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2004 Annual Report

Table of contents

  • Page 1
    2004 Annual Report

  • Page 2
    ... of retail locations in North America, adding a number of new distribution channels for Coinstar. The acquisition of CellCards of Illinois, L.L.C. and Telesouth Communications dramatically broadened our product portfolio and increased our e-payment services business to thousands of convenience and...

  • Page 3
    ... aggregate market value of the common stock held by non-affiliates of the registrant, based upon the closing price of our common stock on June 30, 2004 as reported on the NASDAQ National Market, was approximately $302.3 million. Shares of our common stock held by each executive officer and director...

  • Page 4
    ... Related Stockholder Matters Selected Consolidated Financial Data Management's Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosures About Market Risk Financial Statements and Supplementary Data Changes in and Disagreements with Accountants...

  • Page 5
    ... "Special Note Regarding Forward-Looking Statements" at the beginning of this annual report. Summary We are the leader in the self-service coin-counting services market. We own and operate the only multi-national fully automated network of self-service coin-counting machines across the United States...

  • Page 6
    ... entertainment machines, providing a convenient service to retailers. E-payment services We estimate that the e-payment services market is approximately $1.3 billion in the United States. We offer e-payment services, including loading prepaid wireless accounts, reloading prepaid MasterCard® cards...

  • Page 7
    ... our machines, which we believe increases usage, resulting in higher revenues for us and our retail partners. We believe that any potential competitors in the skill-crane and bulk vending markets would need to invest significant capital and secure relationships with large scale retailers in order to...

  • Page 8
    ..., including gift cards, through our coin-counting machines. Grow through acquisitions. We continue to explore opportunities to acquire companies and assets in order to strengthen our position in existing markets and to add complementary products and services to offer to both our retail partners and...

  • Page 9
    ...margins to fluctuate on a quarterly and annual basis as a function of our coin-counting, e-payment and entertainment services revenues. In addition, as a result of the ACMI acquisition, we are now required to maintain inventory of consumer products to support our skill-crane and bulk vending machine...

  • Page 10
    ... to attract new retail partners and penetrate new markets and distribution channels. In order to continue our coin-counting and entertainment services machine installation growth, we will need to attract new retail partners and develop operational or unit production cost efficiencies that make it...

  • Page 11
    ... 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 retail partners for vouchers that have already been redeemed...

  • Page 12
    ...-counting services and entertainment services equipment, our ability to develop and commercialize new products and services and the costs incurred to do so, and our ability to successfully integrate our entertainment business into our operations. Our operating results have a history of fluctuating...

  • Page 13
    ... our businesses and sourcing goods internationally. We currently have coin operations in Canada and the United Kingdom. We also now have entertainment services equipment operating in Mexico. We expect to continue increasing our deployment of both coin-counting machines and entertainment services...

  • Page 14
    ... retail partner relationships, • operating results below market expectations and changes in, or our failure to meet, financial estimates of securities analysts or our own guidance, • trends and fluctuations in the use of our coin-counting and entertainment services machines, • period-to-period...

  • Page 15
    ... accounting consequences, • costs incurred in identifying and performing due diligence on potential acquisition targets that may or may not be successful, • difficulties and expenses in assimilating the operations, products, technology, information systems or personnel of the acquired company...

  • Page 16
    ... maintain most of our sales, marketing, research and development, testing and customer service operations and administration. In addition, our main entertainment office is located in Louisville, Colorado. Our corporate administrative, marketing and product development facility is located in a 46,070...

  • Page 17
    PART II Item 5. Market for Registrant's Common Stock and Related Stockholder Matters. Market Information Our common stock is traded on the NASDAQ National Market under the symbol "CSTR." The following table sets forth the high and low bid prices per share as reported by the NASDAQ National Market ...

  • Page 18
    ... Financial Statements of Coinstar, Inc. and related Notes thereto included elsewhere in this Annual Report on Form 10-K. Year Ended December 31, 2004 2003 2002 2001 2000 (in thousands, except per share, per unit data and where noted) Consolidated Statements of Operations: REVENUE $ EXPENSES: Direct...

  • Page 19
    ..."Special Note Regarding Forward-Looking Statements" at the beginning of this annual report. Overview We are the leader in the self-service coin-counting services market. We own and operate the only multi-national fully automated network of self-service coin-counting machines across the United States...

  • Page 20
    ... entertainment machines, providing a convenient service to retailers. E-payment services We estimate that the e-payment services market is approximately $1.3 billion in the United States. We offer e-payment services, including loading prepaid wireless accounts, reloading prepaid MasterCard® cards...

  • Page 21
    ..., Accounting for Certain Investments in Debt and Equity Securities. Our available-for-sale securities have maturities of one year or less and are reported at fair value based on quoted market prices and are included in the balance sheet caption, "prepaid expenses and other current assets." Changes...

  • Page 22
    ... factors with the retailers such as total revenue, e-payment capabilities, long-term non-cancelable contracts, installation of our machines in high traffic and/or urban or rural locations, new product commitments, co-op marketing incentive or other criteria. We recognize this expense at the time...

  • Page 23
    ...have an effect on our financial position or results of operations. In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004), ShareBased Payment ("SFAS 123R"). SFAS 123R will require that the compensation cost relating to share-based payment transactions be...

  • Page 24
    ... machines in service during this period. The total dollar value of coins processed through our network increased to approximately $2.2 billion during 2004 from approximately $2.0 billion for the comparable prior year. The average installed base of coin-counting machines increased to 11,345 in 2004...

  • Page 25
    ...fees paid to our retail partners resulting from a 13.1% increase in coin-counting revenue, an increase in coin pick-up and processing costs resulting from the increased coin volumes processed during the year, and increases in field service expenses related to our expansion into new international and...

  • Page 26
    ...$62.1 million. Cash being processed represents coin residing in our coin-counting or entertainment services machines or being processed by third-party carriers, which we are mainly obligated to use to settle our accrued liabilities payable to our retailer partners. Working capital was $105.0 million...

  • Page 27
    ...to the credit agreement are secured by a first security interest in substantially all of our assets and the assets of our subsidiaries, as well as a pledge of our subsidiaries' capital stock. The credit facility matures on July 7, 2011. As of December 31, 2004, our original term loan balance of $250...

  • Page 28
    ... the terms of our new credit agreement entered into on July 7, 2004, we are permitted and our Board has authorized us to repurchase up to $3.0 million of our common stock plus proceeds from the issuance of new shares of capital stock under our employee equity compensation plans. (This authorization...

  • Page 29
    ... the current year presentation. Three Month Periods Ended Dec. 31, 2004 Sept. 30, 2004 June 30, 2004 March 31, 2004 Dec. 31, 2003 Sept. 30, 2003 June 30, 2003 March 31, 2003 (in thousands, except per share data) (unaudited) Consolidated Statements of Operations: Revenue...Expenses: Direct operating...

  • Page 30
    ... by October 6, 2004. Loans made pursuant to the credit agreement are secured by a first security interest in substantially all of our assets and the assets of our subsidiaries, as well as a pledge of our subsidiaries' capital stock. The credit facility matures on July 7, 2011. All indebtedness from...

  • Page 31
    ... of the effectiveness of our internal control over financial reporting as of December 31, 2004 as required by the Securities Exchange Act of 1934 Rule 13a-15(c). In making this assessment, we used the criteria set forth in the framework in Internal Control-Integrated Framework issued by the...

  • Page 32
    ... herein by reference to the Proxy Statement. Item 13. Certain Relationships and Related Transactions. The information required by this item is incorporated herein by reference to the Proxy Statement. Item 14. Principal Accountant Fees and Services. The information required by this item is...

  • Page 33
    ... Plan Stock Option Grant Notice. 2000 Amended and Restated Equity Incentive Plan Stock Option Grant Notice. Form of Indemnity Agreement between the Registrant and its Executive Officers and Directors. Form of Release Agreement. Summary of 2005 Base Salaries for 2004 Named Executive Officers. Form of...

  • Page 34
    ..., Lehman Commercial Paper, Inc., as Syndication Agent, and JPMorgan Chase Bank, as Administrative Agent. Lease Agreement, dated January 1, 2004, by and between Registrant and EOP Operating Limited Partnership. Industrial Building Lease, dated October 24, 2002, by and between FCF Properties, LLC...

  • Page 35
    ... to be signed on its behalf by the undersigned, thereunto duly authorized. Coinstar, Inc. By: /s/ BRIAN V. TURNER Brian V. Turner Chief Financial Officer Date: February 28, 2005 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following...

  • Page 36
    ... the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of December 31, 2004 and 2003, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years then ended, and our report, dated February...

  • Page 37
    ... with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Coinstar, Inc.'s internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring...

  • Page 38
    ... REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors Coinstar, Inc. Bellevue, Washington We have audited the accompanying consolidated balance sheet (not presented herein) of Coinstar, Inc. and subsidiary (the "Company") as of December 31, 2002, and the related consolidated statements of operations...

  • Page 39
    ... ...Current portion of long-term debt and capital lease obligations ...Total current liabilities ...LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS ...Total liabilities ...STOCKHOLDERS' EQUITY: Preferred stock, $0.001 par value-Authorized, 5,000,000 shares; no shares issued and outstanding in 2004 or...

  • Page 40
    COINSTAR, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) Year Ended December 31, 2004 2003 2002 REVENUE...EXPENSES: Direct operating ...Sales and marketing ...Research and development...General and administrative ...Depreciation and other ...Amortization of ...

  • Page 41
    ... rate swap on long-term debt net of tax benefit of $36...Total comprehensive income: ...BALANCE, December 31, 2003 ...Proceeds from common stock offering, net of offering costs of $5,112...Proceeds from issuance of shares under employee stock purchase plan ...Proceeds from exercise of stock options...

  • Page 42
    ... options and issuance of shares under employee stock purchase plan ...Financing costs associated with long-term credit facility...Net cash provided (used) by financing activities...Effect of exchange rate changes on cash ...NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND CASH BEING PROCESSED...

  • Page 43
    ..., Accounting for Certain Investments in Debt and Equity Securities. Our available-for-sale securities have maturities of one year or less and are reported at fair value based on quoted market prices and are included in the balance sheet caption "prepaid expenses and other current assets." Changes in...

  • Page 44
    ... FINANCIAL STATEMENTS -(Continued) YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002 Inventory: Inventory, which consists primarily of plush toys and other products dispensed from our entertainment services machines, are stated at the lower of cost or market. The cost of inventory includes mainly...

  • Page 45
    ... of certain factors with the retailers such as total revenue, e-payment capabilities, long-term non-cancelable contracts, installation of our machines in high traffic and/or urban or rural locations, new product commitments, or other criteria. We recognize this expense at the time we recognize...

  • Page 46
    ... value of stock options is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: four to five year expected life from date of grant; annualized stock volatility of 69%, 72% and 74% for 2004, 2003, and 2002, respectively; risk-free interest rates...

  • Page 47
    ... stops and other distribution channels. These entertainment services include skillcrane machines, bulk vending, kiddie rides and video games. We acquired ACMI in order to add new classes of trade, broaden our retailer base, diversify services, expand the reach of field service and create a platform...

  • Page 48
    ... Useful lives in Years Estimated Weighted Average Useful lives in Years Purchase Price (In thousands, except years) Intangible assets: Retailer relationships...$ 34,200 Internal use software ...200 Total...$ 34,400 10.00 3.00 9.94 0.02 9.96 Based on identified intangible assets recorded...

  • Page 49
    ... of Long-Lived Assets. In the first and second quarter of 2004, as a result of our evaluation, we recorded a charge of approximately $1.9 million for the write down of the first generation hardware of our prepaid services. This charge, which related primarily to our North American operating segment...

  • Page 50
    ... in the agreement. As of December 31, 2004, we were in compliance with our covenants and restrictions. Quarterly principal payments on the term loan totaling $0.5 million will end March 31, 2011. The remaining principal balance of $194.8 million is due July 7, 2011, the maturity date of the facility...

  • Page 51
    ... corporate administrative, marketing and product development facility is located in a 46,070 square foot facility in Bellevue, Washington, under a lease that expires December 1, 2009. The future minimum payments of this new lease are at a lower monthly rate than under the prior lease terms. The new...

  • Page 52
    ... Plan. Stock options have been granted to officers and employees to purchase common stock at prices ranging from $0.25 to $32.79 per share, which represented fair market value at the date of grants and our best estimate of fair market value for grants issued prior to our initial public offering. We...

  • Page 53
    ..., we adopted the Employee Stock Purchase Plan (the "ESPP") under Section 423(b) of the Internal Revenue Code. Under the ESPP, the board of directors may authorize participation by eligible employees, including officers, in periodic offerings. The total number of shares reserved for issuance under...

  • Page 54
    ... follows: December 31, 2004 2003 2002 U.S. federal tax expense at the statutory rate ...State income taxes, net of federal benefit ...Research and development credits...Non-deductible foreign expenses...Other ...Change in valuation allowance for deferred tax asset...Recognition of net deferred...

  • Page 55
    ..., over an indefinite period. During 2004, the common shares of ACMI were acquired by Coinstar, Inc. As a result of the acquisition, ACMI's $33.1 million of net operating loss carryforwards at July 7, 2004 are subject to limitation under the provisions of Section 382 of the Internal Revenue Code. In...

  • Page 56
    ... companies report separately in the financial statements certain financial and descriptive information about operating segments profit or loss, certain specific revenue and expense items and segment assets. The method for determining what information is reported is based on the way that management...

  • Page 57
    ...) (15,232) Total assets ...$ 547,134 $ 204,074 Currently, management does not use product line financial performance as a basis for business operating decisions. However, our CEO does analyze our revenue based on revenue generated from our coin-counting and e-payment service revenue separate from...

  • Page 58
    ... increased costs for certain products purchased by us which could have a material adverse effect on our financial performance. We currently conduct limited manufacturing operations and obtain key hardware components used in our coin-counting and entertainment services machines from a limited number...

  • Page 59
    ...'s board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process...

  • Page 60
    ...'s board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process...

  • Page 61
    ... In connection with the Annual Report of Coinstar, Inc. (the "Company") on Form 10-K for the period ending December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Form 10-K"), I, David W. Cole, Chief Executive Officer of the Company, certify, pursuant to 18...

  • Page 62
    ... In connection with the Annual Report of Coinstar, Inc. (the "Company") on Form 10-K for the period ending December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Form 10-K"), I, Brian V. Turner, Chief Financial Officer of the Company, certify, pursuant to 18...

  • Page 63
    ... and services can help retailers drive profit in this underdeveloped area of the store. We are optimistic about the year ahead and remain focused on executing our business plan and building value for shareholders. We sincerely thank all of our partners and shareholders for their ongoing support, and...

  • Page 64
    ... Company, Inc. 350 Indiana Street, Suite 800, Golden, CO 80401 | 303.262.0600 Stock exchange listing Coinstar common stock is traded on the Nasdaq National Market System under the symbol CSTR . www.coinstar.com Note Regarding Forward-Looking Statements Contained in this Annual Report. This annual...