Attached files
file | filename |
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EX-4.1 - EX-4.1 - OUTERWALL INC | v53895exv4w1.htm |
EX-31.2 - EX-31.2 - OUTERWALL INC | v53895exv31w2.htm |
EX-31.1 - EX-31.1 - OUTERWALL INC | v53895exv31w1.htm |
EX-32.1 - EX-32.1 - OUTERWALL INC | v53895exv32w1.htm |
EX-32.2 - EX-32.2 - OUTERWALL INC | v53895exv32w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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 quarter ended September 30, 2009
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 000-22555
COINSTAR, INC.
(Exact name of registrant as specified in its charter)
Delaware | 94-3156448 | |
(State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) |
|
1800 114th Avenue SE, Bellevue, Washington (Address of principal executive offices) |
98004 (Zip Code) |
(425) 943-8000
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
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 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 definition 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 (Do not check if a smaller reporting company) | Smaller reporting company o |
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
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
Class | Outstanding at October 23, 2009 | |
Common Stock, $0.001 par value | 31,065,788 |
COINSTAR, INC.
FORM 10-Q
Index
Index
2
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
COINSTAR, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
ASSETS |
||||||||
CURRENT ASSETS: |
||||||||
Cash and cash equivalents |
$ | 68,411 | $ | 66,408 | ||||
Cash in machine or in transit |
49,290 | 34,583 | ||||||
Cash being processed |
65,679 | 91,044 | ||||||
Accounts receivable, net of allowance for doubtful accounts of $4,076 and $2,702
at September 30, 2009 and December 31, 2008, respectively |
57,235 | 51,908 | ||||||
Inventory |
88,041 | 92,247 | ||||||
Deferred income taxes |
8,594 | 6,881 | ||||||
Prepaid expenses and other current assets |
24,990 | 24,715 | ||||||
Total current assets |
362,240 | 367,786 | ||||||
PROPERTY AND
EQUIPMENT, NET |
382,184 | 348,949 | ||||||
DEFERRED INCOME TAXES |
103,567 | 4,338 | ||||||
OTHER ASSETS |
16,511 | 11,865 | ||||||
INTANGIBLE ASSETS, NET |
32,877 | 43,385 | ||||||
GOODWILL |
292,361 | 290,391 | ||||||
TOTAL ASSETS |
$ | 1,189,740 | $ | 1,066,714 | ||||
LIABILITIES AND EQUITY |
||||||||
CURRENT LIABILITIES: |
||||||||
Accounts payable |
$ | 100,919 | $ | 132,194 | ||||
Accrued payable to retailers and agents |
115,303 | 132,490 | ||||||
Other accrued liabilities |
82,027 | 87,500 | ||||||
Current portion of long-term debt |
6,682 | 11,655 | ||||||
Current portion of capital lease obligations |
27,428 | 20,264 | ||||||
Total current liabilities |
332,359 | 384,103 | ||||||
LONG-TERM DEBT AND OTHER |
418,667 | 295,942 | ||||||
CAPITAL LEASE OBLIGATIONS |
31,950 | 23,509 | ||||||
DEFERRED TAX LIABILITY |
60 | 12,072 | ||||||
TOTAL LIABILITIES |
783,036 | 715,626 | ||||||
EQUITY: |
||||||||
Preferred stock, $0.001 par valueAuthorized, 5,000,000 shares; no shares issued
and outstanding at September 30, 2009 and December 31, 2008 |
| | ||||||
Common stock, $0.001 par valueAuthorized, 45,000,000 shares; 32,894,913 and
30,181,151 issued and 30,968,832 and 28,255,070 shares outstanding at
September 30, 2009 and December 31, 2008, respectively |
401,532 | 369,735 | ||||||
Retained earnings (accumulated deficit) |
47,612 | (2,672 | ) | |||||
Treasury stock |
(40,831 | ) | (40,831 | ) | ||||
Accumulated other comprehensive loss |
(1,609 | ) | (6,204 | ) | ||||
Total stockholders equity |
406,704 | 320,028 | ||||||
Non-controlling interest |
| 31,060 | ||||||
Total equity |
406,704 | 351,088 | ||||||
TOTAL LIABILITIES AND EQUITY |
$ | 1,189,740 | $ | 1,066,714 | ||||
See notes to consolidated financial statements
3
Table of Contents
COINSTAR, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
(in thousands, except per share data)
(unaudited)
Nine Month Periods | Three Month Periods | |||||||||||||||
Ended September 30, | Ended September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
REVENUE |
$ | 816,786 | $ | 533,817 | $ | 295,970 | $ | 203,452 | ||||||||
EXPENSES: |
||||||||||||||||
Direct operating (1) |
559,054 | 344,232 | 203,650 | 134,342 | ||||||||||||
Marketing |
16,605 | 13,946 | 5,833 | 7,372 | ||||||||||||
Research and development |
3,916 | 3,578 | 1,360 | 1,157 | ||||||||||||
General and administrative |
96,524 | 65,789 | 32,570 | 22,997 | ||||||||||||
Depreciation and other (1) |
66,864 | 41,997 | 23,432 | 15,384 | ||||||||||||
Amortization of intangible assets |
5,941 | 6,223 | 2,029 | 2,041 | ||||||||||||
Proxy, write-off of acquisition costs, and litigation settlement |
| 3,084 | | | ||||||||||||
Income from operations |
67,882 | 54,968 | 27,096 | 20,159 | ||||||||||||
OTHER INCOME (EXPENSE): |
||||||||||||||||
Foreign currency loss and other, net |
(339 | ) | (2,775 | ) | (270 | ) | (717 | ) | ||||||||
Interest income |
184 | 1,063 | 30 | 180 | ||||||||||||
Interest expense |
(24,510 | ) | (16,073 | ) | (9,372 | ) | (5,394 | ) | ||||||||
Loss from equity investments |
| (338 | ) | | (1 | ) | ||||||||||
Early retirement of debt |
(1,082 | ) | | (1,082 | ) | | ||||||||||
Income from continuing operations before income taxes |
42,135 | 36,845 | 16,402 | 14,227 | ||||||||||||
Income tax expense |
(16,231 | ) | (13,272 | ) | (6,761 | ) | (6,357 | ) | ||||||||
Income from continuing operations |
25,904 | 23,573 | 9,641 | 7,870 | ||||||||||||
Income (loss) from discontinued operations, net of tax (Note 6) |
28,007 | (2,892 | ) | 31,722 | (12 | ) | ||||||||||
Net income |
53,911 | 20,681 | 41,363 | 7,858 | ||||||||||||
Less: Net income attributable to non-controlling interests |
(3,627 | ) | (10,789 | ) | | (3,347 | ) | |||||||||
NET INCOME ATTRIBUTABLE TO COINSTAR, INC. |
$ | 50,284 | $ | 9,892 | $ | 41,363 | $ | 4,511 | ||||||||
BASIC EARNINGS PER SHARE: |
||||||||||||||||
Basic
earnings per share from continuing operations attributable to Coinstar, Inc. |
$ | 0.75 | $ | 0.45 | $ | 0.32 | $ | 0.16 | ||||||||
Basic
earnings per share from discontinued operations attributable to Coinstar, Inc. |
0.94 | (0.10 | ) | 1.04 | | |||||||||||
Basic earnings per share attributable to Coinstar, Inc. |
$ | 1.69 | $ | 0.35 | $ | 1.36 | $ | 0.16 | ||||||||
DILUTED EARNINGS PER SHARE: |
||||||||||||||||
Diluted
earnings per share from continuing operations attributable to Coinstar, Inc. |
$ | 0.74 | $ | 0.45 | $ | 0.31 | $ | 0.16 | ||||||||
Diluted
earnings per share from discontinued operations attributable to Coinstar, Inc. |
0.92 | (0.10 | ) | 1.03 | | |||||||||||
Diluted earnings per share attributable to Coinstar, Inc. |
$ | 1.66 | $ | 0.35 | $ | 1.34 | $ | 0.16 | ||||||||
WEIGHTED SHARES OUTSTANDING: |
||||||||||||||||
Basic |
29,829 | 27,992 | 30,437 | 28,170 | ||||||||||||
Diluted |
30,209 | 28,507 | 30,840 | 28,685 |
(1) | Direct operating above excludes depreciation and other of $56.4 million and $20.0 million for the nine and three month periods ended September 30, 2009 and $36.2 million and $13.4 million for the nine and three month periods ended September 30, 2008, respectively. |
See notes to consolidated financial statements
4
Table of Contents
COINSTAR, INC.
CONSOLIDATED STATEMENT OF EQUITY AND COMPREHENSIVE INCOME
Nine Month Period Ended September 30, 2009
(in thousands, except share data)
(unaudited)
Nine Month Period Ended September 30, 2009
(in thousands, except share data)
(unaudited)
Accumulated | ||||||||||||||||||||||||||||||||
Retained Earnings | Other | |||||||||||||||||||||||||||||||
Common Stock | (Accumulated | Treasury | Comprehensive | Non-controlling | Comprehensive | |||||||||||||||||||||||||||
Shares | Amount | Deficit) | Stock | Loss | Interest | Total | Income | |||||||||||||||||||||||||
BALANCE, December 31, 2008 |
28,255,070 | $ | 369,735 | $ | (2,672 | ) | $ | (40,831 | ) | $ | (6,204 | ) | $ | 31,060 | $ | 351,088 | ||||||||||||||||
Proceeds
from exercise of stock options, net |
630,804 | 13,275 | 13,275 | |||||||||||||||||||||||||||||
Stock-based compensation expense |
141,708 | 5,883 | 349 | 6,232 | ||||||||||||||||||||||||||||
Shares issued for DVD agreement |
193,348 | 1,091 | 1,091 | |||||||||||||||||||||||||||||
Convertible debt-equity portion, net of tax |
20,160 | 20,160 | ||||||||||||||||||||||||||||||
Tax deficiency on stock-based compensation expense |
(354 | ) | (354 | ) | ||||||||||||||||||||||||||||
Purchase of non-controlling interest in Redbox, net of $55,778 deferred tax benefit |
(56,751 | ) | (35,036 | ) | (91,787 | ) | ||||||||||||||||||||||||||
Share issuance for purchase of Redbox non-controlling interest |
1,747,902 | 48,493 | 48,493 | |||||||||||||||||||||||||||||
Net income |
50,284 | 3,627 | 53,911 | $ | 53,911 | |||||||||||||||||||||||||||
Gain on short-term investments
net of tax expense of $10 |
14 | 14 | 14 | |||||||||||||||||||||||||||||
Foreign currency translation adjustments
net of tax expense of $301 |
3,873 | 3,873 | 3,873 | |||||||||||||||||||||||||||||
Interest rate hedges on long-term debt
net of tax expense of $452 |
708 | 708 | 708 | |||||||||||||||||||||||||||||
Comprehensive income |
58,506 | |||||||||||||||||||||||||||||||
Less: Comprehensive income attributable to non-controlling interests |
(3,627 | ) | ||||||||||||||||||||||||||||||
Total comprehensive income |
$ | 54,879 | ||||||||||||||||||||||||||||||
BALANCE, September 30, 2009 |
30,968,832 | $ | 401,532 | $ | 47,612 | $ | (40,831 | ) | $ | (1,609 | ) | $ | | $ | 406,704 | |||||||||||||||||
See notes to consolidated financial statements
5
Table of Contents
COINSTAR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Month Periods | ||||||||
Ended September 30, | ||||||||
2009 | 2008 | |||||||
OPERATING ACTIVITIES: |
||||||||
Net income |
$ | 53,911 | $ | 20,681 | ||||
Adjustments
to reconcile net income to net cash provided by operating activities from continuing operations: |
||||||||
Depreciation and other |
66,864 | 41,997 | ||||||
Amortization of intangible assets and deferred financing fees |
6,907 | 6,608 | ||||||
Write-off of acquisition costs |
1,262 | 1,004 | ||||||
Non-cash stock-based compensation for employees |
6,232 | 6,288 | ||||||
Share-based payments for DVD agreement |
1,091 | | ||||||
Excess tax benefit on share-based awards |
| (615 | ) | |||||
Deferred income taxes |
3,582 | 9,231 | ||||||
Income from equity investments |
| 3,449 | ||||||
(Income) loss from discontinued operations, net of tax |
(28,007 | ) | 2,892 | |||||
Loss on early retirement of debt |
1,082 | | ||||||
Other |
632 | 835 | ||||||
Cash (used) provided by changes in operating assets and liabilities, net of effects of business acquisitions |
(70,480 | ) | 14,996 | |||||
Net cash provided by operating activities from continuing operations |
43,076 | 107,366 | ||||||
INVESTING ACTIVITIES: |
||||||||
Purchase of property and equipment |
(105,141 | ) | (115,740 | ) | ||||
Acquisitions, net of cash acquired of $43,621 in 2008 |
(1,229 | ) | (24,829 | ) | ||||
Proceeds from sale of fixed assets |
214 | 290 | ||||||
Net cash used by investing activities from continuing operations |
(106,156 | ) | (140,279 | ) | ||||
FINANCING ACTIVITIES: |
||||||||
Principal payments on capital lease obligations and other |
(18,642 | ) | (12,119 | ) | ||||
Proceeds from capital lease financing |
22,020 | | ||||||
Net (payments) borrowings on credit facility |
(35,000 | ) | 34,000 | |||||
Convertible debt borrowings, net of underwriting discount and commissions of $6,000 |
194,000 | | ||||||
Financing costs associated with revolving line of credit and convertible debt |
(3,984 | ) | | |||||
Cash used to purchase remaining non-controlling interests in Redbox |
(113,867 | ) | | |||||
Excess tax benefit on share-based awards |
| 615 | ||||||
Proceeds from exercise of stock options |
10,889 | 8,547 | ||||||
Net cash provided by financing activities from continuing operations |
55,416 | 31,043 | ||||||
Effect of exchange rate changes on cash |
2,996 | (2,462 | ) | |||||
NET DECREASE IN CASH AND CASH EQUIVALENTS, CASH IN
MACHINE OR IN TRANSIT, AND CASH BEING PROCESSED FROM CONTINUING OPERATIONS |
(4,668 | ) | (4,332 | ) | ||||
CASH FLOWS FROM DISCONTINUED OPERATIONS: |
||||||||
Operating cash flows |
14,872 | 2,761 | ||||||
Investing cash flows |
(16,397 | ) | (8,130 | ) | ||||
Financing cash flows |
(2,462 | ) | (4,140 | ) | ||||
(3,987 | ) | (9,509 | ) | |||||
NET DECREASE IN CASH AND CASH EQUIVALENTS, CASH IN
MACHINE OR IN TRANSIT, AND CASH BEING PROCESSED |
(8,655 | ) | (13,841 | ) | ||||
CASH AND CASH EQUIVALENTS, CASH IN MACHINE OR IN TRANSIT, AND CASH BEING PROCESSED: |
||||||||
Beginning of period |
192,035 | 196,592 | ||||||
End of period |
$ | 183,380 | $ | 182,751 | ||||
See Note 10 for supplemental cash flow information.
See notes to consolidated financial statements
6
Table of Contents
COINSTAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Nine and Three Month Periods Ended September 30, 2009 and 2008
(unaudited)
(unaudited)
NOTE 1: ORGANIZATION, BUSINESS, AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of company: Incorporated as a Delaware company in 1993, Coinstar, Inc. (the
Company) is a leading provider of automated retail solutions offering convenient products and
services that benefit consumers and drive incremental retail traffic
and revenue for retailers. The Companys core offerings in automated retail include its Coin and DVD businesses.
The Coin services business consists of self-service coin counting kiosks where consumers can
convert their coin to cash, a gift card or an e-certificate, among other options. The DVD services
business consists of self-service DVD kiosks where consumers can rent or purchase movies. The
Companys products and services also include money transfer services; and electronic payment
(E-payment) services such as stored value cards, prepaid debit cards and prepaid wireless
products. The Companys products and services can currently be found at more than 90,000 points of
presence including supermarkets, drug stores, mass merchants, financial institutions, convenience
stores, restaurants, and money transfer agent locations. As of September 30, 2009, the Company had
an approximate total of:
Coin-counting kiosks |
18,800 | * | ||
DVD kiosks |
20,600 | |||
Money transfer services locations |
45,000 | |||
E-payment point-of-sale terminals |
24,500 |
* | Amount includes 12,400 coin to card, e-payment or e-certificate kiosks |
Sale of Entertainment Services Business: On September 8, 2009 we sold our Entertainment
Services Business (Entertainment Business) to National Entertainment Network, Inc. See further
discussion in Note 6.
Basis of presentation: The unaudited consolidated financial statements of Coinstar included
herein reflect all adjustments, consisting only of normal recurring adjustments that, in the
opinion of management, are necessary to present fairly our consolidated financial position, results
of operations and cash flows for the periods presented. Certain reclassifications have been made to
the prior year amounts to conform to the current year presentation. Effective the third quarter of
fiscal 2009 following the sale of our Entertainment Business, we reclassified the results of the
Entertainment Business to discontinued operations for all periods presented.
These financial statements have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission (the SEC) and in accordance with United States generally
accepted accounting principles (GAAP) for interim financial information. Certain information and
footnote disclosures normally included in annual financial statements prepared in accordance with
GAAP have been condensed or omitted pursuant to such SEC rules and regulations. These financial
statements should be read in conjunction with our audited financial statements and the accompanying
notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed
with the SEC. The results of operations for the nine and three month periods ended September 30,
2009 are not necessarily indicative of the results to be expected for any future quarter or for the
entire fiscal year. Acquisitions are recorded and included in our results of operations as of the
date acquired.
Principles of consolidation: The accompanying unaudited consolidated financial statements
include the accounts of Coinstar, Inc., our wholly-owned subsidiaries, companies in which we have a
controlling interest, and other entities in accordance with Financial Accounting Standards Board
Accounting Standard Codification (FASB ASC) 810-10. Investments in companies of which we may have significant influence, but not a controlling
interest, are accounted for using the equity method of accounting. All significant intercompany
balances and transactions have been eliminated in consolidation.
Use of estimates: The preparation of financial statements in conformity with 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 revenue and expenses during the reporting
7
Table of Contents
period. These
judgments are difficult as matters that are inherently uncertain directly impact their valuation
and accounting. Actual results may vary from managements estimates and assumptions.
Revenue recognition: We recognize revenue as follows:
| Coin-counting revenue, which is collected from either consumers or card issuers (in stored value card or e-certificate transactions), is recognized at the time the consumers coins are counted by our coin-counting kiosks. Cash deposited in kiosks that has not yet been collected is referred to as cash in machine and is reported in our consolidated balance sheet under the caption Cash in machine or in transit. Our revenue represents the fee charged for coin-counting; | ||
| Net revenue from DVD movie rentals is recognized on a ratable basis during the term of a customers rental transaction. Revenue from the sale directly out of the kiosk of previously rented movies is recognized at the time of sale. On rental transactions for which the related DVDs have not yet been returned to the kiosk at month-end, revenue is recorded with a corresponding receivable recorded in the balance sheet, net of a reserve for uncollectibility. We record revenue net of refunds and applicable sales taxes collected from customers; | ||
| Money transfer revenue represents the commissions earned on a money transfer transaction and is recognized at the time the customer completes the transaction; | ||
| E-payment revenue is recognized at the point of sale based on our commissions earned, net of retailer fees. |
Interest rate swap: During the first quarter of 2008, we entered into an interest rate swap
agreement with Wells Fargo bank for a notional amount of $150.0 million to hedge against the
potential impact on earnings from an increase in market interest rates associated with the interest
payments on our variable-rate revolving credit facility. In the
fourth quarter of 2008, we entered
into another interest rate swap agreement with JP Morgan Chase for a notional amount of $75.0
million to hedge against the potential impact on earnings from an increase in market interest rates
associated with the interest payments on our variable-rate revolving credit facility. One of our
risk management objectives and strategies is to lessen the exposure of variability in cash flow due
to the fluctuation of market interest rates and lock in an interest rate for the interest cash
outflows on our revolving debt. Under the interest rate swap agreements, we receive or make
payments on a monthly basis, based on the differential between a specific interest rate and
one-month LIBOR. The interest rate swaps are accounted for as cash flow hedges in accordance with
FASB ASC 815-30 as of September 30, 2009. The cumulative change in the fair value of the swaps,
which was $6.3 million, was recorded in other comprehensive income, net of tax of $2.5 million,
with the corresponding adjustment to other accrued liabilities in our consolidated financial
statements. We reclassify a corresponding amount from accumulated other comprehensive income to
interest expense in the consolidated statement of operations as the interest payments are made.
The estimated losses in accumulated other comprehensive income of approximately $4.6 million are
expected to be reclassified into earnings as a component of interest expense over the next twelve
months. The net gain or loss included in our consolidated statement of operations representing the
amount of hedge ineffectiveness is inconsequential. The term of the $150.0 million swap is through
March 20, 2011. The term of the $75.0 million swap is through October 28, 2010. The following
table provides information about our interest rate swaps:
Fair value | ||||||||||||
September 30, | December 31, | |||||||||||
Balance sheet classification | 2009 | 2008 | ||||||||||
(in thousands) | ||||||||||||
Interest rate swap |
Other accrued liabilities | $ | 6,306 | $ | 7,466 |
Fair value: The carrying amounts for cash and cash equivalents, our receivables and our
payables approximate fair value, which is the amount for which the instrument could be exchanged in
a current transaction between willing parties. The fair values of our revolving line of credit and
term loan approximate their carrying amount.
In 2008, we elected to defer the
guidance of FAS 157, now incorporated within FASB ASC Subtopic
820-10, related to our non-financial assets and non-financial liabilities that are recognized and
disclosed at fair value in the financial statements on a
non-recurring basis until January 1, 2009. The adoption of FASB ASC Subtopic 820-10 for our
non-financial assets and non-financial liabilities did not have a material impact to our
consolidated financial statements.
FASB ASC Subtopic 820-10 establishes a hierarchy that prioritizes fair value measurements
based on the types of inputs used for the various valuation techniques. The levels of the hierarchy
are described below:
| Level 1: Observable inputs such as quoted prices in active markets for identical assets or liabilities |
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| Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; these include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active | ||
| Level 3: Unobservable inputs that reflect the reporting entitys own assumptions |
The following table presents our financial assets and liabilities that have been measured at
fair value as of September 30, 2009 and indicates the fair value hierarchy of the valuation inputs
utilized to determine such fair value.
Balance as of September 30, 2009 | ||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||
Short-term investment |
$ | 9,793 | | | ||||||||
Interest rate swap liability |
| $ | 6,306 | |
Recent accounting pronouncements: In July 2009 the FASB issued Statement of Financial
Accounting Standards No. 168, The Accounting Standards Codification and the Hierarchy of Generally
Accepted Accounting Principles (SFAS 168). SFAS 168 became the source of authoritative GAAP
recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases
of the SEC under authority of federal securities laws are also sources of authoritative GAAP for
SEC registrants. On the effective date of SFAS 168, the Codification superseded all then-existing
non-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting
literature not included in the Codification became nonauthoritative. This Statement is effective
for financial statements issued for interim and annual periods ending after September 15, 2009. The
adoption of SFAS 168 did not have a material impact on our consolidated financial position, results
of operations, cash flows, or disclosures.
In December 2007, the FASB issued FAS 141 (revised 2007), which is now incorporated within
FASB ASC 805. FASB ASC 805 retains the fundamental requirements of FASB Statement No. 141 to
account for all business combinations using the acquisition method (formerly the purchase method)
and for an acquiring entity to be identified in all business combinations. However, the new
guidance requires the acquiring entity in a business combination to recognize all the assets
acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as
the measurement objective for all assets acquired and liabilities assumed; and requires the
acquirer to disclose the information needed to evaluate and understand the nature and financial
effect of the business combination. The new guidance incorporated in FASB ASC 805 is effective for
acquisitions made on or after the first day of annual periods beginning on or after December 15,
2008. The adoption of the new provisions incorporated in FASB ASC 805 resulted in the recognition
of $1.3 million in acquisition related expenses in our results of operations for the nine months
ended September 30, 2009.
In December 2007, the FASB issued FASB Statement 160 which is now incorporated within FASB ASC
810-10. The new guidance in FASB ASC 810-10 establishes new accounting and reporting standards for
the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The new
guidance is effective for interim and annual periods beginning on or after December 15, 2008. The
adoption of the new guidance changed our reporting presentation for non-controlling interests and
impacted our consolidated financial position, results of operations and cash flows related to the
purchase of non-controlling interests in Redbox as described in Note 2.
In March 2008, the FASB issued FAS 161 which is now incorporated within FASB ASC 815-10-50.
The new accounting guidance in FASB ASC 815 requires enhanced disclosures about how and why
companies use derivatives, how derivative instruments and related hedged items are accounted for
and how derivative instruments and related hedged items affect a companys financial position,
financial performance and cash flows. The new guidance is effective for financial statements issued
for fiscal years and interim periods beginning after November 15, 2008. The adoption of the new
accounting provisions within FASB ASC 815 did not have a material impact on our consolidated
financial position, results of operations, cash flows, or disclosures.
In May 2009, the FASB issued FAS 165 which is now incorporated within FASB ASC 855. The new
guidance addresses accounting and disclosure requirements related to subsequent events. The
objective of the new guidance is to establish general standards of accounting for and disclosure of
events that occur after the balance sheet date but before the financial statements are issued or
available to be issued. FASB ASC 855 sets forth:
1. | The period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; |
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2. | The circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and | ||
3. | The disclosures that an entity should make about events or transactions that occurred after the balance sheet date. |
The new guidance within FASB ASC 855 is effective for interim or annual financial statements
ending after June 15, 2009. As the new guidance is required to be applied prospectively, the
impact on our financial statements will be dependent upon the timing of future transactions and
application of FASB ASC 855 on those transactions. We have evaluated subsequent events in
accordance with FASB ASC 855 through November 5, 2009.
In May 2008, the FASB issued new accounting guidance pertaining to convertible debt. This
accounting guidance which is now included in FASB ASC 470-20 specifies that issuers of convertible
debt instruments that may be settled in cash upon conversion (including partial cash settlement)
should separately account for the liability and equity components in a manner that will reflect the
entitys nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods.
The accounting guidance is effective for financial statements issued for fiscal years beginning
after December 15, 2008, and interim periods within those fiscal years. We adopted this new
accounting guidance on January 1, 2009, and we have applied this accounting guidance to the
convertible debt we issued in the third quarter of 2009.
Contingency: In April 2007, we received a request for arbitration filed by ScanCoin before
the Arbitration Institute of the Stockholm Chamber of Commerce regarding ownership of intellectual
property related to an agreement between Coinstar and ScanCoin dated April 23, 1993. The parties
have selected arbitrators, and we advanced partial payment for the arbitration. In August 2007, we
received ScanCoins statement of claim and we responded with our statement of defense in November
2007. ScanCoin seeks a declaration of ownership of over 70 of our patents and patent applications
related to our coin-counting kiosks, as well as monetary damages of approximately 56 million
Swedish kronor (estimated to be approximately $8 million at September 30, 2009), plus interest. The
arbitration has been delayed until after December 2009, but no new date has been set. We believe
that ScanCoins claims against us are without merit and intend to defend ourselves vigorously in
this arbitration. In October 2007, we filed a claim in United States District Court for the
Northern District of Illinois against ScanCoin North America alleging that it is infringing on a
patent we own relating to self-service coin kiosks. The case is stayed pending resolution of the
arbitration.
NOTE 2: PURCHASE OF NON-CONTROLLING INTERESTS IN REDBOX
In January 2008, we exercised our option to acquire a majority ownership interest in the
voting equity of Redbox and our ownership interest increased from 47.3% to 51.0%. Since our initial
investment in Redbox, we had accounted for our 47.3% ownership interest under the equity method in
our Consolidated Financial Statements. Effective with the close of the transaction on January 18,
2008, we began consolidating Redboxs financial results into our Consolidated Financial Statements.
On February 26, 2009, we closed the transaction announced on February 12, 2009 (the GAM
Transaction), whereby we agreed under a Purchase and Sale Agreement (the GAM Purchase Agreement)
with GetAMovie, Inc. (GAM) to acquire (i) GAMs 44.4% voting interests (the Interests) in
Redbox and (ii) GAMs right, title and interest in a Term Promissory Note dated May 3, 2007 made by
Redbox in favor of GAM in the principal amount of $10.0 million (the Note), in exchange for a
combination of cash and our common stock, par value $0.001 per share (the Common Stock).
On February 26, 2009, we purchased the Interests and the Note, paying initial consideration to
GAM in the form of cash in the amount of $10.0 million and 1.5 million shares of Common Stock.
Pursuant to the GAM Purchase Agreement, these shares were valued at $27.7433 each (based on the
average of the volume weighted average price per share of Common
Stock for each of the eight NASDAQ trading days prior to, but not including, the date of
issuance).
In addition, on February 26, 2009, the Company purchased the remaining outstanding interests
of Redbox from non-controlling interest and non-voting interest holders in Redbox under similar
terms to those of the GAM Purchase Agreement, issuing 146,039 unregistered shares of Common Stock
and an aggregate of 101,863 shares of Common Stock pursuant to already existing effective
registration statements and paying $83,000, as initial consideration.
Any consideration paid in shares of Common Stock
to these parties has or will be valued in the same manner as
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any consideration paid
in shares of Common Stock to GAM and such shares will either be newly issued, unregistered shares
of Common Stock with similar registration rights to those of GAM or newly issued shares of Common
Stock for which we already have an existing effective registration statement.
We made a payment for deferred consideration of $92.3 million in the second quarter of 2009.
The remaining payment for deferred consideration was made during the third quarter of 2009 and the
obligation is paid in full as of September 30, 2009. The total consideration paid for the 2009
Redbox transaction was $162.4 million including cash of $113.9 million and Coinstar common stock of
$48.5 million.
The purchase of the non-controlling interest in Redbox was a change of our ownership interest
in a previously consolidated subsidiary. Such change was accounted for as an equity transaction in
accordance with FASB ASC 810-10. There was no gain or loss recorded in the consolidated net income
or comprehensive income. The difference, approximately $112.5 million, between the fair value of
the consideration paid and the amount of the non-controlling interest was recognized as a reduction
to equity attributable to Coinstar. This difference will be amortized over fifteen years for tax
purposes. As a result, we recognized a deferred tax benefit of $43.8 million in equity. In
addition, we made an IRS code section 754 election resulting in an additional deferred tax benefit
of $11.9 million recorded in equity. After taking these two tax benefits into consideration the
difference is $56.8 million, which was recorded in the equity section of our balance sheet.
Secured credit facility: On April 29, 2009, we modified our credit agreement, dated as of
November 20, 2007 and amended as of February 12, 2009 (the Original Credit Agreement), by
amending and restating the Original Credit Agreement in its entirety (the Amended and Restated
Credit Agreement). Among other changes, the Amended and Restated Credit Agreement provided for a
new two-year $62.5 million term loan (the Term Facility), the proceeds of which, net of fees and
closing costs, have been used to pay a portion of the deferred consideration payable by us in
connection with our purchase of the outstanding interests in Redbox on February 26, 2009 (the
Redbox Obligation). The Amended and Restated Credit Agreement allowed us to, subject to meeting
certain conditions, make a single request on or before May 28, 2009 to increase the commitment
under the Term Facility by a minimum amount of $10.0 million and up to a maximum amount that would
not cause the total commitment under the Term Facility to exceed $100.0 million after giving effect
to such increase. Pursuant to this provision, on April 30, 2009, an additional lender increased the
commitment under the Term Facility by $25.0 million. A portion of the proceeds of this increase has
also been used to pay a portion of the Redbox Obligation. After the increase on April 30, 2009, we
were not entitled under the terms of the Amended and Restated Credit Agreement to additional
increases under the Term Facility.
The Amended and Restated Credit Agreement does not modify the amount of the $400.0 million
revolving credit facility (the Revolving Facility) that was provided for in the Original Credit
Agreement, provided that the provision of the Original Credit Agreement that allowed us to increase
the size of the Revolving Facility by up to $50.0 million (subject to obtaining commitments from
lenders for such increase) was deleted in the Amended and Restated Credit Agreement. The Amended
and Restated Credit Agreement did not modify the interest rates or commitment fees that apply to
the Revolving Facility. As a part of the amendment in February 2009, Redbox became a guarantor of
our credit facility debt and Redbox financial results are included in our debt covenant calculation requirement.
We paid off the Term Facility and a portion of the Revolving Facility with the proceeds from
the convertible debt issuance during the third quarter of 2009 (See discussion at Note 9).
NOTE 3: PROPERTY AND EQUIPMENT
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
(in thousands) | ||||||||
Machines |
$ | 654,947 | $ | 608,779 | ||||
Computers |
36,841 | 32,277 | ||||||
Office furniture and equipment |
11,238 | 13,202 | ||||||
Vehicles |
12,885 | 21,611 | ||||||
Leasehold improvements |
3,888 | 3,715 | ||||||
719,799 | 679,584 | |||||||
Accumulated depreciation and amortization |
(337,615 | ) | (330,635 | ) | ||||
$ | 382,184 | $ | 348,949 | |||||
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The amounts in the table above for 2008 include $37.3 million of net property and equipment
for the Entertainment Business, which was sold during the third quarter of 2009.
During
the third quarter of 2009, we entered into $30.4 million in
additional capital lease obligations. Approximately $22.0 million of
the additions were equipment sale leaseback arrangements. As of
September 30, 2009, our contractual capital lease obligations by
fiscal year, including interest of approximately $5.7 million,
totaled $10.0 million in 2009, $28.9 million in 2010, $18.9 million
in 2011, $6.7 million in 2012 and $0.5 million in 2013.
NOTE 4: STOCK-BASED COMPENSATION
Stock-based compensation: Stock-based compensation is accounted for in accordance with the
provisions of FASB ASC 810-10. Under FASB ASC 718, the fair value of stock awards is estimated at
the date of grant using the Black-Scholes-Merton (BSM) option valuation model. Stock-based
compensation expense is reduced for estimated forfeitures and is amortized over the vesting period.
The following summarizes the weighted average valuation assumptions and grant date fair value
of options granted during the periods shown below:
Nine Month Periods | Three Month Periods | |||||||||||||||
Ended September 30, | Ended September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Expected term (in years) |
3.7 | 3.7 | 3.7 | 3.7 | ||||||||||||
Expected stock price volatility |
40 | % | 35 | % | 40 | % | 35 | % | ||||||||
Risk-free interest rate |
1.5 | % | 2.5 | % | 1.9 | % | 2.6 | % | ||||||||
Expected dividend yield |
0 | % | 0 | % | 0 | % | 0 | % | ||||||||
Estimated fair value per option granted |
$ | 9.29 | $ | 9.66 | $ | 9.80 | $ | 10.08 |
The expected term of the options represents the estimated period of time from grant until
exercise and is based on historical experience of similar awards, giving consideration to the
contractual terms, vesting schedules and expectations of future employee behavior. Expected stock
price volatility is based on historical volatility of our stock for a period at least equal to the
expected term. The risk-free interest rate is based on the implied yield available on United States
Treasury zero-coupon issues with an equivalent remaining term. We have not paid dividends in the
past and do not plan to pay any dividends in the foreseeable future.
The following table summarizes employee stock-based compensation expense, and the related
deferred tax benefit for stock option and award expense during the periods indicated:
Nine Month Periods | Three Month Periods | |||||||||||||||
Ended September 30, | Ended September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Stock-based compensation expense |
$ | 6,232 | $ | 4,809 | $ | 1,497 | $ | 1,618 | ||||||||
Related deferred tax benefit |
1,908 | 1,362 | 480 | 485 |
Stock options: Stock options are granted to employees under the 2000 Amended and
Restated Equity Incentive Plan (the 2000 Plan) and the 1997 Amended and Restated Equity Incentive
Plan (the 1997 Plan). Options awarded vest annually over 4 years and expire after 5 years. Shares
of common stock are issued upon exercise of stock options.
The following table presents a summary of the stock option activity for the nine months ended
September 30, 2009:
Weighted | ||||||||
average exercise | ||||||||
Shares | price | |||||||
(in thousands) | ||||||||
OUTSTANDING, December 31, 2008 |
2,689 | $ | 25.24 | |||||
Granted |
642 | 29.26 | ||||||
Exercised |
(631 | ) | 21.86 | |||||
Cancelled, expired or forfeited |
(245 | ) | 30.06 | |||||
OUTSTANDING, September 30, 2009 |
2,455 | 26.67 | ||||||
EXERCISABLE, September 30, 2009 |
1,469 | $ | 24.56 | |||||
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As of September 30, 2009, total unrecognized stock-based compensation expense related to
unvested stock options was approximately $6.8 million. This expense is expected to be recognized
over a weighted average period of approximately 1.9 years. During the nine month period ended
September 30, 2009, the total intrinsic value of stock options exercised was approximately $7.1
million. At September 30, 2009, there were 4.6 million shares of unissued common stock reserved for
issuance under all the stock plans of which 2.1 million shares were available for future grants.
Restricted stock awards: Restricted stock awards are granted to certain employees and
non-employee directors under the 1997 Plan and vest annually over 4 years and one year,
respectively. The restricted shares require no payment from the grantee. The fair value of the
awards is based on the market price on the grant date and is recorded on a straight-line basis over
the vesting period.
The following table presents a summary of the restricted stock award activity for the nine
months ended September 30, 2009:
Weighted | ||||||||
average | ||||||||
grant date | ||||||||
Shares | fair value | |||||||
(in thousands) | ||||||||
NON-VESTED, December 31, 2008 |
135 | $ | 30.36 | |||||
Granted |
207 | 29.20 | ||||||
Vested |
(90 | ) | 30.72 | |||||
Forfeited |
(45 | ) | 30.09 | |||||
NON-VESTED, September 30, 2009 |
207 | $ | 29.70 | |||||
Compensation expense related to our restricted stock awards totaled approximately $3.1
million and $0.8 million for the nine and three month periods ended September 30, 2009.
Compensation expense related to our restricted stock awards totaled approximately $1.6 million and
$0.6 million for the nine and three month periods ended September 30, 2008. As of September 30,
2009 total unrecognized stock-based compensation expense related to unvested restricted stock
awards was approximately $4.5 million. This expense is expected to be recognized over a weighted
average period of approximately 1.6 years. During the nine month period ended September 30, 2009,
the total fair value of restricted stock awards vested was approximately $2.1 million.
NOTE 5: INCOME PER SHARE
Basic earnings per share is computed by dividing the net income available to common
stockholders for the period by the weighted average number of common shares outstanding during the
period. Diluted earnings per share is computed by dividing the net income available to common
stockholders for the period by the weighted average number of common and potential common shares
outstanding (if dilutive) during the period. Potential common shares, composed of incremental
common shares issuable upon the exercise of stock options and vesting of certain non-vested
restricted stock awards and the conversion features of our convertible debt we issued in the third
quarter of 2009, are included in the calculation of diluted earnings per share to the extent such
shares are dilutive.
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The following table sets forth the computation of basic and diluted earnings per share for the
periods indicated:
Nine Month Periods | Three Month Periods | |||||||||||||||
Ended September 30, | Ended September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Numerator: |
||||||||||||||||
Income from continuing operations |
$ | 25,904 | $ | 23,573 | $ | 9,641 | $ | 7,870 | ||||||||
Income (loss) from discontinued operations, net of tax |
28,007 | (2,892 | ) | 31,722 | (12 | ) | ||||||||||
Net income |
53,911 | 20,681 | 41,363 | 7,858 | ||||||||||||
Less: Net income attributable to non-controlling interests |
(3,627 | ) | (10,789 | ) | | (3,347 | ) | |||||||||
Net income attributable to Coinstar, Inc |
$ | 50,284 | $ | 9,892 | $ | 41,363 | $ | 4,511 | ||||||||
Denominator: |
||||||||||||||||
Weighted average shares for basic calculation |
29,829 | 27,992 | 30,437 | 28,170 | ||||||||||||
Incremental shares from employee stock options and awards |
380 | 515 | 403 | 515 | ||||||||||||
Weighted average shares for diluted calculation |
30,209 | 28,507 | 30,840 | 28,685 | ||||||||||||
For the nine and three month periods ended September 30, 2009, options and certain
restricted stock awards totaling approximately 1.3 million and 1.3 million shares of common stock,
respectively, were excluded from the computation of earnings per common share because their impact
would be antidilutive. For the nine and three month periods ended September 30, 2008, options and
restricted stock awards totaling approximately 0.9 million and 0.9 million shares, respectively, of
common stock were excluded from the computation of earnings per common share because their impact
would be antidilutive. For the nine and three month periods ended September 30, 2009,
no shares related to the conversion feature
of our convertible debt were included in the calculation of earnings
per share because the average price of our common stock remained
below the initial conversion price of $40.29 during the period.
NOTE 6: SALE OF ENTERTAINMENT BUSINESS
On September 8, 2009, we sold our subsidiaries comprising our Entertainment Business to
National Entertainment Network, Inc (National) for nominal consideration. With the transaction,
National assumed the operations of the Entertainment Business, including substantially all of the
Entertainment Businesss related assets and liabilities. The disposed
assets and liabilities primarily consist of current assets of $29.4 million, net property,
plant and equipment of $35.2 million, intangible assets of
$4.4 million, other assets of $3.1 million, and current liabilities of
$24.3 million. As a result of the sale, we recorded a pre-tax loss on disposal of $49.8 million
and a one-time tax benefit of $82.2 million during the third quarter of 2009. We have presented
the disposition of our Entertainment Business as well as the operating loss from our Entertainment
Business under discontinued operations in our Consolidated Statement of Operations, for all periods
presented. The cash flows related to our Entertainment Business have been separately disclosed in
our Consolidated Statement of Cash Flows under the operating, investing, and financing positions
attributable to our discontinued operations.
Revenue from discontinued operations was $90.6 million and $26.3 million for the nine month
and three month periods ended September 30, 2009 and $117.1 million and $37.0 million for the nine
month and three month periods ended September 30, 2008. The pretax loss from discontinued
operations was $6.9 million and $1.0 million for the nine month and three month periods ended
September 30, 2009, before the loss on disposal and related tax benefit, and the pretax loss from
discontinued operations was $4.3 million for the nine month period ended September 30, 2008.
During the three month period ended September 30, 2008 the pretax income from discontinued
operations was $0.3 million.
Our tax basis in
the Entertainment Business was determined to be approximately $256.8 million which has been written off as
worthless stock. However, the net tax benefit resulting from the worthless stock deduction was
reduced by writing off the net deferred tax assets recorded on Entertainment Businesss books
at the time of sale, resulting in a net one-time tax benefit of $82.2 million.
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The following table sets forth the computation of income (loss) from discontinued operations,
net of tax for the periods indicated:
Nine Month Periods | Three Month Periods | |||||||||||||||
Ended September 30, | Ended September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
(Loss) Income from discontinued operations (including loss on disposal
of $49.8 million in the third quarter of 2009) |
$ | (56,784 | ) | $ | (4,390 | ) | $ | (50,887 | ) | $ | 307 | |||||
Income tax benefit (expense) on discontinued operations |
2,559 | 1,498 | 377 | (319 | ) | |||||||||||
One-time income tax benefit on loss on disposal in 2009 |
82,232 | | 82,232 | | ||||||||||||
Income (loss) from discontinued operations, net of tax |
$ | 28,007 | $ | (2,892 | ) | $ | 31,722 | $ | (12 | ) | ||||||
NOTE 7: BUSINESS SEGMENT INFORMATION
FASB ASC 280 requires that companies report, on an interim basis, separately in the financial
statements certain financial and descriptive information about segment revenue, income and assets.
The method for determining what information is reported is based on the way that management
organizes the operating segments for making operational decisions and assessments of financial
performance. Our chief operating decision maker is considered to be the Chief Executive Officer
(CEO). In early 2008, we assessed our business segments due to changes in our business and
product lines as well as our organizational structure. We redefined our business segments from
North America and International to Coin and Entertainment services, DVD services, Money Transfer
services, and E-payment services. With the sale of the Entertainment Business during the third
quarter of 2009 we now report Coin services as its own segment. The amounts shown below for
revenue and income exclude the Entertainment Business for all periods presented. The amounts shown
for assets include both Coin and Entertainment assets for the periods prior to the sale of
Entertainment. The following table presents revenue by product lines:
Nine Month Periods | Three Month Periods | |||||||||||||||
Ended September 30, | Ended September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Revenue: |
||||||||||||||||
Coin services |
$ | 192,404 | $ | 194,771 | $ | 69,565 | $ | 71,027 | ||||||||
DVD services |
541,707 | 254,661 | * | 198,085 | 104,192 | * | ||||||||||
Money transfer services |
64,560 | 66,273 | 22,476 | 22,016 | ||||||||||||
E-payment services |
18,115 | 18,112 | 5,844 | 6,217 | ||||||||||||
Consolidated revenue |
$ | 816,786 | $ | 533,817 | $ | 295,970 | $ | 203,452 | ||||||||
* | DVD services revenue above for 2008 does not include $11.0 million for the period January 1, 2008 through January 17, 2008 when we did not consolidate Redbox. See Note 2. |
Our operating costs included in our shared service functions, which consist primarily of
sales, finance, legal, human resources, and information technology, are allocated to our four
segments. We will continually evaluate the shared service allocations for segment reporting
purposes, which may result in changes to segment allocations in future periods. In addition, our
CEO manages our business by evaluating the financial results of the four operating segments,
focusing primarily on segment revenue and segment operating income (loss) before depreciation and
amortization, stock compensation expense and share-based payments (segment operating income
(loss)). We utilize segment revenue and segment operating income (loss) because we believe they
provide useful information for effectively allocating resources among business segments, evaluating
the health of our business segments based on metrics that management can actively influence, and
gauging our investments and our ability to service, incur or pay down debt. Specifically, our CEO
evaluates segment revenue and segment operating income (loss) from continuing operations, and
assesses the performance of each business segment based on these measures, as well as, among other
things, the prospects of each of the segments and how they fit into the Companys overall strategy.
Our CEO then decides how resources should be allocated among our business segments. Stock-based
compensation expense, share-based payments, and depreciation and amortization expenses are not
allocated to our four operating segments.
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The following table summarizes our income from operations, by segment for the period
indicated:
Nine Month Periods | Three Month Periods | |||||||||||||||
Ended September 30, | Ended September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Operating
income before depreciation/amortization and stock-based compensation/shared-based payments: |
||||||||||||||||
Coin services |
$ | 66,731 | $ | 68,741 | $ | 23,399 | $ | 25,432 | ||||||||
DVD services |
91,528 | 49,537 | 34,510 | 17,740 | ||||||||||||
Money transfer services |
(8,974 | ) | (9,425 | ) | (2,190 | ) | (2,725 | ) | ||||||||
E-payment services |
(1,275 | ) | 623 | (576 | ) | (560 | ) | |||||||||
Subtotal |
148,010 | 109,476 | 55,143 | 39,887 | ||||||||||||
Depreciation/amortization
and stock-based compensation/shared-based payments: |
||||||||||||||||
Depreciation, amortization and other |
(72,805 | ) | (48,220 | ) | (25,461 | ) | (17,425 | ) | ||||||||
Stock-based compensation and share-based payments |
(7,323 | ) | (6,288 | ) | (2,586 | ) | (2,303 | ) | ||||||||
Subtotal |
(80,128 | ) | (54,508 | ) | (28,047 | ) | (19,728 | ) | ||||||||
Consolidated income from operations |
$ | 67,882 | $ | 54,968 | $ | 27,096 | $ | 20,159 | ||||||||
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
(in thousands) | (in thousands) | |||||||
Total assets: |
||||||||
Coin services |
$ | 513,469 | $ | 473,256 | ||||
DVD services |
453,833 | 378,092 | ||||||
Money transfer services |
112,268 | 105,645 | ||||||
E-payment services |
42,093 | 35,963 | ||||||
Unallocated corporate assets |
68,077 | 73,758 | ||||||
Consolidated assets |
$ | 1,189,740 | $ | 1,066,714 | ||||
The table above includes assets associated with the Entertainment Business within the
Coin services line of $67.1 million as of December 31, 2008. Entertainment assets are not included
as of September 30, 2009 as the Entertainment Business was sold in early September 2009.
The following tables represent information by geographic area. North America includes the
United States, Canada, Mexico, and Puerto Rico and International primarily includes the United
Kingdom, Ireland and other European countries in which our money transfer subsidiary, Coinstar
Money Transfer, operates.
Nine Month Periods | Three Month Periods | |||||||||||||||
Ended September 30, | Ended September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Revenue: |
||||||||||||||||
North America |
$ | 765,514 | $ | 482,252 | $ | 276,461 | $ | 185,703 | ||||||||
International |
51,272 | 51,565 | 19,509 | 17,749 | ||||||||||||
Total revenue |
$ | 816,786 | $ | 533,817 | $ | 295,970 | $ | 203,452 | ||||||||
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
(in thousands) | ||||||||
Total assets: |
||||||||
North America |
$ | 1,163,723 | $ | 1,025,362 | ||||
International |
135,178 | 138,868 | ||||||
Intercompany eliminations |
(109,161 | ) | (97,516 | ) | ||||
Total assets |
$ | 1,189,740 | $ | 1,066,714 | ||||
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The table above includes assets associated with the Entertainment Business within the
North America line of $67.1 million as of December 31, 2008. Entertainment assets are not included
as of September 30, 2009 as the Entertainment Business was sold in early September 2009.
Our Coin, DVD, Money Transfer and E-payment services are primarily located within retailers.
The following retailers accounted for 10% or more of our consolidated revenue:
Nine Month Periods | Three Month Periods | |||||||||||||||
Ended September 30, | Ended September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Walmart Stores Inc. |
20.3 | % | 13.3 | % | 20.2 | % | 14.4 | % | ||||||||
Walgreen Co. |
10.1 | % | 3.8 | % | 11.5 | % | 3.3 | % | ||||||||
McDonalds |
9.6 | % | 12.0 | % | 8.4 | % | 11.8 | % | ||||||||
Supervalu Inc. |
8.4 | % | 10.2 | % | 7.8 | % | 10.8 | % |
NOTE 8: DVD LICENSE AGREEMENT
Sony agreement
On July 17, 2009, Redbox entered into a copy depth license agreement (the Sony Agreement)
with SPHE Scan Based Trading Corporation (Sony), a subsidiary of Sony Pictures Home Entertainment
Inc. Redbox estimates that it will pay Sony approximately $460.0 million during the term of the
Sony Agreement, which is expected to last from July 1, 2009 until September 30, 2014. However, at
Sonys discretion, the Sony Agreement may expire earlier on September 30, 2011. Coinstar has
guaranteed up to $25.0 million of Redboxs liability under the Sony Agreement. In addition,
Coinstar has granted Sony 193,348 shares of restricted stock that will vest over the term of the
Sony Agreement. In the third quarter of 2009, we recorded share-based payment expense of $1.1
million related to the Sony Agreement to direct operating expenses in the consolidated statements
of operations.
Under the Sony Agreement, Redbox agrees to license minimum quantities of theatrical and
direct-to-video DVDs for rental in its DVD kiosks in the United States. The DVDs licensed and
purchased from Sony are expected to represent approximately 19.9% percent of the total DVDs
licensed and purchased by Redbox for 2009. Under the Sony Agreement, Redbox should receive delivery
of the DVDs by the street date, defined in the Sony Agreement as the initial date on which the
pictures are distributed on a rental basis to the general public for the purpose of non-commercial
home entertainment viewing.
Lionsgate agreement
On August 10, 2009, Redbox entered into a Home Video Lease Output Agreement (the Lionsgate
Agreement) with Lions Gate Films, Inc. (Lionsgate). Redbox estimates that it will pay Lionsgate
approximately $158 million during the term of the Lionsgate Agreement, which is expected to last
from September 1, 2009 until August 31, 2014. However, at Lionsgates discretion, the Lionsgate
Agreement may expire earlier on August 31, 2011.
Under the Lionsgate Agreement, Redbox agrees to license minimum quantities of theatrical and
direct-to-video DVDs for rental in each location that has a Redbox DVD kiosk in the United States.
The DVDs licensed and purchased from Lionsgate are expected to represent approximately 7.4% percent
of the total DVDs licensed and purchased by Redbox for 2009. Under the Lionsgate Agreement, Redbox
should receive delivery of the DVDs by the street date, defined in the Lionsgate Agreement as the
initial date on which the pictures are distributed on a rental basis
to the general public for the purpose of non-commercial home
entertainment viewing.
Paramount agreement
On August 25, 2009, Redbox entered into a revenue sharing license agreement (the Paramount
Agreement) with Paramount Home Entertainment Inc. (Paramount) that runs from August 25, 2009,
through December 31, 2009 (the Initial Term). Prior to December 15, 2009, Paramount has the
unilateral right to extend the term of the Paramount Agreement to December 31, 2014 (the Extended
Term). However, if Paramount does agree to the Extended Term, at Paramounts discretion, the
Paramount Agreement may be terminated earlier on December 31, 2011. Redbox estimates that it would
pay Paramount approximately $561.0 million during the Initial Term and the Extended Term. During
the Initial Term, Coinstar will provide a $28.0 million letter of credit to Paramount. The letter
of credit took effect October 1, 2009. During the Extended Term,
the letter of credit would be
replaced with a Coinstar guarantee to Paramount of up to $25 million.
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Under the Paramount Agreement, Redbox agrees to license minimum quantities of theatrical and
direct-to-video DVDs for rental in each location that has a Redbox DVD kiosk in the United States.
The DVDs licensed and purchased from Paramount are expected to represent approximately 18.5%
percent of the total DVDs licensed and purchased by Redbox for 2009. Under the Paramount Agreement,
Redbox should receive delivery of the DVDs by the street date, defined in the Paramount Agreement
as the first date on which the titles are available to the general public for home entertainment
purposes, whether on a rental or sell-through basis.
NOTE 9: 4% CONVERTIBLE SENIOR NOTES
In September 2009, we issued $200 million aggregate principal amount of 4% Convertible Senior
Notes (the Notes) for proceeds, net of expenses, of approximately $193.3 million. The Notes bear
interest at a fixed rate of 4% per annum, payable semi-annually in arrears on each March 1 and
September 1, beginning March 1 2010. The Notes mature on September 1, 2014. The effective interest
rate on the Notes is 8.5%.
The Notes are convertible, upon the occurrence of certain events or maturity, into cash up to
the aggregate principal amount of the Notes and shares of our common stock, in respect of the
remainder, if any, of the conversion obligation in excess of the aggregate principal amount. The
initial conversion rate is 24.8181 shares of Common Stock per $1,000 principal amount of Notes,
which is equivalent to an initial conversion price of approximately $40.29 per share of Common
Stock. The events for conversion include: i) at any time during the period beginning on June 1,
2014 and ending on the close of business on the business day immediately preceding the stated
maturity date; ii) during any quarter commencing after December 31, 2009 in which the closing price
of our common stock exceeds 130% of the conversion price for at least 20 trading days during the
period of 30 consecutive trading days ending on the last trading day of the preceding calendar
quarter; (iii) during any five business day period after any 10 consecutive trading day period in
which the trading price per $1,000 principal amount of the Notes for each day of that period is
less than 98% of the product of the closing sale price of our common stock and the applicable
conversion rate; (iv) we elect to distribute to substantially all holders of our common stock the
right to purchase common stock at a price per share less than the average price of the closing
price for the 10 consecutive trading day periods preceding the date of such announcement; or we
elect to distribute to substantially all holders of our common stock the assets, debt securities,
or rights to purchase securities of us, which distribution has a per value exceeding 10% of the
closing price of the common stock preceding the declaration date for such distribution; (v) upon
specified corporate transactions including a consolidation or merger.
We have separately accounted for the liability and the equity component of the Notes in
accordance with FASB ASC 470-20, Debt with Conversion and Other
Options. The fair value of $165.2 million for our Notes and $34.8 million for the
equity component was initially recorded and the transaction costs of $6.7 million directly related
to the issuance were proportionally allocated to the liability and equity component. The total we
recorded to equity was $20.1 million after a deferred tax asset of $13.5 million and $1.2 million
of transaction costs. As our Notes are not actively traded in the market, fair value was estimated
using a discounted cash flow analysis, based on the borrowing rate for similar types of borrowing
arrangements. As of September 30, 2009, the fair value of our Notes was approximately $166.0
million and the carrying value of our Notes was $165.7 million. The unamortized debt discount as
of September 30, 2009 was $34.3 million and the amortization of the debt discount will be
recognized as non-cash interest expense. We recorded $0.3 million in
interest expense in the third quarter related to the contractual
interest coupon of the Notes. We recorded $0.5 million in non-cash interest expense in
the third quarter of 2009 related to the amortization of the debt discount. The unamortized debt
discount will be recognized as non-cash interest expense over the remaining periods in the amount
of $1.4 million in 2009, $6.0 million in 2010, $6.6 million in 2011, $7.1 million in 2012, $7.7
million in 2013, and $5.5 million in 2014.
The Notes are not redeemable at our election prior to maturity, but are subject to repurchase
by us at the option of the holders following a fundamental change at a price equal to 100% of the
principal amount of the Notes to be repurchased, plus accrued and unpaid interest to, but
excluding, the fundamental change purchase date. The fundamental change includes i) any person
acquires the beneficial ownership of us and entitles to exercise 50% or more of the total voting
power of our capital stocks; ii) certain merger and combination transactions; iii) substantial
turnover of our Board Directors; iv) stockholders approval of the liquidation and dissolution of
us; v) termination of Trading, defined as our common stocks trading on the security exchange
market.
Net proceeds of the Notes were used to pay off our $87.5 million term loan under its senior
secured credit facility and to pay down $105.8 million of the outstanding amount under our $400
million revolving line of credit under our senior secured credit facility. We recorded $1.1
million in early retirement of debt expense in the consolidated statements of operations for the
nine and three month periods ended September 30, 2009 related to the write-off of deferred
financing costs associated with the term loan.
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The Notes are the
general senior unsecured obligations of Coinstar and rank equal in right of
payment with all of our existing and future unsecured and unsubordinated indebtedness. The
Notes will be structurally subordinated to all existing and future indebtedness incurred by
Coinstars subsidiaries (including trade payables and guarantees under the Coinstars senior
secured credit facility provided by certain of Coinstars subsidiaries), and will be effectively
subordinated to any of Coinstars secured indebtedness (including capital leases) to the extent of
the value of Coinstars assets that secure such indebtedness.
As of September 30, 2009, our outstanding revolving line of credit and convertible debt
balance together was $400.7 million. As of September 30, 2009 we were in compliance with all
covenants.
NOTE 10: SUPPLEMENTAL CASH FLOW INFORMATION
The following table provides supplemental cash flow information for the period indicated for
our continuing operations:
Nine Month Periods | ||||||||
Ended September 30, | ||||||||
2009 | 2008 | |||||||
(in thousands) | ||||||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
||||||||
Cash paid during the period for interest |
$ | 22,705 | $ | 9,545 | ||||
Cash paid during the period for income taxes |
1,215 | 5,552 | ||||||
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES: |
||||||||
Non-cash consideration for purchase of Redbox non-controlling interest |
$ | 48,493 | $ | | ||||
Underwriting discount and commissions on convertible debt |
6,000 | | ||||||
Purchase of vehicles financed by capital lease obligations |
4,750 | 580 | ||||||
Purchase of kiosks financed by capital lease obligations |
8,439 | | ||||||
Accrued acquisition costs |
| 10,000 |
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Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion and analysis should be read in conjunction with the Consolidated
Financial Statements and related Notes included elsewhere in this Quarterly Report on Form 10-Q.
Except for the consolidated historical information, the following discussion contains
forward-looking statements that involve risks and uncertainties, such as our objectives,
expectations and intentions. Our actual results could differ materially from results that may be
anticipated by such forward-looking statements and discussed elsewhere herein. Factors that could
cause or contribute to such differences include, but are not limited to, those discussed below and
those discussed under Risk Factors in Item IA of Part II of this Quarterly Report on Form 10-Q
and in Item IA of Part I of our Annual Report on Form 10-K for the fiscal year ended December 31,
2008 (the Form 10-K). Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date of this report. We undertake no obligation to revise
any forward-looking statements in order to reflect events or circumstances that may subsequently
arise. Readers are urged to carefully review and consider the various disclosures made in this
report and in our other reports filed with the SEC that attempt to advise interested parties of the
risks and factors that may affect our business, prospects and results of operations.
Overview
We are a leading provider of automated retail solutions offering convenient products and
services that benefit consumers and drive incremental retail traffic
and revenue for retailers. Our core offerings in automated retail include our Coin and DVD businesses. Our Coin
services consist of self-service coin counting kiosks where consumers can convert their coin to
cash, a gift card or an e-certificate, among other options. Our DVD services consist of
self-service DVD kiosks where consumers can rent or purchase movies. Our products and services
also include money transfer services; and electronic payment (E-payment) services such as stored
value cards, prepaid debit cards and prepaid wireless products. Our products and services can
currently be found at more than 90,000 points of presence including supermarkets, drug stores, mass
merchants, financial institutions, convenience stores, restaurants, and money transfer agent
locations.
Recent events
Sale of Entertainment Business
On September 8, 2009, we sold our subsidiaries comprising our entertainment services business
(Entertainment Business) to National Entertainment
Network, Inc (National) for nominal consideration. See discussion
below in Results of Operations.
DVD license agreements
Sony agreement
On July 17, 2009, Redbox entered into a copy depth license agreement (the Sony Agreement)
with SPHE Scan Based Trading Corporation (Sony), a subsidiary of Sony Pictures Home Entertainment
Inc. Redbox estimates that it will pay Sony approximately $460.0 million during the term of the
Sony Agreement, which is expected to last from July 1, 2009 until September 30, 2014. However, at
Sonys discretion, the Sony Agreement may expire earlier on September 30, 2011. Coinstar has
guaranteed up to $25.0 million of Redboxs liability under the Sony Agreement. In addition,
Coinstar has granted Sony 193,348 shares of restricted stock that will vest over the term of the
Sony Agreement. In the third quarter of 2009, we recorded share-based payment expense of $1.1
million related to the Sony Agreement.
Under the Sony Agreement, Redbox agrees to license minimum quantities of theatrical and
direct-to-video DVDs for rental in its DVD kiosks in the United States. The DVDs licensed and
purchased from Sony are expected to represent approximately 19.9% percent of the total DVDs
licensed and purchased by Redbox for 2009. Under the Sony Agreement, Redbox should receive delivery
of the DVDs by the street date, defined in the Sony Agreement as the initial date on which the
pictures are distributed on a rental basis to the general public for the purpose of non-commercial
home entertainment viewing.
Lionsgate agreement
On August 10, 2009, Redbox entered into a Home Video Lease Output Agreement (the Lionsgate
Agreement) with Lions Gate Films, Inc. (Lionsgate). Redbox estimates that it will pay Lionsgate
approximately $158 million during the term of the Lionsgate Agreement, which is expected to last
from September 1, 2009 until August 31, 2014. However, at Lionsgates discretion, the Lionsgate
Agreement may expire earlier on August 31, 2011.
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Under the Lionsgate Agreement, Redbox agrees to license minimum quantities of theatrical and
direct-to-video DVDs for rental in each location that has a Redbox DVD kiosk in the United States.
The DVDs licensed and purchased from Lionsgate are expected to represent approximately 7.4% percent
of the total DVDs licensed and purchased by Redbox for 2009. Under the Lionsgate Agreement, Redbox
should receive delivery of the DVDs by the street date, defined in the Lionsgate Agreement as the
initial date on which the pictures are distributed on a rental basis
to the general public for the purpose of non-commercial home
entertainment viewing.
Paramount agreement
On August 25, 2009, Redbox entered into a revenue sharing license agreement (the Paramount
Agreement) with Paramount Home Entertainment Inc. (Paramount) that runs from August 25, 2009,
through December 31, 2009 (the Initial Term). Prior to December 15, 2009, Paramount has the
unilateral right to extend the term of the Paramount Agreement to December 31, 2014 (the Extended
Term). However, if Paramount does agree to the Extended Term, at Paramounts discretion, the
Paramount Agreement may be terminated earlier on December 31, 2011. Redbox estimates that it would
pay Paramount approximately $561.0 million during the Initial Term and the Extended Term. During
the Initial Term, Coinstar will provide a $28.0 million letter of credit to Paramount. The letter
of credit took effect October 1, 2009. During the Extended Term,
the letter of credit would be
replaced with a Coinstar guarantee to Paramount of up to $25 million.
Under the Paramount Agreement, Redbox agrees to license minimum quantities of theatrical and
direct-to-video DVDs for rental in each location that has a Redbox DVD kiosk in the United States.
The DVDs licensed and purchased from Paramount are expected to represent approximately 18.5%
percent of the total DVDs licensed and purchased by Redbox for 2009. Under the Paramount Agreement,
Redbox should receive delivery of the DVDs by the street date, defined in the Paramount Agreement
as the first date on which the titles are available to the general public
for home entertainment purposes, whether on a rental or sell-through
basis.
Convertible debt
In September 2009, we issued $200 million aggregate principal amount of 4% Convertible Senior
Notes (the Notes) for proceeds, net of expenses, of approximately $193.3 million. The Notes bear
interest at a fixed rate of 4% per annum, payable semi-annually in arrears on each March 1 and
September 1, beginning March 1, 2010. The Notes mature on September 1, 2014. See further
discussion below in Liquidity and Capital Resources.
Management of Business Segments
In early 2008, we assessed our business segments due to changes in our business and product
lines as well as our organizational structure. We redefined our business segments from North
America and International to Coin and Entertainment services, DVD services, Money Transfer services
and E-payment services. With the sale of the Entertainment Business during the third quarter of
2009 we now report Coin services as its own segment. Our business segments now include:
| Coin services We offer self-service coin-counting services. We own and service all of our coin-counting kiosks, providing a convenient and trouble-free service to retailers. We own and operate the only multi-national fully-automated network of self-service coin-counting kiosks across the United States, Canada, Puerto Rico, Ireland, and in the United Kingdom. We generate revenue from coin-counting transaction fees from our customers and business partners. | ||
| DVD services Through Redbox and DVDXpress, we offer DVDs through our self-service kiosks where consumers can rent or purchase movies. Our DVD kiosks supply the functionality of a traditional video rental store, yet usually occupy an area of less than ten square feet. Consumers use a touch screen to select their DVD, swipe a valid credit or debit card, and go. The process is designed to be fast, efficient and fully automated with no upfront or membership fees. We generate revenue primarily through fees charged to rent or purchase a DVD. | ||
| Money Transfer services Through Coinstar Money Transfer (CMT) and GroupEx Financial Corporation, JRJ Express Inc. and Kimeco, LLC (collectively, GroupEx), we offer money transfer services primarily in the United Kingdom, European countries, North America, and Central America. Our money transfer services provide an easy to use, reliable and cost-effective way to send money around the world. We generate revenue primarily through commissions earned on money transfer transactions. |
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| E-payment services We offer E-payment services, including activating and reloading value on prepaid wireless accounts, selling stored value cards, loading and reloading prepaid debit cards and prepaid phone cards, selling prepaid phones and providing payroll card services. We generate revenue primarily through commissions or fees charged per E-payment transaction and pay our retailers a fee based on commissions earned on the sales of E-payment services. |
We manage our business by evaluating the financial results of these segments, focusing
primarily on segment revenue and segment operating income (loss) before depreciation and
amortization, stock compensation expense and share-based payments (segment operating income
(loss)). Segment operating income (loss) contains the internally allocated costs including the
shared service functions, which consist primarily of sales, finance, legal, human resources, and
information technology.
We utilize segment revenue and segment operating income/loss because we believe they provide
useful information for effectively allocating resources among business segments, evaluating the
health of our business segments based on metrics that management can actively influence, and
gauging our investments and our ability to service, incur or pay down debt. Specifically, our CEO
evaluates segment revenue and segment operating income/loss, and assesses the performance of each
business segment based on these measures, as well as, among other things, the prospects of each of
the segments and how they fit into our overall strategy. Our CEO then decides how resources should
be allocated among our business segments. For example, if a segments revenue decreases more than
expected, our CEO may consider allocating less financial or other resources to that segment in the
future.
See Note 7 of the Consolidated Financial Statements for additional information regarding
business segments.
Strategy
Our strategy is based upon leveraging our core competencies in the automated retail space to
provide the consumer with convenience and value and to help retailers drive incremental
traffic and revenue. Our competencies include success in building strong consumer and retailer
relationships, and in scaling and managing kiosk businesses. We build strong consumer
relationships by providing valuable self-service products and services in convenient locations. We
build strong retailer relationships by providing retailers with turnkey solutions that
complement their businesses without significant outlays of time and financial resources.
We expect to continue devoting significant resources to our automated retail strategy,
developing the information technology systems and technology infrastructure necessary to support
our products and services, and adding administrative personnel to support our growing organization.
We expect to continue evaluating new marketing and promotional programs to increase use of our
products and services. As the Money Transfer services and E-payment services do not leverage our
core competencies in automated retail, we are currently considering strategic alternatives for
these businesses.
Purchase of the remaining non-controlling interests in Redbox
Effective on January 18, 2008, when we exercised our option to acquire a majority ownership
interest in the voting equity of Redbox and our ownership interest increased from 47.3% to 51.0%,
we began consolidating Redboxs financial results into our Consolidated Financial Statements.
On February 26, 2009, we purchased the remaining outstanding interests of Redbox from
GetAMovie, Inc. (GAM) and other minority interest holders, and GAMs right, title and interest in
a Term Promissory Note dated May 3, 2007 made by Redbox in favor of GAM in the principal amount of
$10.0 million, paid initial consideration in the form of cash in the amount of $10.1 million and
1.75 million shares of our common stock valued at $27.7433 per share and recognized deferred
consideration of $101.1 million, which was paid off along with the interest during the second and
third quarter of 2009. The interest totaled $2.7 million. Redbox is now a wholly-owned subsidiary
of Coinstar. The total consideration paid for the 2009 Redbox transaction was $162.4 million
including cash of $113.9 million and Coinstar common stock of $48.5 million.
Results of Operations
Sale of Entertainment Business
On September 8, 2009, we sold our subsidiaries comprising our Entertainment Business to
National for nominal consideration. With the transaction, National assumed the operations of the
Entertainment Business, including substantially
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all of the Entertainment Businesss related assets and liabilities. As a result of the sale, we
recorded a pre-tax loss on disposal of $49.8 million and a one-time tax benefit of $82.2 million
during the third quarter of 2009. We have presented the result of the disposition of our
Entertainment Business as well as the operating loss from our Entertainment Business under the
discontinued operations in our Consolidated Statement of Operations, for all periods presented.
The cash flows related to our Entertainment Business discontinued operations have been separately
disclosed in our Consolidated Statement of Cash Flows.
Revenue from discontinued operations was $90.6 million and $26.3 million for the nine month
and three month periods ended September 30, 2009 and $117.1 million and $37.0 million for the nine
month and three month periods ended September 30, 2008. The pretax loss from discontinued
operations was $6.9 million and $1.0 million for the nine month and three month periods ended
September 30, 2009, before the loss on disposal and related tax benefit, and the pretax loss from
discontinued operations was $4.3 million for the nine month period ended September 30, 2008.
During the three month period ended September 30, 2008 the pretax income from discontinued
operations was $0.3 million.
Our
tax basis in the Entertainment Business was determined to be approximately $256.8 million
which has been written off as worthless stock. However, the net tax benefit resulting from the
worthless stock deduction was reduced by writing off the net deferred tax assets recorded on
Entertainment Businesss books at the time of sale, resulting in a net one-time tax benefit of
$82.2 million.
The following table sets forth the computation of income (loss) from discontinued operations,
net of tax for the periods indicated:
Nine Month Periods | Three Month Periods | |||||||||||||||
Ended September 30, | Ended September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
(Loss) Income from discontinued operations
(including loss on disposal
of $49.8 million in the third quarter of 2009) |
$ | (56,784 | ) | $ | (4,390 | ) | $ | (50,887 | ) | $ | 307 | |||||
Income tax benefit (expense) on discontinued
operations |
2,559 | 1,498 | 377 | (319 | ) | |||||||||||
One-time income tax benefit on loss on disposal
in 2009 |
82,232 | | 82,232 | | ||||||||||||
Income (loss) from discontinued operations, net
of tax |
$ | 28,007 | $ | (2,892 | ) | $ | 31,722 | $ | (12 | ) | ||||||
We redefined our business segments from North America and International to Coin and
Entertainment services, DVD services, Money Transfer services and E-payment services in early 2008.
With the sale of the Entertainment Business during the third quarter of 2009 we now report Coin
services as its own segment. The amounts shown below exclude the Entertainment Business for all
periods presented.
Summary of operating results
Total revenue/Total operating income
Nine Month Periods Ended September 30, | Three Month Periods Ended September 30, | |||||||||||||||||||||||||||||||
(In millions, except percentages) | 2009 | 2008 | $ Chng | % Chng | 2009 | 2008 | $ Chng | % Chng | ||||||||||||||||||||||||
Total consolidated revenue |
$ | 816.8 | $ | 533.8 | $ | 283.0 | 53.0 | % | $ | 296.0 | $ | 203.5 | $ | 92.5 | 45.5 | % | ||||||||||||||||
Total consolidated income from operations |
$ | 67.9 | $ | 55.0 | $ | 12.9 | 23.5 | % | $ | 27.1 | $ | 20.2 | $ | 6.9 | 34.2 | % | ||||||||||||||||
Income from operations as a % of Total Revenue |
8.3 | % | 10.3 | % | 9.2 | % | 9.9 | % |
The increases in our consolidated revenue for the nine and three month periods ended September
30, 2009 compared to the nine and three months ended September 30, 2008 were driven primarily by
our DVD services segment as a result of the increased number of DVD installed kiosks in our
retailers locations as well as the revenue growth of our existing installed kiosks. The increase
in our DVD services revenue was $287.1 million and $94.0 million for nine month and three month
periods ended September 30, 2009 compared to the prior year. The increase was partially offset by
the decrease in revenue from the foreign operations of Coin and Money Transfer services due to
unfavorable changes in currency exchange rates.
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Our consolidated income from operations was $67.9 million and $55.0 million for the nine
months ended September 30, 2009 and September 30, 2008, respectively. Our consolidated income from
operations, before depreciation, amortization and other of $72.8 million, stock compensation
expense and share-based payments of $7.3 million totaled $148.0 million for the nine month periods
ended September 30, 2009, compared to $109.5 million for the prior-year period. The increase of
$38.5 million from our consolidated segment operating income was offset by the increase in
depreciation and amortization of $24.6 million primarily due to the increase in installations of
DVD kiosks. The decrease in consolidated income from operations as a percentage of total revenue
was mostly driven by higher product costs primarily resulting from the decrease in DVD salvage
values.
Our consolidated income from operations was $27.1 million and $20.2 million for the three
months ended September 30, 2009 and September 30, 2008, respectively. Our consolidated operating
income, before depreciation, amortization and other of $25.5 million, stock compensation expense
and share-based payments of $2.6 million totaled $55.1 million for the third quarter of 2009,
compared to $39.9 million from the prior-year third quarter. The increase of $15.2 million from
our consolidated segment operating income was offset by higher depreciation and amortization
expense of $8.0 million due to the increase in installations of DVD kiosks. The decrease in
consolidated income from operations as a percentage of total revenue
was primarily due to lower Coin services operating income as a
percentage of revenue partially offset by increased DVD services
operating income as a percentage of revenue.
Segment Revenue/Operating income (loss)
Coin services
Nine Month Periods Ended September 30, | Three Month Periods Ended September 30, | |||||||||||||||||||||||||||||||
(In millions, except percentages) | 2009 | 2008 | $ Chng | % Chng | 2009 | 2008 | $ Chng | % Chng | ||||||||||||||||||||||||
Coin services revenue |
$ | 192.4 | $ | 194.8 | $ | (2.4 | ) | -1.2 | % | $ | 69.5 | $ | 71.0 | $ | (1.5 | ) | -2.1 | % | ||||||||||||||
Coin services operating income |
$ | 66.7 | $ | 68.7 | $ | (2.0 | ) | -2.9 | % | $ | 23.4 | $ | 25.4 | $ | (2.0 | ) | -7.9 | % | ||||||||||||||
Operating income as a % of segment revenue |
34.7 | % | 35.3 | % | 33.7 | % | 35.8 | % |
The decreases in Coin services revenue for the nine and three month periods ended September
30, 2009 compared to the nine and three months ended September 30, 2008 were primarily driven by
the unfavorable foreign exchange rates which have negatively impacted our Coin revenue by
approximately $6.1 million and $1.4 million for the nine and three month periods ended September
30, 2009 compared to the prior year periods. Excluding the impact of foreign currency
fluctuations, Coin revenue increased by $3.7 million (or 1.9%) for the nine month periods ended
September 30, 2009 compared to the prior year periods and stayed consistent for the third quarter
comparing to the prior year.
The decrease in segment operating income for the nine month period ended September 30, 2009
compared to the nine months ended September 30, 2008 is primarily driven by the decline in segment
revenue, partially offset by the decrease in the direct marketing expense resulting from the timing
of marketing campaign activities. Coin service operating income as a percentage of revenue was
fairly consistent period over period, 34.7% and 35.3% for the nine month periods ended September
30, 2009 and September 30, 2008. Coin services income from
operations decreased as a percentage of revenue for the three months
ended September 30, 2009 compared to the prior year period due
to certain fixed costs remaining static while Coin services revenue
decreased for the quarter.
DVD services
Nine Month Periods Ended September 30, | Three Month Periods Ended September 30, | |||||||||||||||||||||||||||||||
(In millions, except percentages) | 2009 | 2008 | $ Chng | % Chng | 2009 | 2008 | $ Chng | % Chng | ||||||||||||||||||||||||
DVD services revenue |
$ | 541.7 | $ | 254.6 | $ | 287.1 | 112.8 | % | $ | 198.1 | $ | 104.2 | $ | 93.9 | 90.1 | % | ||||||||||||||||
DVD services operating income |
$ | 91.5 | $ | 49.5 | $ | 42.0 | 84.8 | % | $ | 34.5 | $ | 17.7 | $ | 16.8 | 94.9 | % | ||||||||||||||||
Operating income as a % of segment revenue |
16.9 | % | 19.4 | % | 17.4 | % | 17.0 | % |
DVD services revenue for the nine months of 2008 above does not include $11.0 million for the
period January 1, 2008 through January 17, 2008 when we did not consolidate Redbox. The remaining
increases in DVD services revenue for the nine and three month periods ended September 30, 2009
compared to the nine and three months ended September 30, 2008 were driven by the increase in the
number of rentals as a result of new kiosk placements compared to the prior year as well as revenue
growth from existing kiosks. At September 30, 2009, we installed more than 8,800 additional DVD
kiosks since September 30, 2008.
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The DVD services segment operating income increased year over year for both the nine and
three month periods ended September 30, 2009 compared to prior year. The increases in segment
operating income reflect the favorable revenue increase, offset in part by the DVD product costs to
support the increased rental transactions, declines in DVD salvage
values, and increased general and
administration expenses to sustain the growth of the segment.
The decline in DVD services segment operating income as a percentage of revenue for the nine
month period ended September 30, 2009 compared to the prior year period was mostly driven by higher
product costs, primarily resulting from the decrease in DVD salvage
values. For the three month period ended September
30, 2009, the DVD services segment operating income as a percentage of revenue improved 40 basis
points compared to the prior year period, as the impact of higher product costs, primarily
resulting from the decrease in DVD salvage values, was more than offset by lower marketing expense
as a percentage of revenue and the favorable impact of leveraging
general and administrative expenses. Throughout the first nine months
of 2009, one movie studio
has restricted the distribution of DVDs to our DVD services segment. During
October 2009, two additional movie studios began restricting the distribution
of DVDs to our DVD services segment. The increased restriction of DVDs is expected
to have a negative impact on the operating income margins in our DVD services business,
because in these situations we must obtain DVD titles from alternative sources,
often at a higher cost and often not in advantageous quantities.
Money Transfer services
Nine Month Periods Ended September 30, | Three Month Periods Ended September 30, | |||||||||||||||||||||||||||||||
(In millions, except percentages) | 2009 | 2008 | $ Chng | % Chng | 2009 | 2008 | $ Chng | % Chng | ||||||||||||||||||||||||
Money Transfer services revenue |
$ | 64.6 | $ | 66.3 | $ | (1.7 | ) | -2.6 | % | $ | 22.5 | $ | 22.0 | $ | 0.5 | 2.3 | % | |||||||||||||||
Money Transfer services operating loss |
$ | (9.0 | ) | $ | (9.4 | ) | $ | 0.4 | -4.3 | % | $ | (2.2 | ) | $ | (2.7 | ) | $ | 0.5 | -18.5 | % | ||||||||||||
Operating loss as a % of segment revenue |
-13.9 | % | -14.2 | % | -9.8 | % | -12.3 | % |
The decline in revenue for the nine month period ended September 30, 2009 compared to the
nine month period ended September 30, 2008 was largely due to a decrease in the average amount per
transaction from approximately $571 to approximately $539. In addition, the unfavorable foreign
currency exchange has negatively impacted the revenue. Our Money Transfer service revenue for the
third quarter of 2009 increased compared to the prior year period. The increase was primarily
driven by increased transaction volume from our foreign Money Transfer subsidiaries.
Our Money Transfer service operating loss remained relatively flat for the nine month periods
and three month periods ended September 30, 2009, compared to the nine month and three month
periods ended September 30, 2008.
E-payment services
Nine Month Periods Ended September 30, | Three Month Periods Ended September 30, | |||||||||||||||||||||||||||||||
(In millions, except percentages) | 2009 | 2008 | $ Chng | % Chng | 2009 | 2008 | $ Chng | % Chng | ||||||||||||||||||||||||
E-payment revenue |
$ | 18.1 | $ | 18.1 | $ | | 0.0 | % | $ | 5.9 | $ | 6.3 | $ | (0.4 | ) | -6.3 | % | |||||||||||||||
E-payment operating (loss) income |
$ | (1.3 | ) | $ | 0.6 | $ | (1.9 | ) | -316.7 | % | $ | (0.6 | ) | $ | (0.6 | ) | $ | | 0.0 | % | ||||||||||||
Operating loss or income as a %
of segment revenue |
-7.2 | % | 3.3 | % | -10.2 | % | -9.5 | % |
The revenue from our E-payment services has remained relatively consistent for the nine
and three month periods ended September 30, 2009 and September 30, 2008.
The decline in our E-payment segment operating profit during the nine month periods ended
September 30, 2009 compared to prior year was primarily due to income from the InComm settlement
which generated $2.0 million of pre-tax income in the second quarter of 2008.
Expenses
Direct Operating Expenses
Our direct operating expenses consist primarily of (1) amortization of our DVD library, (2)
the percentage of transaction fees and commissions we pay to our retailers and agents, (3) credit
card fees and coin pick-up, transportation and processing expenses, and (4) field operations
support. Variations in the percentage of transaction fees and commissions we pay to our retailers
and agents may result in increased expenses. Such variations are based on certain factors, such as
total revenue, long-term non-cancelable contracts, installation of our machines in high traffic
and/or urban or rural locations, E-payment capabilities, new product commitments, co-op marketing
incentives, or other criteria.
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Nine Month Periods Ended September 30, | Three Month Periods Ended September 30, | |||||||||||||||||||||||||||||||
(In millions, except percentages) | 2009 | 2008 | $ Chng | % Chng | 2009 | 2008 | $ Chng | % Chng | ||||||||||||||||||||||||
Direct operating expenses |
$ | 559.1 | $ | 344.2 | $ | 214.9 | 62.4 | % | $ | 203.7 | $ | 134.3 | $ | 69.4 | 51.6 | % | ||||||||||||||||
as a % of Total Revenue |
68.5 | % | 64.5 | % | 68.8 | % | 66.0 | % |
Direct operating expenses increased in the nine and three month periods ended September
30, 2009 compared to the nine and three month periods ended September 30, 2008 primarily due to the
increased revenue in the DVD service segment, and the resulting variable expenses associated with
the increased revenue. In addition, the direct operating expenses as a percentage of revenue
increased by 400 basis points and 280 basis points for the nine and three month periods ended
September 30, 2009 compared with the prior year periods. These increases were driven mainly by
higher DVD product costs primarily resulting from a decrease in DVD salvage values. The total
increases in direct operating expenses for DVD services were $221.9 million and $71.8 million for
the nine and three month periods ended September 30, 2009. The increases were partially offset by
the cost reduction in our Money Transfer and E-payment services businesses.
Marketing
Our marketing expenses represent our cost of advertising, traditional marketing, on-line
marketing and public relations efforts in national and regional advertising and the major
international markets in which we operate our Money Transfer services.
Nine Month Periods Ended September 30, | Three Month Periods Ended September 30, | |||||||||||||||||||||||||||||||
(In millions, except percentages) | 2009 | 2008 | $ Chng | % Chng | 2009 | 2008 | $ Chng | % Chng | ||||||||||||||||||||||||
Marketing |
$ | 16.6 | $ | 13.9 | $ | 2.7 | 19.4 | % | $ | 5.8 | $ | 7.4 | $ | (1.6 | ) | -21.6 | % | |||||||||||||||
as a % of Total Revenue |
2.0 | % | 2.6 | % | 2.0 | % | 3.6 | % |
Marketing expenses increased in the nine month
period ended September 30, 2009 compared
to the nine month period ended September 30, 2008 primarily as a result of the growth of DVD
services. Marketing expenses for DVD services increased $2.0 million.
Marketing expenses decreased in the three month period ended September 20, 2009 compared to
the three month period ended September 30, 2008 primarily as a result of lower direct marketing
spending in our Coin services. The decrease in our Coin marketing was approximately $1.1 million
resulting from the timing of the direct marketing campaign activities.
Research and Development
Our research and development expenses consist primarily of development costs of our
coin-counting kiosk software, network applications, machine improvements and new product
development. Research and development expenses represent expenditures to support development and
design of our complementary new product ideas and to continue our ongoing efforts to enhance our
existing products and services.
Nine Month Periods Ended September 30, | Three Month Periods Ended September 30, | |||||||||||||||||||||||||||||||
(In millions, except percentages) | 2009 | 2008 | $ Chng | % Chng | 2009 | 2008 | $ Chng | % Chng | ||||||||||||||||||||||||
Research and development |
$ | 3.9 | $ | 3.6 | $ | 0.3 | 8.3 | % | $ | 1.4 | $ | 1.2 | $ | 0.2 | 16.7 | % | ||||||||||||||||
as a % of Total Revenue |
0.5 | % | 0.7 | % | 0.5 | % | 0.6 | % |
Research and development expenses have remained relatively consistent for the nine and
three month periods ended September 30, 2009 and September 30, 2008.
General and Administrative
Our general and administrative expenses consist primarily of administrative support for field
operations, customer service, systems and engineering support, computer network operations,
finance, human resources, occupancy expenses, legal expenses and insurance.
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Nine Month Periods Ended September 30, | Three Month Periods Ended September 30, | |||||||||||||||||||||||||||||||
(In millions, except percentages) | 2009 | 2008 | $ Chng | % Chng | 2009 | 2008 | $ Chng | % Chng | ||||||||||||||||||||||||
General and administrative |
$ | 96.5 | $ | 65.8 | $ | 30.7 | 46.7 | % | $ | 32.6 | $ | 23.0 | $ | 9.6 | 41.8 | % | ||||||||||||||||
as a % of Total Revenue |
11.8 | % | 12.3 | % | 11.0 | % | 11.3 | % |
General and administrative expenses increased for the nine and three month periods ended
September 30, 2009 compared to the nine and three month period ended September 30, 2008 primarily
as a result of increased administrative costs to sustain the growth of the DVD business segment,
expensing acquisition related costs upon adoption of FASB ASC 805, Business Combinations, in the
first quarter of 2009, as well as certain management transition costs.
Proxy, write-off of acquisition costs, and litigation settlement
During the second quarter of 2008 there were unique events resulting in expenses for a proxy
contest and the write-off of acquisition costs as well as income from the litigation settlement
agreement with InComm Holding Inc.
Nine Month Periods Ended September 30, | Three Month Periods Ended September 30, | |||||||||||||||||||||||||||||||
(In millions, except percentages) | 2009 | 2008 | $ Chng | % Chng | 2009 | 2008 | $ Chng | % Chng | ||||||||||||||||||||||||
Proxy, write-off of
acquisition costs, and
litigation settlement |
$ | | $ | 3.1 | $ | (3.1 | ) | -100.0 | % | $ | | $ | | $ | | 0.0 | % | |||||||||||||||
as a % of Total Revenue |
0.0 | % | 0.6 | % | 0.0 | % | 0.0 | % |
Depreciation and Other
Our depreciation and other expenses consist primarily of depreciation charges on our installed
kiosks as well as on computer equipment and leased automobiles.
Nine Month Periods Ended September 30, | Three Month Periods Ended September 30, | |||||||||||||||||||||||||||||||
(In millions, except percentages) | 2009 | 2008 | $ Chng | % Chng | 2009 | 2008 | $ Chng | % Chng | ||||||||||||||||||||||||
Depreciation and other |
$ | 66.9 | $ | 42.0 | $ | 24.9 | 59.3 | % | $ | 23.4 | $ | 15.4 | $ | 8.0 | 51.9 | % | ||||||||||||||||
as a % of Total Revenue |
8.2 | % | 7.9 | % | 7.9 | % | 7.6 | % |
Depreciation and other expenses increased in the nine and three month periods ended
September 30, 2009 compared to the nine and three month periods ended September 30, 2008 primarily
due to the installation of 1,300 coin kiosks and 8,800 DVD kiosks over the last four quarters.
Amortization of Intangible Assets
Our amortization expense consists of amortization of intangible assets, which are mainly
comprised of the value assigned to our acquired retailer relationships and, to a lesser extent,
internally developed software.
Nine Month Periods Ended September 30, | Three Month Periods Ended September 30, | |||||||||||||||||||||||||||||||
(In millions, except percentages) | 2009 | 2008 | $ Chng | % Chng | 2009 | 2008 | $ Chng | % Chng | ||||||||||||||||||||||||
Amortization of intangible assets |
$ | 5.9 | $ | 6.2 | $ | (0.3 | ) | -4.8 | % | $ | 2.0 | $ | 2.0 | $ | | 0.0 | % | |||||||||||||||
as a % of Total Revenue |
0.7 | % | 1.2 | % | 0.7 | % | 1.0 | % |
Amortization expense remained consistent for the nine and three month period ended
September 30, 2009 compared to the nine and three month periods ended September 30, 2008.
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Other Income and Expense
Nine Month Periods Ended September 30, | Three Month Periods Ended September 30, | |||||||||||||||||||||||||||||||
(In millions, except percentages) | 2009 | 2008 | $ Chng | % Chng | 2009 | 2008 | $ Chng | % Chng | ||||||||||||||||||||||||
Foreign currency loss and other, net |
$ | (0.3 | ) | $ | (2.8 | ) | $ | 2.5 | -89.3 | % | $ | (0.3 | ) | $ | (0.7 | ) | $ | 0.4 | -57.1 | % | ||||||||||||
Interest income |
$ | 0.2 | $ | 1.1 | $ | (0.9 | ) | -81.8 | % | $ | | $ | 0.2 | $ | (0.2 | ) | -100.0 | % | ||||||||||||||
Interest expense |
$ | (24.5 | ) | $ | (16.1 | ) | $ | (8.4 | ) | 52.2 | % | $ | (9.4 | ) | $ | (5.4 | ) | $ | (4.0 | ) | 74.1 | % | ||||||||||
Loss from equity investments |
$ | | $ | (0.3 | ) | $ | 0.3 | -100.0 | % | $ | | $ | | $ | | 0.0 | % | |||||||||||||||
Early retirement of debt |
$ | (1.1 | ) | $ | | $ | (1.1 | ) | 100.0 | % | $ | (1.1 | ) | $ | | $ | (1.1 | ) | 100.0 | % | ||||||||||||
Non-controlling interest |
$ | (3.6 | ) | $ | (10.8 | ) | $ | 7.2 | -66.7 | % | $ | | $ | (3.3 | ) | $ | 3.3 | -100.0 | % |
Foreign currency loss and other improved in the nine and three month periods ended September
30, 2009 as compared to the nine and three month periods ended September 30, 2008 primarily due to
the impact from the unfavorable movement of foreign exchange rates in our foreign subsidiaries and
the timing of the settlement of foreign currency transactions during the first nine months of 2008.
Interest income decreased for the nine and three month periods ended September 30, 2009 due to
lower invested balances and a decrease in interest rates.
Interest expense increased in the nine and three month period ended September 30, 2009 as
compared to the nine and three month period ended September 30, 2008 primarily due to increased
borrowings in 2009 to acquire the remaining interest in Redbox which has resulted in higher debt
balances during the current year periods.
Early retirement of debt totaled $1.1 million during the nine and three month periods ended
September 30, 2009. We used the proceeds from our convertible debt issuance during the third
quarter of 2009 to pay off the $87.5 million term loan we entered into earlier in 2009. The early
retirement of debt expense in the nine and three month periods ended September 30, 2009 related to
the write-off of deferred financing costs associated with the term loan.
Non-controlling interest for the nine and three month periods ended September 30, 2009
represents the operating results, net of tax, for the 49% stake in Redbox that we did not own prior
to our purchase of the remaining non-controlling interests in Redbox in February 2009.
Income Tax Expense
The
effective tax rate from continuing operations attributable to
Coinstar, Inc. was 42.1% and 41.2%, respectively for
the nine and three months ended September 30, 2009 and 50.9% and
58.4% for the nine and three
months ended September 30, 2008. These rates differ from the federal statutory rate primarily due
to the effect of losses in the United Kingdom that do not provide tax benefits currently. The
effective tax rate attributable to Coinstar, Inc. was reduced in 2009 by our election to treat our
money transfer subsidiaries based in the United Kingdom as disregarded entities for United States
federal income tax as of July 1, 2009. The election permits operating losses sustained by the
disregarded entities to be deducted in the United States going forward. The effective rate also
includes implications from the application of FASB ASC 718-740 with respect to incentive stock
options.
Liquidity and Capital Resources
Cash and Liquidity
Our business involves collecting and processing large volumes of cash, most of it in the form
of coins. We present three categories of cash on our balance sheet: cash and cash equivalents, cash
in machine or in transit, and cash being processed.
As of September 30, 2009, we had cash and cash equivalents, cash in machine or in transit, and
cash being processed totaling $183.4 million. This consisted of cash and cash equivalents
immediately available to fund our operations of $68.4 million, cash in machine or in transit of
$49.3 million and cash being processed of $65.7 million (which relates to our partner payable
liability and payable to our money transfer agents as recorded in accrued payable to retailers and
agents in the Consolidated Balance Sheet). Working capital was $29.9 million as of September 30,
2009, compared with a working capital deficit of $(16.3) million as of December 31, 2008. The
increase in working capital is primarily due to the timing of payments to our vendors and
retailers.
Net cash provided by operating activities from continuing operations was $43.1 million for the
nine months ended September 30, 2009, compared to net cash provided by operating activities of
$107.4 million for the nine months ended
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September 30, 2008, resulting in a total decrease of $64.3 million. The decrease is primarily
due to an increase in cash used by working capital of
$85.5 million and a $12.0 million decrease in
adjustments to reconcile net income to net cash provided by operating activities, offset by an
increase of $33.2 million in net income.
Cash used by working capital increased in the first nine months of 2009 compared to the first
nine months of 2008 due to DVD services accounts payable balances that grew during 2008 but
stabilized in the current year and an excise tax refund received in 2008. Cash used by working
capital also increased due to timing of payments to vendors. These increases in cash used by
working capital over the prior year were offset by an increase in cash provided by working capital
as a result of a decline in inventory growth for DVD services as compared to the prior year.
Adjustments to reconcile net income to net cash provided by operating activities decreased
primarily due to the income from discontinued operations and lower deferred tax expense partially
offset by higher depreciation expense in the current year.
Net cash used by investing activities from continuing operations for the nine months ended
September 30, 2009 was $106.2 million compared to $140.3 million in the comparable prior year
period. Net cash used by investing activities was higher in the prior year period primarily due to
the acquisition of GroupEx and the acquired increased ownership percentage in Redbox from 47.3% to
51.0%, which both took place in January 2008. The decrease in cash used by investing activities
year-over-year was also due to decreased cash used for capital expenditures during the first nine
months of 2009 as compared to the first nine months of 2008.
Net cash provided by financing activities for the nine months ended September 30, 2009 was
$55.4 million compared to cash provided of $31.0 million in the comparable prior year period. In
2009, net cash provided by financing activities primarily represented the borrowings on convertible
debt of $194.0 million, net of underwriting discount and commissions of $6.0 million, proceeds from
capital lease financing of $22.0 million and $10.9 million in proceeds from employee stock
exercises. These increases were offset by cash used to purchase the remaining non-controlling
interest in Redbox of $113.9 million, net payments on our credit facility of $35.0 million,
principal payments on capital lease and other obligations of $18.6 million and $4.0 million in
financings costs associated with our revolving line of credit and convertible debt. Net cash
provided by financing activities for the nine months ended September 30, 2008, was $31.0 million.
This amount primarily represented the net borrowings on our credit facility of $34.0 million,
proceeds of employee stock option exercises of $8.5 million, and the excess tax benefit from
exercise of stock options of $0.6 million, offset by cash used to make principal payments on
capital leases of $12.1 million.
Credit Facility
On April 29, 2009, we modified our existing credit agreement, dated as of November 20, 2007
and amended as of February 12, 2009 (the Original Credit Agreement), by amending and restating it
in its entirety (the Amended and Restated Credit Agreement). Among other changes, the Amended
and Restated Credit Agreement provides for a new term loan, proceeds of which, net of fees and
closing costs, have been used to pay a portion of the deferred consideration payable by us in
connection with our purchase of the outstanding interests in Redbox on February 26, 2009. We paid
off the term loan with the proceeds from the convertible debt issuance during the third quarter of
2009, as discussed below. As of September 30, 2009, our outstanding revolving line of credit and
convertible debt balance together was $400.7 million. As a part of the amendment in February 2009,
Redbox became a guarantor of our credit facility debt and Redbox financial results
are included in our debt
covenant calculation requirement. As of September 30, 2009 we were in compliance with all
covenants.
Convertible debt
In September 2009, we issued $200 million aggregate principal amount of 4% Convertible Senior
Notes (the Notes) for proceeds, net of expenses, of approximately $193.3 million. The Notes bear
interest at a fixed rate of 4% per annum, payable semi-annually in arrears on each March 1 and
September 1, beginning March 1, 2010. The Notes mature on September 1, 2014.
As the Notes can be settled in cash and equity upon conversion, we have separately accounted
for the liability and the equity component of the Note in accordance with FASB ASC 470-20, Debt
with Conversion and Other Options. The fair value of $165.2 million for our Notes and $34.8 million
for the equity component was initially recorded and the transaction costs directly related to the
issuance were proportionally allocated to the liability and equity component. As our Notes are not
actively traded in the market, fair value was estimated using a discounted cash flow analysis,
based on the borrowing rate for similar types of borrowing arrangements. As of September 30, 2009,
the fair value of our Notes was approximately $166.0 million and the carrying value of our Notes
was $165.7 million. The unamortized debt discount as of September 30, 2009 was $34.3 million and
the amortization of the debt discount will be recognized as non-cash interest expense. We recorded
$0.5 million in non-cash interest expense in the third quarter of 2009 related to the amortization
of the debt discount. The unamortized debt discount will be recognized as non-cash interest expense
over the remaining periods in the amount of $1.4 million in 2009, $6.0 million in 2010, $6.6
million in 2011, $7.1 million in 2012, $7.7 million in 2013, and $5.5 million in 2014.
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Net proceeds of the Notes were used to pay off our $87.5 million term loan under its senior
secured credit facility and to pay down $105.8 million of the outstanding amount under our $400
million revolving line of credit under its senior secured credit facility.
Letters of Credit
As of September 30, 2009, we had five irrevocable standby letters of credit that totaled $12.1
million. These standby letters of credit, which expire at various times through December 2009, are
used to collateralize certain obligations to third parties. Prior to and as of September 30, 2009,
no amounts have been, or are outstanding under these standby letters of credit.
Interest rate swap
During the first quarter of 2008, we entered into an interest rate swap agreement with Wells
Fargo Bank for a notional amount of $150.0 million to hedge against the potential impact on
earnings from an increase in market interest rates associated with the interest payments on our
variable-rate revolving credit facility. In the fourth quarter of 2008 we entered into another
interest rate swap agreement with JP Morgan Chase for a notional amount of $75.0 million to hedge
against the potential impact on earnings from an increase in market interest rates associated with
the interest payments on our variable-rate revolving credit facility. One of our risk management
objectives and strategies is to lessen the exposure of variability in cash flow due to the
fluctuation of market interest rates and lock in an interest rate for the interest cash outflows on
our revolving debt. Under the interest rate swap agreements, we receive or make payments on a
monthly basis, based on the differential between a specific interest rate and one-month LIBOR. The
interest rate swaps are accounted for as cash flow hedges in accordance with FASB ASC 815-30, Cash
Flow Hedges, of September 30, 2009, the cumulative change in the fair value of the swaps, which was
$6.3 million, was recorded in other comprehensive income, net of tax of $2.5 million, with the
corresponding adjustment to other accrued liabilities in our consolidated financial statements. We
reclassify a corresponding amount from accumulated other comprehensive income to the consolidated
statement of operations as the interest payments are made. The estimated losses in accumulated
other comprehensive income of approximately $4.6 million are expected to be reclassified into
earnings as a component of interest expense over the next twelve months. The net gain or loss
included in our consolidated statement of operations representing the amount of hedge
ineffectiveness is inconsequential. The term of the $150.0 million swap is through March 20, 2011.
The term of the $75.0 million swap is through October 28, 2010.
Redbox Rollout Agreement
In November 2006, Redbox and McDonalds USA entered into a Rollout Purchase, License and
Service Agreement (the Rollout Agreement) giving McDonalds USA and its franchisees and franchise
marketing cooperatives the right to purchase DVD rental kiosks to be located at selected McDonalds
restaurant sites for which Redbox subsequently received proceeds. The proceeds under the Rollout
Agreement are classified as debt and the interest rate is based on similar rates that Redbox has
with its kiosk sale-leaseback transactions. The payments made to McDonalds USA over the
contractual term of the Rollout Agreement, which is 5 years, will reduce the accrued interest
liability and principal. The future payments made under this Rollout Agreement contain a minimum
annual payment of $2.1 million as well as the variable payouts based on this license fee earned by
McDonalds USA and its franchisees. As of September 30, 2009, included in our consolidated
financial statements was debt associated with the Rollout Agreement of $19.3 million.
Capital
Resources
We believe our existing cash, cash equivalents and amounts available to us under our credit
facility will be sufficient to fund our cash requirements and capital expenditure needs for at
least the next 12 months. After that time, the extent of additional financing needed, if any, will
depend on the success of our business. If we significantly increase installations beyond planned
levels or if coin-counting kiosk or DVD kiosk volumes generated are lower than historical levels,
our cash needs may increase. Furthermore, our future capital requirements will depend on a number
of factors, including consumer use of our services, the timing and number of machine installations,
the number of available installable machines, the type and scope of service enhancements and the
cost of developing potential new product, service offerings, and enhancements and cash required to
fund future acquisitions.
Off-Balance Sheet Arrangements
As of September 30, 2009, off-balance sheet arrangements are comprised of our operating leases
and letters of credit as disclosed in Note 8 to our Consolidated Financial Statements included in
our Form 10-K. We have no other off-balance sheet arrangements that have had or are reasonably
likely to have a material current or future effect on our financial condition or consolidated
financial statements.
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Contractual Obligations
The following table discloses, as of September 30, 2009, material changes to two line items,
Long-term debt and Capital lease obligations, from the table in Managements Discussion and
Analysis of Financial Condition and Results of OperationsContractual Obligations included in our
Form 10-K for the year ended December 31, 2008, as well as one new line item, DVD Agreement
obligations.
Payments Due by Period | ||||||||||||||||||||||||||||
Contractual Obligations | Total | 2009 | 2010 | 2011 | 2012 | 2013 | Thereafter | |||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
Long-term debt (1) |
$ | 440,757 | $ | 610 | $ | 2,441 | $ | 2,441 | $ | 235,242 | $ | 23 | $ | 200,000 | ||||||||||||||
Capital lease obligations (2) |
65,030 | 9,964 | 28,908 | 18,940 | 6,717 | 501 | | |||||||||||||||||||||
DVD Agreement obligations (3) |
663,611 | 71,455 | 100,750 | 127,033 | 144,555 | 144,555 | 75,263 | |||||||||||||||||||||
Total contractual cash obligations |
$ | 1,169,398 | $ | 82,029 | $ | 132,099 | $ | 148,414 | $ | 386,514 | $ | 145,079 | $ | 275,263 | ||||||||||||||
(1) | Long-term debt does not include contractual interest payments as they are variable in nature. The revolving line of credit totaled $235.0 as of September 30, 2009. We also added $200.0 million in convertible debt during the third quarter of 2009. | |
(2) | Capital lease obligations represent gross minimum lease payments, which includes interest of approximately $5.7 million. We added approximately $30.4 million in capital leases in the third quarter of 2009. | |
(3) | See Note 8 to our Consolidated Financial Statements included in this Form 10-Q. The DVD agreement obligations in the above table are summarized as follows: |
| Redbox estimates that it will pay Sony approximately $460.0 million during the term of the Sony Agreement, which is expected to last from July 1, 2009 until September 30, 2014. At Sonys discretion, the Sony Agreement may expire earlier on September 30, 2011. The amounts above reflect the $460.0 million as if the term expires in 2014. The $460.0 million estimate is based on future assumptions including pricing estimates, estimated number of locations, estimated titles in the kiosk, and estimated title counts. | ||
| Redbox estimates that it will pay Lionsgate $158.0 million during the term of the Lionsgate Agreement, which is expected to last from September 1, 2009 through August 31, 2014. At Lionsgates discretion, the Lionsgate Agreement may expire earlier on August 31, 2011. The amounts above reflect the $158.0 million as if the term expires in 2014. The $158.0 million estimate is based on future assumptions including pricing estimates, estimated number of locations, estimated titles in the kiosk, and estimated title counts. | ||
| Redbox estimates that it will pay Paramount $45.6 million during the Initial Term of the Paramount Agreement, which runs from August 25, 2009 through December 31, 2009. This amount has been included in the 2009 column above. The $45.6 million estimate is based on future assumptions including price and quantities purchased. |
Quarterly Financial Results
The following table sets forth selected unaudited quarterly financial information for the last
eight quarters. This information has been prepared on the same basis as our audited consolidated
financial statements and includes, in the opinion of management, all normal and recurring
adjustments that management considers necessary for a fair presentation of the quarterly results
for the periods. The operating results for any quarter are not necessarily indicative of the
results for future periods. Certain reclassifications have been made to the prior period balances
to conform to the current period presentation.
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Three Month Periods Ended | ||||||||||||||||||||||||||||||||
Sept. 30, | June 30, | March 31, | Dec. 31, | Sept. 30, | June 30, | March 31, | Dec. 31, | |||||||||||||||||||||||||
2009(1) | 2009 | 2009 | 2008 | 2008 | 2008(2) | 2008(3) | 2007(4) | |||||||||||||||||||||||||
(in thousands, except per share data) | ||||||||||||||||||||||||||||||||
(unaudited) | ||||||||||||||||||||||||||||||||
Consolidated Statement of Operations: |
||||||||||||||||||||||||||||||||
Revenue |
$ | 295,970 | $ | 282,048 | $ | 238,768 | $ | 227,864 | $ | 203,452 | $ | 184,071 | $ | 146,294 | $ | 82,896 | ||||||||||||||||
Expenses: |
||||||||||||||||||||||||||||||||
Direct operating |
203,650 | 193,941 | 161,463 | 150,079 | 134,342 | 117,592 | 92,298 | 49,977 | ||||||||||||||||||||||||
Marketing |
5,833 | 5,671 | 5,101 | 5,251 | 7,372 | 3,788 | 2,786 | 1,975 | ||||||||||||||||||||||||
Research and development |
1,360 | 1,299 | 1,257 | 1,180 | 1,157 | 1,175 | 1,246 | 1,070 | ||||||||||||||||||||||||
General and administrative |
32,570 | 32,379 | 31,575 | 28,503 | 22,997 | 23,554 | 19,238 | 9,984 | ||||||||||||||||||||||||
Depreciation and other |
23,432 | 22,844 | 20,588 | 19,472 | 15,384 | 14,130 | 12,483 | 8,401 | ||||||||||||||||||||||||
Amortization of intangible assets |
2,029 | 1,961 | 1,951 | 1,983 | 2,041 | 2,068 | 2,114 | 1,435 | ||||||||||||||||||||||||
Proxy, write-off of acquisition costs, and litigation
settlement |
| | | | | 3,084 | | | ||||||||||||||||||||||||
Income (loss) from operations |
27,096 | 23,953 | 16,833 | 21,396 | 20,159 | 18,680 | 16,129 | 10,054 | ||||||||||||||||||||||||
Foreign currency (loss) gain and other, net |
(270 | ) | 93 | (162 | ) | (1,153 | ) | (717 | ) | (895 | ) | (1,163 | ) | 90 | ||||||||||||||||||
Interest income |
30 | 46 | 108 | 155 | 180 | 625 | 258 | 197 | ||||||||||||||||||||||||
Interest expense |
(9,372 | ) | (8,628 | ) | (6,510 | ) | (5,453 | ) | (5,394 | ) | (5,847 | ) | (4,832 | ) | (4,512 | ) | ||||||||||||||||
Income (loss) from equity investments and other |
| | | 1 | (1 | ) | 243 | (580 | ) | 472 | ||||||||||||||||||||||
Early retirement of debt |
(1,082 | ) | | | | | | | (1,794 | ) | ||||||||||||||||||||||
Income (loss) from continuing operations before income
taxes |
16,402 | 15,464 | 10,269 | 14,946 | 14,227 | 12,806 | 9,812 | 4,507 | ||||||||||||||||||||||||
Income taxes |
(6,761 | ) | (6,510 | ) | (2,960 | ) | (5,018 | ) | (6,357 | ) | (3,856 | ) | (3,059 | ) | (4,596 | ) | ||||||||||||||||
Income (loss) from continuing operations |
9,641 | 8,954 | 7,309 | 9,928 | 7,870 | 8,950 | 6,753 | (89 | ) | |||||||||||||||||||||||
Income (loss) from discontinued operations, net of tax |
31,722 | (1,996 | ) | (1,719 | ) | (2,061 | ) | (12 | ) | (2,001 | ) | (879 | ) | (37,133 | ) | |||||||||||||||||
Net income (loss) |
41,363 | 6,958 | 5,590 | 7,867 | 7,858 | 6,949 | 5,874 | (37,222 | ) | |||||||||||||||||||||||
Less: Net income attributable to non-controlling interests |
| | (3,627 | ) | (3,647 | ) | (3,347 | ) | (4,269 | ) | (3,173 | ) | | |||||||||||||||||||
Net income (loss) attributable to Coinstar, Inc. |
$ | 41,363 | $ | 6,958 | $ | 1,963 | $ | 4,220 | $ | 4,511 | $ | 2,680 | $ | 2,701 | $ | (37,222 | ) | |||||||||||||||
Earnings (loss) per share attributable to Coinstar, Inc: |
||||||||||||||||||||||||||||||||
Basic |
$ | 1.36 | $ | 0.23 | $ | 0.07 | $ | 0.15 | $ | 0.16 | $ | 0.10 | $ | 0.10 | $ | (1.34 | ) | |||||||||||||||
Diluted |
$ | 1.34 | $ | 0.23 | $ | 0.07 | $ | 0.15 | $ | 0.16 | $ | 0.09 | $ | 0.10 | $ | (1.34 | ) |
(1) | In the third quarter of 2009 we sold the Entertainment Business, which is included in discontinued operations above for all periods presented. | |
(2) | In the second quarter of 2008, we recognized $3.1 million in expense related to a proxy contest, the write-off of in-process acquisition costs and a litigation settlement. | |
(3) | In the first quarter of 2008, we acquired GroupEx and the majority ownership interest of Redbox. | |
(4) | In the fourth quarter of 2007, we recorded an impairment and excess inventory charge for the Entertainment Business, now included as discontinued operations. |
Seasonality
We have historically experienced seasonality in our revenue with higher revenue in the second
half of the year than in the first half of the year. Our Coin product line generally experiences
its highest revenue in the third calendar quarter, followed by the fourth calendar quarter, and
relatively lower revenue in the first half of the year. Our DVD product line experiences lower
revenue in April and May due in part to improved weather and Daylight Saving Time, and in September
and October, due in part to the beginning of the school year and the introduction of the new
television season. The year-end and summer holiday months have historically been the highest
rental months for DVD services. Our Money Transfer and E-payment product lines generally provide
their highest revenue in the fourth quarter. We expect our results of operations will continue to
fluctuate as a result of seasonal fluctuations and our revenue mix between relatively higher margin
Coin and DVD product lines, and relatively lower margin Money Transfer and E-payment product lines.
Critical Accounting Policies
Our consolidated financial statements have been prepared in accordance with United States
generally accepted accounting principles (GAAP). Preparation of these statements requires
management to make judgments and estimates. We base our estimates on historical experience and on
other assumptions that we believe to be reasonable under the present
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circumstances. A summary of
significant accounting policies and a description of accounting policies that are considered
critical may be found in our Form 10-K at Item 7, Managements Discussion and Analysis of
Financial Condition and
Results of Operations. There have been no material changes to the critical accounting
policies previously disclosed in our Form 10-K.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The following discussion about our market risk involves forward-looking statements. Actual
results could differ from those projected in our forward-looking statements.
We are subject to the risk of fluctuating interest rates in the normal course of business,
primarily as a result of our credit agreement with a syndicate of lenders led by Bank of America,
N.A. and investment activities that generally bear interest at variable rates. Because our
investments have maturities of three months or less, and our credit facility interest rates are
based upon either the LIBOR, prime rate or base rate plus an applicable margin, we believe that the
risk of material loss is low and that the carrying amount of these balances approximates fair
value.
Based on the balance of our outstanding revolving line of credit of $235.0 million as of
September 30, 2009, an increase of 1.0% in interest rates over the next year would increase our
annualized interest expense by approximately $0.1 million, net of a $2.3 million offset resulting
from our interest rate swap agreements; a decrease of 1.0% in interest rates over the next year
would decrease our annualized interest expense by approximately $0.1 million, net of a $2.3 million
offset resulting from our interest rate swap agreements. Such potential increases or decreases are
based on certain simplified assumptions, including an immediate, across-the-board increase or
decrease in the level of interest rates with no other subsequent changes for the remainder of the
periods. We have hedged a portion of our interest rate risk by entering into two interest rate
swaps with notional amounts of $150.0 million and $75.0 million, respectively. The interest rate
swaps convert a portion of our variable one-month LIBOR rate financing into a fixed interest rate
financing. These fixed interest rate swaps reduce the effect of fluctuations in the market
interest rates. The term of the $150.0 million swap is through March 20, 2011. The term of the
$75.0 million swap is through October 28, 2010.
We are further subject to the risk of foreign exchange rate fluctuation in the normal course
of business as a result of our operations in the United Kingdom, Ireland, Europe, Canada, and
Mexico.
Item 4. Controls and Procedures
We maintain a set of disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act)). Management,
with the participation of our chief executive officer and chief financial officer, has evaluated
the effectiveness of the design and operation of our disclosure controls and procedures as of the
end of the period covered by this report and has determined that such disclosure controls and
procedures are effective.
We also maintain a system of internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) of the Exchange Act). No changes in our internal control over financial
reporting occurred during the quarter ended September 30, 2009, that have materially affected, or
are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In April 2007, we received a request for arbitration filed by ScanCoin before the Arbitration
Institute of the Stockholm Chamber of Commerce regarding ownership of intellectual property related
to an agreement between Coinstar and ScanCoin dated April 23, 1993. The parties have selected
arbitrators, and we advanced partial payment for the arbitration. In August 2007, we received
ScanCoins statement of claim and we responded with our statement of defense in November 2007.
ScanCoin seeks a declaration of ownership of over 70 of our patents and patent applications related
to our coin-counting kiosks, as well as monetary damages of approximately 56 million Swedish kronor
(estimated to be approximately $8 million at September 30, 2009), plus interest. The arbitration
has been delayed until after December 2009, but no new date has been set. We believe that
ScanCoins claims against us are without merit and intend to defend ourselves vigorously in this
arbitration. In October 2007, we filed a claim in United States District Court for the Northern
District of Illinois against
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ScanCoin North America alleging that it is infringing on a patent we
own relating to self-service coin kiosks. The case is stayed pending resolution of the arbitration.
In October 2008, Redbox filed a complaint against Universal Studios Home Entertainment
(Universal Studios) in the U.S. District Court for the District of Delaware. Redbox is alleging
antitrust, copyright misuse, and tortious interference claims, in response to distribution terms
implemented or proposed by Universal Studios that would prohibit us from receiving delivery of
their DVD titles until several weeks following their release for sale. Redbox is seeking
injunctive relief, declaratory relief, money damages, attorneys fees and costs. In August 2009,
the court ruled on Universal Studios motion to dismiss, upholding our right to proceed on the
antitrust claim, but dismissing our claims for copyright misuse and tortious interference.
Universal Studios filed its answer to our complaint in August 2009. Redbox also filed separate
complaints against 20th Century Fox and Warner Home Video in August 2009, alleging substantially
similar claims to those in the Universal Studios litigation. 20th Century Fox and Warner Home Video
have each moved to dismiss our claims.
In
October
2009, an Illinois resident, Laurie Piechur, individually and on
behalf of all others similarly situated, filed a class action complaint against Redbox in the
Circuit Court for the Twentieth Judicial Circuit, St. Clair County, Illinois. The plaintiff
alleges that, among other things, Redbox charges consumers illegal and excessive late fees
in violation of the Illinois Consumer Fraud and Deceptive
Business Practices Act and other state statutes. We believe that the claims
against us are without merit
and intend to defend ourselves vigorously in this matter.
Item 1A. Risk Factors
In
connection with our Notes offering in September 2009, we substantially revised our risk
factors. These revised risk factors are disclosed in full below.
The termination, non-renewal or renegotiation on materially adverse terms of our contracts with one
or more of our significant retailers could seriously harm our business, financial condition and
results of operations.
The success of our business depends in large part on our ability to maintain contractual
relationships with our retailers in profitable locations. Our typical coin contract term ranges
from one to three years and automatically renews until we or the retailer gives notice of
termination. DVD contracts typically range from three to six years. Certain contract provisions
with our retailers vary, including product and service offerings, the service fees we are committed
to pay each retailer, frequency of service, and the ability to cancel the contract upon notice
after a certain period of time. We strive to provide direct and indirect benefits to our retailers
that are superior to or competitive with other providers or systems (including coin-counting
systems which retailers could operate themselves or through a third party) or alternative uses of
the floor space that our machines occupy. If we are unable to provide our retailers with adequate
benefits, we may be unable to maintain or renew our contractual relationships on acceptable terms
causing our business, financial condition and results of operations to suffer.
We do a substantial amount of our business with certain retailers. For example, we have
significant relationships with Wal-Mart Stores, Inc., Walgreen Co., and McDonalds USA, LLC, which
accounted for approximately 20%, 10% and 10% of our consolidated revenue, respectively, for the
nine months ended September 30, 2009. Our coin and DVD relationship with Walmart is governed by
contracts that provide either Coinstar or Walmart the right to terminate the contracts in their
entirety, or as to any store serviced by the contracts, with or without cause, on 90 days notice.
In addition, McDonalds USA has the right to terminate its contract with us with respect to all of
our DVD kiosks in a particular geographic market, with or without cause, on 90 days notice, in
which event we have the option to repurchase our kiosks on specified terms. Cancellation, adverse
renegotiation of or other changes to these relationships could seriously harm our business and
reputation.
There are many risks related to our DVD services business that may negatively impact our business.
The home video industry is highly competitive with many factors affecting our ability to
profitably manage our DVD services business. We have invested, and plan to continue to invest,
substantially to establish our nationwide infrastructure of DVD rental kiosks, and we currently
expect to have at least 22,000 installed DVD rental kiosks by the end of year 2009. The home video
distribution market is rapidly evolving as new technologies and distribution channels are being
developed to compete for market share. There is no assurance that the DVD rental kiosk channel will
maintain or achieve additional market share over the long-term, and if it does not, our business,
operating results and financial condition will be materially and adversely affected. Some of the
risks that could negatively impact our participation in this industry include:
| Competition from other providers, including those using other distribution channels, having more experience, greater or more appealing inventory, better financing, and better relationships with those in the movie industry, than we have, including: |
| traditional video retailers, like Blockbuster and other local and regional video stores, and other DVD kiosk businesses; | ||
| mail-delivery and online retailers like Netflix or Amazon; | ||
| other retailers like Walmart and other chain stores selling DVDs; | ||
| pay-per-view/cable/satellite and similar movie content providers like Comcast or HBO; | ||
| other forms of movie content providers like Internet sites including iTunes, YouTube, Hulu or Google; | ||
| noncommercial sources like libraries; and |
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| general competition from other forms of entertainment such as movie theaters, television, sporting events and video gaming. |
| Changes in consumer content delivery preferences, including DVDs with higher picture/sound quality (e.g., Blu-ray), disposable or download-to-burn DVDs, more use of personal video recorders (e.g., TiVo), pay-per-view/cable/satellite and similar technologies, computer downloads, online streaming, portable devices (e.g., iPhones), and other mediums, and less demand for high volume of new movie content due to such things as larger home DVD and downloaded movie libraries. | ||
| Increased availability of movie content inventory through personal video recorders, pay-per-view/cable/satellite and similar technologies, computer downloads, online streaming, portable devices, and other mediums. | ||
| Decreased quantity and quality of movie content availability for DVD distribution due to general-industry-related factors, including financial disruptions, labor conflicts (e.g., actor/writer strikes) or movie content failing to appeal to consumers tastes. | ||
| The risks described below in Our inability to receive delivery of DVDs on the date of their initial release to the general public, or shortly thereafter, for home entertainment viewing could adversely affect our DVD services business. and If we do not manage our DVD inventory effectively, our business, financial condition and results of operations could be materially and adversely affected. | ||
| Decreased costs related to purchasing or receipt of movie content, including less expensive DVDs, more aggressive competitor pricing strategies and piracy, and cheaper use of pay-per-view/cable/satellite, download and similar technologies. |
Adverse developments relating to any of these risks, as well as others relating to our
participation in the home video industry, could significantly affect our business, financial
condition and operating results.
Our inability to receive delivery of DVDs on the date of their initial release to the general
public, or shortly thereafter, for home entertainment viewing could adversely affect our DVD
services business.
Businesses that rent movies in physical formats such as DVDs currently enjoy a competitive
advantage over other movie distribution rental channels because of the early timing of the
distribution window for physical formats by movie studios. After the initial theatrical release of
a movie, the movie studios current practice is in most cases to make their movies available on
physical formats for a 30- to 45-day release window before release to other movie distribution
rental channels, such as pay-per view, video-on-demand, premium television, basic cable, and
network and syndicated television.
However, certain movie studios have begun to change and other movie studios could change their
practices, including shortening or discontinuing altogether, or otherwise restricting, movie
distribution windows, including simultaneous video-on-demand/computer downloads/online streaming
and DVD releases or making video-on-demand/computer downloads/online streaming available prior to
DVD release. For example, there have been recent announcements that certain movie studios have made
new release titles available on video-on-demand or for online purchase on the same date as the DVD
release. Further, certain studios have implemented or announced their intention to implement
policies to lengthen the time that certain video retailers (e.g., Redbox) must wait before renting
movies following their initial release on DVD to retailers. For example, our subsidiary, Redbox,
has filed separate complaints in federal court against Universal Studios Home Entertainment, Warner
Home Video and 20th Century Fox in response to distribution terms implemented or proposed by these
respective studios that would prohibit us from receiving delivery of DVD titles released by the
movie studios until 28 to 45 days following release of a title for sale on DVD format. Under
Universal Studios policy, Redbox would be required to wait at least 45 days following the initial
DVD release before making certain movie titles available and potentially in non-advantageous
quantities, and Warner and 20th Century Fox have also limited
distribution of DVDs to Redbox subject to similar policies. Policies
such as those of these three movie
studios may negatively impact our business because in those situations we must obtain DVD titles
from alternative sources often at a higher cost and often not in advantageous quantities, which
may negatively impact our margins in our DVD services business. Accordingly, if additional movie
studios that make up a significant source of the DVD titles that we distribute implement such
policies, such impact could be heightened. If we are not able to achieve an acceptable outcome or
reach an appropriate settlement with applicable movie studios seeking to delay or otherwise
restrict the availability of our access to DVD titles following their initial release date, we will
be forced to seek alternative sources for DVD releases. Obtaining DVDs from such sources may result
in higher costs to us, or we may not be able to obtain such DVDs at all, which would negatively
affect our DVD services business.
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If we do not manage our DVD inventory effectively, our business, financial condition and results of
operations could be materially and adversely affected.
A critical element of our DVD services business model is to optimize our inventory of DVD
titles and copy depth to achieve satisfactory availability rates to meet customer demand while also
maintaining our desired margins. If we do not timely acquire sufficient DVD titles, due to, for
example, not correctly anticipating demand, intentionally acquiring fewer copies than needed to
fully satisfy demand or the lack of available titles, we may not appropriately satisfy customer
demand, which could decrease customer satisfaction and we could lose customers to competitors.
Conversely, if we attempt to mitigate this risk and acquire a larger number of copies to achieve
higher availability rates for select titles or a wider range of titles, our inventory utilization
would become less efficient and our margins for DVD services would be adversely affected. Our
ability to accurately predict customer demand as well as market factors, such as our ability to
obtain satisfactory distribution arrangements, may impact our ability to timely acquire appropriate
quantities of certain DVD titles. In addition, if we are unable to obtain or maintain favorable
terms from our suppliers with respect to such matters as timely movie access, copy depth and
product returns, among others, or if the price of DVDs increases or decreases generally or for
certain titles, our inventories may become unbalanced and our margins may be adversely affected.
Any of these developments could have a material adverse effect on our business, financial condition
and results of operations.
For example, we have entered into licensing agreements with Sony Pictures Home Entertainment,
Lions Gate Films and Paramount Home Entertainment under which we agreed to license minimum
quantities of theatrical and direct-to-video DVDs for rental at our kiosks. Under the agreements,
the studios agreed to provide delivery of their DVDs by the street date, the first date on which
the DVD releases are available to the general public for home entertainment purposes on a rental
basis (and in the case of Paramount Home Entertainment, on either a rental or sell-through basis).
These agreements may be effective for up to five years (through the end of 2014, and in the case of
Paramount Home Entertainment, the agreement terminates in December 2009, unless earlier extended at
Paramounts option), but each of the movie studios have options to terminate the agreements in the
second half of 2011 pursuant to the terms of the respective agreements. Our business, financial
condition and results of operations could be materially and adversely affected if these agreements
do not provide the expected benefits to us. For example, if the titles or format provided are not
attractive to our customers, we will be required to purchase too many copies of undesirable titles
or an undesirable format, possibly in substantial amounts, which could adversely affect our DVD
services business by decreasing customer demand for offered DVD titles and customer satisfaction
with our services or negatively impacting margins. If studios elect to delay the general release of
DVDs to the rental market for significant periods after they are released for retail sales, demand
for rental of these titles may be adversely affected. In addition, we may incur non-cash increases
to operating expenses amortized over the terms of any such arrangements that also could have a
dilutive impact on our stockholders, such as the issuance of equity under our current contracts or
to the extent we enter into similar arrangements with other movie studios in the future. Further,
if some or all of these agreements prove beneficial but are early terminated, we could be
negatively impacted. Moreover, if we cannot enter into similar arrangements in the future with
these or other studios or distributors, our business could suffer.
If our sell-back prices to distributors continue to decrease or we are restricted from selling DVDs
at all, or if there is an increase in customer demand for titles or formats that are more expensive
for us to acquire, our margins in the DVD services business could be adversely affected.
Margins in our DVD services business are influenced in part by our ability to negotiate
favorable sell-back terms with certain distributions for DVDs at the end of their rental life. The
price at which we can sell back DVDs under these arrangements has declined in recent periods and in
certain instances we have entered into arrangements that require the destruction of certain DVD
titles at the end of their rental life. If these trends continue, or if we are otherwise restricted
from selling our previously-viewed DVDs to our distributors or customers, our operating results
could be adversely affected. Further, it is uncertain whether we will be able to negotiate purchase
and sell-back prices with our DVD distributors for new physical formats such as Blu-ray discs on
acceptable terms and in appropriate quantities that would allow us to be profitable under our
current business model. Increased market acceptance of Blu-ray discs could also put downward
pressure on our customers demand as well as the distributors sell-back price for
standard-definition DVDs. In addition, certain titles cost more for us to acquire, depending on the
source from which they are acquired and the terms on which they are acquired. If customer demand
for these titles increases, our content acquisition expenses could increase, and our margins could
be adversely affected. Titles released on the new high-definition formats, such as Blu-ray discs,
may be more expensive to acquire than titles released on standard-definition formats. The rate of
customer acceptance and adoption of these new formats or services is uncertain. If customers select
the new higher-cost, high-definition formats on a proportional basis more often than
standard-definition formats, and if we are unable to negotiate attractive purchase and sell-back
prices for both high- and standard-definition formats with our distributors, our actual content
acquisition expenses could increase and our margins in the DVD services business could be adversely
affected.
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Litigation, arbitration, mediation, regulatory actions, investigations or other legal proceedings
could result in material rulings, decisions, settlements, fines, penalties or publicity that could
adversely affect our business, financial condition and results of operations.
Our business has in the past been, and may in the future continue to be, party to class
actions, regulatory actions, investigations, arbitration, mediation and other legal proceedings.
The outcome of such proceedings is often difficult to assess or quantify. Plaintiffs, regulatory
bodies or other parties may seek very large or indeterminate amounts of money from us or
substantial restrictions on our business activities, and the results, including the magnitude, of
lawsuits, actions, settlements, decisions and investigations may remain unknown for substantial
periods of time. The cost to defend, settle or otherwise finalize lawsuits, regulatory actions,
investigations, arbitrations, mediations or other legal proceedings may be significant and such
proceedings may divert managements time. For example, we have been in dispute with a former
supplier, ScanCoin AB (ScanCoin), regarding certain contract rights and obligations as well as
ownership of certain of our patents and patent applications related to our coin-counting business.
ScanCoin is seeking a declaration of ownership of substantially all of our United States and
international patents related to certain aspects of self-service coin-counting, including machine
networking, fraud avoidance and voucher authentication, and monetary damages of approximately 56
million Swedish kronor, plus interest (estimated to be approximately $8 million using exchange
rates as of September 30, 2009). The arbitration hearing date for this matter has been delayed
until after December 2009; but no new date has been set. Coinstar has filed a claim in United
States District Court against ScanCoin North America alleging infringement on one of our patents
relating to self-service coin machines. In addition, as discussed above in the risk factor
entitled, Our ability to receive delivery of DVDs on the date of their initial release to the
general public for home entertainment viewing could adversely affect our DVD services business,
our subsidiary Redbox has filed separate actions in federal court against certain movie studios
relating to new distribution terms implemented or proposed by such studios that would restrict
certain rental and sales practices associated with the DVD releases of those studios. We have
incurred and expect to incur significant costs relating to these disputes, and cannot be sure of
when they will be resolved, and if resolved, the magnitude of the effects the ultimate resolutions
will have on our business, which could be significant. In addition, there may be adverse publicity
associated with such developments that could decrease customer acceptance of our products and
services. As a result, litigation, arbitration, mediation, regulatory actions or investigations
involving us or our affiliates may adversely affect our business, financial condition and results
of operations.
Our most extensive business relationship is with Walmart, and changes to this relationship have had
and are expected to continue to have material effects on our operations and results.
A significant amount of our resources are committed to our relationship with Walmart,
including investments in machines and other equipment and managements time. In late 2007 and early
2008, we and Walmart worked extensively to revise our business arrangements in connection with
Walmarts efforts to reset and optimize its store entrances. As part of these arrangements and in
light of the successful completion of our coin and DVD tests in hundreds of Walmart locations, we
amended written agreements covering, among other things, the installation and service of
coin-counting machines and DVD kiosks. At September 30, 2009, we had over 3,300 coin-counting units
installed and over 4,300 DVD kiosks installed in Walmart locations. We have substantially completed
the roll-out of DVD kiosks, and expect to complete the roll-out of approximately 100 additional
coin-counting units in the fourth quarter of 2009. As a result, we have made and are continuing to
make significant investments, such as machine and kiosk manufacturing, in line with these expected
installations.
Although we have had and expect to continue to have a successful relationship with Walmart,
changes to this relationship will continue to occur both in the long and short-term, some of which
could adversely affect our business. Our relationship with Walmart is governed by contracts that
provide either Coinstar or Walmart the right to terminate the contracts in their entirety, or as to
any store serviced by the contracts, with or without cause, on 90 days notice. Further, because
our formal arrangements with Walmart are generally for relatively short periods and do not provide
for minimum installation obligations by Walmart, much of our benefit in this relationship will
depend on the continued installation of significant numbers of our coin-counting machines and DVD
kiosks.
If we cannot manage our growth effectively, we could experience a material adverse effect on or
business, financial condition or results of operations.
We have experienced substantial growth in our business over the last two years, particularly
due to our acquisition and the rapid expansion of Redbox. This growth, including the integration of
Redbox, has placed and may continue to place significant demands on our operational, financial and
administrative infrastructure and our management. As our operations have grown in size, scope and
complexity, we have focused on integrating as appropriate and improving and upgrading our systems
and infrastructure, both those relating to providing attractive and efficient customer products and
services and those relating to our administration and internal systems, processes and controls. For
example, management has had to adapt to and
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provide for oversight of a more decentralized
organization as Redboxs operations have remained primarily in Oakbrook Terrace, Illinois, while
Coinstars corporate headquarters and coin operations have remained in Bellevue, Washington. This
integration and expansion of our administration, processes, systems and infrastructure have
required us to commit and will continue to cause us to commit substantial financial, operational
and technical resources to managing our business. Further, our growth could strain our ability to
maintain popular and reliable product and service levels for our customers, develop and improve our
operational, financial and management controls in a timely and efficient manner, enhance our
reporting systems and processes as may be required, and recruit, train and retain highly skilled
personnel. Also, while we believe that the total addressable market for DVD rental kiosks is large,
we cannot be certain about its size or the most effective plan for locating kiosks. Because of our
limited operating history and because the DVD rental kiosk market and our business model for DVD
services is rapidly evolving, we have very limited data and track records for predicting kiosk and
market performance in future periods. As a result, we may make errors in predicting and reacting to
relevant business trends which could have a material adverse effect on our business, financial
condition and results of operations. For example, we may, among other things, over-install kiosks
in certain geographic areas leading to non-accretive installations.
Managing our growth will require significant expenditures and allocation of valuable
management resources. If we fail to achieve the necessary level of efficiency in our organization
as we continue to integrate Redbox and otherwise appropriately grow business lines, our business,
operating results and financial condition could be harmed.
We have substantial indebtedness.
On November 20, 2007, we entered into a senior secured revolving credit facility, which
replaced a prior credit facility. The credit facility provided for a term loan, as well as a $400.0
million revolving line of credit. On April 29, 2009, we amended and restated our credit facility
to, among other things, provide for a new two-year $87.5 million term loan, the proceeds of which,
net of fees and closing costs, were used to pay a portion of the deferred consideration payable by
us in connection with our purchase of the outstanding interests in Redbox. We paid the term loan
off in the third quarter of 2009 using the proceeds from our convertible debt offering. As of
September 30, 2009, $400.7 million was outstanding under our revolving line of credit and
convertible debt. In addition, under the revolving credit facility we may generally prepay amounts
borrowed without premium or penalty. The credit facility bears interest at variable rates
determined by prevailing interest rates and our leverage ratio. As a result, our costs of borrowing
are exposed to risks of fluctuations in interest rates, as well as our financial condition and
operating results, which affect our leverage ratio. Loans made pursuant to the credit facility are
secured by a first priority security interest in substantially all of our assets and substantially
all of the assets of our domestic subsidiaries, as well as a pledge of a substantial portion of our
subsidiaries capital stock.
This credit facility may limit our ability to obtain future financings or may negatively
impact our business, financial condition, results of operations and growth. Due to substantial
financial leverage, we may not be able to generate sufficient cash flow to service the
indebtedness, or to adequately fund our operations. Moreover, the credit facility contains negative
covenants and restrictions relating to such things as certain stock repurchases, liens,
investments, capital expenditures, other indebtedness, payments of dividends, and fundamental
changes or dispositions of our assets that could impair our flexibility to pursue growth
opportunities. In addition, the credit facility requires that we meet certain financial covenants,
including a maximum consolidated leverage ratio and a minimum consolidated interest coverage ratio,
all as defined in the credit facility. If the financial covenants are not met or any other event of
default occurs under the credit facility, our lenders would be entitled to declare our indebtedness
immediately due and payable and exercise other remedies.
We may be unable to identify and define product and service trends or anticipate, gauge and react
to changing consumer demands in a timely manner.
Our strategy is based upon leveraging our core competencies in the automated retail space to
provide the consumer with convenience and value and to help retailers drive incremental
traffic and revenue. If we cannot execute on our strategy, our business could suffer. To be
competitive, we need to develop or otherwise provide new product and service offerings that are
accepted by the market and establish third-party relationships necessary to develop and
commercialize such product and service offerings. For example, our DVD kiosks must make available
on a timely basis a variety of movie titles to a broad range of customers whose preferences cannot
be predicted with certainty and are subject to change. If we misjudge the market for our products
and services or if a contract with a significant retailer is renegotiated, we may be faced with
significant excess inventories for some products, such as DVDs and missed opportunities for sales
of other products and services. In addition, if we fail to timely establish or maintain
relationships with significant suppliers, we may not be able to provide our customers with
desirable products and services such as various movie titles or formats. Further, in order to
develop and commercialize new products and services, including our money transfer business, we will
need to enhance the capabilities of our coin-counting machines and e-payment machines and
equipment, as well as our related networks and systems through appropriate technological solutions,
and establish market acceptance of such products or services. We cannot assure you that new
products or services that we provide will be successful.
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Utilization of our deferred tax assets may be limited and is dependent on future taxable income.
As of September 30, 2009, our deferred tax assets included approximately $282.2 million of net
operating losses (NOL); however, a valuation allowance is recorded against the use of foreign
NOLs in the amount of $33.6 million, leaving $248.6 million of NOLs expected to be realized.
Deferred tax assets also include $8.2 million of tax credit carryforwards. The tax credits consist
of $1.5 million of foreign tax credits that expire from the years 2016 to 2019, $2.2 million of
research and development tax credits that expire from the years 2011 to 2030 and $4.5 million of
alternative minimum tax credits that do not expire. If we fail to generate profits in the
foreseeable future, our deferred tax assets may not be fully utilized, if at all. Further, there
can be no assurance that we will have sufficient taxable income in future years to use the NOL and
tax credit carryforwards before they expire.
We will evaluate our ability to utilize our NOL and tax credit carryforwards in future periods
and, in compliance with FASB ASC 740, Accounting for Income Taxes , record any resulting
adjustments that may be required to deferred income tax expense. In addition, we will reduce our
deferred income tax assets for the benefits of NOL and tax credit carryforwards actually used in
future periods and will recognize and record federal and state income tax expense at statutory
rates in future periods. If, in the future, we determine, based on our assessment of both positive
and negative evidence and objective and subjective evidence, which takes into consideration our
forecasted taxable income, that it is more likely than not that we will not realize all or a
portion of the deferred tax assets, we will record a valuation allowance against deferred tax
assets, which would result in a charge to income tax expense. A plan for the utilization of our NOL
and tax credit carryforwards may not be successfully implemented or may not result in any increase
in shareholder value.
A governmental authority could challenge the amount of our NOL and tax credit carryforwards, or tax
laws, regulations or interpretations could change, negatively impacting our NOL or tax credit
carryforwards.
The amount of our NOL and tax credit carryforwards has not been audited or otherwise validated
by the Internal Revenue Service (the IRS). The IRS could challenge the amount of our NOL and tax
credit carryforwards, which could significantly reduce our NOL and tax credit carryforwards.
Further, revisions in U.S. federal tax laws, regulations or interpretations thereof could adversely
impair our ability to use the tax benefits associated with NOL and tax credit carryforwards. In
addition, Section 382 of the Internal Revenue Code of 1986, as amended (the Code), imposes
certain limitations on NOL carryforwards in the event of an ownership change. Calculating whether
an ownership change has occurred is subject to uncertainty, both because of the complexity and
ambiguity of Section 382, and because of limitations on a publicly traded companys knowledge as to
the ownership of and transactions in, its securities. Therefore, the calculation of the amount of
our NOL and tax credit carryforwards may be changed as a result of a challenge by a governmental
authority or our learning of new information about the ownership of, and transactions in, our
securities.
We recently experienced changes in our senior management team. The loss of key personnel or the
inability of replacements to quickly and successfully perform in their new roles could adversely
affect our business.
During 2009, we experienced significant changes in our senior management team, most notably
the transition of Paul Davis to Coinstars chief executive officer from chief operating officer of
Coinstar, and the appointment of Gregg Kaplan as Coinstars president and chief operating officer
and John Harvey as Coinstars chief financial officer (formerly chief executive officer and chief
financial officer of Redbox, respectively). Further, on September 6, 2009, John Harvey gave notice
of his decision to leave Coinstar and we have begun the search process to find a replacement for
Mr. Harvey. Mr. Harvey submitted his resignation effective November 9, 2009. Mr. Harvey stated that
his decision to leave Coinstar was because of the extensive time his position required him to spend
away from his family as he commuted from Redbox in Illinois to Coinstar headquarters in Bellevue,
Washington on a weekly basis. Further changes in senior management could result in disruptions to
our operations. If we lose (including due to the stress of travel between Redbox and Coinstar
locations which various management frequently undertakes) or terminate the services of one or more
of our current executives or key employees or if one or more of our current or former executives or
key employees joins a competitor or otherwise leaves or competes with us, it could harm our
business and our ability to successfully implement our business plan. Additionally, if we are
unable to timely hire qualified replacements for our executive and other key positions, our ability
to execute our business plan could be harmed. Even if we can timely hire qualified replacements, we
would expect to experience operational disruptions and inefficiencies during any transition.
Competitive pressures could seriously harm our business, financial condition and results of
operations.
Our coin-counting services faces competition from supermarkets, banks and other companies that
purchase and operate coin-counting equipment from companies such as ScanCoin, Cummins-Allison
Corporation and others. Our retailers may choose to replace our coin-counting machines with
competitor machines and operate such machines themselves or through a
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third party, or not carry
coin-counting machines at all deciding that floor space could be used for other purposes. In
addition, retailers, some of which have significantly more resources than we do, may decide to
enter the coin-counting market. Some banks and other competitors already provide coin-counting free
of charge or for an amount that yields very low margins or that may not generate a profit at all.
An expansion of the coin-counting services provided or a reduction in related fees
charged by any of these competitors or retailer decisions to use floor space for other than
coin-counting, could materially and adversely affect our business and results of operations.
Our DVD business faces competition from many other providers of movie content, from
traditional stores, such as Blockbuster and Hollywood Video, to other self-service kiosks, such as
Blockbuster Express, to online or postal providers, such as Netflix, to other movie distribution
rental channels, such as pay-per-view, video-on-demand, online streaming, premium television, basic
cable, and network and syndicated television, many of whom may be more experienced in the business
or have more resources than we do or otherwise compete with us in this segment of our business as
described above.
Our e-payment services, including our money transfer services, prepaid wireless and long
distance accounts, stored value cards, debit cards and payroll services, face competition from a
variety of types of providers, including, among others, national distributors of similar cards,
other retailers who provide these services themselves, as well as money transfer companies. Many of
these providers are more established in selling their e-payment services than we are and many
invest more resources in providing such services to customers, such as InComm in the prepaid
wireless and long distance markets, Blackhawk Network in the stored value cards and debit card
markets and Western Union in the money transfer market. In addition, in order for us to provide
many of our e-payment services, we depend on relationships with third parties, such as national
wireless carriers, national supermarket chains and other retailers, money transfer agents and
financial institutions. Accordingly, if we are unable to effectively market our e-payment services
or maintain and establish successful relationships with appropriate third parties or our
competitors provide better terms, our e-payment services will not be competitive. Moreover, since
we have announced that we are currently considering strategic alternatives for our e-payment and
money transfer businesses, competitors may seek to take advantage of this announcement by
encouraging retailers and other third parties to either terminate or
not renew existing contracts.
In addition, the nature and extent of consolidations and bankruptcies, which often occur
during or as a result of economic downturns such as the recent crisis, in markets where we install
our machines and equipment, particularly the supermarket and other retailing industries, could
adversely affect our operations, including our competitive position, as the number of installations
and potential retail users of our machines and equipment could be significantly reduced. See the
risk factor below entitled, Events outside of our control, including the current economic
environment, has and could continue to negatively affect customers use of our products and
services.
We may be unable to adequately protect or enforce our patents and other proprietary rights.
Our success depends, in part, on our ability to protect our intellectual property and maintain
the proprietary nature of our technology through a combination of patents, licenses and other
intellectual property arrangements, without infringing the proprietary rights of third parties. We
have over 90 United States and international patents related to aspects of self-service
coin-counting, including patents regarding machine networking, fraud avoidance and voucher
authentication, and an additional four United States and international patents related to aspects
of our DVD business. We also have additional patents and patent applications pending in the United
States and several foreign jurisdictions directed to our coin-counting, DVD and e-payment
technologies. In addition, we may apply for or obtain (through development, acquisition or
otherwise) additional patents regarding technologies used in our business.
Our patents may not be held valid if challenged, our patent applications may not be issued,
and other parties may claim rights in or ownership of our patents and other proprietary rights.
Since many patent applications in the United States are not publicly disclosed until 18 months
after the patent has been applied for, others may have filed applications, which, if issued as
patents, could cover our products or technology. Patents issued to us may be circumvented or fail
to provide adequate protection of our technologies. Our competitors might independently develop or
patent technologies that are substantially equivalent or superior to our technologies. Further,
since patent terms are limited, other parties may begin practicing our patented technologies when
our related patents expire. For example, our United States patent rights based on our original
patent application primarily relating to our coin-counting business will expire in September 2012
and a patent relating to Redboxs Rent and Return Anywhere feature will expire in June 2010.
In addition, certain parties may assert claims of patent infringement or misappropriation
against us based on current or pending United States or foreign patents, copyrights or trade
secrets, or contracts. If such claims were successful, our business could be harmed. Defending our
company and our retailers against these types of claims, regardless of their merits, could require
us to incur substantial costs and divert the attention of key personnel. Parties making these types
of claims may be able to obtain injunctive or other equitable relief, which could effectively block
or impair our ability to provide our coin-
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counting, DVD or e-payment services, in the United States
or abroad. Such claims could also result in an award of substantial damages. If third parties have
or obtain proprietary rights that our products infringe, we may be unable to obtain necessary
licenses from others at a reasonable cost or at all. For example, we have been in dispute with a
former supplier, ScanCoin, regarding certain contract rights and obligations as well as ownership
of certain of our patents and patent applications related to our coin-counting business as
described above. In addition, if we instigate litigation to enforce our patents or protect our
other proprietary rights, or to determine the validity and scope of other parties proprietary
rights, such litigation could cause
us to spend significant financial and management resources. For example, we filed a claim in
the federal court against ScanCoin North America alleging that it is infringing on a patent we own
related to self-service coin machines. We also rely on trademarks, copyrights, trade secrets and
other intellectual property to develop and maintain our competitive position. Although we protect
our intellectual property in part by confidentiality agreements with our employees, consultants,
vendors and corporate partners, these parties may breach these agreements. We may have inadequate
remedies for any such breach and our trade secrets may otherwise become known or be discovered
independently by our competitors. The failure to protect our intellectual property rights
effectively or to avoid infringing the intellectual property rights of others, as well as
unfavorable rulings or settlements, could seriously harm our business, financial condition and
results of operations.
We may be unable to attract new retailers and penetrate new markets and distribution channels.
In order to increase our coin-counting, DVD, money transfer and e-payment services machine and
equipment installations, we need to attract new retailers and develop operational or unit
production cost efficiencies that make it feasible for us to penetrate lower density markets or new
distribution channels, such as coin-counting machines in banks and credit unions and DVD kiosks in
convenience stores. We may be unable to attract new retailers or drive down costs relating to the
manufacture, installation or servicing of coin-counting, DVD, money transfer and e-payment services
machines and equipment to levels that would enable us to operate profitably in lower density
markets or penetrate new distribution channels. If we are unable to do so, our future operating
results could be adversely affected.
Payment of increased service fees to retailers could negatively affect our business results.
We face ongoing pricing pressure from our retailers to increase the service fees we pay to
them on coin-counting, DVD, money transfer and e-payment products and services or to make other
financial concessions to win or retain business. If we are unable to respond effectively to ongoing
pricing-related pressures, we may fail to win or retain certain accounts. Our fee arrangements are
based on our evaluation of unique factors with each retailer, such as total revenue, e-payment
capabilities, long-term non-cancelable contracts, installation of our machines and equipment in
high-traffic, urban or rural locations and new product and service commitments. Together with other
factors, an increase in service fees paid or other financial concessions made to our retailers
could significantly increase our direct operating expenses in future periods and harm our business.
Events outside of our control, including the current economic environment, has and could continue
to negatively affect customers use of our products and services.
Our customers use of many of our products and services is dependent on discretionary
spending, which is affected by, among other things, economic and political conditions, consumer
confidence, interest and tax rates, and financial and housing markets. With increased economic
pressures recently affecting more and more of our potential customers, we have been negatively
impacted by more conservative purchasing tendencies over the last year and expect that fewer
non-essential products and services will be purchased during the coming periods if the current
economic environment continues. In addition, because our business relies in part on customers
initially visiting retailers to purchase products and services that are not necessarily our
products and services, the fact that people are generally visiting retailers less frequently and
being more careful with their money when they do, is also negatively impacting our business. For
example, revenues of our coin-counting services business decreased during 2008 and 2009, which
could partially be a result of less foot traffic at our retailers locations.
Further, our ability to obtain additional funding in the future, if and as needed, through
equity issuances or loans, or otherwise meet our current obligations to third parties could be
adversely affected if the economic environment continues to be difficult. In addition, the ability
of third parties to honor their obligations to us could be negatively impacted, as retailers,
suppliers and other parties deal with the difficult economic environment as well. Finally, there
may be consequences that will ultimately result from the current economic conditions that are not
yet known, and any one or more of these unknown consequences (as well as those currently being
experienced) could potentially have a material adverse effect on our financial condition, operating
results and liquidity as well as our business generally.
Defects, failures or security breaches in and inadequate upgrade of or changes to our operating
systems could harm our business.
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The operation of the coin-counting, DVD, money transfer and e-payment machines and equipment
relating to our business, depends on sophisticated software, hardware, computer networking and
communication services that may contain undetected errors or may be subject to failures or
complications. These errors, failures or complications may arise particularly when new, changed or
enhanced products or services are added. In the past, there have been limited delays and
disruptions resulting from upgrading or improving these operating systems. Future upgrades,
improvements or changes that may be necessary to expand and maintain our business could result in
delays or disruptions or may not be timely or appropriately made, any of which could seriously harm
our operations.
Certain aspects of the operating systems relating to our business are outsourced to
third-party providers, including long-distance telecommunications. Accordingly, the effectiveness
of these operating systems is to a certain degree dependent on the actions and decisions of
third-party providers.
Further, while we have taken significant steps to protect the security of operating systems
and have established certain back-up systems and disaster recovery procedures, service disruptions
may result from intentional or unintentional acts of third parties, computer viruses, natural
disasters, or other causes which are beyond our control. Any service disruptions, whether due to
errors or delays in or failure to adequately upgrade software or computing systems, interruptions
or breaches in the communications network, inadequate back-up or disaster recovery, or security
breaches of the computer network systems, caused by us or third parties, could seriously harm our
business, financial condition and results of operations.
Failure to adequately comply with information security policies or to safeguard against breaches of
such policies could adversely affect our operations and could damage our business, reputation,
financial position and results of operations.
As our business expands to provide new products and services, including additional money
transfer, e-payment and DVD services, we are increasing the amount of consumer data that we
collect, transfer and retain as part of our business. These activities are subject to laws and
regulations, as well as industry standards, in the United States and other jurisdictions in which
our products and services are available. These requirements, which often differ materially and
sometimes conflict among the many jurisdictions in which we operate, are designed to protect the
privacy of consumers personal information and to prevent that information from being
inappropriately used or disclosed. We maintain and review technical and operational safeguards
designed to protect this information and require third party vendors and others with whom we work
to do so as well. However, despite those safeguards, it is possible that hackers, employees acting
contrary to our policies, third-party agents or others could improperly access relevant systems or
improperly obtain or disclose data about our customers, or that we may be determined not to be in
compliance with applicable legal requirements and industry standards for data security, such as the
Payment Card Industry guidelines. Any breach of relevant security policies that compromises
consumer data or determination of non-compliance with applicable legal requirements or industry
standards for data security could expose us to regulatory enforcement actions, card association or
other monetary fines or sanctions, or contractual liabilities, limit our ability to provide our
products and services, subject us to litigation and damage our reputation.
Lack of consumer confidence, whether real or perceived, in our coin-counting machines could harm
our business.
The accuracy of the coin-counting functionality of our machines is important to consumers and
our retailers. The failure to maintain consumer confidence in our technology and systems could harm
our business. Our inability to collect the data from our coin-counting machines could lead to a
delay in processing coins and crediting the accounts of our retailers for vouchers that have
already been redeemed. Any inaccuracy, loss or delay in collecting or processing coin data could
seriously harm our operations.
Our future operating results may fluctuate.
Our future operating results will depend significantly on our ability to continue to drive new
and repeat use of our coin-counting and DVD, our ability to develop and commercialize new products
and services and the costs incurred to do so, and our ability to successfully integrate newer lines
of business into our operations, including, for example, DVD and money transfer services. Our
operating results have a history of fluctuating and may continue to fluctuate based upon many
factors, including:
| relationships with manufacturers and suppliers; | ||
| fluctuations in revenue generated by our coin-counting, DVD, money transfer and e-payment products and services; | ||
| our ability to establish or maintain relationships with significant retailers on acceptable terms; |
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| the amount of service fees that we pay to our retailers; | ||
| the transaction fees we charge consumers to use our services; | ||
| fluctuations in consumer spending patterns; | ||
| the successful operation of our coin-counting, DVD, money transfer and e-payment network; | ||
| fluctuations in operating expenses caused by various factors, including petroleum costs, labor costs and transportation costs; | ||
| the commercial success of our retailers, which could be affected by such factors as general economic conditions, severe weather or strikes; | ||
| the level of product and price competition; | ||
| fluctuations in interest rates, which affects our debt service obligations; | ||
| the timing of, and our ability to develop and successfully commercialize, new or enhanced products and services; | ||
| activities of and acquisitions or announcements by competitors; and | ||
| the impact from any impairment of inventory, goodwill, fixed assets or intangibles related to our acquisitions. |
In addition, we have historically experienced seasonality in our revenues, with higher
revenues in the second half of the year. Our coin product line generally experiences its highest
revenues in the third calendar quarter, followed by the fourth calendar quarter, and relatively
lower revenues in the first half of the year. Our DVD product line generates higher revenues in the
second half of the year. Our e-payment and money transfer product lines generally provide their
highest revenues in the fourth quarter. We expect our results of operations will continue to
fluctuate as a result of seasonal fluctuations and our revenue mix between relatively higher margin
coin and DVD product lines, and relatively lower margin e-payment and money transfer product lines.
We depend upon third-party manufacturers, suppliers and service providers for key components and
substantial support for our coin-counting, e-payment and DVD services machines and equipment.
We conduct limited manufacturing operations and depend on outside parties to manufacture key
components of our coin-counting, DVD, e-payment services machines and equipment. We intend to
continue to expand our installed base of machines and equipment. Such expansion may be limited by
the manufacturing capacity of our third-party manufacturers and suppliers. Third-party
manufacturers may not be able to meet our manufacturing needs in a satisfactory and timely manner.
If there is an unanticipated increase in demand for coin-counting or e-payment machines or DVD
kiosks, we may be unable to meet such demand due to manufacturing constraints.
Some key hardware components used in the coin-counting, DVD and e-payment machines are
obtained from a limited number of suppliers. We may be unable to continue to obtain an adequate
supply of these components in a timely manner or, if necessary, from alternative sources. If we are
unable to obtain sufficient quantities of components or to locate alternative sources of supply on
a timely basis, we may experience delays in installing or maintaining coin-counting, DVD or
e-payment machines, any of which could seriously harm our business, financial condition and results
of operations.
In addition, we rely on third-party service providers for substantial support and service
efforts that we currently do not provide directly. In particular, we contract with third-party
providers to arrange for pick-up, processing and deposit of coins as well as limited servicing of
our machines. We generally contract with a single transportation provider and coin processor to
service a particular region and either party generally can terminate the contracts with advance
notice ranging from 30 to 90 days. We do not currently have, nor do we expect to have in the
foreseeable future, the internal capability to provide back-up coin processing service in the event
of a sudden disruption in service from a commercial coin processor. Any failure by us to maintain
our existing coin processing relationships or to establish new relationships on a timely basis or
on acceptable terms could harm our business, financial condition and results of operations.
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We are subject to substantial federal, state, local and foreign laws and government regulation
specific to our business.
Our business is subject to federal, state, local and foreign laws and government regulation
relating to coins, vehicle safety, access to machines in public places, charitable fundraising, the
transfer of money or things of value, currency controls, weights and measures, payment cards and
other payment instruments, sweepstakes, contests, consumer protection, consumer privacy, data
protection and information security. The application of existing laws and regulations, changes in
or enactment of new laws and regulations that apply or may in the future apply to our current or
future products or services, changes in governmental authorities interpretation of the application
of various government regulations to our business, or the failure or inability to gain and retain
required permits and approvals could materially and adversely affect our business. In addition,
many jurisdictions require us to obtain certain licenses in connection with the operations of our
coin-counting and e-payment and money transfer services. For example, we have obtained licenses in
those states and the District of Columbia which require licenses with regard to provision of some
of our e-payment services, including stored value card and money transfer transactions. There can
be no assurance that we will be granted all necessary licenses or permits in the future, that
current licenses or permits will be renewed or that regulators will not revoke current licenses or
permits. Given the unique nature of our business and new products and services we may develop or
acquire in the future, the application of various laws and regulations to our business is
uncertain. Further, as governmental and regulatory scrutiny and action with regard to many aspects
of our business increase, we expect that our costs of complying with the applicable legal
requirements will increase, perhaps substantially.
Failure to comply with these laws and regulations could result in, among other things,
revocation of required licenses or permits, loss of approved status, termination of contracts,
administrative enforcement actions and fines, class action lawsuits, cease and desist orders and
civil and criminal liability. The occurrence of one or more of these events, as well as the
increased cost of compliance, could materially adversely affect our business, financial condition
and results of operations.
There are risks associated with conducting our business and sourcing goods internationally.
We currently have coin operations in Canada and the United Kingdom and Ireland and DVD
operations in the United Kingdom. We expect to continue increasing our deployment of machines and
equipment internationally. In addition, as of September 30, 2009, our money transfer services are
offered in approximately 140 countries. Accordingly, political uncertainties, economic changes,
civil unrest, exchange rate fluctuations, restrictions on the repatriation of funds, adverse
changes in legal requirements, including tax, tariff and trade regulations, difficulties with
foreign distributors and other difficulties in managing an organization outside the United States,
could seriously harm the development of our business and ability to operate profitably. Further, as
we do more business in an increasing number of countries, our business becomes more exposed to the
impact of the political and economic uncertainties, including government oversight, of foreign
jurisdictions.
We purchase products from vendors that obtain a significant percentage of such products from
foreign manufacturers. As a result, we are subject to changes in governmental policies, exchange
rate fluctuations, various product quality standards, the imposition of tariffs, import and export
controls, transportation delays and interruptions and political and economic disruptions which
could disrupt the supply and timely delivery of products manufactured abroad. In addition, we could
be affected by labor strikes in the sea shipping, trucking and railroad industries. A reduction or
interruption in supplies or a significant increase in the price of one or more supplies could have
a material adverse effect on our business.
Our money transfer services business requires us to meet specific federal, state, local and foreign
laws and government regulations, subjecting us to additional risk.
The money transfer industry is heavily regulated, both in the United States and
internationally. We operate our money transfer services business under the authority of the
licenses and approvals that we have obtained where required from the various jurisdictions in which
we operate. There is no assurance that we will be able to maintain these licenses and approvals in
the future.
In operating the money transfer services business in the United States for example, we are
responsible for compliance with a variety of state laws and regulations, including licensing
requirements, applicable to the business. In addition, we are subject to United States federal
anti-money laundering laws, including United States Department of the Treasury registration
requirements and reporting requirements for suspicious and certain other transactions, and the
requirements of the Office of Foreign Assets Control, which prohibit transmitting money to
specified countries or to or on behalf of prohibited individuals or entities. If we were to
transmit money to or on behalf of, or otherwise conduct business with, a prohibited individual or
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entity, we could be required to pay significant damages, including fines and penalties, and our
ability to conduct business in the United States and other jurisdictions could be limited. The USA
PATRIOT Act and the U.S. Bank Secrecy Act mandate
several anti-money laundering requirements. Any violation of anti-money laundering laws could
lead to significant penalties, and could limit our ability to conduct business in the United States
and other jurisdictions.
In addition, the money transfer industry is subject to international regulation, which varies
from country to country. In certain countries in which we operate, we are required to maintain
licenses or other governmental approvals in order to operate this business. As described above, we
are responsible for compliance with these laws and regulatory requirements in those countries in
which we operate the money transfer services business. Although most countries in which we operate
this business do not regulate this business to the same degree as the United States, this could
change in the future.
Failure to comply, or as discussed below the failure of a money services business that we have
acquired to comply before our acquisition, with the laws and government regulations in
jurisdictions in which we operate, or in which the acquired company operated the money transfer
services business could result in, among other things, revocation of required licenses or
registrations, loss of approved status, termination of contracts with banks or retail
representatives, administrative enforcement actions and fines, penalties or other damages, class
action lawsuits, cease and desist orders, and/or other civil and criminal liability. The occurrence
of one or more of these events could adversely affect our business, financial condition and results
of operations. Furthermore, additions to or changes in the laws, regulations or other industry
practices and standards in the United States or any of the foreign countries in which the money
transfer services business operates could also increase our compliance and other costs of doing
business, require significant systems redevelopment, reduce the market for or value of our products
or services or render our products or services less profitable or obsolete, lead to a loss of
agents, and have an adverse effect on our results of operations.
Our money transfer service is and will remain reliant on an effective agent network.
Substantially all of the money transfer services revenue is generated through an agent network
spanning approximately 140 countries as of September 30, 2009. Agents include banks and other
financial institutions, regional micro-finance companies, chain stores and local convenience
stores. Transaction volumes at existing agent locations often increase over time and new agents
provide us with additional revenue. If agents decide to leave our network, or if we are unable to
sign new agents, our revenue and profit growth rates may be adversely affected. Agent attrition
might occur for a number of reasons, including a competitor engaging an agent or an agents
dissatisfaction with its relationship with us or the revenue derived from that relationship. In
addition, agents may generate fewer transactions or less revenue for various reasons, including
changes in economic circumstances affecting customers and potential customers, the appearance of
competitors close to our agent locations or increased competition. Because an agent is a third
party that engages in a variety of activities in addition to providing our services, an agent may
encounter business difficulties unrelated to its provision of our services, which could cause the
agent to reduce its number of locations, hours of operation, or cease doing business altogether.
Moreover, we could suffer financial loss and additional liability from the failure for any reason
of our agents to provide good funds in a money transfer. The failure of the agent network to meet
our expectations regarding revenue production and business efficiencies may negatively impact our
business, financial condition and results of operations.
Further, failure, either intentional or unintentional, by our agents to comply with the laws
and regulatory requirements of applicable jurisdictions, including anti-money laundering, consumer
privacy and information security restrictions, in connection with our money transfer services
business or otherwise, could result in, among other things, revocation of required licenses or
registrations, loss of approved status, termination of contracts with third parties, administrative
enforcement actions and fines, seizure or forfeiture of our funds, class action lawsuits, cease and
desist orders and civil and criminal liability, as well as damage to our reputation. The occurrence
of one or more of these events could materially adversely affect our business, financial condition
and results of operations.
Our business involves the movement of large sums of money, and, as a result, our business is
particularly dependent on our ability to process and settle transactions accurately and
efficiently.
Our business involves the movement of large sums of money. For example, our money transfer
services revenues consist primarily of transaction fees that are charged for the movement of money.
These transaction fees represent only a small fraction of the total amount of money that is moved.
Further, our coin-counting and DVD services businesses require the effective transfer of large sums
of money between many different locations as well. Because we are responsible for large sums of
money that often are substantially greater than the revenues generated, the success of our business
particularly depends upon the efficient and error-free handling of the money that is remitted and
that is used to clear payment instruments or complete transfers. We rely on the ability of our
agents and employees and our operating systems and network to process these transactions in an
efficient, uninterrupted and error-free manner. In addition, we rely on third-party vendors in our
business, including, among others, clearing banks which clear our money orders, official checks and
money transfers, and
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certain of our telecommunication providers. In the event of a breakdown,
catastrophic event, security breach, improper operation or any other event impacting our systems or
network or our vendors systems or processes, or improper or other actions taken by our agents,
employees, or third party vendors, we could suffer financial loss, loss of customers, regulatory
sanctions and damage to our reputation.
Our customers ability to access our products and services can be adversely affected by severe
weather, natural disasters and other events beyond our control, such as fires, power failures,
telecommunication loss and terrorist attacks.
Our operational and financial performance is a direct reflection of customer use of and the
ability to operate and service the coin-counting, DVD, money transfer and e-payment services
machines and equipment used in our business. Severe weather, natural disasters and other events
beyond our control can, for extended periods of time, significantly reduce customer use of our
products and services as well as interrupt the ability of our employees and third-party providers
to operate and service our equipment and machines. In some cases, severe weather, natural disasters
and other events beyond our control may result in extensive damage to or destruction of our
infrastructure and equipment, including loss of machines used to provide our products and services,
which losses may not be fully covered by insurance.
Acquisitions and investments involve risks that could harm our business and impair our ability to
realize potential benefits from such acquisitions and investments.
As part of our business strategy, we have in the past sought and may in the future seek to
acquire or invest in businesses, products or technologies that we feel could complement or expand
our business. For example, in February 2009 we completed the acquisition of the outstanding
interest in Redbox, and in January 2008 and May 2006, we purchased the money transfer services
business GroupEx and CMT, respectively. However, we may be unable to adequately address the
financial, legal and operational risks raised by such acquisitions or investments and may not
successfully integrate these acquisitions or investments, which could harm our business and prevent
us from realizing the projected benefits of the acquisitions and investments. Further, the
evaluation and negotiation of potential acquisitions and investments, as well as the integration of
acquired businesses, divert management time and other resources. In addition, we cannot assure you
that any particular transaction, even if successfully completed, will ultimately benefit our
business. Certain financial and operational risks related to acquisitions and investments that may
have a material impact on our business are:
| the assumption of known and unknown liabilities of an acquired company, including employee and intellectual property claims and other violations of applicable law; | ||
| losses related to acquisitions and investments (for example, losses related to our prior Entertainment Business line); | ||
| managing relationships with other investors and the companies in which we have made investments; | ||
| reduced liquidity, including through the use of cash resources and incurrence of debt and contingent liabilities in funding acquisitions and investments; | ||
| difficulties and expenses in assimilating the operations, products, technology, information systems or personnel of an acquired company; | ||
| inability to efficiently divest unsuccessful acquisitions and investments; | ||
| stockholder dilution if an acquisition is consummated through an issuance of our securities; | ||
| imposition of restrictive covenants and increased debt service obligations that provide us less flexibility in how we operate our business to the extent we borrow to finance an acquisition; | ||
| amortization expenses related to acquired intangible assets and other adverse accounting consequences; | ||
| costs incurred in identifying and performing due diligence on potential targets that may or may not be successful; | ||
| impairment of relationships with employees, retailers and affiliates of our business and the acquired business; | ||
| entrance into markets in which we have no direct prior experience; and | ||
| impairment of goodwill arising from our acquisitions and investments. |
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We may be subject to product liability claims if property or people are harmed by our products and
services.
Some of the products we sell may expose us to product liability claims arising from personal
injury, death or property damage. Any such product liability claim may result in adverse publicity
regarding us and the products we sell. Even if we successfully defend ourselves against or settle
this type of claim, we could be forced to spend a substantial amount of money
in litigation or settlement expenses and our management could be required to spend valuable
time in dealing with these claims. Further, our vendors may not indemnify us against product
liability. There is a risk that claim awards, settlement payments, related costs or associated
liabilities may exceed, or fall outside the scope of, our insurance coverage and we cannot be
certain that insurance will continue to be available to us on economically reasonable terms, or at
all. Any imposition, or even possible imposition, of product liability could harm our business,
financial condition and operating results.
Our stock price has been and may continue to be volatile.
Our stock price has fluctuated substantially since our initial public offering in July 1997.
For example, during the twelve months ended September 30, 2009, the closing price of our common
stock ranged from $15.71 to $38.28 per share. Our stock price may fluctuate significantly in
response to a number of factors, including:
| the termination, non-renewal or re-negotiation of one or more retailer, supplier or distributor relationships; | ||
| trends and fluctuations in the use of our coin, DVD, money transfer and e-payment services; | ||
| developments in our contractual obligations or litigation with movie studios and DVD distributors; | ||
| operating results below market expectations and changes in, or our failure to meet, financial estimates of securities analysts or our own guidance; | ||
| acquisition, merger, investment and disposition activities; | ||
| period-to-period fluctuations in our financial results; | ||
| announcements of technological innovations or new products or services by us or our competitors; | ||
| announcements regarding the establishment, modification or termination of relationships regarding the development of new or enhanced products and services; | ||
| release of analyst reports; | ||
| economic or other external factors, for example, those relating to the current economic environment and fluctuations in the trading price of stocks generally; | ||
| ineffective internal controls; and | ||
| industry developments. |
In addition, the securities markets have experienced significant price and volume fluctuations
that are unrelated to the operating performance of particular companies. These market fluctuations
may also seriously harm the market price of our common stock.
Our anti-takeover mechanisms may affect the price of our common stock and make it harder for a
third party to acquire us without the consent of our board of directors.
We have implemented anti-takeover provisions that may discourage takeover attempts and depress
the market price of our stock. Provisions in our certificate of incorporation and bylaws could make
it more difficult for a third party to acquire us, even if doing so would be beneficial to our
stockholders. Delaware law also imposes some restrictions on mergers and other business
combinations between us and any acquirer of 15% or more of our outstanding common stock.
Furthermore, Washington law may impose additional restrictions on mergers and other business
combinations between us and any acquirer of 10% or more of our outstanding common stock. These
provisions may make it harder for a third party to acquire us without the consent of our board of
directors, even if the offer from a third party may be considered beneficial by some stockholders.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Under the terms of our credit facility, we are permitted to repurchase up to (i) $25.0 million
of our common stock plus (ii) proceeds received after November 20, 2007, from the issuance of new
shares of capital stock under our employee equity compensation plans. Subsequent to November 20,
2007 and as of September 30, 2009, the authorized cumulative proceeds received from option
exercises or other equity purchases under our equity compensation plans totaled $22.6 million
bringing the total authorized for purchase under our credit facility to $47.6 million. After taking
into consideration our share repurchases of $6.5 million subsequent to November 20, 2007, the
remaining amount authorized for repurchase under our credit facility is $41.0 million as of
September 30, 2009, however we will not exceed our repurchase limit authorized by the board of
directors as outlined below.
Apart from our credit facility limitations, our board of directors authorized the repurchase
of up to $22.5 million of our common stock plus additional shares equal to the aggregate amount of
net proceeds received after January 1, 2003, from our employee equity compensation plans. As of
September 30, 2009, this authorization allowed us to repurchase up to $37.2 million of our common
stock.
There were no shares repurchased during the quarter ended September 30, 2009, including shares
tendered for tax withholding on vesting of restricted stock awards.
On July 17, 2009, we issued 193,348 shares of unregistered restricted common stock to Sony in
connection with the Sony Agreement discussed in Note 8 to our Consolidated Financial Statements
included in this Form 10-Q. The issuance of the common stock was exempt from registration pursuant
to the Securities Act of 1933, as amended (the Securities Act) by virtue of Section 4(2) and/or
Regulation D promulgated thereunder as a transaction not involving a public offering. We believe
that the issuance is exempt from the registration requirements of the Securities Act on the basis
that: (1) Sony represented it was an accredited investor as defined under the Securities Act; (2)
there was no general solicitation; and (3) Sony represented that it was purchasing such shares for
its own account and not with a view towards distribution. The shares of common stock carry a legend
stating that the shares are not registered under the Securities Act and therefore cannot be resold
unless they are registered under the Securities Act or unless an exemption to registration is
available.
Item 6. Exhibits
In reviewing the agreements included as exhibits to this Quarterly Report on Form 10-Q, please
remember that they are included to provide you with information regarding their terms and are not
intended to provide any other factual or disclosure information about the Company or the other
parties to the agreement. The agreements may contain representations and warranties by each of the
parties to the applicable agreement. These representations and warranties have been made solely for
the benefit of the other party or parties to the applicable agreement and (i) should not in all
instances be treated as categorical statements of fact, but rather as a means of allocating the
risk to one of the parties if those statements prove to be inaccurate; (ii) may have been qualified
by disclosures that were made to the other party or parties in connection with the negotiation of
the applicable agreement, which disclosures are not necessarily reflected in the agreement; (iii)
may apply standards of materiality in a manner that is different from what may be viewed as
material to you or other investors; and (iv) were made only as of the date of the applicable
agreement or other date or dates that may be specified in the agreement and are subject to more
recent developments. Accordingly, these representations and warranties may not describe the actual
state of affairs as of the date they were made or at any other time. Additional information about
the Company may be found elsewhere in this Quarterly Report on Form 10-Q and the Companys other
public filings, which are available without charge through the SECs website at http://www.sec.gov.
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Exhibit Number | Description | |
4.1
|
Restricted Stock Purchase Agreement, dated as of July 17, 2009, between Coinstar, Inc. and Sony Pictures Home Entertainment Inc. | |
10.1*
|
Amendment to Employment Agreement between Coinstar, Inc. and John Harvey. (1) | |
10.2*
|
Second Amendment to Letter Agreement, dated as of September 7, 2009, between Coinstar, Inc. and John Harvey. (2) | |
10.3
|
Stock and Interest Purchase Agreement among Coinstar Entertainment Services, Inc., Entertainment Vending Management, LLC, Sesame Holdings, Inc., Coinstar, Inc. and National Entertainment Network, Inc. dated as of September 8, 2009. (2) | |
10.4
|
Indenture, dated as of September 16, 2009, between Coinstar, Inc. and Wells Fargo Bank, N.A. (3) | |
10.5
|
First Supplemental Indenture, dated as of September 16, 2009, between Coinstar, Inc. and Wells Fargo Bank, N.A. (3) | |
10.6
|
Form of 4.00% Senior Convertible Note due 2014. (3) | |
31.1
|
Certification of Chief Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002. | |
31.2
|
Certification of Chief Financial Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002. | |
32.1
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
* | Includes a management contract or compensatory plan or arrangement. | |
(1) | Incorporated by reference to the Registrants Form 8-K filed on September 8, 2009 (File Number 000-22555). | |
(2) | Incorporated by reference to the Registrants Form 8-K filed on September 9, 2009 (File Number 000-22555). | |
(3) | Incorporated by reference to the Registrants Form 8-K filed on September 16, 2009 (File Number 000-22555). |
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