of assets
    1,528       907                   2,435  
 
                                       
EBITDA
    34,310       1,231 (1)     176             35,717  
 
                                       
Depreciation and accretion expense
    12,696       5,626       715       (27 )     19,010  
Amortization expense
    7,905       1,074       25             9,004  
Interest expense, net
    13,110       2,888       394             16,392  
 
                                       
Capital expenditures, excluding acquisitions (2)
  $ 21,958     $ 18,232     $ 2,763     $     $ 42,953  
 
     
(1)   During the second quarter of 2008, we experienced a significant increase in transactions conducted on our ATMs in the United Kingdom with counterfeit credit cards. Due to a delay in the completion of our Europay MasterCard Visa (“EMV”) security standard certification with the network whose brand was on those cards, we are liable under the network’s rules for the resulting claims, which totaled approximately $1.3 million. As a result, our cost of revenues and EBITDA were negatively impacted by the $1.3 million charge during the three and six month periods ended June 30, 2008.
 
(2)   Capital expenditure amounts include payments made for exclusive license agreements and site acquisition costs. Additionally, capital expenditure amounts for Mexico are reflected gross of any noncontrolling interest amounts.
 
(3)   Selling, general, and administrative expenses for the six months ended June 30, 2009 includes $1.2 million in severance costs associated with the departure of the Company’s former Chief Executive Officer in March 2009.

 

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Identifiable Assets:
                 
    June 30, 2009     December 31, 2008  
    (In thousands)  
United States
  $ 705,177     $ 733,921  
United Kingdom
    83,810       74,876  
Mexico
    13,011       11,736  
Eliminations
    (333,862 )     (339,705 )
 
           
Total
  $ 468,136     $ 480,828  
 
           
     
(16)   New Accounting Pronouncements
Adopted
In addition to its adoption of SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, (see Note 11 ) and the provisions of SFAS No. 157, Fair Value Measurements , to non-financial assets and non-financial liabilities measured at fair value on a nonrecurring basis (see Note 12 ), the Company adopted the following pronouncements effective January 1, 2009:
Noncontrolling Interests . SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51 , provides guidance on the presentation of minority interests in the financial statements and the accounting for and reporting of transactions between the reporting entity and the holders of noncontrolling interests. This standard requires that minority interests be presented as a separate component of stockholders’ equity rather than as a “mezzanine” item between liabilities and stockholders’ equity and requires that minority interests be presented as a separate caption in the income statement. In addition, this standard requires all transactions with minority interest holders, including the issuance and repurchase of minority interests, be accounted for as equity transactions unless a change in control of the subsidiary occurs. The provisions of SFAS No. 160 are to be applied prospectively with the exception of reclassifying noncontrolling interests to equity and recasting consolidated net income (loss) to include net income (loss) attributable to both the controlling and noncontrolling interests, which are required to be adopted retrospectively. The Company adopted the provisions of SFAS No. 160 on January 1, 2009. As a result of the adoption, the Company has reported noncontrolling interests as a component of equity in the Consolidated Balance Sheets and the net income attributable to noncontrolling interests has been separately identified in the Consolidated Statements of Operations. The prior period presentation has been modified to conform to the current classification required by SFAS No. 160.
Business Combinations. SFAS No. 141R, Business Combinations , provides revised guidance on the accounting for acquisitions of businesses. This standard changed the previous guidance on business combinations and now requires that all acquired assets, liabilities, minority interest, and certain contingencies, including contingent consideration, be measured at fair value, and certain other acquisition-related costs, including costs of a plan to exit an activity or terminate and relocate employees, be expensed rather than capitalized. SFAS No. 141R applies to acquisitions effective after December 31, 2008. The Company will apply the requirements of the statement to future business combinations, and the impact of the Company’s adoption will depend upon the nature and terms of business combinations, if any, that the Company consummates in the future.
Useful Life of Intangible Assets. FSP FAS 142-3, Determination of the Useful Life of Intangible Assets, amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS No. 142”). The intent of FSP FAS 142-3 is to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141R (discussed above) and other applicable accounting literature. The Company will (1) apply the useful life estimation provisions of FSP FAS 142-3 to all intangible assets associated with new or renewed contracts on a prospective basis and (2) apply the disclosure provisions to all intangible assets.
Unvested Participating Securities. FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities, states that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. The initial adoption of this standard did not impact the Company’s financial position or results of operations as the Company reported a net loss for the three month period ended March 31, 2009. However, the provisions of this standard have been applied to the Company’s earnings per share calculation for the three month period ended June 30, 2009, contained elsewhere herein.

 

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Interim Disclosures about Fair Value. In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments. This FSP amends SFAS No. 107, Disclosures about Fair Value of Financial Instruments , to require publicly-traded companies, as defined in APB Opinion No. 28, Interim Financial Reporting , to provide disclosures on the fair value of financial instruments in interim financial statements. The Company adopted this standard effective June 30, 2009 and has provided the additional disclosures required by such statement in Note 12, Fair Value Measurements .
Subsequent Events. SFAS No. 165, Subsequent Events , establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS No. 165 defines the subsequent events period and the circumstances under which an entity should recognize events or transactions in its financial statements, as well as requires additional disclosures regarding subsequent events. The Company adopted this standard effective June 30, 2009 and has provided the additional disclosures required by such statement in Note 1, General and Basis of Presentation .
Issued but Not Yet Adopted
FASB Accounting Standards Codification™ . In June 2009, the FASB issued under SFAS No. 168, The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162 (the Codification). The Codification, which was launched on July 1, 2009, became the single source of authoritative non-governmental U.S. GAAP, except for SEC rules and interpretive releases. The Codification eliminates the GAAP hierarchy contained in SFAS No. 162 and establishes one level of authoritative GAAP, deeming all other non-SEC accounting and reporting standards as non-authoritative. This standard is effective for the Company for its quarter ending September 30, 2009. Adoption of the standard will not impact the Company’s consolidated financial position or results of operations; however, it will change references to authoritative GAAP sources for the Company’s accounting policies and disclosures in future filings.
(17) Supplemental Guarantor Financial Information
The Company’s $300.0 million of 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 and six month periods ended June 30, 2009 and 2008 and the condensed consolidating balance sheets as of June 30, 2009 and December 31, 2008 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”):
Condensed Consolidating Statements of Operations
                                         
    Three Months Ended June 30, 2009  
                    Non-              
    Parent     Guarantors     Guarantors     Eliminations     Total  
    (In thousands)  
Revenues
  $     $ 102,782     $ 22,378     $ (512 )   $ 124,648  
Operating costs and expenses
    1,156       90,956       22,232       (517 )     113,827  
 
                             
Operating income (loss)
    (1,156 )     11,826       146       5       10,821  
Interest expense, net, including amortization of deferred financing costs and bond discounts
    812       6,005       1,430             8,247  
Equity in earnings of subsidiaries
    (5,483 )                 5,483        
Other income, net
    (24 )     (882 )     (135 )           (1,041 )
 
                             
Income (loss) before income taxes
    3,539       6,703       (1,149 )     (5,478 )     3,615  
Income tax expense
    945       71                   1,016  
 
                             
Net income (loss)
    2,594       6,632       (1,149 )     (5,478 )     2,599  
Net income attributable to noncontrolling interests
                      111       111  
 
                             
Net income (loss) attributable to controlling interests and available to common stockholders
  $ 2,594     $ 6,632     $ (1,149 )   $ (5,589 )   $ 2,488  
 
                             

 

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    Three Months Ended June 30, 2008  
                    Non-              
    Parent     Guarantors     Guarantors     Eliminations     Total  
    (In thousands)  
Revenues
  $     $ 104,416     $ 22,924     $ (365 )   $ 126,975  
Operating costs and expenses
    673       95,846       26,811       (370 )     122,960  
 
                             
Operating income (loss)
    (673 )     8,570       (3,887 )     5       4,015  
Interest expense, net, including amortization of deferred financing costs and bond discounts
    34       6,573       1,645             8,252  
Equity in losses of subsidiaries
    2,201                   (2,201 )      
Other (income) expense, net
    (116 )     (135 )     268             17  
 
                             
Income (loss) before income taxes
    (2,792 )     2,132       (5,800 )     2,206       (4,254 )
Income tax expense (benefit)
    834             (1,467 )           (633 )
 
                             
Net income (loss)
    (3,626 )     2,132       (4,333 )     2,206       (3,621 )
Net income attributable to noncontrolling interests
                             
 
                             
Net income (loss) attributable to controlling interests and available to common stockholders
  $ (3,626 )   $ 2,132     $ (4,333 )   $ 2,206     $ (3,621 )
 
                             
                                         
    Six Months Ended June 30, 2009  
                    Non-              
    Parent     Guarantors     Guarantors     Eliminations     Total  
    (In thousands)  
Revenues
  $     $ 199,923     $ 40,956     $ (886 )   $ 239,993  
Operating costs and expenses
    2,289       181,560       42,046       (896 )     224,999  
 
                             
Operating income (loss)
    (2,289 )     18,363       (1,090 )     10       14,994  
Interest expense, net, including amortization of deferred financing costs and bond discounts
    1,308       12,431       2,787             16,526  
Equity in earnings of subsidiaries
    (2,849 )                 2,849        
Other income, net
    (191 )     (904 )     (32 )           (1,127 )
 
                             
Income (loss) before income taxes
    (557 )     6,836       (3,845 )     (2,839 )     (405 )
Income tax expense
    1,891       142                   2,033  
 
                             
Net income (loss)
    (2,448 )     6,694       (3,845 )     (2,839 )     (2,438 )
Net income attributable to noncontrolling interests
                      142       142  
 
                             
Net income (loss) attributable to controlling interests and available to common stockholders
  $ (2,448 )   $ 6,694     $ (3,845 )   $ (2,981 )   $ (2,580 )
 
                             
                                         
    Six Months Ended June 30, 2008  
                    Non-              
    Parent     Guarantors     Guarantors     Eliminations     Total  
    (In thousands)  
Revenues
  $     $ 204,769     $ 43,146     $ (365 )   $ 247,550  
Operating costs and expenses
    690       190,778       48,886       (392 )     239,962  
 
                             
Operating income (loss)
    (690 )     13,991       (5,740 )     27       7,588  
Interest expense, net, including amortization of deferred financing costs and bond discounts
    83       13,027       3,282             16,392  
Equity in losses of subsidiaries
    5,918                   (5,918 )      
Other (income) expense, net
    (172 )     (236 )     293             (115 )
 
                             
Income (loss) before income taxes
    (6,519 )     1,200       (9,315 )     5,945       (8,689 )
Income tax expense (benefit)
    2,016       136       (2,333 )           (181 )
 
                             
Net income (loss)
    (8,535 )     1,064       (6,982 )     5,945       (8,508 )
Net income attributable to noncontrolling interests
                             
 
                             
Net income (loss) attributable to controlling interests and available to common stockholders
  $ (8,535 )   $ 1,064     $ (6,982 )   $ 5,945     $ (8,508 )
 
                             

 

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Condensed Consolidating Balance Sheets
                                         
    As of June 30, 2009  
                    Non-              
    Parent     Guarantors     Guarantors     Eliminations     Total  
    (In thousands)  
Assets:
                                       
Cash and cash equivalents
  $ 34     $ 2,273     $ 4,185     $     $ 6,492  
Receivables, net
    11,127       20,346       3,583       (11,672 )     23,384  
Other current assets
    3,526       7,876       9,909       (3,465 )     17,846  
 
                             
Total current assets
    14,687       30,495       17,677       (15,137 )     47,722  
Property and equipment, net
          91,094       59,746       (164 )     150,676  
Intangible assets, net
    7,286       82,444       10,212             99,942  
Goodwill
          150,461       15,022             165,483  
Investments in and advances to subsidiaries
    (45,466 )                 45,466        
Intercompany receivable (payable)
    357,851       13,099       (6,923 )     (364,027 )      
Prepaid expenses, deferred costs, and other assets
          3,226       1,087             4,313  
 
                             
Total assets
  $ 334,358     $ 370,819     $ 96,821     $ (333,862 )   $ 468,136  
 
                             
Liabilities and Stockholders’ (Deficit) Equity:
                                       
Current portion of long-term debt
  $     $     $ 1,748     $     $ 1,748  
Current portion of capital lease obligations
          605                   605  
Current portion of other long-term liabilities
          25,400       455             25,855  
Accounts payable and accrued liabilities
    10,582       57,072       17,106       (15,132 )     69,628  
 
                             
Total current liabilities
    10,582       83,077       19,309       (15,132 )     97,836  
Long-term debt, net of related discounts
    321,431             5,267             326,698  
Intercompany payable
          242,716       120,992       (363,708 )      
Capital lease obligations
                             
Deferred tax liability, net
    12,596       968                   13,564  
Asset retirement obligations
          13,920       8,857             22,777  
Other non-current liabilities
          17,411       101             17,512  
 
                             
Total liabilities
    344,609       358,092       154,526       (378,840 )     478,387  
Stockholders’ (deficit) equity
    (10,251 )     12,727       (57,705 )     44,978       (10,251 )
 
                             
Total liabilities and stockholders’ (deficit) equity
  $ 334,358     $ 370,819     $ 96,821     $ (333,862 )   $ 468,136  
 
                             

 

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    As of December 31, 2008  
                    Non-              
    Parent     Guarantors     Guarantors     Eliminations     Total  
    (In thousands)  
Assets:
                                       
Cash and cash equivalents
  $ 20     $ 3,165     $ 239     $     $ 3,424  
Receivables, net
    2,329       22,872       2,965       (2,849 )     25,317  
Other current assets
    2,547       12,245       10,406       (2,491 )     22,707  
 
                             
Total current assets
    4,896       38,282       13,610       (5,340 )     51,448  
Property and equipment, net
          96,965       56,640       (175 )     153,430  
Intangible assets, net
    7,612       90,844       9,871             108,327  
Goodwill
          150,462       13,322             163,784  
Investments in and advances to subsidiaries
    (48,700 )                 48,700        
Intercompany receivable (payable)
    378,319       12,342       (7,771 )     (382,890 )      
Prepaid expenses, deferred costs, and other assets
          2,899       940             3,839  
 
                             
Total assets
  $ 342,127     $ 391,794     $ 86,612     $ (339,705 )   $ 480,828  
 
                             
Liabilities and Stockholders’ (Deficit) Equity:
                                       
Current portion of long-term debt
  $     $     $ 1,373     $     $ 1,373  
Current portion of capital lease obligations
          757                   757  
Current portion of other long-term liabilities
          24,302                   24,302  
Accounts payable and accrued liabilities
    11,035       51,016       15,669       (5,334 )     72,386  
 
                             
Total current liabilities
    11,035       76,075       17,042       (5,334 )     98,818  
Long-term debt, net of related discounts
    340,137             4,679             344,816  
Intercompany payable
          273,346       109,544       (382,890 )      
Capital lease obligations
          235                   235  
Deferred tax liability, net
    10,705       968                   11,673  
Asset retirement obligations
          13,247       7,822             21,069  
Other non-current liabilities
          23,944       23             23,967  
 
                             
Total liabilities
    361,877       387,815       139,110       (388,224 )     500,578  
Stockholders’ (deficit) equity
    (19,750 )     3,979       (52,498 )     48,519       (19,750 )
 
                             
Total liabilities and stockholders’ (deficit) equity
  $ 342,127     $ 391,794     $ 86,612     $ (339,705 )   $ 480,828  
 
                             
Condensed Consolidating Statements of Cash Flows
                                         
    Six Months Ended June 30, 2009  
                    Non-              
    Parent     Guarantors     Guarantors     Eliminations     Total  
    (In thousands)  
Net cash (used in) provided by operating activities
  $ (10,100 )   $ 36,437     $ 6,368     $     $ 32,705  
 
                             
Additions to property and equipment
          (6,256 )     (4,456 )           (10,712 )
Payments for exclusive license agreements and site acquisition costs
          (56 )     (31 )           (87 )
 
                             
Net cash used in investing activities
          (6,312 )     (4,487 )           (10,799 )
 
                             
Proceeds from issuance of long-term debt
    26,500       12,500       2,312       (13,500 )     27,812  
Repayments of long-term debt and capital leases
    (45,500 )     (43,517 )     (599 )     43,130       (46,486 )
Issuance of long-term notes receivable
    (13,500 )                 13,500        
Payments received on long-term notes receivable
    43,130                   (43,130 )      
Repayments of borrowings under bank overdraft facility, net
                (142 )           (142 )
Payments received for subscriptions receivable
    34                         34  
Other financing activities
    (458 )                       (458 )
Repurchase of capital stock
    (92 )                       (92 )
 
                             
Net cash provided by (used in) financing activities
    10,114       (31,017 )     1,571             (19,332 )
 
                             
Effect of exchange rate changes on cash
                494             494  
 
                             
Net increase in cash and cash equivalents
    14       (892 )     3,946             3,068  
Cash and cash equivalents as of beginning of period
    20       3,165       239             3,424  
 
                             
Cash and cash equivalents as of end of period
  $ 34     $ 2,273     $ 4,185     $     $ 6,492  
 
                             

 

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    Six Months Ended June 30, 2008  
                    Non-              
    Parent     Guarantors     Guarantors     Eliminations     Total  
    (In thousands)  
Net cash (used in) provided by operating activities
  $ (5,239 )   $ 5,930     $ 6,735     $     $ 7,426  
 
                             
Additions to property and equipment, net of proceeds from sale of property and equipment
          (21,908 )     (20,548 )           (42,456 )
Payments for exclusive license agreements and site acquisition costs
          (50 )     (447 )           (497 )
Principal payments received under direct financing leases
                17             17  
 
                             
Net cash used in investing activities
          (21,958 )     (20,978 )           (42,936 )
 
                             
Proceeds from issuance of long-term debt
    76,400       44,179       16,870       (61,213 )     76,236  
Repayments of long-term debt
    (42,900 )     (34,735 )     (251 )     34,057       (43,829 )
Issuance of long-term notes receivable
    (61,213 )                 61,213        
Payments received on long-term notes receivable
    34,057                   (34,057 )      
Repayments of borrowings under bank overdraft facility, net
                (3,881 )           (3,881 )
Payments received for subscriptions receivable
    101                         101  
Proceeds from exercises of stock options
    286                         286  
Other financing activities
    (1,543 )                       (1,543 )
 
                             
Net cash provided by financing activities
    5,188       9,444       12,738             27,370  
 
                             
Effect of exchange rate changes on cash
                (144 )           (144 )
 
                             
Net decrease in cash and cash equivalents
    (51 )     (6,584 )     (1,649 )           (8,284 )
Cash and cash equivalents at beginning of period
    76       11,576       1,787             13,439  
 
                             
Cash and cash equivalents at end of period
  $ 25     $ 4,992     $ 138     $     $ 5,155  
 
                             

 

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Cautionary Statement Regarding Forward-Looking Statements
Certain statements and information in this Quarterly Report on Form 10-Q (this “Form 10-Q”) may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Act of 1995. The words “believe,” “expect,” “anticipate,” “plan,” “intend,” “foresee,” “should,” “would,” “could” or other similar expressions are intended to identify forward-looking statements, which are generally not historical in nature. These forward-looking statements are based on our current expectations and beliefs concerning future developments and their potential effect on us. While management believes that these forward-looking statements are reasonable as and when made, there can be no assurance that future developments affecting us will be those that we currently anticipate. All comments concerning our expectations for future revenues and operating results are based on our forecasts for our existing operations and do not include the potential impact of any future acquisitions. Our forward-looking statements involve significant risks and uncertainties (some of which are beyond our control) and assumptions that could cause actual results to differ materially from our historical experience and our present expectations or projections. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, those summarized below:
    our financial outlook and the financial outlook of the ATM industry;
    our ability to cope with and develop business strategies dealing with the deterioration experienced in global credit markets;
    the consolidation of several of our existing branding customers;
    our ability to expand our bank branding and surcharge-free service offerings;
    our ability to provide new ATM solutions to financial institutions;
    our ATM vault cash rental needs, including liquidity issues with our vault cash providers;
    the implementation of our corporate strategy;
    our ability to compete successfully with our competitors;
    our financial performance;
    our ability to strengthen existing customer relationships and reach new customers;
    our ability to meet the service levels required by our service level agreements with our customers;
    our ability to pursue and successfully integrate acquisitions;
    our ability to expand internationally;
    our ability prevent security breaches; and
    the additional risks we are exposed to in our armored transport business.
Other factors that could cause our actual results to differ from our projected results are described in (1) our Annual Report on Form 10-K for the fiscal year ended December 31, 2008 (“2008 Form 10-K”), (2) our reports and registration statements filed from time to time with the Securities and Exchange Commission (“SEC”) and (3) other announcements we make from time to time.
Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise.

 

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Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Cardtronics, Inc. operates the world’s largest non-bank network of automated teller machines (“ATM”). As of June 30, 2009, our network included over 32,880 ATMs throughout the United States, the United Kingdom, and Mexico, primarily at national and regional merchant locations. We provide ATM management and equipment-related services and electronic funds transfer (“EFT”) transaction processing services to our network of ATMs as well as ATMs owned and operated by third parties. For a more detailed discussion of our operations and the manners in which we derive revenues, please refer to our 2008
Form 10-K.
Economic and Strategic Update
Over the past several years, we have made significant capital investments, including (1) our acquisition of our United Kingdom operations in 2005, (2) our expansion into Mexico in 2006, (3) our acquisition of the ATM and advanced-functionality kiosk business of 7-Eleven, Inc. (“7-Eleven”) in 2007, and (4) the launch of our in-house EFT transaction processing platform. Additionally, during this same period of time, we continued to deploy ATMs in high-traffic locations under our contracts with large, well-known retailers, which has led to the development of relationships with large financial institutions through bank branding opportunities and enhanced the value of our wholly-owned surcharge-free network, Allpoint. As a result of these past strategic actions and the relatively conservative use of capital during this time, we believe that the negative impact of the economic downturn on our business should continue to be mitigated by the following:
Stable and recurring nature of our business model. Our financial results for the six months ended June 30, 2009 demonstrate that the significant capital investments we have made over the past several years have provided us with an operating platform that we believe should continue to generate relatively stable earnings and consistent cash flows. Based on our most recent results, we believe transactions conducted on our ATMs have not been negatively affected by the economic downturn and expect that this trend will continue. For example, average monthly cash withdrawal transactions per ATM increased to 604 during the six months ended June 30, 2009 from 575 during the same period last year. Furthermore, while we have seen some modest declines in surcharge-related withdrawal transactions in the United States and the United Kingdom, we have continued to see slight increases in withdrawal transaction levels (especially surcharge-free withdrawal transactions.)
Strong liquidity position . We continue to believe we have a sufficient amount of liquidity to meet our anticipated operating needs for the foreseeable future. Our $175.0 million credit facility, which is in place until May 2012, had $31.5 million outstanding at June 30, 2009, including letters of credit, leaving us with $143.5 million in available, committed funding. The outstanding balance under our facility decreased by $21.2 million from $52.7 million (including letters of credit) at December 31, 2008, due primarily to repayments made during the three month period ended June 30, 2009. Furthermore, we continue to be in compliance with all covenants under the facility and would continue to be even if we substantially increased our borrowings or had substantially reduced earnings.
Product diversification. Over the past few years, we have consciously worked to diversify our product and service offerings beyond the traditional ATM surcharging model, which we believe will provide future growth opportunities that do not require significant amounts of new capital. Examples of these growth opportunities include (1) adding more third parties to our ATM transaction processing platform, similar to the arrangement we currently have in place to process transactions for over 1,500 ATMs owned and operated by a third-party convenience store chain in the United States; (2) continued expansion and improvement in the types of services that we currently offer on our advanced-functionality ATMs located in 7-Eleven convenience stores across the United States; and (3) continued growth in our branding and surcharge-free offerings. The recent expansion of our branding relationship with an existing bank branding partner to cover an additional 1,300 ATM locations in the United States is an example of one of these growth opportunities.
Although we believe that the characteristics described above should benefit us given current market conditions, the recent issues that have negatively impacted the economy and many of the nation’s largest banks could have an adverse impact on our ongoing operations. For example, the continued loan delinquency and default issues facing financial institutions could have a negative impact on those financial institutions with whom we conduct business. Additionally, even though we recently executed a new bank branding agreement with one of our existing branding partners, the decision-making process on new bank branding arrangements continues to remain relatively slow compared to what we have experienced historically.

 

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While we are continuing to monitor current economic conditions, we cannot at this point accurately predict their impact. However, despite the factors discussed above, we currently believe that our revenues in 2009 will not differ materially from 2008 (excluding the effects of negative year-over-year foreign currency translation adjustments), and we currently expect that any reduction in revenues will be more than offset by certain cost reduction measures that have been put in place as well as anticipated lower interest rates in each of our key markets.
Recent Events
Foreign Currency Exchange Rates. The strengthening of the United States dollar relative to the British pound and Mexican peso negatively impacted our results during the first half of 2009 in terms of translating those foreign earnings into United States dollars. Despite the negative impact on our revenues and gross profits, we do not expect this trend to have a negative impact on our cash flows as we do not currently rely on cash generated by our international operations to fund our domestic operating needs and each operation conducts substantially all of its business in its local currency. Additionally, given the fact that we continue to explore potential growth opportunities in the two international markets in which we currently operate, the strengthening of the United States dollar could enhance our ability to invest in those markets at favorable exchange rates.
Stock Repurchase Program. In February 2009, our Board of Directors approved a common stock repurchase program up to an aggregate of $10.0 million. The shares will be repurchased from time to time in open market transactions or privately negotiated transactions at our discretion. The timing and extent of any purchases will depend on a variety of factors, such as market price, overall market and economic conditions, the level of cash generated from operations, alternative investment opportunities, regulatory considerations or other commitments. We plan to fund repurchases made under this program from available cash balances and cash generated from operations. The share repurchase program will expire on March 31, 2010, unless extended or terminated earlier by our Board of Directors. To date, we have purchased approximately 35,000 shares of our common stock at a total cost of $0.1 million and at an average price per share of $3.37.

 

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Results of Operations
The following table sets forth our Consolidated Statements of Operations information as a percentage of total revenues for the periods indicated. Percentages may not add due to rounding.
                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
    2009     2008     2009     2008  
Revenues:
                               
ATM operating revenues
    97.4 %     96.8 %     97.9 %     96.6 %
ATM product sales and other revenues
    2.6       3.2       2.1       3.4  
 
                       
Total revenues
    100.0       100.0       100.0       100.0  
Cost of revenues:
                               
Cost of ATM operating revenues (exclusive of depreciation, accretion, and amortization, shown separately below) (1)
    67.4       74.0       69.3       74.1  
Cost of ATM product sales and other revenues
    2.5       2.9       2.1       3.2  
 
                       
Total cost of revenues
    69.9       76.8       71.3       77.2  
 
                       
Gross profit
    30.1       23.2       28.7       22.8  
Operating expenses:
                               
Selling, general, and administrative expenses (2)
    8.5       7.7       8.9       7.4  
Depreciation and accretion expense
    8.0       7.9       8.2       7.7  
Amortization expense
    3.6       3.5       3.8       3.6  
Loss on disposal of assets
    1.3       0.9       1.6       1.0  
 
                       
Total operating expenses
    21.4       20.0       22.4       19.7  
 
                       
Income from operations
    8.7       3.2       6.2       3.1  
Other expense (income):
                               
Interest expense, net
    6.6       6.5       6.9       6.6  
Other (income) expense
    (0.8 )     0.0       (0.5 )     0.0  
 
                       
Total other expense
    5.8       6.5       6.4       6.6  
 
                       
Income (loss) before income taxes
    2.9       (3.4 )     (0.2 )     (3.5 )
Income tax expense (benefit)
    0.8       (0.5 )     0.8       (0.1 )
 
                       
Net income (loss)
    2.1       (2.9 )     (1.0 )     (3.4 )
Net income attributable to noncontrolling interests
    0.1       (0.0 )     0.1        
 
                       
Net income (loss) attributable to controlling interests and available to common stockholders
    2.0 %     (2.9 )%     (1.1 )%     (3.4 )%
 
                       
 
     
(1)   Excludes effects of depreciation, accretion, and amortization expense of $12.7 million and $13.2 million for the three month periods ended June 30, 2009 and 2008, respectively, and $25.3 million and $25.6 million for the six month periods ended June 30, 2009 and 2008, respectively. The inclusion of this depreciation, accretion, and amortization expense in Cost of ATM operating revenues would have increased our Cost of ATM operating revenues as a percentage of total revenues by 10.2% and 10.4% for the three month periods ended June 30, 2009 and 2008, respectively, and by 10.5% and 10.3% for the six month periods ended June 30, 2009 and 2008, respectively.
 
(2)   Includes effects of $1.2 million in severance costs associated with the departure of our former CEO during March 2009.

 

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Key Operating Metrics
We rely on certain key measures to gauge our operating performance, including total transactions, total cash withdrawal transactions, ATM operating revenues per ATM per month, and ATM operating gross profit margins. The following table sets forth information regarding certain of these key measures for the three and six month periods ended June 30, 2009 and 2008:
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2009     2008     2009     2008  
Average number of transacting ATMs:
                               
United States: Company-owned
    18,183       18,087       18,207       17,946  
United States: Merchant-owned
    10,130       10,720       10,141       10,855  
United Kingdom
    2,572       2,413       2,554       2,331  
Mexico
    2,117       1,581       2,106       1,514  
 
                       
Total average number of transacting ATMs
    33,002       32,801       33,008       32,646  
 
                       
 
                               
Total transactions (in thousands)
    96,482       90,190       185,853       173,646  
Total cash withdrawal transactions (in thousands)
    62,047       58,710       119,611       112,599  
Average monthly cash withdrawal transactions per average transacting ATM
    627       597       604       575  
 
                               
Per ATM per month:
                               
ATM operating revenues (1)
  $ 1,226     $ 1,249     $ 1,186     $ 1,221  
Cost of ATM operating revenues (exclusive of depreciation, accretion, and amortization) (2)
    848       954       839       936  
 
                       
ATM operating gross profit (2) (3)
  $ 378     $ 295     $ 347     $ 285  
 
                       
 
                               
ATM operating gross profit margin (exclusive of depreciation, accretion, and amortization)
    30.8 %     23.6 %     29.3 %     23.3 %
ATM operating gross profit margin (inclusive of depreciation, accretion, and amortization)
    20.3 %     12.9 %     18.5 %     12.6 %
 
     
(1)   The decline in ATM operating revenues per ATM per month was due to foreign currency exchange rate movements between the three and six month periods ended June 30, 2009 and 2008.
 
(2)   Excludes effects of depreciation, accretion, and amortization expense of $12.7 million and $13.2 million for the three month periods ended June 30, 2009 and 2008, respectively, and $25.3 million and $25.6 million for the six month periods ended June 30, 2009 and 2008, respectively. The inclusion of this depreciation, accretion, and amortization expense in Cost of ATM operating revenues would have increased our Cost of ATM operating revenues per ATM per month and decreased our ATM operating gross profit per ATM per month by $129 and $133 for the three month periods ended June 30, 2009 and 2008, respectively, and by $128 and $131 for the six month periods ended June 30, 2009 and 2008, respectively. The decline in Cost of ATM operating revenues per ATM per month was due to foreign currency exchange rate movements between the three and six month periods ended June 30, 2009 and 2008, as well as lower vault cash interest costs and other operating cost reductions.
 
(3)   ATM operating gross profit is a measure of profitability that uses only the revenue and expenses that related to operating the ATMs in our portfolio. Revenues and expenses from ATM equipment sales and other ATM-related services are not included.

 

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Revenues
                                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
    2009     2008     % Change     2009     2008     % Change  
    (In thousands)             (In thousands)          
ATM operating revenues
  $ 121,362     $ 122,868       (1.2 )%   $ 234,942     $ 239,165       (1.8 )%
ATM product sales and other revenues
    3,286       4,107       (20.0 )%     5,051       8,385       (39.8 )%
 
                                       
Total revenues
  $ 124,648     $ 126,975       (1.8 )%   $ 239,993     $ 247,550       (3.1 )%
 
                                       
Three Months Ended June 30, 2009 Compared to Three Months Ended June 30, 2008
ATM operating revenues. ATM operating revenues generated during the three months ended June 30, 2009 decreased $1.5 million from the three months ended June 30, 2008. Below is the detail, by segment, of changes in the various components of ATM operating revenues:
                                 
    Variance: Three Months Ended June 30, 2009 to  
    Three Months Ended June 30, 2008  
    U.S.     U.K.     Mexico     Total  
    Increase (decrease)  
    (In thousands)  
Surcharge revenue
  $ (2,898 )   $ (1,534 )   $ 929     $ (3,503 )
Interchange revenue
    737       (102 )     67       702  
Branding and surcharge-free network revenue
    1,658             (2 )     1,656  
Other
    (362 )     1             (361 )
 
                       
Total increase (decrease) in ATM operating revenues
  $ (865 )   $ (1,635 )   $ 994     $ (1,506 )
 
                       
United States . During the three months ended June 30, 2009, our United States operations experienced a $0.9 million, or 1%, decrease in ATM operating revenues compared to the three months ended June 30, 2008. This decrease was primarily due to a 5% decline in surcharge revenues that resulted from a decreased level of surcharge transactions during the period. Although total withdrawal transactions increased by 2%, surcharge transactions decreased by 11% due to a decline in our merchant-owned account base and the continued growth seen in our bank branding and surcharge-free network programs, which allow participants’ cardholders to make cash withdrawals on a surcharge-free basis at our ATMs. The decline in our merchant-owned account base, which contributed $1.4 million to the $2.9 million year-over-year surcharge revenue decline, had a minimal impact on our overall gross profit as much of the surcharge revenues generated by those accounts are paid to the underlying merchants. Accordingly, as surcharge revenues declined, so did the related merchant payments. The increase in the total number of withdrawal transactions conducted on our ATMs resulted in a 2% increase in interchange revenues generated by our domestic operations. These higher interchange revenues, coupled with higher bank and surcharge-free network fees, partially offset the decline in surcharge revenues.
During the three months ended June 30, 2009, we agreed to settle a standing lawsuit filed against us by one of our merchant customers in June 2006. As part of that settlement, we agreed to terminate our ATM placement agreement with that merchant (covering approximately 272 ATMs in and around the New York City metropolitan area) no later than October 31, 2009, along with the related bank branding agreement. During the same period, we expanded our bank branding contractual relationship with the same financial institution in roughly 1,300 retail locations across ten states within the United States. As a result of these transactions, we expect that our ATM operating revenues may be negatively impacted in 2010 when compared to 2009, as the lost surcharge and interchange revenues may only be partially offset by the anticipated increase in our branding revenues. However, we expect that these transactions will positively impact our gross profits beginning in 2010, as margins earned on our branding revenues are typically higher than those earned on surcharge and interchange revenues generated by our ATM placement programs.
United Kingdom . Our United Kingdom operations’ ATM operating revenues for the three months ended June 30, 2009, decreased over 8% from the first quarter of 2008. However, this decrease was the result of unfavorable foreign currency exchange rate movements between the two periods. Excluding the impact of foreign currency movements, total surcharge and interchange revenues increased by $1.8 million (by 13%) and $1.5 million (by 25%), respectively. These increases were primarily driven by a 7% increase in the average number of transacting ATMs in the United Kingdom, based on ATM deployments made throughout 2008 and the first six months of 2009, and higher withdrawal transactions on our surcharge-free (also referred to as “free-to-use”) ATMs.
Mexico . The increase in revenues generated by our Mexico operations during 2009 was the result of a 34% increase in the average number of transacting ATMs associated with these operations as well as higher surcharge and overall withdrawal transactions per machine during the three months ended June 30, 2009, partially offset by unfavorable foreign currency exchange rate movements.

 

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ATM product sales and other revenues. ATM product sales and other revenues for the three months ended June 30, 2009 were lower than those generated during the same period in 2008 primarily due to lower value-added reseller (“VAR”) program sales. Under our VAR program, we primarily sell ATMs to Associate VARs who in turn resell the ATMs to various financial institutions throughout the United States in territories authorized by the equipment manufacturer. In light of the current economic climate, financial institutions and others have reduced their ATM purchases and we have, therefore, seen a decline in these sales during 2009.
Six Months Ended June 30, 2009 Compared to Six Months Ended June 30, 2008
ATM operating revenues. ATM operating revenues generated during the six months ended June 30, 2009 decreased $4.2 million from the six months ended June 30, 2008. Below is the detail, by segment, of changes in the various components of ATM operating revenues:
                                 
    Variance: Six Months Ended June 30, 2009 to  
    Six Months Ended June 30, 2008  
    U.S.     U.K.     Mexico     Total  
    Increase (decrease)  
    (In thousands)  
Surcharge revenue
  $ (6,213 )   $ (4,071 )   $ 1,913     $ (8,371 )
Interchange revenue
    1,266       (418 )     367       1,215  
Branding and surcharge-free network revenue
    3,390             (5 )     3,385  
Other
    (451 )     (1 )           (452 )
 
                       
Total increase (decrease) in ATM operating revenues
  $ (2,008 )   $ (4,490 )   $ 2,275     $ (4,223 )
 
                       
United States . During the six months ended June 30, 2009, our United States operations experienced a $2.0 million, or 1%, decrease in ATM operating revenues compared to the six months ended June 30, 2008. This decrease was primarily due to a 6% decline in surcharge revenues that resulted from a decreased level of surcharge transactions during the period. Although the total withdrawal transactions increased by 2%, surcharge transactions decreased by 10% due to the same reasons as outlined above for the quarterly period. The increase in the total number of withdrawal transactions conducted on our ATMs resulted in a 2% increase interchange revenues generated by our domestic operations. These higher interchange revenues, coupled with higher bank branding and surcharge-free network fees, partially offset the decline in surcharge revenues.
United Kingdom . Our United Kingdom operations also contributed to the lower ATM operating revenues for the six months ended June 30, 2009, decreasing over 12% from the first half of 2008. However, as was the case with the quarterly period, this decrease was the result of unfavorable foreign currency exchange rate movements between the two periods. Excluding the impact of foreign currency movements, total surcharge and interchange revenues increased by $1.3 million and $2.1 million, respectively. These increases were primarily driven by a 9% increase in the average number of transacting ATMs in the United Kingdom, based on ATM deployments made throughout 2008 and the first six months of 2009, and higher withdrawal transactions on our free-to-use ATMs.
Mexico . Higher revenues generated by our Mexico operations partially offset the decrease in ATM operating revenues from our domestic and United Kingdom operations. The increase in revenues generated by our Mexico operations during 2009 was the result of a 39% increase in the average number of transacting ATMs associated with these operations as well as higher surcharge and overall withdrawal transactions per machine during the six months ended June 30, 2009.
ATM product sales and other revenues. ATM product sales and other revenues for the six months ended June 30, 2009 were lower than those generated during the same period in 2008 primarily due to lower equipment and VAR program sales. As noted above for the quarterly period, financial institutions and others have reduced their ATM purchases and we have, therefore, seen a decline in these sales during 2009. Also contributing to the year-to-date decline was the completion of our Triple Data Encryption Standard upgrades in 2008, which generated a higher amount of product sales and service-related revenues during the first half of 2008.

 

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Cost of Revenues
                                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
    2009     2008     % Change     2009     2008     % Change  
    (In thousands)     (In thousands)  
Cost of ATM operating revenues (exclusive of depreciation, accretion, and amortization)
  $ 83,975     $ 93,904       (10.6 )%   $ 166,204     $ 183,336       (9.3 )%
Cost of ATM product sales and other revenues
    3,153       3,662       (13.9 )%     4,967       7,826       (36.5 )%
 
                                       
Total cost of revenues (exclusive of depreciation, accretion, and amortization)
  $ 87,128     $ 97,566       (10.7 )%   $ 171,171     $ 191,162       (10.5 )%
 
                                       
Three Months Ended June 30, 2009 Compared to Three Months Ended June 30, 2008
Cost of ATM operating revenues (exclusive of depreciation, accretion, and amortization). The cost of ATM operating revenues (exclusive of depreciation, accretion, and amortization) incurred during the three months ended June 30, 2009 decreased $9.9 million from the same period in 2008. Below is the detail, by segment, of changes in the various components of the cost of ATM operating revenues:
                                 
    Variance: Three Months Ended June 30, 2009 to  
    Three Months Ended June 30, 2008  
    U.S.     U.K.     Mexico     Total  
    Increase (decrease)  
    (In thousands)  
Merchant commissions
  $ (2,746 )   $ (924 )   $ 191     $ (3,479 )
Vault cash rental expense
    (1,328 )     (2,288 )     114       (3,502 )
Other cost of cash
    (764 )     (262 )     (2 )     (1,028 )
Repairs and maintenance
    127       466       152       745  
Communications
    (357 )     (383 )     31       (709 )
Transaction processing
    (258 )     69       27       (162 )
Stock-based compensation
    61                   61  
Other expenses
    (403 )     (1,448 )     (4 )     (1,855 )
 
                       
Total increase (decrease) in cost of ATM operating revenues
  $ (5,668 )   $ (4,770 )   $ 509     $ (9,929 )
 
                       
United States . During the three months ended June 30, 2009, the cost of ATM operating revenues (exclusive of depreciation, accretion, and amortization) incurred by our United States operations decreased $5.7 million when compared to the cost incurred during the same period in 2008. This decrease was primarily due to lower merchant fees, which resulted from the year-over-year decline in the number of our merchant-owned accounts, consistent with the overall decline in surcharge transactions and the related surcharge revenues, as noted above. Also contributing to the decline in the cost of ATM operating revenues was lower vault cash rental fees, primarily due to reduced market interest rates on the unhedged portion of our vault cash rental obligations. The decrease in other cost of cash was attributable to lower armored costs resulting from fewer cash fills, and the decrease in transaction processing costs was primarily due to the continued conversion of our ATMs over to our EFT processing platform. With respect to our domestic vault cash rental obligations, we recently negotiated new pricing terms and conditions with one of our vault cash providers, the results of which will become effective in August 2009. The revised pricing terms and conditions are less favorable to us than those that were in effect under the prior agreement. As a result, our vault cash rental costs are expected to increase slightly in future periods, thus negatively impacting our domestic ATM operating gross profit margin.
In terms of our other operating expense amounts, we continue to aggressively manage our costs without compromising the quality of our services. During the three months ended June 30, 2009, we completed the process of renegotiating and renewing our primary domestic maintenance and armored service provider agreements. As a result, we expect a significant reduction in the amounts we pay for these services on an annual basis, beginning during the second half of 2009. Reference is made to the Gross Profit Margin discussion below for our expectations regarding gross margin levels for the remainder of 2009.
United Kingdom . Our United Kingdom operations also contributed to the decrease in the cost of ATM operating revenues (exclusive of depreciation, accretion, and amortization) during the most recent quarter. The overall $4.8 million decrease was primarily due to foreign currency exchange rate movements between periods. Excluding the impact of exchange rate movements, our United Kingdom operations’ cost of ATM operating revenues remained fairly consistent, despite an increased number of ATMs operating in 2009 compared to 2008. This was primarily due to lower vault cash rental expense as a result of reduced market interest rates on our vault cash rental obligations in 2009 when compared to 2008. Additionally, we maintained higher cash balances in our ATMs within the United Kingdom during the second quarter of 2008 in an effort to minimize the amount of downtime caused by service-related issues with third-party armored service providers, which further contributed to the year-over-year decline. Finally, during the three months ended June 30, 2008, there was a $1.3 million charge associated with a number of transactions conducted with counterfeit credit cards on our ATMs in the United Kingdom, for which no similar charges were incurred during the same period this year.

 

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With respect to our United Kingdom vault cash rental obligations, we are currently negotiating new pricing terms and conditions with our existing vault cash provider in that market, the results of which are expected to become effective during the third quarter of 2009. While it is too soon to predict the ultimate outcome of those negotiations, the revised pricing terms and conditions could be less favorable to us than those that are currently in effect under the existing agreement. If that were to occur, our vault cash rental costs would increase in future periods, thus negatively impacting our ATM operating gross profit margin in the United Kingdom. Furthermore, we recently entered into certain interest rate swap transactions to fix the interest rate utilized in calculating the monthly vault cash rental fees under our vault cash rental agreement in the United Kingdom. Such fixed rates, which will become effective in January 2010, are higher than current market interest rates as the fixed rates under the swap contracts extend through the end of 2012. Accordingly, the amount we pay for our vault cash rental fees in the United Kingdom is expected to increase from current levels beginning in 2010, regardless of any changes that may occur with respect to market interest rates. Reference is made to the Gross Profit Margin discussion below for our expectations regarding gross margin levels for the remainder of 2009.
Mexico . Partially offsetting the decrease in the cost of ATM operating revenues (exclusive of depreciation, accretion, and amortization) of our United States and United Kingdom operations were increased costs incurred by our Mexico operations resulting from a 34% increase in the average number of transacting ATMs and a 40% increase in the total number of transactions conducted on these machines during the second quarter of 2009 when compared to the second quarter of 2008.
Cost of ATM product sales and other revenues. Consistent with the decrease in ATM product sales and other revenues discussed above, the cost of ATM product sales and other revenues decreased during the three months ended June 30, 2009 compared to the same period in 2008 primarily due to lower equipment and VAR program sales during the period.
Six Months Ended June 30, 2009 Compared to Six Months Ended June 30, 2008
Cost of ATM operating revenues (exclusive of depreciation, accretion, and amortization). The cost of ATM operating revenues (exclusive of depreciation, accretion, and amortization) incurred during the six months ended June 30, 2009 decreased $17.1 million from the same period in 2008. Below is the detail, by segment, of changes in the various components of the cost of ATM operating revenues:
                                 
    Variance: Six Months Ended June 30, 2009 to  
    Six Months Ended June 30, 2008  
    U.S.     U.K.     Mexico     Total  
    Increase (decrease)  
    (In thousands)  
Merchant commissions
  $ (4,647 )   $ (1,335 )   $ 501     $ (5,481 )
Vault cash rental expense
    (3,339 )     (4,563 )     284       (7,618 )
Other cost of cash
    (174 )     (401 )     111       (464 )
Repairs and maintenance
    553       243       315       1,111  
Communications
    (594 )     (889 )     85       (1,398 )
Transaction processing
    (962 )     (415 )     118       (1,259 )
Stock-based compensation
    187                   187  
Other expenses
    (829 )     (1,402 )     21       (2,210 )
 
                       
Total increase (decrease) in cost of ATM operating revenues
  $ (9,805 )   $ (8,762 )   $ 1,435     $ (17,132 )
 
                       
United States . During the six months ended June 30, 2009, the cost of ATM operating revenues (exclusive of depreciation, accretion, and amortization) incurred by our United States operations decreased $9.8 million when compared to the cost incurred during the same period in 2008. This decrease was primarily the result of lower merchant fees, which resulted from a 7% year-over-year decline in the number of our merchant-owned accounts. This decline also contributed to the overall decline in surcharge transactions by 10% and related surcharge revenues by 6%. Also contributing to the decline in the cost of ATM operating revenues were lower vault cash rental expense and lower transaction processing costs, as discussed above with respect to the quarterly periods.

 

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United Kingdom . Our United Kingdom operations also contributed to the decrease in the cost of ATM operating revenues (exclusive of depreciation, accretion, and amortization) during the six months ended June 30, 2009. The overall $8.8 million decrease was primarily due to foreign currency exchange rate movements between periods. Excluding the impact of exchange rate movements, our United Kingdom operations’ cost of ATM operating revenues decreased by approximately $1.5 million. Such decrease was attributable to the same factors as described above with respect to the quarterly periods.
Mexico . Partially offsetting the decrease in the cost of ATM operating revenues (exclusive of depreciation, accretion, and amortization) of our United States and United Kingdom operations were the costs incurred by our Mexico operations. As was the case for the quarterly periods, the increase in the number of average transacting ATMs and related transactions resulted in a $1.4 million increase in cost of ATM operating revenues for the six months ended June 30, 2009, when compared to the same period last year.
Cost of ATM product sales and other revenues. Consistent with the decrease in ATM product sales and other revenues discussed above, the cost of ATM product sales and other revenues decreased during the six months ended June 30, 2009 compared to the same period in 2008 primarily due to lower equipment and VAR program sales during the period.
Gross Profit Margin
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2009     2008     2009     2008  
ATM operating gross profit margin:
                               
Exclusive of depreciation, accretion, and amortization
    30.8 %     23.6 %     29.3 %     23.3 %
Inclusive of depreciation, accretion, and amortization
    20.3 %     12.9 %     18.5 %     12.6 %
ATM product sales and other revenues gross profit margin
    4.0 %     10.8 %     1.6 %     6.7 %
Total gross profit margin:
                               
Exclusive of depreciation, accretion, and amortization
    30.1 %     23.2 %     28.7 %     22.8 %
Inclusive of depreciation, accretion, and amortization
    19.9 %     12.8 %     18.1 %     12.4 %
ATM operating gross profit margin . For the three and six months ended June 30, 2009, ATM operating gross profit margin exclusive of depreciation, accretion, and amortization increased 7.2% and 6.0%, respectively, when compared to the same periods in 2008. ATM operating gross profit margin inclusive of depreciation, accretion, and amortization increased 7.4% and 5.9%, respectively, during the three and six months ended June 30, 2009 when compared to the same period in 2008. Higher margins were earned in all three of our operating segments. However, our United States and United Kingdom operations contributed to the majority of the increase due to the effect of lower market interest rates on our vault cash rental costs, lower transaction processing costs due to our in-house EFT processing operations and generally lower other operating costs in the period. Additionally, the year-over-year decline in our merchant-owned account base contributed to the increased margins in 2009, as the revenues related to those merchant-owned accounts were replaced with higher-margin company-owned accounts and related services in all three of our operating segments.
As a result of the anticipated changes in certain operating cost line items, including increased vault cash rental costs in the United States and the United Kingdom and lower maintenance and armored costs in the United States, as well as the expected continued shift in our revenue mix to higher margin company-owned ATMs and branding and surcharge-free arrangements, we expect that our total gross profit margin for the remainder of 2009 will be relatively consistent with the higher margin levels achieved during the first half of 2009.
ATM product sales and other revenues gross profit margin. For the three and six months ended June 30, 2009, our ATM product sales and other revenues gross profit margin decreased by 6.8% and 5.1%, respectively, when compared to the same periods in 2008. These decreases were primarily a result of lower margins achieved on VAR, equipment, and other service sales during the quarter, as we were required to lower our sales prices in light of the reduced market demand for ATM products sales.

 

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Selling, General, and Administrative Expenses
                                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
    2009     2008     % Change     2009     2008     % Change  
    (In thousands)     (In thousands)  
Selling, general, and administrative expenses
  $ 9,715     $ 9,387       3.5 %   $ 19,703     $ 17,737       11.1 %
Stock-based compensation
    869       413       110.4 %     1,736       614       182.7 %
 
                                       
Total selling, general, and administrative expenses
  $ 10,584     $ 9,800       8.0 %   $ 21,439     $ 18,351       16.8 %
 
                                       
 
                                               
Percentage of total revenues:
                                               
Selling, general, and administrative expenses
    7.8 %     7.4 %             8.2 %     7.2 %        
Stock-based compensation
    0.7 %     0.3 %             0.7 %     0.2 %        
Total selling, general, and administrative expenses
    8.5 %     7.7 %             8.9 %     7.4 %        
Selling, general, and administrative expenses (“SG&A expenses”), excluding stock-based compensation. For the three and six months ended June 30, 2009, SG&A expenses, excluding stock-based compensation, increased $0.3 million and $2.0 million over the same periods in 2008. The increase for the six-month period was primarily attributable to the recognition of $1.2 million in severance costs associated with the departure of our former CEO in March 2009. The increase for the three-month period was primarily attributable to incremental employee-related costs in 2009 in all of our operating segments, as well as additional costs associated with our corporate office relocation and higher professional services fees, offset somewhat by foreign currency exchange rate movements. The increase for the remainder of the six-month period was primarily attributable to incremental employee-related costs in 2009 in all of our operating segments, offset somewhat by foreign currency exchange rate movements.
Stock-based compensation. The increase in stock-based compensation during the three and six months ended June 30, 2009 was due to the issuance of additional shares of restricted stock and stock options during 2008 and 2009. For additional details on these stock and option grants, see Item 1, Notes to Consolidated Financial Statements, Note 3, Stock-Based Compensation .
Depreciation and Accretion Expense
                                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
    2009     2008     % Change     2009     2008     % Change  
    (In thousands)     (In thousands)  
Depreciation expense
  $ 9,427     $ 9,546       (1.2 )%   $ 18,601     $ 18,184       2.3 %
Accretion expense
    508       432       17.6 %     973       826       17.8 %
 
                                       
Depreciation and accretion expense
  $ 9,935     $ 9,978       (0.4 )%   $ 19,574     $ 19,010       3.0 %
 
                                       
 
                                               
Percentage of total revenues:
                                               
Depreciation expense
    7.6 %     7.6 %             7.8 %     7.3 %        
Accretion expense
    0.4 %     0.3 %             0.4 %     0.3 %        
Total depreciation and accretion expense
    8.0 %     7.9 %             8.2 %     7.7 %        
Depreciation expense. For the three and six months ended June 30, 2009, depreciation expense remained fairly constant over the same periods in 2008. Depreciation expense increased by 7.3% and 4.9% for the three and six months ended June 30, 2009, respectively, excluding the impact of foreign currency exchange rate movements, which was primarily due to the higher number of machines deployed under Company-owned arrangements in 2009 when compared to 2008.
Accretion expense. We account for our asset retirement obligations in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 143, Accounting for Asset Retirement Obligations , which requires that we estimate the fair value of future retirement obligations associated with our ATMs, including the anticipated costs to deinstall, and in some cases refurbish, certain merchant locations. Accretion expense represents the increase of this liability from the original discounted net present value to the amount we ultimately expect to incur. The increase in accretion expense during the three and six months ended June 30, 2009 was primarily attributable to the higher number of ATMs deployed under Company-owned arrangements during 2009 when compared to the same period in 2008.

 

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Amortization Expense
                                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
    2009     2008     % Change     2009     2008     % Change  
    (In thousands)     (In thousands)  
Amortization expense
  $ 4,504     $ 4,501       0.1 %   $ 9,031     $ 9,004       0.3 %
 
                                               
Percentage of total revenues
    3.6 %     3.5 %             3.8 %     3.6 %        
Amortization expense recognized during the three and six month periods ended June 30, 2009 were consistent with the amount recognized during the same period in 2008, as higher amortization associated with the acceleration of certain contract intangible assets of our domestic operations was offset by lower amortization expense from our international operations due to favorable foreign currency exchange rate movements.
Loss on Disposal of Assets
                                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
    2009     2008     % Change     2009     2008     % Change  
    (In thousands)     (In thousands)  
Loss on disposal of assets
  $ 1,676     $ 1,115       50.3 %   $ 3,784     $ 2,435       55.4 %
 
                                               
Percentage of total revenues
    1.3 %     0.9 %             1.6 %     1.0 %        
We recognized a higher loss on the disposal of assets during the three and six month periods ended June 30, 2009 primarily due to certain optimization efforts undertaken by us associated with our United Kingdom operations. These optimization efforts resulted in the identification and deinstallation of several hundred underperforming ATMs that we expect to redeploy under separate ATM operating agreements. As a result of the deinstallation of these machines, we were required to write-off the associated installations costs and any remaining asset retirement obligations associated with the deinstalled machines.
Interest Expense, Net
                                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
    2009     2008     % Change     2009     2008     % Change  
    (In thousands)     (In thousands)  
Interest expense, net
  $ 7,644     $ 7,722       (1.0 )%   $ 15,355     $ 15,354       0.0 %
Amortization of deferred financing costs and bond discounts
    603       530       13.8 %     1,171       1,038       12.8 %
 
                                       
Total interest expense, net
  $ 8,247     $ 8,252       (0.1 )%   $ 16,526     $ 16,392       0.8 %
 
                                       
 
                                               
Percentage of total revenues
    6.6 %     6.5 %             6.9 %     6.6 %        
Interest expense, net. Interest expense, net, decreased slightly during the three month period ended June 30, 2009, when compared to the same periods in 2008, due to lower market interest rates and a slight reduction in amounts outstanding under our revolving credit facility.
Amortization of deferred financing costs and bond discounts. The increase in the amortization of deferred financing costs and bond discounts during 2009 was a result of the additional financing costs incurred in connection with the amendment of our revolving credit facility in February 2009. The amendment, among other things, (i) authorizes our repurchase of common stock up to an aggregate of $10.0 million; (ii) increases the amount of aggregate “Investments” (as such term is defined in our revolving credit facility) that we may make in non wholly-owned subsidiaries from $10.0 million to $20.0 million and correspondingly increases the aggregate amount of Investments that we may make in subsidiaries that are not Loan Parties (as such term is defined in our revolving credit facility) from $25.0 million to $35.0 million; (iii) increases the maximum amount of letters of credit that may be issued under our revolving credit facility from $10.0 million to $15.0 million; and (iv) modifies the amount of capital expenditures that may be incurred on a rolling 12-month basis, as measured on a quarterly basis. Also contributing to the increased expense amount were our senior subordinated notes, as the deferred financing costs and discounts associated with these notes are amortized over the contractual term of the underlying borrowings utilizing the effective interest method.

 

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Income Tax Expense
                                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
    2009     2008     % Change     2009     2008     % Change  
    (In thousands)     (In thousands)  
Income tax expense (benefit)
  $ 1,016     $ (633 )     260.5 %   $ 2,033     $ (181 )     1223.2 %
 
                                               
Effective tax rate
    28.1 %     14.9 %             (502.0 )%     2.1 %        
Our income tax expense increased during both the three and six month periods ended June 30, 2009 when compared to the same periods in 2008. This increase was primarily the result of certain deferred tax benefits recorded in 2008 related to our United Kingdom operations that were not recorded during the three and six months ended June 30, 2009. Effective December 31, 2008, we determined that a valuation allowance should be established for the net deferred tax asset balance in our United Kingdom jurisdiction, consistent with the policies in place with respect to our United States and Mexico jurisdictions. Accordingly, we do not expect to record any income tax benefits in our financial statements for any of our operating segments until it is more likely than not that such benefits will be utilized. Furthermore, due to the exclusion of certain deferred tax liability amounts from our ongoing analysis of our domestic net deferred tax asset position, we will likely continue to record additional valuation allowances for our domestic operations during 2009 and beyond.
Liquidity and Capital Resources
Overview
As of June 30, 2009, we had $6.5 million in cash and cash equivalents on hand and $329.1 million in outstanding long-term debt and capital lease obligations.
We have historically funded our operations primarily through cash flows from operations, borrowings under our revolving credit facilities, the issuance of equity securities, and the sale of bonds. Furthermore, we have historically used cash to invest in additional operating ATMs, either through the acquisition of ATM networks or through organically generated growth. We have also used cash to fund increases in working capital and to pay interest and principal amounts outstanding under our borrowings. Because we collect a sizable portion of our cash from sales on a daily basis but generally pay our vendors on 30 day terms and are not required to pay certain of our merchants until 20 days after the end of each calendar month, we are able to utilize the excess upfront cash flow to pay down borrowings made under our revolving credit facility and to fund our ongoing capital expenditure program. Accordingly, we will typically reflect a working capital deficit position and carry a small cash balance on our books.
We believe that our cash on hand and our current bank credit facilities will be sufficient to meet our working capital requirements and contractual commitments for the next 12 months. We expect to fund our working capital needs with cash flows generated from our operations and, to the extent needed, borrowings under our revolving credit facility. See additional discussion under Financing Facilities below.
Operating Activities
Net cash provided by operating activities totaled $32.7 million for the six months ended June 30, 2009 compared to net cash provided by operating activities of $7.4 million during the same period in 2008. The year-over-year increase was primarily attributable to improved operating margins and favorable working capital movements in 2009 when compared to 2008.
Investing Activities
Net cash used in investing activities totaled $10.8 million for the six months ended June 30, 2009 compared to $42.9 million during the same period in 2008. The year-over-year decrease was the result of a decline in the amount of capital expenditures incurred, as a result of our decision to reduce capital spending in 2009.
Anticipated Future Capital Expenditures. We currently anticipate that the majority of our capital expenditures for the foreseeable future will be driven by organic growth projects, including the purchasing of ATMs for existing as well as new ATM management agreements as opposed to acquisitions. We expect that our capital expenditures for the remaining six months of 2009 will total approximately $14.0 million, net of noncontrolling interests, the majority of which will be utilized to purchase additional ATMs for our Company-owned accounts. We expect such expenditures to be funded with cash generated from our operations. However, we will continue to evaluate selected acquisition opportunities that complement our existing ATM network, some of which could be material. We believe that expansion opportunities continue to exist in all of our current markets, as well as in other international markets, and we will continue to pursue those opportunities as they arise. Such acquisition opportunities, either individually or in the aggregate, could be material.

 

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Financing Activities
Net cash used in financing activities totaled $19.3 million for the six months ended June 30, 2009 compared to $27.4 million provided by financing activities for the same period in 2008. In 2008, we incurred incremental borrowings under our revolving credit facility to fund the higher level of capital expenditures during the period, as discussed in the Investing Activities section above. However, in 2009, we generated sufficient cash flows after capital expenditures that allowed us to repay a significant portion of the outstanding borrowings under our revolving credit facility. Although the amount outstanding under our revolving credit facility may fluctuate over the course of the year, we expect that the overall level of our senior debt, absent any acquisitions or unanticipated changes in our working capital and capital expenditure levels, will continue to trend downward over the remainder of the year, especially as we expect to generate higher net cash flows that allow us to repay outstanding borrowings.
Financing Facilities
As of June 30, 2009, we had $329.1 million in outstanding long-term debt and capital lease obligations, which was comprised of (1) $297.0 million (net of discount of $3.1 million) of our senior subordinated notes, (2) $24.5 million in borrowings under our revolving credit facility, (3) $7.0 million in notes payable outstanding under equipment financing lines of our Mexico subsidiary, and (4) $0.6 million in capital lease obligations.
Revolving credit facility. Borrowings under our revolving credit facility bear interest at a variable rate based upon LIBOR or prime rate at our option. Additionally, we pay a commitment fee of 0.25% per annum on the unused portion of the revolving credit facility. Substantially all of our assets, including the stock of our wholly-owned domestic subsidiaries and 66% of the stock of our foreign subsidiaries, are pledged to secure borrowings made under the revolving credit facility. Furthermore, each of our domestic subsidiaries has guaranteed our obligations under such facility. There are currently no restrictions on the ability of our 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 that we can have outstanding at any given point in time, (ii) the maintenance of a set ratio of earnings to fixed charges, as computed on a rolling 12-month basis, (iii) limitations on the amounts of restricted payments that can be made in any given year, and (iv) limitations on the amount of capital expenditures that we can incur on a rolling 12-month basis. Additionally, we are currently prohibited from making any cash dividends pursuant to the terms of the facility.
At June 30, 2009, the weighted average interest rate on our outstanding facility borrowings was approximately 4.2%. Additionally, as of June 30, 2009, we were in compliance with all covenants contained within the facility and had the ability to borrow an additional $143.5 million under the facility based on such covenants.
Bank Machine overdraft facility. In addition to the above revolving credit facility, Bank Machine, our wholly-owned subsidiary operating in the United Kingdom, has a £1.0 million overdraft facility. Such facility, which bears interest at 1.75% over the bank’s base rate (0.5% as of June 30, 2009) and is secured by a letter of credit posted under our corporate revolving credit facility, is utilized for general corporate purposes for our United Kingdom operations. As of June 30, 2009, no amounts were outstanding under this facility. The letter of credit we have posted that is associated with this overdraft facility reduces the available borrowing capacity under our corporate revolving credit facility.
Cardtronics Mexico equipment financing agreements. Between 2006 and 2009, Cardtronics Mexico entered into seven separate five-year equipment financing agreements with a single lender. These agreements, which are denominated in Mexican pesos and bear interest at an average fixed rate of 10.98%, were utilized for the purchase of additional ATMs to support our Mexico operations. As of June 30, 2009, $92.5 million pesos ($7.0 million U.S.) were outstanding under the agreements, with any future borrowings to be individually negotiated between the lender and Cardtronics. Pursuant to the terms of the equipment financing agreements, we have issued a guaranty for 51.0% of the obligations under these agreements (consistent with our ownership percentage in Cardtronics Mexico.) As of June 30, 2009, the total amount of the guaranty was $47.2 million pesos ($3.6 million U.S.).

 

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Capital lease agreements. In connection with a prior acquisition, we assumed certain capital and operating lease obligations for approximately 2,000 ATMs. We currently have $2.7 million in letters of credit under our revolving credit facility in favor of the lessors under these assumed equipment leases. These letters of credit reduce the available borrowing capacity under our revolving credit facility. As of June 30, 2009, the principal balance of our capital lease obligations totaled $0.6 million.
New Accounting Standards
For a description of the accounting standards that we have adopted during 2009, as well as details of the accounting standards that will apply to us in the future, see Item 1, Notes to Consolidated Financial Statements, Note 16, New Accounting Pronouncements .

 

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ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Vault cash rental expense. Because our ATM cash rental expense is based on market rates of interest, it is sensitive to changes in the general level of interest rates in the United States, the United Kingdom, and Mexico. In the United States, we pay a monthly fee on the average amount of vault cash outstanding under a formula based either on LIBOR or the federal funds effective rate, depending on the vault cash provider. In the United Kingdom and Mexico, we pay a monthly fee to our vault cash providers under a formula based on LIBOR and the Mexican Interbank Rate, respectively.
As a result of the significant sensitivity surrounding the vault cash interest expense for our United States and United Kingdom operations, we have entered into a number of interest rate swaps to fix the rate of interest utilized to determine the amounts we pay on a portion of our current and anticipated outstanding vault cash balances. The following swaps in place as of June 30, 2009, serve to fix the interest rate utilized for our vault cash rental agreements in the United States and the United Kingdom for the following notional amounts and periods:
                                 
Notional Amounts     Notional Amounts     Notional Amounts     Weighted Average      
United States     United Kingdom     Consolidated (1)     Fixed Rate     Term
      (In thousands)                  
$ 550,000     £     $ 550,000       4.30 %  
July 1, 2009 – December 31, 2009
$ 600,000     £ 50,000     $ 682,936       3.92 %  
January 1, 2010 – December 31, 2010
$ 550,000     £ 50,000     $ 632,936       3.66 %  
January 1, 2011 – December 31, 2011
$ 350,000     £ 25,000     $ 391,468       3.82 %  
January 1, 2012 – December 31, 2012
$ 100,000     £     $ 100,000       4.11 %  
January 1, 2013 – December 31, 2013
     
(1)   United Kingdom pound sterling amounts have been converted into United States dollars at $1.65873 to £1.00, which was the exchange rate in effect as of June 30, 2009.
The following table presents a hypothetical sensitivity analysis of our annual vault cash interest expense based on our outstanding vault cash balances as of June 30, 2009 and assuming a 100 basis point increase in interest rates:
                                                 
                                    Additional Interest Incurred on  
                    Additional Interest Incurred     100 Basis Point Increase  
                    on 100 Basis Point Increase     (Including Impact of  
    Vault Cash Balance as of     (Excluding Impact of     Interest Rate Swaps  
    June 30, 2009     Interest Rate Swaps)     Currently in Effect)  
    (Functional             (Functional             (Functional        
    currency)     (U.S. dollars)     currency)     (U.S. dollars)     currency)     (U.S. dollars)  
    (In millions)     (In millions)     (In millions)  
United States
  $ 809.2     $ 809.2     $ 8.1     $ 8.1     $ 2.6     $ 2.6  
United Kingdom (1)
  £ 88.4       146.6     £ 0.9       1.5     £ 0.9       1.5  
Mexico
  p $ 308.4       23.4     p $ 3.1       0.2     p $ 3.1       0.2  
 
                                         
Total
          $ 979.2             $ 9.8             $ 4.3  
 
                                         
     
(1)   The interest rate swaps in the United Kingdom, although in place as of June 30, 2009, are not effective until January 1, 2010.
As of June 30, 2009, we had a net liability of $30.6 million recorded in our Consolidated Balance Sheets related to our interest rate swaps, which represented the estimated fair value of the instruments as of such date. For additional information on our accounting treatment of these swaps and the calculation of their fair value, see Item 1, Notes to Consolidated Financial Statements, Note 11, Derivative Financial Instruments and Note 12, Fair Value Measurements .
As of June 30, 2009, we have not currently entered into any derivative financial instruments to hedge our variable interest rate exposure in Mexico.
Interest expense. Our interest expense is also sensitive to changes in the general level of interest rates in the United States, as our borrowings under our domestic revolving credit facility accrue interest at floating rates. Based on the $24.5 million outstanding under the facility as of June 30, 2009, an increase of 100 basis points in the underlying interest rate would have impacted our interest expense by less than $0.2 million; however, there is no guarantee that we will not borrow additional amounts under the facility, and, in the event we borrow additional amounts and interest rates significantly increased, we could be required to pay additional interest and such interest could be material.

 

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Outlook. The significant reductions in interest rates seen recently should reduce the interest expense we incur under our bank credit facility in the United States, as well as the amounts we pay under the unhedged portions of our vault cash rental programs. Because of the historically low interest rates currently in effect, we recently entered into additional interest rate swap transactions to hedge an additional portion of our vault cash interest rate risk in the United States and the United Kingdom, and may continue to do so in the future. We may be unsuccessful in those efforts or may be required to pay fixed rates under the new interest rate swaps that are significantly higher than current market rates. If we are unsuccessful in those efforts and interest rates increase significantly in the future, such increase could have an adverse impact on our business, financial condition and results of operations by increasing our operating costs and expenses. However, the impact on our financial statements would be somewhat mitigated by the interest rate swaps that are currently in place.
Foreign Currency Exchange Risk
Due to our operations in the United Kingdom and Mexico, we are exposed to market risk from changes in foreign currency exchange rates, specifically with changes in the United States dollar relative to the British pound and Mexican peso. Our United Kingdom and Mexico subsidiaries are consolidated into our financial results and are subject to risks typical of international businesses including, but not limited to, differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions, and foreign exchange rate volatility. Furthermore, we are required to translate the financial condition and results of operations of our U.K. subsidiary (Bank Machine) and Cardtronics Mexico into United States dollars, with any corresponding translation gains or losses being recorded in other comprehensive loss in our consolidated financial statements. As of June 30, 2009, such translation loss totaled approximately $23.2 million compared to approximately $31.9 million as of December 31, 2008.
Our results during the three and six months ended June 30, 2009 were negatively impacted by decreases in the value of the British pound relative to the United States dollar compared to the same period in 2008. (See Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations for additional details on the impact of changes in the foreign exchange rate between the United States dollar and the British pound.) Additionally, as our Mexico operations expand, our future results could be materially impacted by changes in the value of the Mexican peso relative to the United States dollar. A sensitivity analysis indicates that if the United States dollar uniformly strengthened or weakened 10% against the British pound during the three months ended June 30, 2009, the effect upon Bank Machine’s operating income would have been $0.2 million. A similar sensitivity analysis between the United States dollar and Mexican peso indicated that the impact on Cardtronics Mexico’s operating income would have been immaterial. At this time, we have not deemed it to be cost effective to engage in a program of hedging the effect of foreign currency fluctuations on our operating results using derivative financial instruments.
We do not hold derivative commodity instruments, and all of our cash and cash equivalents are held in money market and checking funds.

 

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ITEM 4.   CONTROLS AND PROCEDURES
Management’s Quarterly Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Form 10-Q, management performed, under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act). Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, to allow timely decisions regarding required disclosures. Based on the results of this evaluation, management concluded that our disclosure controls and procedures were effective as of June 30, 2009.
Changes in Internal Control over Financial Reporting
There have been no changes in our system of internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION
ITEM 1.   LEGAL PROCEEDINGS
For information on our material legal proceedings, see Part I., Item I., Financial Information, Notes to Consolidated Financial Statements, Note 13, Commitments and Contingencies.
ITEM 1A.   RISK FACTORS
Our business, results of operations and financial condition are subject to a number of risks. Some of those risks are set forth in our 2008 Form 10-K. Outlined below is a modification to certain risks previously disclosed in our 2008 Form 10-K. These risks should be read in conjunction with the risk factors discussed in Part I, Item 1A. Risk Factors , in our 2008 Form 10-K. The risks described in this Form 10-Q and in our 2008 Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results.
We maintain a significant amount of cash within our Company-owned ATMs, which is subject to potential loss due to theft or other events, including natural disasters.
As of June 30, 2009, there was approximately $979.0 million in vault cash held in our domestic and international ATMs. Although legal and equitable title to such cash is held by the cash providers, any loss of such cash from our ATMs through theft or other means is typically our responsibility. While we maintain insurance to cover a significant portion of any losses that may be sustained by us as a result of such events, we are still required to fund a portion of such losses through the payment of the related deductible amounts under our insurance policies. Furthermore, any increase in the frequency and/or amounts of such thefts and losses could negatively impact our operating results as a result of higher deductible payments and increased insurance premiums. Additionally, any damage sustained to our merchant customers’ store locations in connection with any ATM-related thefts, if extensive and frequent enough in nature, could negatively impact our relationships with such merchants and impair our ability to deploy additional ATMs in those locations (or new locations) with those merchants in the future. Finally, impacted merchants may request, and have requested on a limited basis, that we remove ATMs from store locations that have suffered damage as a result of ATM-related thefts, thus negatively impacting our financial results.
Interchange fees, which comprise a substantial portion of our ATM transaction revenues, may be lowered at the discretion of the various EFT networks through which our ATM transactions are routed, thus reducing our future revenues.
Interchange fees, which represented approximately 30% of our total ATM operating revenues for the year ended December 31, 2008 and the six months ended June 30, 2009, are set by the various EFT networks through which our ATM transactions are routed. The fees are set at the discretion of each network and typically vary from one network to the next. Accordingly, if some or all of the networks through which our ATM transactions are routed were to lower the interchange rates paid to us, our future ATM transaction revenues and related profits would decline. Historically, we have been successful in offsetting the effects of such reductions through changes in our business. However, we can give no assurances that we will be successful in offsetting the effects of any future reductions in interchange fees, if and when they occur.

 

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ITEM 2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Purchases of Equity Securities by the Issuer and Affiliated Purchasers. The following table provides information about purchases of equity securities that are registered by us pursuant to Section 12 of the Exchange Act during the quarter ended June 30, 2009:
                                 
                    Total Number of     Approximate Dollar  
    Total Number of     Average     Shares Purchased as     Value that May Yet  
    Shares     Price Paid     Part of a Publicly     be Purchased Under  
Period   Purchased     Per Share     Announced Program     the Program (1) (2)  
April 1 – 30, 2009
                    $ 10,000,000  
May 1 – 31, 2009
                    $ 10,000,000  
June 1 – 30, 2009
    108,348 (3)(4)   $ 3.60 (5)     27,058 (6)   $ 9,909,344  
 
                         
Total
    108,348     $ 3.60       27,058          
 
                         
 
     
(1)   In February 2009, our Board of Directors approved a common stock repurchase program up to an aggregate of $10.0 million. The shares will be repurchased from time to time in open market transactions or privately negotiated transactions at our discretion. The share repurchase program will expire on March 31, 2010, unless extended or terminated earlier by the Board of Directors.
 
(2)   In connection with the lapsing of the forfeiture restrictions on restricted shares granted by our Company under our 2007 Stock Incentive Plan, which was adopted in December 2007 and expires in December 2017, we permitted employees to sell a portion of their shares to us in order to satisfy the tax liabilities that arose as a consequence of the lapsing of the forfeiture restrictions. In future periods, we may not permit our employees to sell their shares to us in order to satisfy such tax liabilities. Furthermore, since the number of restricted shares that will become unrestricted each year is dependent upon the continued employment of the award recipients, we cannot forecast either the total amount of such securities or the approximate dollar value of those securities that we might purchase in future years as the forfeiture restrictions on such shares lapse.
 
(3)   Included in these shares are 81,290 shares surrendered to us by participants in our 2007 Stock Incentive Plan to settle the participants’ personal tax liabilities that resulted from the lapsing of restrictions on shares awarded to the participants under the plan.
 
(4)   Included in these shares are 27,058 shares repurchased by us pursuant to our common stock repurchase program.
 
(5)   The price paid per share was based on the weighted average of the high and low trading price of our Company’s common stock on June 5, 2009 and June 20, 2009 which represent the dates the restrictions lapsed on such shares, and on the dates in which we repurchased shares under our common stock repurchase program.
 
(6)   Represents shares of common stock repurchased by us pursuant to our publicly announced common stock repurchase program
ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In conjunction with our Annual Meeting of Stockholders held on June 18, 2009, two proposals were presented to stockholders. Set forth below are the voting results for the proposals presented for a stockholder vote at the Annual Meeting.
Proposal No. 1: Re-election of two independent Class II directors to our Board of Directors for a three-year term:
                 
    Number of Shares  
    For     Withheld  
J. Tim Arnoult
    33,686,629       4,123,710  
Dennis F. Lynch
    33,686,629       4,123,710  
Our other continuing directors are Fred R. Lummis, Robert P. Barone, Jorge M. Diaz, and Michael A.R. Wilson.
Proposal No. 2: Ratification of the Audit Committee’s selection of KPMG LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2009:
                                 
For         Against     Abstain     Broker Non-Votes  
  37,734,849    
 
    64,340       11,150        

 

44


Table of Contents

ITEM 6.   EXHIBITS
The exhibits required to be filed pursuant to the requirements of Item 601 of Regulation S-K are set forth in the Index to Exhibits accompanying this report and are incorporated herein by reference.

 

45


Table of Contents

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
  CARDTRONICS, INC.
 
 
August 7, 2009  /s/ J. Chris Brewster    
  J. Chris Brewster   
  (Duly Authorized Officer and
Principal Financial Officer)
 
 
     
August 7, 2009  /s/ Tres Thompson    
  Tres Thompson   
  Chief Accounting Officer
(Duly Authorized Officer and
Principal Accounting Officer)
 
 

 

46


Table of Contents

EXHIBIT INDEX
Each exhibit identified below is part of this Form 10-Q. Exhibits filed (or furnished in the case of Exhibit 32.1) with this Form 10-Q are designated by an “*”. All exhibits not so designated are incorporated herein by reference to a prior filing as indicated.
         
Exhibit    
Number   Description
  3.1    
Third Amended and Restated Certificate of Incorporation of Cardtronics, Inc. (incorporated herein by reference to Exhibit 3.1 of the Current Report on Form 8-K filed by Cardtronics, Inc. on December 14, 2007, Registration No. 001-33864).
       
 
  3.2    
Second Amended and Restated Bylaws of Cardtronics, Inc. (incorporated herein by reference to Exhibit 3.2 of the Current Report on Form 8-K filed by Cardtronics, Inc. on December 14, 2007, Registration No. 001-33864) .
       
 
* 10.1  
Second Amendment to Contract Cash Solutions Agreement, dated July 19, 2009, by and between Cardtronics USA, Inc., Cardtronics, Inc., and Wells Fargo Bank, N.A.
       
 
  * 31.1    
Certification of the Chief Executive Officer of Cardtronics, Inc. pursuant to Section 13a-14(a) of the Securities Exchange Act of 1934.
       
 
  * 31.2    
Certification of the Chief Financial Officer of Cardtronics, Inc. pursuant to Section 13a-14(a) of the Securities Exchange Act of 1934.
       
 
  * 32.1    
Certification of the Chief Executive Officer and Chief Financial Officer of Cardtronics, Inc. pursuant to Section 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.
     
  Certain portions of this exhibit have been omitted by redacting a portion of the text (indicated by asterisks in the text). This exhibit has been filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment.

 

47

Exhibit 10.1   EXECUTION COPY
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR THE REDACTED PORTIONS OF THIS
AGREEMENT. THE REDACTIONS ARE INDICATED WITH FIVE ASTERISKS (“*****”). A COMPLETE VERSION OF THIS AGREEMENT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
SECOND AMENDMENT TO CONTRACT CASH SOLUTIONS AGREEMENT
     THIS SECOND AMENDMENT TO CONTRACT CASH SOLUTIONS AGREEMENT (this “ Amendment ”), dated and effective as of July 19, 2009, is made and entered into among CARDTRONICS USA, INC. and CARDTRONICS, INC. (the “ Clients ”) and WELLS FARGO BANK, NATIONAL ASSOCIATION (“ Wells Fargo ”).
R E C I T A L S:
     A. Clients and Wells Fargo entered into a Contract Cash Solutions Agreement, dated as of July 20, 2007 (as modified or amended from time to time, the “ Agreement ”).
     B. Wells Fargo and Clients desire to extend Stated Termination Date to July 20, 2011.
     C. Clients have requested that Wells Fargo increase the maximum available amount of Cash available during non-holiday periods.
     D. Subject to and on the terms and conditions of this Amendment, Wells Fargo is willing to increase the maximum available amount to $400,000,000 during non-holiday periods and to extend the Stated Termination Date.
     NOW, THEREFORE, in consideration of the foregoing recitals and other good and valuable considerations, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows, intending to be legally bound:
ARTICLE I
Definitions
     Capitalized terms used in this Amendment, to the extent not otherwise defined herein, shall have the meanings assigned to such terms in the Agreement.
ARTICLE II
Amendments
     Section 2.1 Maximum Available Amount . Section II.C. is amended by deleting the reference to “$375,000,000” and inserting in lieu thereof a reference to “$400,000,000”.
     Section 2.2 Fees . Section VII.A. is amended and restated in its entirety to read as follows:

 


 

      General . Clients, jointly and severally, agree to pay Wells Fargo the fees calculated in accordance with the terms of a separate fee letter between Wells Fargo and Clients (as amended, amended and restated or otherwise modified in writing, the “ Fee Letter ”), which is hereby incorporated into this Agreement. Fees may be changed by Wells Fargo on 90 days prior notice to Clients and Clients are free to accept such changes or terminate this Agreement as provided herein prior to the expiration of such notice period; provided, however, that if Clients do not accept such changes, such changes will nonetheless apply from the effective date thereof until termination.
     Section 2.3 Term . Section XI.A. is amended and restated in its entirety to read as follows:
      General . The initial term of this Agreement expires on July 20, 2009. The Parties have agreed, pursuant to a written amendment to the Agreement to a renewal term commencing on July 20, 2009, and expiring on July 20, 2011 (the “ Stated Termination Date ”), unless earlier terminated by a Party as provided or permitted in this Agreement (the “ Actual Termination Date ”).
ARTICLE III
Conditions Precedent
     The effectiveness of this Amendment is subject to the satisfaction of the following conditions precedent:
     (a) Clients and Wells Fargo shall have executed and delivered this Amendment;
     (b) Clients shall have accepted in writing the Fee Letter dated as of the date of this Amendment; and
     (c) Clients shall have provided to Wells Fargo such other and further documents and instruments, if any, as Wells Fargo may reasonably request.
ARTICLE IV
Representations and Warranties; Acknowledgments
     Each of the parties represents and warrants to the others that (i) the execution, delivery and performance of this Amendment has been duly authorized by all requisite action on its part; and (ii) it is in compliance with the terms and agreement contained in the Agreement applicable to it.

- 2 -


 

ARTICLE V
General Provisions
     Section 5.1 Counterparts . This Amendment may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same agreement.
     Section 5.2 Facsimile Signatures . Delivery by fax of an executed counterpart of a signature page to this Amendment shall be effective as delivery of an original executed counterpart of this Amendment.
     Section 5.3 Section Headings . The section headings in this Amendment are for purposes of reference only and shall not limit or effect any of the terms hereof.
     Section 5.4 Costs and Expenses . Clients, jointly and severally, agree to reimburse Wells Fargo on demand for all costs and expenses incurred by Wells Fargo in connection with preparation, negotiation and delivery of this Amendment, including, without limitation, all the reasonable fees and disbursements of Wells Fargo’s legal counsel.
     Section 5.5 Successors and Assigns . This Amendment is binding upon and shall inure to the benefit of parties hereto and their respective successors and assigns, subject, however, to the requirements of Section XIV.D. of the Agreement.
     Section 5.6 Governing Law . The Governing Law shall govern this Amendment and the interpretation thereof.
     Section 5.7 Entire Agreement; Modification . This Amendment constitutes the entire agreement between Wells Fargo and Clients relating to the subject matter hereof and may not be changed orally, but only by written instrument signed by both parties. There are no restrictions, promises, warranties, covenants, or undertakings relating to the subject matter of this Amendment other than those expressly set forth or referred-to herein. Nothing in this Amendment alters or impairs the Agreement except for the amendments specifically provided herein.
[Balance of Page Intentionally Left Blank. Signature Page Follows]

- 3 -


 

      IN WITNESS WHEREOF , each of the Parties has caused this Amendment to be executed on its behalf by the duly authorized officers as of the date and year first written above.
                 
CARDTRONICS USA, INC.   WELLS FARGO BANK, NATIONAL ASSOCIATION    
 
               
By:
  /s/ Michael H. Clinard
 
Name: Michael H. Clinard
  By:   /s/ John Kallina
 
John Kallina
   
 
  Title: President, Global Services       Vice President    
 
               
CARDTRONICS, INC.            
 
               
By:
  /s/ Michael H. Clinard            
 
               
 
  Name: Michael H. Clinard            
 
  Title: President, Global Services            

- 4 -


 

EXECUTION COPY
Amended and Restated Fee Letter
July 19, 2009
Cardtronics, Inc.
Cardtronics USA, Inc.
3250 Briarpark Drive, Suite 400
Houston, TX 77042
Attention: Michael H. Clinard
Ladies and Gentlemen:
     Reference is made to the July 20, 2007, Contract Cash Solutions Agreement (as amended, herein so called) among the above-named addressees (“Clients”) and Wells Fargo Bank, National Association (“Wells Fargo”). This letter agreement is the Fee Letter referred-to in the Contract Cash Solutions Agreement and is an amendment and restatement of the July 20, 2007, Fee Letter. Capitalized terms used but not defined herein have the meanings assigned to them in the Contract Cash Solutions Agreement.
     Clients, jointly and severally, agree to pay to Wells Fargo the fees calculated in accordance with the terms of Exhibits A and B to this Fee Letter, which are incorporated herein, which may be amended from time to time and at any time upon ***** days notice to the Clients as provided in the Contract Cash Solutions Agreement. The Cardtronics Entities agree that their obligations under this Fee Letter will survive the consummation of the transactions described in the Contract Cash Solutions Agreement, including those described in the Second Amendment thereto of even date.
     If you are in agreement with the foregoing and wish to induce Wells Fargo to extend the Stated Termination Date as contemplated in the Second Amendment to the Contract Cash Solutions Agreement, please sign and return to us a copy of this Fee Letter, whereupon it shall constitute a binding agreement between us. The Cardtronics Entities agree that this Fee Letter and its contents are subject to confidentiality provisions and will not be disclosed except as required by law or a final order of a court of competent jurisdiction.
         
  Yours very truly,

WELLS FARGO BANK, NATIONAL ASSOCIATION
 
 
  By:     /s/ John Kallina    
  Name:   John Kallina   
  Title:   VP   
 

 


 

Accepted and Agreed to on July 19, 2009:
         
CARDTRONICS, INC.    
 
       
By:
Name:
  /s/ Michael H. Clinard
 
Michael H. Clinard
   
Title:
  President, Global Services    
 
       
CARDTRONICS USA, INC.    
 
       
By:
Name:
  /s/ Michael H. Clinard
 
Michael H. Clinard
   
Title:
  President, Global Services    

2


 

EXHIBIT A
Fees
1.   Monthly Fee . Clients shall pay a monthly fee as calculated in accordance with the following formula:
     Monthly Fee = The ***** the ***** while there are *****, and the ***** at all other times.
          Where:
A = The *****
B = (*****)/*****
C = The *****
X = The *****
Y = (*****)/*****
2.   Definitions . The following terms when used in this Exhibit A shall have the following meanings:
  a)   *****
 
  b)   *****
 
  c)   *****
 
  d)   *****
 
  e)   *****
 
  f)   Daily Three Month LIBOR ” means, for each day, LIBOR then in effect for delivery for a three month period on such day or if such day is not a Business Day on the immediately preceding Business Day.
 
  g)   LIBOR ” means the rate per annum determined pursuant to the following formula:
       
LIBOR =
  Base LIBOR
 
 
 
 
  100% - LIBOR Reserve Percentage
  (a)   “Base LIBOR” means the rate per annum for United States dollar deposits quoted by Wells Fargo for the purpose of calculating the effective rate for loans that reference Daily Three Month LIBOR as the Inter-Bank Market Offered Rate in effect from time to time for three month delivery of funds in amounts approximately equal to the Average Daily LIBOR Tranche

3


 

      Dollars Outstanding. Each Client understands and agrees that Wells Fargo may base its quotation of the Inter-Bank Market Offered Rate upon such offers or other market indicators of the Inter-Bank Market as Wells Fargo in its discretion deems appropriate, including but not limited to the rate offered for U.S. dollar deposits on the London Inter-Bank Market.
 
  (b)   “LIBOR Reserve Percentage” means the reserve percentage prescribed by the Board of Governors of the Federal Reserve System (or any successor) for “Eurocurrency Liabilities” (as defined in Regulation D of the Federal Reserve Board, as amended), adjusted by Wells Fargo for expected changes in such reserve percentage during the applicable term of the Agreement.
  h)   Wells Fargo FF Margin ” means ***** basis points.
 
  i)   Wells Fargo LIBOR Margin ” means ***** basis points.
 
  j)   *****
3.   Ancillary Services and Charges . Clients shall also pay the customary charges and fees of Wells Fargo for the ancillary services set forth on Exhibit B to the Fee Letter, which Exhibit reflects the current charges on the date of this Agreement. Wells Fargo’s standard treasury and cash management agreements will apply to all ancillary services such as wire transfers, ACH services and the like.

4


 

EXHIBIT B
Form of Monthly Billing Statement
Fees are as follows:
Wells Fargo Treasury Management Proposal
      Cardtronics
     (Monthly Fee calculated per Exhibit A)
                                             
                                (Below are Monthly Volume and
                                Activity Charges Examples)
WF                               Monthly   Activity
Code   TMA Code   Service Description   Charge Basis   Price   Volume   Charges
 
          Cash Vault                                
08156
    100199     ATM Contract Cash Balance/Location     * ****     * ****     * ****     * ****
08190
    100140     Cash Vault Cash Order-Call IN     * ****     * ****     * ****     * ****
08189
    100141     Cash Vault Cash Order-Touchtone     * ****     * ****     * ****     * ****
08182
    100141     Cash Vault Cash Orders-CEO     * ****     * ****     * ****     * ****
08115
    100146     Cash Vault Coin Furnished-Std Box     * ****     * ****     * ****     * ****
08124
    100000     Cash Vault Currency Furn-Bundle     * ****     * ****     * ****     * ****
08416
    100199     Cash Vault Currency Furnished     * ****     * ****     * ****     * ****
08290
    100199     Cash Vault Currency/Coin Deposited     * ****     * ****     * ****     * ****
08160
    100501     Cash Vault Deposit Adjustment     * ****     * ****     * ****     * ****
CVBSE
    100100     Cash Vault Monthly Base     * ****     * ****     * ****     * ****
VLTRT
    100199     Cash Vault Retn Dup Deposit Ticket     * ****     * ****     * ****     * ****
08801
    109999     Contract Cash ATM Settlement     * ****     * ****     * ****     * ****
08151
    100100     Contract Cash Balance/Settlement     * ****     * ****     * ****     * ****
08152
    100199     Contract Cash [Interest] Expense     * ****     * ****     * ****     * ****
08601
    100141     Expanded Network Cash Order-Std     * ****     * ****     * ****     * ****
08611
    100199     Expanded Network Currency Deposited     * ****     * ****     * ****     * ****
08604
    100199     Expanded Network Currency Furnished     * ****     * ****     * ****     * ****
08616
    100501     Expanded Network Deposit Adjustment     * ****     * ****     * ****     * ****
 
          Subtotal                             * ****

 


 

                                             
                                (Below are Monthly Volume and
                                Activity Charges Examples)
WF                               Monthly   Activity
Code   TMA Code   Service Description   Charge Basis   Price   Volume   Charges
 
          General Account Services                                
CK011
    010101     Credits Posted     * ****     * ****     * ****     * ****
CK018
    250201     Electronic Credits Posted     * ****     * ****     * ****     * ****
CK019
    250200     Electronic Debits Posted     * ****     * ****     * ****     * ****
22992
    401001     Image PC Request-Electronic Deliver     * ****     * ****     * ****     * ****
 
          Subtotal                             * ****
 
 
          Total Monthly Activity Charges                             * ****
 
*   The ***** balancing fee is for 3800 Non-VCOM ATM’s. If the volume of ATMs increase pricing is subject to change.

 

Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER OF CARDTRONICS, INC.
PURSUANT TO RULE 13a-14(a) UNDER THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,
AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Fred R. Lummis, Interim Chief Executive Officer of Cardtronics, Inc., certify that:
1.   I have reviewed this Quarterly Report on Form 10-Q (this “report”) of Cardtronics, Inc.;
2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
  (a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
  (b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
  (c)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
  (d)   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
  (a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
  (b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
         
Date: August 7, 2009  /s/ Fred R. Lummis    
  Fred R. Lummis   
  Interim Chief Executive Officer
(Principal Executive Officer) 
 

 

 

Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER OF CARDTRONICS, INC.
PURSUANT TO RULE 13a-14(a) UNDER THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,
AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, J. Chris Brewster, Chief Financial Officer of Cardtronics, Inc., certify that:
1.   I have reviewed this Quarterly Report on Form 10-Q (this “report”) of Cardtronics, Inc.;
2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
  (a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
  (b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
  (c)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
  (d)   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
  (a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
  (b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
         
Date: August 7, 2009  /s/ J. Chris Brewster    
  J. Chris Brewster   
  Chief Financial Officer   

 

 

Exhibit 32.1
CERTIFICATION OF
CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Cardtronics, Inc. (“Cardtronics”) for the period ended June 30, 2009 as filed with the Securities and Exchange Commission (the “SEC”) on the date hereof (the “Report”), the undersigned each hereby certifies, pursuant to 18 U.S.C. §1350 as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002:
(1) The Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Cardtronics.
         
Date: August 7, 2009  /s/ Fred R. Lummis    
  Fred R. Lummis   
  Interim Chief Executive Officer
(Principal Executive Officer) 
 
         
Date: August 7, 2009  /s/ J. Chris Brewster    
  J. Chris Brewster   
  Chief Financial Officer