Back to GetFilings.com

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For The Quarter Ended March 31, 2003

OR

Commission File Number: 000-22555

COINSTAR, INC.

(Exact name of registrant as specified in its charter)

(425) 943-8000

(Registrant’s 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  x    No  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act) Yes x No ¨

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Table of Contents

COINSTAR, INC.

FORM 10-Q

Index

Table of Contents

PART I.    FINANCIAL INFORMATION

Item 1.    Consolidated Financial Statements

COINSTAR, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

See notes to consolidated financial statements.

3

Table of Contents

COINSTAR, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

See notes to consolidated financial statements.

4

Table of Contents

COINSTAR, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

Three Month Period Ended March 31, 2003

(in thousands, except share data)

(unaudited)

See notes to consolidated financial statements.

5

Table of Contents

COINSTAR, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

See notes to consolidated financial statements.

6

Table of Contents

COINSTAR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Three Month Periods Ended March 31, 2003 and 2002

(unaudited)

NOTE 1:    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of company:    We develop, own and operate a network of automated, self-service coin-counting and processing machines that provide consumers with a convenient means to convert loose coins into cash. We have increased our installed base every year since inception and, as of March 31, 2003, had a total installed base of 10,844 units located in supermarkets and financial institutions in 48 states, the District of Columbia, Canada and the United Kingdom. Of the 10,844 units, 10,286 units were installed in North America and 558 units were installed in the United Kingdom.

Basis of presentation:    The unaudited consolidated financial statements of Coinstar, Inc. included herein reflect all adjustments, consisting only of normal recurring adjustments which, in the opinion of management, are necessary to present fairly our consolidated financial position, results of operations and cash flows for the 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 accounting principles generally accepted in the United States of America (“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, 2002, filed with the SEC. The results of operations for the three month period ended March 31, 2003 are not necessarily indicative of the results to be expected for any future quarter or for the entire fiscal year.

Change in accounting policy:    We accounted for the loss from early retirement of debt as an extraordinary item in fiscal year 2002, whereas we now include losses from early retirement of debt within the other income and expense section of our consolidated statements of operations. The new method of accounting for loss on early retirement of debt is the result of adopting Statement of Financial Accounting Standards (“SFAS”) No. 145. Prior year financial statements have been restated to apply the new method retroactively.

Principles of consolidation:    The accompanying consolidated financial statements include the accounts of our North American business and our wholly owned International business in the United Kingdom. All significant intercompany balances and transactions have been eliminated in consolidation.

Securities available-for-sale:    Our investments are all classified as available-for-sale and are stated at fair value in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. This statement specifies that available-for-sale securities are reported at fair value with changes in unrealized gains and losses recorded directly to stockholders’ equity. All of our investments have maturities of one year or less. Unrealized gains or losses at March 31, 2003 were insignificant. Fair value is based upon quoted market prices. Available-for-sale securities are included in prepaid expenses and other current assets.

Stock-based compensation:    We account for stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees. All options granted under the stock-based compensation plans had an exercise price equal to the fair market value of the stock at the date of grant. Accordingly, no compensation expense has been recognized for our stock option grants. We accelerated the vesting of stock options for certain former employees pursuant to employment agreements for which we recorded compensation expense (benefit) of $(69,416), and $608,487 in the first quarters of 2003, and 2002, respectively. The following illustrates the effect on net income (loss) and net income (loss) per share had we applied the fair value recognition provision of SFAS No. 123, Accounting for Stock-Based Compensation, to the stock option awards.

7

Table of Contents

COINSTAR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The assumptions used to calculate the fair value of options granted are evaluated and revised, as necessary, to reflect market conditions and the Company’s experience.

Recent accounting pronouncements:    In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. Additionally, the associated asset retirement costs should be capitalized as part of the carrying amount of the long-lived asset. The adoption of SFAS No. 143, which is effective for fiscal years beginning after June 15, 2002, does not have an impact on our financial position or results of our operations.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No. 145 requires that only certain extinguishments of debt be classified as an extraordinary item. Further, this statement requires that capital leases, which are modified such that the resulting lease agreement is classified as an operating lease, be accounted for under the sale-leaseback provisions of SFAS No. 98. The provisions of the statement pertaining to debt extinguishments are effective for companies with fiscal years beginning after May 15, 2002. The provisions of the statement pertaining to lease modifications are effective for transactions consummated after May 15, 2002. Implementation of this statement has no impact on net income; however, it resulted in a reclassification of the extraordinary loss we reported in 2002. Such amounts are reported as a separate component of other income and the earnings per share effects are not disclosed on the face of the income statement.

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities. This statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Previous guidance, provided under Emerging Issues Task Force (“EITF”) Issue 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring), required an exit cost liability be recognized at the date of an entity’s commitment to an exit plan. The provisions of this statement are effective for exit or disposal activities that are initiated by a company after December 31, 2002. Implementation of this statement does not have an impact on our financial position or results of operations.

8

Table of Contents

COINSTAR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In November 2002, the FASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, which elaborates on existing disclosure of most guarantees, and clarifies when a company must recognize an initial liability for the fair value of obligations it assumes under guarantee agreements. The initial recognition and measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002. The 2003 adoption of this Interpretation does not have a material impact on our consolidated financial position.

In December 2002, the FASB issued SFAS 148, Accounting for Stock-Based Compensation – Transition and Disclosure – an Amendment of SFAS 123. SFAS 148 provides additional transition guidance for those entities that elect to voluntarily adopt the provision of SFAS 123, Accounting for Stock Based Compensation. In addition, SFAS 148 mandates new disclosures in both interim and year-end financial statements within the Significant Accounting Policies footnote. We have adopted the disclosure requirements in these consolidated financial statements as noted above under Stock-Based Compensation.

Reclassifications:    Certain reclassifications have been made to the prior year balances to conform to the current year presentation.

NOTE 2:    TREASURY STOCK

On July 30, 2002 the Board of Directors approved a stock repurchase program authorizing purchases of up to $15.0 million of common stock in the open market or in private transactions. During 2002, 299,500 shares of common stock were repurchased at a cost of approximately $7.5 million. On February 4, 2003, the Board of Directors authorized the purchase of an incremental $15.0 million of common stock, plus additional amounts equal to proceeds received from option exercises or other equity purchases under our equity compensation plans. Under our current debt agreement, we may repurchase up to a maximum of $7.5 million of our common stock per fiscal year. We may purchase up to an aggregate of an additional $7.5 million (over and above purchases made with proceeds from the option exercises or other equity purchase plans) if we simultaneously pay down our term debt on a dollar-for-dollar basis. In addition, we may only make purchases if the purchase would not cause us to breach any covenants in our credit agreement. On February 18, 2003, we repurchased 125,000 shares of common stock at a cost of approximately $2.0 million and on February 20, 2003, we repurchased an additional 64,000 shares of common stock at a cost of approximately $1.0 million.

NOTE 3:    ACQUISITION

On February 6, 2003, we acquired substantially all of the assets and assumed certain liabilities of Prizm Technologies, Inc., a privately held corporation. Prizm’s proprietary technology allows consumers to conduct a range of automated prepaid wireless transactions at its Top-Up^™ terminals, such as adding minutes to a prepaid wireless handset. The purchase was accounted for as a business combination under the provisions of SFAS No. 141, Business Combinations. The fair value of the assets acquired and liabilities assumed were included in our financial statements as of February 6, 2003, the acquisition date. The purchase price of this acquisition does not have a material impact on our consolidated financial position.

Under the terms of the asset purchase agreement, the shareholders of Prizm may be eligible to receive additional consideration based primarily on achieving certain financial targets during 2003. If achieved, the additional consideration paid to these shareholders will be recorded as goodwill in accordance with SFAS No. 142, Goodwill and Other Intangible Assets, which will be tested periodically for impairment. At this time, any payment resulting from the additional consideration cannot be estimated.

NOTE 4:    INCOME (LOSS) PER SHARE

Basic net income (loss) per share is computed by dividing the net income (loss) available to common stockholders for the period by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing the net income (loss) 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 warrants, are included in the calculation of diluted net income (loss) per share to the extent such shares are dilutive.

9

Table of Contents

COINSTAR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table sets forth the computation of basic and diluted net income (loss) per share for the periods indicated:

Because the 2002 results from operations reflect a net loss for the three month period ended March 31, 2002, basic and diluted net loss and net loss per share amounts for this period are calculated based on the same weighted average number of shares outstanding. For purposes of calculating these amounts, 11,497 warrants and 1,072,185 options were excluded from the calculation in 2002 because they were anti-dilutive.

NOTE 5: BUSINESS SEGMENT INFORMATION

Operating segments as defined in SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, are components of an enterprise for which separate financial information is available and regularly reviewed by the chief operating decision-maker.

We are organized into two reportable business segments: the North American business (which includes the United States and Canada), and our International business (which includes the United Kingdom).

10

Table of Contents

Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the Financial Statements and related Notes thereto included elsewhere in this Quarterly Report on Form 10-Q. Except for the 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, those discussed under the caption “Risk Factors”, and those discussed elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2002. 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 Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect our business, prospects and results of operations.

Overview

We currently derive substantially all our revenue from coin processing services generated by our installed base of Coinstar units located in supermarket chains and financial institutions in 48 states across the United States, the District of Columbia and Canada as well as in the United Kingdom. We generate revenue based on a processing fee charged on the total dollar amount of coins processed in a transaction. We recognize coin processing fee revenue at the time the customers’ coins are counted by the Coinstar units. Overall revenue growth is primarily dependent on the growth in coin processing volumes of our installed base and, to a lesser degree, the rate of new installations. Our results to date show that coin processing volumes per unit generally increase with the length of time the unit is in operation as usage levels of the service increase, driving initial trial and repeat usage for the service. Since inception, our coin processing services have counted and processed more than 147 billion coins worth over $6.8 billion relating to over 200 million customer transactions. There can be no assurance, however, that unit volumes will continue to increase as a function of the time the unit is in operation. We believe that coin processing volumes per unit may also be affected by other factors such as (i) public relations, advertising and other activities that promote trial and usage of the units, (ii) the amount of consumer traffic in the stores in which the units are located and (iii) seasonality.

We launched our business in North America with the installation of the first Coinstar unit in 1993 and in 2001 we began rolling out our coin-counting service in the United Kingdom. With over 270 retail partners (including supermarket chains, independent operators and financial institutions) we currently operate more than 10,840 Coinstar units in over 150 regional markets across 48 states, the District of Columbia, Canada and the United Kingdom.

Our direct operating expenses are comprised of the regional expenses associated with our coin-counting unit operations and support and consist primarily of coin pick-up, transportation and processing, field operations support and related expenses, retail operations support and the amount of our service fee that we share with our retail partners, which we refer to as revenue sharing. Direct operating expenses also consist of refurbishment expenses, which represent costs to bring machines to a like-new condition. Coin pick-up, transportation and processing costs, which represent a large portion of direct operating expenses, vary based on the level of total coin processing volume and the density of the units within a region. Field service operations and related expenses vary depending on the number of geographic regions in which Coinstar units are located and the density of the units within a region. Regional sales and marketing expenses are comprised of ongoing marketing, advertising and public relations efforts in existing market regions and, to a lesser degree, startup marketing expenses incurred to launch our services in new regional markets. Product research and development expenses consist of the development costs of the Coinstar unit software, network applications, Coinstar unit improvements and new product development. Selling, general and administrative expenses are comprised of administrative support for field operations, our customer service center, sales and marketing support, systems and engineering support, computer network operations, finance, human resources, occupancy expenses, legal expenses and insurance. Depreciation and amortization consists primarily of depreciation charges on Coinstar units, and to a lesser extent, depreciation on computer equipment, leased automobiles, furniture and fixtures, leasehold improvements and amortization of our deferred financing fees.

Since 1995, we have devoted significant resources to building our sales and marketing organization, adding administrative personnel and developing the network systems and infrastructure to support the rapid growth of our installed base of Coinstar coin-counting units. The cost of this expansion and the significant depreciation expense of our installed network have resulted in significant operating losses in prior years. We expect to continue to evaluate new marketing and promotional programs to increase the breadth and rate of customer utilization of our Coinstar service. We also intend to continue to engage in systems and product research and development. We believe our prime retail locations form a strategic platform from which we will be able to deliver

11

Table of Contents

additional value-added new products and services to consumers and our retail partners that may create additional revenue streams independent of coin counting. In the future we envision the Coinstar unit as a touch-point for a range of consumer products and services such as prepaid cards, prepaid cellular services, bill payment and person-to-person money transfers.

We believe that our future coin-counting revenue growth, operating margin gains and profitability will depend on the success of our efforts to increase customer usage, retain our current retail partners, expand our installed base with retail partners in existing markets, expand into new geographies and distribution formats and undertake ongoing marketing and promotional activities that will sustain the growth in unit coin volume over time. Given the unpredictability of the timing of installations with retail partners and the resulting revenues, the growth in coin processing volumes of our installed base and the continued market acceptance of our services by consumers and retail partners, our operating results for any future periods may be subject to significant variation, and we believe that period-to-period comparisons of our results of operations are not necessarily predictive and should not be relied on as indications of future performance.

Prizm Acquisition:    On February 6, 2003, we acquired substantially all of the assets and assumed certain liabilities of Prizm Technologies, Inc., a privately held corporation. Prizm’s proprietary technology allows consumers to conduct a range of automated prepaid wireless transactions at its Top-Up^™ terminals, such as adding minutes to a prepaid wireless handset. We believe Prizm’s technology will facilitate our faster market penetration in new product areas and in new distribution channels. The purchase was accounted for as a business combination under the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 141, Business Combinations. The fair value of the assets acquired and liabilities assumed have been included in our financial statements as of February 6, 2003, the acquisition date. The purchase price of this acquisition does not have a material impact on our consolidated financial position.

Under the terms of the asset purchase agreement, the shareholders of Prizm may be eligible to receive additional consideration based primarily on achieving certain financial targets during 2003. If achieved, the additional consideration paid to these shareholders will be recorded as goodwill in accordance with SFAS No. 142, Goodwill and Other Intangible Assets, which will be tested periodically for impairment. At this time, any payment resulting from the additional consideration cannot be estimated.

Results of Operations

The following table shows revenue and expense as a percent of revenue for the periods indicated:

Three Month Periods Ended March 31, 2003 and 2002

Revenue

Revenue increased to $38.0 million in the three months ended March 31, 2003 from $33.2 million for the comparable 2002 period. Revenue grew principally as a result of an increase in the number of users and frequency of use, an increase in the number of Coinstar units in service during the three months ended March 31, 2003 and the volume of coins processed by the units in service during this period. The total installed base of Coinstar units increased to 10,844 as of March 31, 2003 from 9,854 as of March 31, 2002. The total dollar value of coins processed through our network increased to $430.8 million during the three month period ended March 31, 2003 from $374.4 million for the comparable 2002 period.

12

Table of Contents

Direct Operating Expenses

Direct operating expenses increased to $17.3 million in the three months ended March 31, 2003 from $15.2 million in the comparable prior year period. Direct operating expenses increased primarily due to increases in field service expenses related to our expansion into ten new international and domestic regional markets during the twelve months between March 31, 2002 and March 31, 2003, an increase in coin pick-up and processing costs resulting from the increased coin volumes processed during the three month period, and an increase in the amount paid to our retail partners in the form of revenue sharing resulting from a 14.6% increase in coin processing revenue. Direct operating expenses as a percentage of revenue decreased to 45.5% in the three months ended March 31, 2003 from 45.8% in the same period of 2002. The decrease in direct operating expenses as a percentage of revenue resulted from the realization of coin pick-up and transportation cost economies attributable to regional densities and utilization of more efficient coin pick-up methods and a decrease in per unit field service expenses as a percentage of revenue as we increased our density in our existing markets.

Regional Sales and Marketing

Regional sales and marketing expenses increased to $0.7 million in the quarter ended March 31, 2003 from $0.5 million in the comparable prior year quarter. Regional sales and marketing expenses increased due to increased spending for regional marketing and local advertising support for new product pilots. Historically, advertising during the first quarter of our fiscal year has not resulted in significant increases in the volume of coin processed by our customers during our seasonally low first quarter. Consistent with prior years, we plan to increase advertising levels during the remainder of this year. Regional sales and marketing as a percentage of revenue increased slightly to 1.9% in the three months ended March 31, 2003 from 1.6% in the comparable prior year quarter, primarily due to the timing of advertising activity so far this year.

Product Research and Development

Product research and development expenses increased to $1.3 million in the quarter ended March 31, 2003 from $1.2 million in the comparable prior year quarter. Product research and development expenses grew primarily as the result of an increase in staffing levels to support research and development to design complementary new product ideas and continue our ongoing efforts to enhance our existing coin processing system. Product research and development expenses as a percentage of revenue decreased to 3.4% for the quarter ended March 31, 2003 from 3.7% in the comparable prior year quarter.

Selling, General and Administrative

Selling, general and administrative expenses remained flat at $5.8 million for each of the three month periods ending March 31, 2003 and 2002. Selling, general and administrative expenses experienced increases in insurance and professional fees during 2003 offset by decreased expenses associated with non-cash stock option compensation for retiring executives. Selling, general and administrative expenses as a percentage of revenue decreased to 15.3% in the quarter ended March 31, 2003 from 17.4% in the comparable prior year quarter.

Depreciation and Amortization

Depreciation and amortization expense decreased to $6.4 million in the quarter ended March 31, 2003 from $6.6 million in the comparable prior year quarter. Depreciation expense declined primarily due to the net decrease in the number of Coinstar units being depreciated. A greater number of Coinstar units became fully depreciated between March 31, 2002 and March 31, 2003 than were newly installed in the same period. Depreciation and amortization as a percentage of revenue decreased to 16.8% in the three months ended March 31, 2003 from 20.0% in the same period in the prior year.

Other Income and Expense

Interest income decreased to $71,000 in 2003 from $93,000 in 2002. The decrease in interest income was attributed to both lower interest rates earned on investments and lower amounts of funds invested in the quarter ended March 31, 2003 than in the prior year.

13

Table of Contents

Interest expense decreased to $0.4 million in the three months ended March 31, 2003 from $1.7 million in the comparable prior year period. The decrease was attributed to the repurchase of $61.0 million of our 13% senior subordinated discount notes during the first half of 2002. The long term debt was retired using cash and $43.0 million of term and revolving debt from a new $90.0 million credit facility provided by a syndicate of financial institutions led by Bank of America. The combination of reduced interest rates and the decreased amount of outstanding debt during the first quarter of 2003 resulted in the $1.3 million decrease of interest expense in the three month period ended March 31, 2003 compared to the same period in 2002. As of March 31, 2003, we had $32.0 million of long term debt outstanding on our credit facility.

We had accounted for the loss from early retirement of debt as an extraordinary item in 2002. However, in accordance with SFAS No. 145 we have reclassified the losses associated with our early retirement of debt within the other income and expense section of our consolidated statements of operations. These 2002 expenses are related to premiums paid and write-offs of deferred financing fees to retire our 13% senior subordinated discount notes prior to the October 2006 maturity date.

Liquidity and Capital Resources

As of March 31, 2003, we had cash, cash equivalents and cash due to retailers totaling $91.3 million, which consisted of cash and cash equivalents available to fund our operations of $34.3 million and cash due to retailers of $57.0 million. Cash due to retailers represents cash being processed by armored car carriers or residing in Coinstar units which is payable to our retail partners. Working capital was $24.5 million at March 31, 2003.

Net cash provided by operating activities was $1.5 million for the three months ended March 31, 2003, compared to net cash provided by operating activities of $5.7 million for the three months ended March 31, 2002. Cash provided by operating activities decreased primarily as the result of an increased use of cash from changes in operating assets and liabilities, offset by an increase in net income for the quarter ended March 31, 2003. The cash used by operating assets and liabilities increased in 2003 mainly from the timing of payments to our partners that reduced our payable balance, prepayments for certain advertising expenses that will occur later in the year and a reduction of accrued liabilities.

Net cash used by investing activities for the three month period ended March 31, 2003 was $7.5 million compared to $4.4 million in the comparable prior year quarter. Net cash used by investing activities consisted of capital expenditures made in each of the three month periods ended March 31, 2003 and 2002, mainly for the purchase of Coinstar units as of March 31, 2003. As of March 31, 2003 we had entered into certain purchase agreements with suppliers of Coinstar units, which require aggregate purchases for Coinstar units in the amount of $7.4 million.

Net cash used by financing activities for the three month period ended March 31, 2003 was $5.4 million. This amount represented cash used to make principal payments of $2.7 million and $0.2 million on our term loan and for capital lease payments, respectively, and cash used to repurchase 189,000 shares of our own stock for $3.0 million in February 2003, offset by proceeds from the exercise of stock options and employee stock purchases of $0.5 million. Net cash used by financing activities for the three months ended March 31, 2002 was $9.5 million. This amount represented cash used to retire $25.3 million of our senior subordinated discount notes and the payment of $2.0 million in premiums associated with the retirement of this debt, offset by cash provided by financing activities in the form of new borrowings totaling $15.0 million on a lower interest rate credit facility and proceeds from the exercise of stock options and employee stock purchases of $2.8 million.

As of March 31, 2003, we had three irrevocable letters of credit that totaled $8.8 million. These letters of credit, which expire at various times through April 30, 2003, are available to collateralize certain obligations to third parties. We expect to renew these letters of credit and have an agreement with Bank of America to automatically renew one of the letters of credit, in three-month increments, through December 31, 2004. As of March 31, 2003, no amounts were outstanding under these letters of credit agreements.

On July 30, 2002 the Board of Directors approved a stock repurchase program authorizing purchases of up to $15.0 million of common stock in the open market or in private transactions. During 2002, 299,500 shares of common stock were repurchased at a cost of approximately $7.5 million. On February 4, 2003, the Board of Directors authorized the purchase of an incremental $15.0 million of common stock, plus additional amounts equal to proceeds received from option exercises or other equity purchases under our equity compensation plans. Under our current debt agreement, we may repurchase up to a maximum of $7.5 million of our common stock per fiscal year. We may purchase up to an aggregate of an additional $7.5 million (over and above purchases made with proceeds from the option exercise or other equity purchases under the equity purchase plans) if we simultaneously pay down our term debt on a dollar-for-dollar basis. In addition, we may only make purchases if the purchase would not cause us to breach any covenants in our credit agreement. On February 18, 2003, we repurchased an additional

14

Table of Contents

125,000 shares of common stock at a cost of approximately $2.0 million and on February 20, 2003 we repurchased an additional 64,000 shares of common stock at a cost of approximately $1.0 million.

On April 18, 2002, we entered into a credit agreement with Bank of America, N.A., for itself and as agent for US Bank National Association, Silicon Valley Bank, KeyBank National Association and Comerica Bank-California. The credit agreement provides for a senior secured credit facility of $90.0 million, consisting of a revolving loan commitment of $50.0 million and a term loan commitment of $40.0 million. Loans made pursuant to the credit agreement are secured by a first priority security interest in substantially all of our assets and the assets of our subsidiaries, including the pledge of its capital stock.

Advances under this credit facility may be made as either base rate loans or LIBOR rate loans at our election. Applicable interest rates are based upon either the LIBOR or base rate plus an applicable margin dependent upon a consolidated leverage ratio of certain outstanding indebtedness to EBITDA (to be calculated in accordance with the terms specified in the credit agreement). Initially, interest rates payable upon advances were based upon either an initial rate of LIBOR plus 225 basis points or the base rate plus 75 basis points. As of January 15, 2003, we qualified for an interest rate of LIBOR plus 175 basis points or the base rate plus 25 basis points.

The credit facility contains standard negative covenants and restrictions on actions by us including, without limitation, restrictions on common stock repurchases, liens, investments, capital expenditures, indebtedness, restricted payments including cash payments of dividends, fundamental changes or dispositions of our assets, among other restrictions. In addition, the credit agreement requires that we meet certain financial covenants, ratios and tests, including maintaining a minimum quarterly consolidated net worth and quarterly consolidated EBITDA, a minimum fixed charge coverage ratio, a maximum consolidated leverage ratio and a minimum net cash balance, all as defined in the agreement.

Quarterly principal payments on the outstanding term loan began on September 30, 2002 and are based upon the repayment terms as specified in the agreement. Our first three quarterly principal payments of $2.7 million each were paid September 30, 2002, December 31, 2002 and March 31, 2003. Our principal payments will increase to $3.8 million per quarter beginning June 30, 2003 and ultimately will increase to $4.3 million per quarter beginning June 30, 2004, with all remaining principal and interest due May 20, 2005, the maturity date of the credit facility. Commitment fees on the unused portion of the facility, initially equal to 40 basis points, may vary and are based on our maintaining certain consolidated leverage ratios. As of January 15, 2003 we qualified for a commitment fee on the unused portion of the facility equal to 20 basis points.

We believe existing cash, cash equivalents, short-term investments and amounts available to us under our new 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 unit coin processing volumes generated are lower than historical levels, our cash needs may increase. Our future capital requirements will depend on a number of factors, including customer usage, the timing and number of installations, the type and scope of service enhancements, our expansion in the United Kingdom and the cost of developing potential new product and service offerings and enhancements.

Deferred Tax Assets

As required by SFAS No. 109, Accounting for Income Taxes, we have recognized deferred income tax assets on our balance sheet, which as of March 31, 2003, totaled $47.3 million. The deferred income tax assets primarily represent the income tax benefit of net operating losses (“NOL”) we have incurred in prior years and expect to be able to use in future periods. We will periodically reevaluate our ability to utilize our NOL carryforwards and record any resulting adjustments that may be material. In addition, we will reduce the deferred income tax asset for the benefits of NOL carryforwards actually used in future periods. In the quarter ended March 31, 2003, we recorded $2.3 million in income tax expense, which, as a result of our NOL carryforward, will not result in cash payments for income taxes paid other than those required by some states and alternative minimum taxes.

15

Table of Contents

Contractual Obligations and Commercial Commitments

Quarterly Financial Results

Our quarterly financial information for 2001 presents the net effect of discontinued operations separate from the results of our continuing operations. Historical financial information has been reclassified to present consistently the discontinued operations.

The following table sets forth selected unaudited quarterly financial information and operating data for the last eight quarters. Except for the reclassification of the loss on our early retirement of debt, as discussed in Note 1 of our notes to consolidated financial statements, 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 statement of the quarterly results for the periods. The operating results and data for any quarter are not necessarily indicative of the results for future periods.

16

Table of Contents