UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

 

Commission file number 333-113470

 

 

 

 

CARDTRONICS, INC.

(Exact name of registrant as specified in its charter)

 

 

Registrant’s telephone number, including area code:

(281) 596-9988

 

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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o     Accelerated filer o     Non-accelerated filer þ

 

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

 

 

 

CARDTRONICS, INC.

 

TABLE OF CONTENTS

 

 

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

 

PART I. FINANCIAL INFORMATION

 

 

CARDTRONICS, INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

 

 

See accompanying notes to condensed consolidated financial statements.

 

CARDTRONICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)

 

 

See accompanying notes to condensed consolidated financial statements.

 

CARDTRONICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

 

 

See accompanying notes to condensed consolidated financial statements.

CARDTRONICS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

1. General and Basis of Presentation

 

General

 

Cardtronics, Inc., along with its wholly-owned subsidiaries (collectively, the “Company” or “Cardtronics”), owns and/or operates the world’s largest network of ATMs, including over 28,600 automated teller machines (“ATM”) in all 50 states and approximately 1,900 ATMs located throughout the United Kingdom. Additionally, the Company owns a majority interest in an entity that operates approximately 1,000 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 Allpoint network, the largest surcharge-free ATM network within the United States (based on number of participating ATMs), under which it sells surcharge-free access to its ATMs to financial institutions that lack a significant ATM network. The Company also works with financial institutions to brand the Company’s ATMs in order to provide the financial institutions’ banking customers with convenient, surcharge-free ATM access and increased brand awareness for the financial institutions.

 

In July 2007, the Company purchased substantially all of the assets of the financial services business of 7-Eleven^®, Inc. (“7-Eleven”) for approximately $138.0 million in cash (the “7-Eleven ATM Transaction”), including an adjustment for working capital and other related closing costs. See Note 2 for additional information on this acquisition.

 

Basis of Presentation

 

The unaudited interim condensed 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.

 

This Quarterly Report on 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 of America. You should read this Quarterly Report on Form 10-Q along with the Company’s 2006 Annual Report on Form 10-K, which includes a summary of the Company’s significant accounting policies and other disclosures.

 

The financial statements as of September 30, 2007 and for the three and nine month periods ended September 30, 2007 and 2006 are unaudited. The balance sheet as of December 31, 2006 was derived from the audited balance sheet filed in the Company’s 2006 Annual Report on Form 10-K. In management’s opinion, all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation of the Company’s interim period results have been made. The results of operations for the three and nine month periods ended September 30, 2007 and 2006 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 reported net loss or stockholders’ deficit.

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 such differences could be material to the financial statements.

 

CARDTRONICS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Cost of ATM Operating Revenues and Gross Profit Presentation

 

The Company presents “Cost of ATM operating revenues” and “Gross profit” within its condensed consolidated financial statements exclusive of depreciation, accretion, and amortization. A summary of the amounts excluded from cost of ATM operating revenues and gross profit during the three and nine months ended September 30, 2007 and 2006 is presented below:

 

 

The depreciation and accretion amounts shown above and as presented in the Company’s condensed consolidated statements of operations includes depreciation and accretion related to assets under capital leases.

 

2. Acquisitions

 

Acquisition of 7-Eleven Financial Services Business

 

On July 20, 2007, the Company acquired substantially all of the assets of the financial services business of 7-Eleven (“7-Eleven Financial Services Business”) for approximately $138.0 million in cash. Such amount included a $2.0 million payment for estimated acquired working capital and approximately $1.0 million in other related closing costs. Subsequent to September 30, 2007, the working capital payment was reduced to $1.3 million based on the actual working capital amounts outstanding as of the acquisition date, thus reducing the Company’s overall cost of the acquisition to $137.3 million. The 7-Eleven ATM Transaction included approximately 5,500 ATMs located in 7-Eleven stores throughout the United States, of which approximately 2,000 are advanced-functionality financial self-service kiosks branded as “Vcom^TM” terminals that are capable of providing more sophisticated financial services, such as check-cashing, deposit taking using electronic imaging, money transfer, bill payment services, and other kiosk-based financial services (collectively, the “Vcom Services”). The Company funded the acquisition through the issuance of $100.0 million of 9.25% senior subordinated notes due 2013 — Series B and additional borrowings under its revolving credit facility, which was amended in connection with the acquisition. See Note 7 for additional details on these financings.

 

The Company has accounted for the 7-Eleven ATM Transaction as a business combination pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 141, Business Combinations. Accordingly, the Company has allocated the total purchase consideration to the assets acquired and liabilities assumed based on

 

CARDTRONICS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

their respective fair values as of the acquisition date. The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed as of the acquisition date (in thousands):

 

 

The purchase price allocation presented above, which reflects the working capital true-up adjustment, resulted in an initial goodwill balance of approximately $62.4 million, which is deductible for tax purposes. Additionally, the purchase price allocation resulted in approximately $78.0 million in identifiable intangible assets subject to amortization, which consisted of $64.3 million associated with the ten-year ATM operating agreement that was entered into with 7-Eleven in conjunction with the acquisition and $13.7 million related to additional contracts acquired in the transaction. The $78.0 million assigned to the acquired intangible assets was determined by utilizing a discounted cash flow approach. The $64.3 million is being amortized on a straight-line basis over the term of the underlying ATM operating agreement, while the $13.7 million is being amortized over the weighted-average remaining life of the underlying contracts of 8.4 years. Additionally, the Company recorded $19.5 million of other deferred liabilities ($7.8 million in current and $11.7 million in long-term) related to certain unfavorable equipment operating leases and an operating contract assumed as part of the 7-Eleven ATM Transaction. These liabilities are being amortized over the remaining terms of the underlying contracts and serve to reduce the corresponding ATM operating expense amounts to fair value.

 

Pro Forma Results of Operations

 

The following table presents the unaudited pro forma combined results of operations of the Company and the acquired 7-Eleven Financial Services Business for the nine month periods ended September 30, 2007 and 2006, after giving effect to certain pro forma adjustments, including the effects of the issuance of the Company’s $100.0 million of 9.25% senior subordinated notes due 2013 — Series B and additional borrowings under its revolving credit facility, as amended (Note 7). The unaudited pro forma financial results assume that both the 7-Eleven ATM Transaction and related financing transactions occurred on January 1, 2006. This pro forma information is presented for illustrative purposes only and is not necessarily indicative of the actual results that

 

CARDTRONICS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

would have occurred had those transactions been consummated on such date. Furthermore, such pro forma results are not necessarily indicative of the future results to be expected for the consolidated operations.

 

 

Acquisition of CCS Mexico

 

In February 2006, the Company acquired a 51.0% ownership stake in CCS Mexico, an independent ATM operator located in Mexico, for approximately $1.0 million in cash consideration and the assumption of approximately $0.4 million in additional liabilities. Additionally, the Company incurred approximately $0.3 million in transaction costs associated with this acquisition. CCS Mexico, which was renamed Cardtronics Mexico upon the completion of the Company’s investment, currently operates approximately 1,000 surcharging ATMs in selected retail locations throughout Mexico, and the Company anticipates placing additional surcharging ATMs in other retail establishments throughout Mexico as those opportunities arise.

 

The Company has allocated the total purchase consideration to the assets acquired and liabilities assumed based on their respective fair values as of the acquisition date. Such allocation resulted in goodwill of approximately $0.7 million. Such goodwill, which is not deductible for tax purposes, has been assigned to a separate reporting unit representing the acquired CCS Mexico operations. Additionally, such allocation resulted in approximately $0.4 million in identifiable intangible assets, including $0.3 million for certain acquired customer contracts and $0.1 million related to non-compete agreements entered into with the minority interest shareholders of Cardtronics Mexico.

 

Because the Company owns a majority interest in and absorbs a majority of the entity’s losses or returns, Cardtronics Mexico is reflected as a consolidated subsidiary in the accompanying condensed consolidated financial statements, with the remaining ownership interest not held by the Company being reflected as a minority interest. See Note 9 for additional information regarding this minority interest.

 

 

In the first quarter of 2006, the Company adopted SFAS No. 123 (revised 2004), Share-Based Payment. As a result of this adoption, the Company now records the grant date fair value of stock-based compensation arrangements, net of estimated forfeitures, as compensation expense on a straight-line basis over the underlying service periods of the related awards. The following table reflects the total stock-based compensation expense amounts included in the accompanying condensed consolidated statements of operations for the each of the periods indicated:

 

 

CARDTRONICS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

A summary of the status of the Company’s outstanding stock options as of September 30, 2007, and changes during the nine months ended September 30, 2007, are presented below:

 

 

 

SFAS No. 130, Reporting Comprehensive Income, establishes standards for reporting comprehensive income (loss) and its components in the financial statements. Accumulated other comprehensive income is displayed as a separate component of stockholders’ deficit in the accompanying condensed consolidated balance sheets and consists of unrealized gains and losses, net of related income taxes, related to changes in the fair values of the Company’s interest rate swap derivative transactions and the cumulative amount of foreign currency translation adjustments associated with the Company’s foreign operations. In addition, as of December 31, 2006, accumulated other comprehensive income included unrealized gains on available-for-sale marketable securities, net of income taxes. These securities were sold in January 2007.

 

The following table presents the calculation of comprehensive (loss) income, which includes the Company’s (i) net loss; (ii) foreign currency translation adjustments; (iii) changes in the unrealized gains and losses associated with the Company’s interest rate hedging activities, net of income taxes; and (iv) reclassifications of unrealized gains on the Company’s available-for-sale securities, net of income taxes, for each of the periods indicated:

 

 

CARDTRONICS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The following table sets forth the components of accumulated other comprehensive income, net of applicable taxes:

 

 

The Company currently believes that 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 on the differences between the Company’s book basis and underlying tax basis in those subsidiaries or on the foreign currency translation adjustment amounts reflected in the tables above. The unrealized gains on interest rate hedges as of December 31, 2006 has been included in accumulated other comprehensive income net of income taxes of $2.7 million. However, as a result of the Company’s overall net loss position for tax purposes, the Company has not recorded deferred taxes on the loss amount related to its interest rate hedges as of September 30, 2007, as management does not believe that the Company will be able to realize the benefits associated with such deferred tax positions.

 

 

Intangible Assets with Indefinite Lives

 

The following table depicts the net carrying amount of the Company’s intangible assets with indefinite lives as of September 30, 2007 and December 31, 2006, as well as the changes in the net carrying amounts for the nine month period ended September 30, 2007, by segment:

 

 

CARDTRONICS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Intangible Assets with Definite Lives

 

The following is a summary of the Company’s intangible assets that are subject to amortization as of September 30, 2007:

 

 

The Company’s intangible assets with definite lives are being amortized over the assets’ estimated useful lives utilizing the straight-line method. Estimated useful lives range from three to twelve years for customer contracts and relationships and four to eight years for exclusive license agreements. The Company has also assumed an estimated life of four years for its non-compete agreements. Deferred financing costs are amortized through interest expense over the contractual term of the underlying borrowings utilizing the effective interest method. The Company periodically reviews the estimated useful lives of its identifiable intangible assets, taking into consideration any events or circumstances that might result in a reduction in fair value or a revision of those estimated useful lives.

 

Amortization of customer contracts and relationships, exclusive license agreements, and non-compete agreements totaled $9.2 million and $2.3 million for the three month periods ended September 30, 2007 and 2006, respectively, and $14.1 million and $9.6 million for the nine month periods ended September 30, 2007 and 2006, respectively. Included in the 2007 quarter-to-date and year-to-date amounts is approximately $5.2 million and $5.3 million, respectively, of additional amortization expense related to impairments associated with certain contract-based intangible assets. Of these amounts, approximately $5.1 million relates to an impairment recorded for a single merchant contract acquired in 2004. The Company has been in discussions with this particular merchant customer regarding additional services that could be offered under the existing contract to increase the number of transactions conducted on, and cash flows generated by, the underlying ATMs. However, the Company was unable to make any progress in this regard during the three month period ended September 30, 2007, and, based on discussions that have been held with this merchant, has concluded that the likelihood of being able to provide such additional services has decreased considerably. Furthermore, average monthly transaction volumes associated with this particular contract have continued to decrease in 2007 when compared to the same period last year. Accordingly, the Company concluded that the above impairment charge was warranted as of September 30, 2007. The impairment charge recorded served to write-off the remaining unamortized intangible asset associated with this merchant. Management plans to continue to work with this merchant customer to offer the additional services, which management believes could significantly increase the future cash flows earned under this contract. Absent its ability to do this, management will attempt to restructure the terms of the existing contract in an effort to improve the underlying cash flows associated with the contract.

 

Included in the 2006 year-to-date figure is approximately $2.8 million of additional impairment expense related to the acquired BAS Communications, Inc. (“BASC”) ATM portfolio. This impairment, taken in the in first quarter of 2006, was attributable to the anticipated reduction in future cash flows resulting from a higher than anticipated attrition rate associated with such portfolio. In January 2007, the Company received approximately $0.8 million in net proceeds from an escrow account established upon the initial closing of this acquisition. Such proceeds were meant to compensate the Company for the attrition issues experienced in the BASC portfolio subsequent to the acquisition date. Such amount was utilized to reduce the remaining carrying value of the intangible asset amount associated with this portfolio.

 

CARDTRONICS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Amortization of deferred financing costs and bond discount totaled approximately $0.4 million for the three month periods ended September 30, 2007 and 2006, and $1.2 million and $1.6 million for the nine month periods ended September 30, 2007 and 2006, respectively. Included in the 2006 year-to-date figure is approximately $0.5 million in deferred financing costs written off in February 2006 in connection with certain modifications made to the Company’s existing revolving credit facilities.

 

Estimated amortization expense for the Company’s intangible assets with definite lives for the remaining three months of 2007 and each of the next five years and thereafter is as follows:

 

 

 

The Company’s accounts payable and accrued liabilities consisted of the following:

 

 

CARDTRONICS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

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

 

 

Revolving Credit Facility

 

In February 2006, the Company amended its then existing revolving credit facility to remove and modify certain restrictive covenants contained within the facility and to reduce the maximum borrowing capacity from $150.0 million to $125.0 million. As a result of this amendment, the Company recorded a pre-tax charge of approximately $0.5 million in the first quarter of 2006 associated with the write-off of previously deferred financing costs related to the facility. Additionally, the Company incurred approximately $0.1 million in fees associated with such amendment.

 

In May 2007, the Company further amended its revolving credit facility to modify, among other things, (i) the interest rate spreads on outstanding borrowings and other pricing terms and (ii) certain restrictive covenants contained within the facility. Such modification will allow for reduced interest expense in future periods, assuming a constant level of borrowings. Furthermore, the amendment increased the amount of capital expenditures that the Company can incur on a rolling 12-month basis from $50.0 million to $60.0 million. As a result of these amendments, the primary restrictive covenants within the facility include (i) limitations on the amount of senior debt that the Company 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, including dividends, and (iv) limitations on the amount of capital expenditures that the Company can incur on a rolling 12-month basis.

 

In July 2007, in conjunction with the 7-Eleven ATM Transaction, the Company further amended its revolving credit facility. Such amendment provided for, among other modifications, (i) an increase in the maximum borrowing capacity under the revolver from $125.0 million to $175.0 million in order to partially finance the 7-Eleven ATM Transaction and to provide additional financial flexibility; (ii) an increase in the amount of “indebtedness” (as defined in the credit agreement) to allow for the issuance of the $100.0 million of 9.25% senior subordinated notes due 2013 — Series B (described below); (iii) an extension of the term of the credit agreement from May 2010 to May 2012; (iv) an increase in the amount of capital expenditures the Company can incur on a rolling 12-month basis from $60.0 million to a maximum of $75.0 million; and (v) an amendment of certain restrictive covenants contained within the facility. In conjunction with this amendment, the Company borrowed approximately $43.0 million under the credit agreement to fund a portion of the 7-Eleven ATM Transaction. Additionally, the Company posted $7.5 million in letters of credit under the facility in favor of the lessors under the ATM equipment leases that the Company assumed in connection with the 7-Eleven ATM Transaction. These letters

 

CARDTRONICS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

of credit, which the lessors may draw upon in the event the Company fails to make payments under the leases, further reduced the Company’s borrowing capacity under the facility. As of September 30, 2007, the Company’s available borrowing capacity under the amended facility, as determined under the earnings before interest, taxes, depreciation and accretion, and amortization (“EBITDA”) and interest expense covenants contained in the agreement, totaled approximately $61.9 million.

 

Borrowings under the revolving credit facility currently bear interest at the London Interbank Offered Rate (“LIBOR”) plus a spread, which was 2.5% as of September 30, 2007. Additionally, the Company pays a commitment fee of 0.3% per annum on the unused portion of the revolving credit facility. Substantially all of the Company’s assets, including the stock of its wholly-owned domestic subsidiaries and 66.0% of the stock of its foreign subsidiaries, are pledged to secure borrowings made under the revolving credit facility. Furthermore, each of the Company’s domestic subsidiaries has guaranteed the Company’s obligations under such facility. There are currently no restrictions on the ability of the Company’s wholly-owned subsidiaries to declare and pay dividends directly to the Company. As of September 30, 2007, the Company was in compliance with all applicable covenants and ratios under the facility.

 

Senior Subordinated Notes

 

In October 2006, the Company completed the registration of $200.0 million in senior subordinated notes (the “Notes”), which were originally issued in August 2005 pursuant to Rule 144A of the Securities Act of 1933, as amended. The Notes, which are subordinate to borrowings made under the revolving credit facility, mature in August 2013 and carry a 9.25% coupon with an effective yield of 9.375%. Interest under the Notes is paid semi-annually in arrears on February 15th and August 15th of each year. The Notes, which are guaranteed by the Company’s domestic subsidiaries, contain certain covenants that, among other things, limit the Company’s ability to incur additional indebtedness and make certain types of restricted payments, including dividends. As of September 30, 2007, the Company was in compliance with all applicable covenants required under the Notes.

 

On July 20, 2007, the Company sold $100.0 million of 9.25% senior subordinated notes due 2013 — Series B (the “Series B Notes”) pursuant to Rule 144A of the Securities Act of 1933. The form and terms of the Series B Notes are substantially the same as the form and terms of the $200.0 million senior subordinated notes issued in August 2005, except that (i) the notes issued in August 2005 have been registered with the Securities and Exchange Commission while the Series B Notes remain subject to transfer restrictions until the Company completes an exchange offer, and (ii) the Series B Notes were issued with Original Issue Discount and have an effective yield of 9.54%. The Company has agreed to file a registration statement with the SEC within 240 days of the issuance of the Series B Notes with respect to an offer to exchange each of the Series B Notes for a new issue of its debt securities registered under the Securities Act with terms identical to those of the Series B Notes (except for the provisions relating to the transfer restrictions and payment of additional interest) and to use reasonable best efforts to have the exchange offer become effective as soon as reasonably practicable after filing but in any event no later than 360 days after the initial issuance date of the Series B Notes. If the Company fails to satisfy its registration obligations, it will be required, under certain circumstances, to pay additional interest to the holders of the Series B Notes. The Company used the net proceeds from the issuance of the Series B Notes to fund a portion of the 7-Eleven ATM Transaction and to pay fees and expenses related to the acquisition.

 

Other Facilities

 

In addition to the revolving credit facility, the Company’s wholly-owned United Kingdom subsidiary, Bank Machine, has a £2.0 million unsecured overdraft facility, the term of which was recently extended to July 2008. Such facility, which bears interest at 1.75% over the bank’s base rate (currently 5.75%), is utilized for general corporate purposes for the Company’s United Kingdom operations. As of September 30, 2007 and December 31, 2006, approximately £1.9 million ($3.8 million U.S. and $3.7 million U.S., respectively) of this overdraft facility had been utilized to help fund certain working capital commitments and to post a £275,000 bond. Amounts outstanding under the overdraft facility (other than those amounts utilized for posting bonds) have been reflected in

 

CARDTRONICS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

accounts payable in the accompanying condensed consolidated balance sheets, as such amounts are automatically repaid once cash deposits are made to the underlying bank accounts.

 

As of September 30, 2007, Cardtronics Mexico had entered into four separate five-year equipment financing agreements. Such agreements, which are denominated in Mexican pesos and bear interest at an average fixed rate of 11.03%, were utilized for the purchase of additional ATMs to support the Company’s Mexico operations. As of September 30, 2007 and December 31, 2006, approximately $53.6 million pesos ($4.9 million U.S.) and $9.3 million pesos ($0.9 million U.S.), respectively, were outstanding under these facilities, with future borrowings to be individually negotiated between the lender and Cardtronics. Pursuant to the terms of the agreements, Cardtronics, Inc. has issued a guaranty for 51.0% (its ownership percentage in Cardtronics Mexico) of the obligations under the loan agreements. As of September 30, 2007, the total amount of the guaranty was $27.3 million pesos ($2.5 million U.S.).

 

 

The Company accounts for asset retirement obligations in accordance with SFAS No. 143, Asset Retirement Obligations. Asset retirement obligations consist primarily of deinstallation costs of the ATM and the costs to restore the ATM site to its original condition. The Company is legally required to perform this deinstallation and restoration work. In accordance with SFAS No. 143, for each group of ATMs, the Company 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 nine month period ended September 30, 2007 (in thousands):

 

 

The additional obligations amount for the nine months ended September 30, 2007, reflects new ATM deployments in all of the Company’s markets during this period and the obligations assumed in connection with the 7-Eleven ATM Transaction. The change in estimate for the nine months ended September 30, 2007 represents a change in the anticipated amount the Company will incur to deinstall and refurbish certain merchant locations, based on actual costs incurred on recent ATM deinstallations.

 

CARDTRONICS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

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

 

 

The increase in other deferred liabilities is due to the $11.7 million in other long-term deferred liabilities recorded to value certain unfavorable equipment leases and an operating contract assumed as part of the 7-Eleven ATM Transaction. These liabilities are being amortized over the remaining terms of the underlying contracts and serve to reduce the corresponding ATM operating expense amounts to fair value. During the three and nine months ended September 30, 2007, the Company recognized approximately $1.7 million of expense reductions associated with the amortization of these liabilities.

 

The minority interest in subsidiary amount as of December 31, 2006, represents the equity interests of the minority shareholders of Cardtronics Mexico. As of September 30, 2007, the cumulative losses generated by Cardtronics Mexico and allocable to such minority interest shareholders exceeded the underlying equity amounts of such minority interest shareholders. Accordingly, all future losses generated by Cardtronics Mexico will be allocated 100% to Cardtronics until such time that Cardtronics Mexico generates a cumulative amount of earnings sufficient to cover all excess losses allocable to the Company, or until such time that the minority interest shareholders contribute additional equity to Cardtronics Mexico in an amount sufficient to cover such losses. As of September 30, 2007, the cumulative amount of excess losses allocated to Cardtronics totaled approximately $132,000. Such amount is net of a contribution of $174,000 made by the minority interest shareholder in the third quarter of 2007. See Note 16 for additional information on this minority interest contribution.

 

 

During 2005, the Company issued 929,789 shares of its Series B preferred stock, of which 894,568 shares were issued to TA Associates for $75.0 million in proceeds and the remaining 35,221 shares were issued as partial consideration for the Bank Machine acquisition. The Series B preferred shareholders have certain preferences to the Company’s common shareholders, including board representation rights and the right to receive their original issue price prior to any distributions being made to the common shareholders as part of a liquidation, dissolution or winding up of the Company. As of September 30, 2007, the liquidation value of the shares totaled $78.0 million. In addition, the Series B preferred shares are convertible into the same number of shares of the Company’s common stock, as adjusted for future stock splits and the issuance of dilutive securities. The Series B preferred shares have no stated dividends and are redeemable at the option of a majority of the Series B holders at any time on or after the earlier of (i) December 2013 and (ii) the date that is 123 days after the first day that none of the Company’s 9.25% senior subordinated notes remain outstanding, but in no event earlier than February 2012.

 

On June 1, 2007, the Company entered into a letter agreement with certain investment funds controlled by TA Associates (the “Funds”) pursuant to which the Funds agreed to (i) approve the 7-Eleven ATM Transaction and (ii) not transfer or otherwise dispose of any of their shares of Series B Convertible Preferred Stock during the period beginning on the date thereof and ending on the earlier of the date the 7-Eleven ATM Transaction closed (i.e., July 20, 2007) or September 1, 2007. Pursuant to the terms of the letter agreement, the Company amended the terms of its Series B Convertible Preferred Stock in order to increase, under certain circumstances, the number of shares of

 

CARDTRONICS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

common stock into which the Funds’ Series B Convertible Preferred Stock would be convertible in the event the Company completes an initial public offering. The Company has filed a registration statement on Form S-1 relating to an initial public offering of shares of its common stock. Based on the $15 per share mid-point of the offering range, the incremental shares received by the Funds in connection with this beneficial conversion would total $1.4 million. Such amount would be reflected as a reduction of the Company’s net income (or an increase in the Company’s net loss) available to common shareholders immediately upon the conversion and completion of the initial public offering.

 

The carrying value of the Company’s Series B Convertible Preferred Stock was $76.8 million and $76.6 million, net of unaccreted issuance costs of approximately $1.2 million and $1.4 million as of September 30, 2007 and December 31, 2006, respectively. Such issuance costs are being accreted on a straight-line basis through February 2012, which represents the earliest optional redemption date outlined above.

 

 

Income taxes included in the Company’s net loss for the three and nine month periods ended September 30, 2007 and 2006 were as follows:

 

 

The Company computes its quarterly income tax provision amounts under the effective tax rate method based on applying an anticipated annual effective tax rate in each major tax jurisdiction to the pre-tax book income or loss amounts generated in such jurisdictions. During the second quarter of 2007, as a result of the Company’s forecasted domestic pre-tax book loss for the remainder of 2007 and as a result of the anticipated impact of the 7-Eleven ATM Transaction on the Company’s forecasted domestic pre-tax book loss figures for the remainder of 2007, the Company determined that a valuation allowance should be established for the Company’s existing domestic net deferred tax asset balance as it is more likely than not that such net benefits will not be realized. Additionally, the Company determined that all future domestic tax benefits should not be recognized until it is more likely than not that such benefits will be utilized.

 

During the three month period ended September 30, 2007, the Company increased its domestic valuation allowance by $2.5 million, reflecting the increase in the Company’s net deferred tax asset balance subsequent to June 30, 2007. Such change was primarily due to a reduction in the estimated deferred tax liabilities associated with the Company’s interest rate swaps as a result of the interest rate declines experienced during that period, and the creation of additional net operating losses from tax deductions that are currently not anticipated to reverse prior to the expiration of such losses. Finally, during the three and nine month periods ended September 30, 2007, the Company did not record approximately $2.9 million and $5.4 million, respectively, in potential tax benefits

 

CARDTRONICS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

associated with current period losses, based on the above policy. These items, coupled with the establishment of the valuation allowance during the periods ended September 30, 2007, resulted in the negative effective tax rates reflected in the table above for the 2007 periods.

 

In addition to the above, the Company recorded a $0.2 million deferred tax benefit during the three month period ended September 30, 2007 related to a reduction in the United Kingdom corporate statutory income tax rate from 30% to 28%. Such rate reduction, which will become effective in 2008, was formally enacted in July 2007.

 

 

Legal and Other Regulatory Matters

 

National Federation of the Blind (“NFB”).  In connection with its acquisition of the E*TRADE Access, Inc. (“ETA”) ATM portfolio in June 2004, the Company assumed ETA’s interests and liability for a lawsuit instituted in the United States District Court for the District of Massachusetts (the “Court”) by the NFB, the NFB’s Massachusetts chapter, and several individual blind persons (collectively, the “Private Plaintiffs”) as well as the Commonwealth of Massachusetts with respect to claims relating to the alleged inaccessibility of ATMs for those persons who are visually-impaired. After the acquisition of the ETA ATM portfolio, the Private Plaintiffs named Cardtronics as a co-defendant with ETA and ETA’s parent — E*Trade Bank, and the scope of the lawsuit has expanded to include both ETA’s ATMs as well as the Company’s pre-existing ATM portfolio.

 

In June 2007, the parties completed and executed a settlement agreement, which the Company believes will be approved by the Court. The principal objective of the settlement is for 90% of all transactions (as defined in the settlement agreement) conducted on Cardtronics’ Company-owned and merchant-owned ATMs by July 1, 2010 to be conducted at ATMs that are voice-guided. In an effort to accomplish such objective, the Company is subject to numerous interim reporting requirements and a one-time obligation to market voice-guided ATMs to a subset of its merchants that do not currently have voice-guided ATMs. Finally, the proposed settlement requires the Company to pay $900,000 in attorneys’ fees to the NFB and to make a $100,000 contribution to the Massachusetts’ local consumer aid fund. These amounts have been fully reserved for as of September 30, 2007. The Company does not believe that the settlement requirements outlined above will have a material impact on its financial condition or results of operations.

 

Since the above matter is being treated as a class action settlement, the Company and the Private Plaintiffs were required to give notice to the affected classes. Such notices were provided during the third quarter of 2007, which required members of the affected class to file any objections with the Court no later than October 31, 2007. It is the Company’s understanding that no meaningful objections were filed with the Court. Although no meaningful objections were filed in a timely manner, it is possible that objections could be filed before the hearing date, and the Court could consider such objections, or on its own volition, and object to the settlement. The Court has scheduled a hearing for December 4, 2007. Although the Company expects that the Court will approve the proposed settlement, if for any reason the Court refuses to approve the settlement, the lawsuit would resume and, if that occurs, the Company will continue its defense of this lawsuit in an aggressive manner.

 

Other matters.  In June 2006, Duane Reade, Inc. (“Customer”), one of the Company’s merchant customers, filed a complaint in the United States District Court for the Southern District of New York (the “Federal Action”). The complaint, which was formally served to the Company in September 2006, alleged that Cardtronics had breached an ATM operating agreement between the parties by failing to pay the Customer the proper amount of fees under the agreement. The Customer is claiming that it is owed no less than $600,000 in lost revenues, exclusive of interests and costs, and projects that additional damages will accrue to them at a rate of approximately $100,000 per month, exclusive of interest and costs. As the term of the Company’s operating agreement with the Customer extends to December 2014, the Customer’s claims could exceed $12.0 million. On October 6, 2006, the Company filed a petition in the District Court of Harris County, Texas, seeking a declaratory judgment that it had not breached the ATM operating agreement. On October 10, 2006, the Customer filed a second complaint, this time in New York

 

CARDTRONICS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

State Supreme Court, alleging the same claims it had alleged in the Federal Action. Subsequently, the Customer withdrew the Federal Action because the federal court did not have subject matter jurisdiction. Additionally, Cardtronics has voluntarily dismissed the Texas lawsuit, electing to litigate the above-described claims in the New York State Supreme Court. In response to a motion for summary judgment filed by the Customer and a cross-motion filed by the Company, the New York State Supreme Court ruled on September 21, 2007 that the Company’s interpretation of the ATM operating agreement was the appropriate interpretation and expressly rejected the Customer’s proposed interpretations. In the event the Customer appeals this ruling, the Company will continue its aggressive defense of this lawsuit. Further, the Company believes that the ultimate resolution of this dispute will not have a material adverse impact on its financial condition or results of operations.

 

In March 2006, the Company filed a complaint in the United States District Court in Portland, Oregon, against CGI, Inc. (“Distributor”), a distributor for the ETA ATM business acquired by the Company. The complaint alleged that the Distributor breached the parties’ agreement by directly competing with Cardtronics on certain merchant accounts. The Distributor denied such violations, alleging that an oral modification of its distributor agreement with ETA permitted such activities, and initiated a counter-claim for alleged under-payments by us. The Company expressly denied the Distributor’s allegations. On July 31, 2007, the parties executed a settlement agreement wherein neither party admitted any wrongdoing, all differences were resolved, and both parties released each other from all claims made in the lawsuit. In connection with this settlement, the Distributor agreement was re-instated in a modified form to, among other things, clarify the Distributor’s non-compete obligations. Additionally, the settlement provided for a nominal payment to the Distributor relating to payments claimed under the distributor agreement. Subsequent to the execution of the settlement agreement, both parties have operated under the revised distributorship agreement without any material issues or disputes.

 

The Company is also subject to various legal proceedings and claims arising in the ordinary course of its business. Additionally, the 7-Eleven Financial Services Business acquired by the Company is subject to various legal claims and proceedings in the ordinary course of its business. The Company does not expect the outcome in any of these legal proceedings, individually or collectively, to have a material adverse effect on its financial condition or results of operations.

 

Capital and Operating Lease Obligations

 

As a result of the 7-Eleven ATM Transaction, the Company assumed responsibility for certain capital and operating lease contracts that will expire at various times during the next three years. Upon the fulfillment of certain payment obligations related to the capital leases, ownership of the ATMs transfers to the Company. As of September 30, 2007, approximately $2.3 million of capital lease obligations were included within the Company’s condensed consolidated balance sheet.

 

Additionally, in conjunction with its purchase price allocation related to the 7-Eleven ATM Transaction, the Company recorded approximately $8.7 million of other deferred liabilities (current and long-term) to value certain unfavorable equipment operating leases assumed as part of the acquisition. These liabilities are being amortized over the remaining terms of the underlying leases, the majority of which expire in late 2009, and serve to reduce ATM operating lease expense amounts to fair value. During the three and nine month periods ended September 30, 2007, the Company recognized approximately $0.7 million of operating lease expense reductions associated with the amortization of these liabilities. Upon the expiration of the operating leases, the Company will be required to renew such lease contracts, enter into new lease contracts, or purchase new or used ATMs to replace the leased equipment. If the Company decides to purchase ATMs and terminate the existing lease contracts at that time, it is currently anticipated that the Company will incur between $13.0 and $16.0 million in related capital expenditures. Additionally, in conjunction with the acquisition, the Company posted $7.5 million in letters of credit related to these operating and capital leases. See Note 7 for additional details on these letters of credit.

 

CARDTRONICS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

As a result of its variable-rate debt and ATM cash management activities, the Company is exposed to changes in interest rates (LIBOR in the United States and the United Kingdom, the federal funds effective rate in the United States, and the Mexican Interbank Rate (“TIIE”) in Mexico). It is the Company’s policy to limit the variability of a portion of its expected future interest payments as a result of changes in LIBOR by utilizing certain types of derivative financial instruments.

 

To meet the above objective, the Company entered into several LIBOR-based interest rate swaps during 2004 and 2005 to fix the interest-based rental rate paid on $300.0 million of the Company’s current and anticipated outstanding ATM cash balances in the United States. The effect of such swaps was to fix the interest-based rental rate paid on the following notional amounts for the periods identified (in thousands):

 

 

Additionally, in conjunction with the 7-Eleven ATM Transaction, the Company entered into a separate vault cash agreement with Wells Fargo, N.A. (“Wells Fargo”) to supply the cash that the Company utilizes for the operation of the 5,500 ATMs and Vcom units the Company acquired in that transaction. Under the terms of the vault cash agreement, the Company pays a monthly cash rental fee to Wells Fargo on the average amount of cash outstanding under a formula based on the federal funds effective rate. Subsequent to the acquisition date (July 20, 2007), the outstanding vault cash balance for the acquired 7-Eleven ATMs and Vcom units has averaged approximately $350.0 million. As a result, the Company’s exposure to changes in domestic interest rates has increased significantly. Accordingly, the Company entered into additional interest rate swaps in August 2007 to limit its exposure to changing interest-based rental rates on $250.0 million of the Company’s current and anticipated 7-Eleven ATM cash balances. The effect of these swaps was to fix the interest-based rental rate paid on the $250.0 million notional amount at 4.93% (excluding the applicable margin) through December 2010.

 

The Company’s interest rate swaps have been classified as cash flow hedges pursuant to SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. Accordingly, changes in the fair values of the Company’s interest rate swaps have been reported in accumulated other comprehensive income in the accompanying condensed consolidated balance sheets. As of September 30, 2007, the unrealized loss on such swaps totaled approximately $2.5 million, which was down from an unrealized gain of $7.1 million as of December 31, 2006. Such decline was due to the significant drop in current and forward interest rates that occurred in the financial markets during the quarter ended September 30, 2007. The unrealized gain amount as of December 31, 2006 has been included in accumulated other comprehensive income net of income taxes of $2.7 million. However, as a result of the Company’s overall net loss position for tax purposes, the Company has not recorded deferred taxes on the loss amount related to its interest rate hedges as of September 30, 2007, as management does not believe that the Company will be able to realize the benefits associated with such deferred tax positions.

 

Net amounts paid or received under such swaps are recorded as adjustments to the Company’s “Cost of ATM operating revenues” in the accompanying condensed consolidated statements of operations. During the nine month periods ended September 30, 2007 and 2006, gains or losses incurred as a result of ineffectiveness associated with the Company’s interest rate swaps were immaterial.

 

As of September 30, 2007, the Company has not entered into any derivative financial instruments to hedge its variable interest rate exposure in the United Kingdom or Mexico.

 

CARDTRONICS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

Prior to the 7-Eleven ATM Transaction, the Company’s operations consisted of its United States, United Kingdom, and Mexico segments. As a result of the 7-Eleven ATM Transaction, the Company determined that the advanced-functionality Vcom Services provided through the acquired Vcom units are distinctly different than its other three segments and has identified the Vcom operations as an additional separate segment (“Advanced Functionality”). Accordingly, as of September 30, 2007, the Company’s operations consisted of its United States, United Kingdom, Mexico, and Advanced Functionality segments. The Company’s United States reportable segment now includes the traditional ATM operations of the acquired 7-Eleven Financial Services Business, including the traditional ATM activities conducted on the Vcom units. While each of these reportable segments provides similar kiosk-based and/or ATM-related services, each segment is managed separately, as they require different marketing and business strategies.

 

Management uses earnings before interest expense, income taxes, depreciation expense, accretion expense, and amortization expense (“EBITDA”) to assess the operating results and effectiveness of its business 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 accounting principles generally accepted in the United States (“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 GAAP. Below is a reconciliation of EBITDA to net loss for the three and nine month periods ended September 30, 2007 and 2006:

 

 

The following tables reflect certain financial information for each of the Company’s reportable segments for the three and nine month periods ended September 30, 2007 and 2006, and as of September 30, 2007 and

 

CARDTRONICS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

December 31, 2006. All intercompany transactions between the Company’s reportable segments have been eliminated.

 

 

 

 

CARDTRONICS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

 

 

Identifiable Assets:

 

 

 

Accounting for Uncertainty in Income Taxes.  During the first quarter of 2007, the Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109. This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. The interpretation prescribes a recognition threshold and measurement attribute for a tax position taken or expected to be taken in a tax return and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Company applied the provisions of FIN 48 to all tax positions upon its initial adoption effective January 1, 2007, and determined that no cumulative effect adjustment was required as of such date. As of September 30, 2007, the Company had a $0.2 million reserve for uncertain tax positions recorded pursuant to FIN 48.

 

Fair Value Measurements.  In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”), which provides guidance on measuring the fair value of assets and liabilities in the financial statements. The provisions of SFAS No. 157 are effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is currently evaluating the impact, if any, this statement will have on its financial statements.

 

CARDTRONICS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Fair Value Option.  In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No. 159”), which provides companies the option to measure certain financial instruments and other items at fair value. The provisions of SFAS No. 159 are effective as of the beginning of fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact, if any, this statement will have on its financial statements.

 

Registration Payment Arrangements.  In December 2006, the FASB issued FASB Staff Position (“FSP”) Emerging Issues Task Force (“EITF”) No. 00-19-2, Accounting for Registration Payment Arrangements (“FSP EITF 00-19-2”), which addresses an issuer’s accounting for registration payment arrangements. Specifically, FSP EITF 00-19-2 specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, should be separately recognized and measured in accordance with SFAS No. 5, Accounting for Contingencies. The guidance contained in this standard amends SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, and SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, as well as FIN 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, to include scope exceptions for registration payment arrangements. FSP EITF 00-19-2 is effective immediately for registration payment arrangements and the financial instruments subject to those arrangements that are entered into or modified subsequent to the date of issuance of this standard. For registration payment arrangements and financial instruments subject to those arrangements that were entered into prior to the issuance of this standard, the guidance in the standard is effective for financial statements issued for fiscal years beginning after December 15, 2006, and interim periods within those fiscal years. The Company’s adoption of this standard on January 1, 2007 had no impact on its financial statements. The Company is currently evaluating the impact that the implementation of FSP EITF 00-19-2 may have on its financial statements as it relates to the Company’s issuance of $100.0 million of Series B Notes in July 2007. The Company has agreed to file a registration statement with the SEC within 240 days of the issuance of the Series B Notes with respect to an offer to exchange each of the Series B Notes for a new issue of its debt securities registered under the Securities Act and to use reasonable best efforts to have the exchange offer become effective as soon as reasonably practicable after filing but in any event no later than 360 days after the initial issuance date of the Series B Notes.

 

 

Series B Convertible Preferred Stock Amendment.  On June 1, 2007, the Company entered into a letter agreement to amend the terms of its Series B Convertible Preferred Stock in order to increase, under certain circumstances, the number of shares of common stock into which the Funds’ Series B Convertible Preferred Stock would be convertible in the event the Company completes an initial public offering. For additional information on this amendment, see Note 10.

 

Cardtronics Mexico Capital Contribution.  In June 2007, the Company purchased an additional 1,177,429 shares of Class B preferred stock issued by Cardtronics Mexico for approximately $0.2 million. The Company’s 51.0% ownership interest in Cardtronics Mexico did not change as a result of this purchase, as a minority interest shareholder has entered into an agreement to purchase a pro rata amount of Class A preferred stock at the same price. In August 2007, the minority interest shareholder funded the $0.2 million purchase consideration related to its additional share purchase. As of the date of contribution, the cumulative losses generated by Cardtronics Mexico and allocable to such minority interest shareholder had exceeded the minority interest shareholders equity investment in Cardtronics Mexico. Accordingly, incremental losses generated by Cardtronics Mexico have been (and continue to be) allocated 100% to Cardtronics. As the incremental losses previously allocated to Cardtronics on behalf of the minority interest shareholders exceeded the $0.2 million minority interest contribution, 100% of this contribution was recognized by Cardtronics as income.

 

CARDTRONICS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

All future losses generated by Cardtronics Mexico will continue to be allocated 100% to Cardtronics until such time that Cardtronics Mexico generates a cumulative amount of earnings sufficient to cover all excess losses allocable to the Company, or until such time that the minority interest shareholders contribute additional equity to Cardtronics Mexico in an amount sufficient to cover such losses.

 

Common Stock Repurchase.  During the three months ended September 30, 2006, the Company repurchased 15,255 shares of the Company’s common stock held by certain of the Company’s executive officers for approximately $1.3 million in proceeds. Such proceeds were primarily utilized by the executive officers to repay certain loans, including all accrued and unpaid interest related thereto, made between such executive officers and the Company in 2003. Such loans were required to be repaid pursuant to SEC rules and regulations prohibiting registrants from having loans with executive officers. This was effective as a result of the successful registration of the Company’s senior subordinated notes with the SEC in September 2006.

 

 

The Company’s senior subordinated notes issued in August 2005, as well as its Series B Notes issued in July 2007, are guaranteed on a full and unconditional basis by the Company’s domestic subsidiaries. The following information sets forth the condensed consolidating statements of operations for the three and nine month periods ended September 30, 2007 and 2006, the condensed consolidating balance sheets as of September 30, 2007 and December 31, 2006, and the condensed consolidating statements of cash flows for the nine month periods ended September 30, 2007 and 2006, of (i) Cardtronics, Inc., the parent company and issuer of the senior subordinated notes (the “Parent”); (ii) the Company’s domestic subsidiaries on a combined basis (collectively, the “Guarantors”); and (iii) the Company’s international subsidiaries on a combined basis (collectively, the “Non-Guarantors”):

 

CARDTRONICS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Condensed Consolidating Statements of Operations