Edgar Filing: COINSTAR INC

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended March 31, 2013

¨	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		98004
(Address of principal executive offices)		(Zip Code)

(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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

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.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ¨ No x

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


Class		Outstanding at April 19, 2013
Common Stock, $0.001 par value		28,096,785

COINSTAR, INC.

FORM 10-Q

INDEX


		Page
PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited):

	Consolidated Balance Sheets as of March 31, 2013 and December 31, 2012		1

	Consolidated Statements of Comprehensive Income for the three months ended March 31, 2013 and 2012		2

	Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2013		3

	Consolidated Statements of Cash Flows for the three months ended March 31, 2013 and 2012		4

	Notes to Consolidated Financial Statements		6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		24

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		38

Item 4.	Controls and Procedures		38

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings		39

Item 1A.	Risk Factors		40

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		53

Item 3.	Defaults Upon Senior Securities		53

Item 4.	Mine Safety Disclosures		53

Item 5.	Other Information		53

Item 6.	Exhibits		54

SIGNATURE			56

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

COINSTAR, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(unaudited)


	March 31, 2013			December 31, 2012
Assets
Current Assets:
Cash and cash equivalents	$	453,452		$	282,894
Accounts receivable, net of allowances of $1,874 and $2,003		56,006			58,331
Short term investments		53,000			—
Content library		155,797			177,409
Deferred income taxes		—			7,187
Prepaid expenses and other current assets		39,137			29,686

Total current assets		757,392			555,507
Property and equipment, net		561,121			571,358
Notes receivable		26,669			26,731
Deferred income taxes		3,024			1,373
Goodwill and other intangible assets		356,812			358,829
Other long-term assets		60,579			47,927

Total assets	$	1,765,597		$	1,561,725

Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable	$	223,843		$	250,588
Accrued payable to retailers		123,013			138,413
Other accrued liabilities		118,955			146,125
Current callable convertible debt		132,103			—
Current portion of long-term debt		16,478			15,529
Current portion of capital lease obligations		13,812			13,350
Deferred income taxes		1,400			—

Total current liabilities		629,604			564,005
Long-term debt and other long-term liabilities		514,926			341,179
Capital lease obligations		15,479			15,702
Deferred tax liabilities		92,347			91,751

Total liabilities		1,252,356			1,012,637
Commitments and contingencies (Note 15)
Debt conversion feature		8,273			—
Stockholders’ Equity:
Preferred stock, $0.001 par value - 5,000,000 shares authorized; no shares issued or outstanding		—			—
Common stock, $0.001 par value - 60,000,000 authorized;
36,168,730 and 35,797,592 shares issued;
28,060,015 and 28,626,323 shares outstanding		486,553			504,881
Treasury stock		(339,631	)		(293,149	)
Retained earnings		361,583			338,979
Accumulated other comprehensive loss		(3,537	)		(1,623	)

Total stockholders’ equity		504,968			549,088

Total liabilities and stockholders’ equity	$	1,765,597		$	1,561,725

See accompanying Notes to Consolidated Financial Statements

COINSTAR, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands, except per share data)

(unaudited)


	Three Months Ended
	March 31,
	2013			2012
Revenue	$	574,686		$	568,179
Expenses:
Direct operating⁽¹⁾		407,799			390,410
Marketing		7,957			6,957
Research and development		4,397			3,930
General and administrative		55,216			47,811
Depreciation and other		49,438			40,104
Amortization of intangible assets		2,017			687

Total expenses		526,824			489,899

Operating income		47,862			78,280
Other income (expense), net:
Income (loss) from equity method investments, net (Note 8)		(7,025	)		15,159
Interest expense, net		(5,533	)		(4,114	)
Other, net		59			43

Total other income (expense), net		(12,499	)		11,088

Income before income taxes		35,363			89,368
Income tax expense		(12,759	)		(35,672	)

Net income		22,604			53,696

Foreign currency translation adjustment⁽²⁾		(1,914	)		727

Comprehensive income	$	20,690		$	54,423

Basic earnings per share	$	0.82		$	1.76
Diluted earnings per share	$	0.78		$	1.65
Weighted average shares used in basic per share calculations		27,493			30,590
Weighted average shares used in diluted per share calculations		28,937			32,628

(1)	“Direct operating” excludes depreciation and other of $33.3 million and $30.0 million for the three months ended March 31, 2013 and 2012, respectively.

(2)	Foreign currency translation adjustment has no tax effect for the three months ended March 31, 2013 and 2012, respectively.

See accompanying Notes to Consolidated Financial Statements

COINSTAR, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except share data)

(unaudited)


												Accumulated
												Other
	Common Stock						Treasury			Retained		Comprehensive
	Shares			Amount			Stock			Earnings		Loss			Total
BALANCE, December 31, 2012		28,626,323		$	504,881		$	(293,149	)	$	338,979	$	(1,623	)	$	549,088
Proceeds from exercise of options, net		153,810			4,655											4,655
Adjustments related to tax withholding for share-based compensation		(65,730	)		(3,913	)										(3,913	)
Share-based payments expense		283,058			4,837											4,837
Tax benefit on share-based compensation expense					1,973											1,973
Repurchases of common stock		(937,446	)					(46,482	)							(46,482	)
Repurchase of convertible debt - conversion option, net of tax					(17,607	)										(17,607	)
Reclassification of debt conversion feature to temporary equity					(8,273	)										(8,273	)
Net income											22,604					22,604
Foreign currency translation adjustment, net of tax													(1,914	)		(1,914	)

BALANCE, March 31, 2013		28,060,015		$	486,553		$	(339,631	)	$	361,583	$	(3,537	)	$	504,968

See accompanying Notes to Consolidated Financial Statements

COINSTAR, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)


	Three Months Ended
	March 31,
	2013			2012
Operating Activities:
Net income	$	22,604		$	53,696
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation and other		49,438			40,104
Amortization of intangible assets and deferred financing fees		2,577			1,219
Share-based payments expense		4,837			8,792
Excess tax benefits on share-based payments		(2,069	)		(3,139	)
Deferred income taxes		10,416			31,184
(Income) loss from equity method investments, net		7,025			(15,159	)
Non-cash interest on convertible debt		1,663			1,717
Other		609			(1,511	)
Cash flows from changes in operating assets and liabilities:
Accounts receivable		2,305			(1,776	)
Content library		21,612			(3,318	)
Prepaid expenses and other current assets		(7,921	)		(3,812	)
Other assets		514			551
Accounts payable		(29,971	)		(38,661	)
Accrued payable to retailers		(14,697	)		(14,014	)
Other accrued liabilities		(27,840	)		(955	)

Net cash flows from operating activities		41,102			54,918
Investing Activities:
Purchases of property and equipment		(33,231	)		(38,007	)
Proceeds from sale of property and equipment		132			144
Purchases of short term investments		(53,000	)		—
Receipt of note receivable principal		95			—
Equity investments		(14,000	)		(28,350	)

Net cash flows from investing activities		(100,004	)		(66,213	)
Financing Activities:
Proceeds from issuance of senior unsecured notes		343,769			—
Financing costs associated with senior unsecured notes		(302	)		—
Principal payments on term loan and repurchase of convertible debt		(65,736	)		(2,188	)
Repurchases of common stock		(46,482	)		—
Principal payments on capital lease obligations and other debt		(3,251	)		(4,683	)
Excess tax benefits related to share-based payments		2,069			3,139
Proceeds from exercise of stock options, net		1,093			2,213

Net cash flows from financing activities		231,160			(1,519	)
Effect of exchange rate changes on cash		(1,700	)		587

Increase (decrease) in cash and cash equivalents		170,558			(12,227	)
Cash and cash equivalents:
Beginning of period		282,894			341,855

End of period	$	453,452		$	329,628

Supplemental disclosure of cash flow information:
Cash paid during the period for interest	$	4,408		$	5,731
Cash paid during the period for income taxes	$	805		$	1,530
Supplemental disclosure of non-cash investing and financing activities:
Purchases of property and equipment financed by capital lease obligations	$	3,455		$	1,310
Purchases of property and equipment included in ending accounts payable	$	30,447		$	13,522
Non-cash gain included in equity investments	$	—		$	19,500
Non-cash debt issue costs	$	6,231		$	—

See accompanying Notes to Consolidated Financial Statements

INDEX FOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


		Page
Note 1	Basis of Presentation and Principles of Consolidation		6

Note 2	Organization and Business		7

Note 3	Business Combination		7

Note 4	Cash and Cash Equivalents		8

Note 5	Short Term Investments		9

Note 6	Property and Equipment		9

Note 7	Goodwill and Other Intangible Assets		9

Note 8	Equity Method Investments and Related Party Transactions		10

Note 9	Debt and Other Long-Term Liabilities		12

Note 10	Repurchases of Common Stock		15

Note 11	Share-Based Payments		15

Note 12	Earnings Per Share		18

Note 13	Business Segments and Enterprise-Wide Information		18

Note 14	Fair Value		20

Note 15	Commitments and Contingencies		21

Note 16	Subsequent Event		23

COINSTAR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1: BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION

The unaudited consolidated financial information included herein has been prepared by Coinstar, Inc., pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The unaudited consolidated financial statements of Coinstar, Inc. 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. The financial information as of December 31, 2012, is derived from our 2012 Annual Report on Form 10-K. The consolidated financial statements included within this Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements and the notes thereto included in our 2012 Annual Report on Form 10-K. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year.

The accompanying consolidated financial statements include the accounts of Coinstar, Inc. and our wholly-owned subsidiaries. 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.

Accounting Pronouncements Adopted During the Current Year

In July 2012, the FASB issued ASU No. 2012-02, “Intangibles – Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment.” ASU 2012-02 allows an entity to first assess qualitative factors to determine whether it is necessary to perform the quantitative impairment test for indefinite-lived intangible assets. An organization that elects to perform a qualitative assessment no longer is required to perform the quantitative impairment test for an indefinite-lived intangible asset if it is not more likely than not that the asset is impaired. The ASU, which applies to all public, private, and not-for-profit organizations, is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Our adoption of ASU 2012-02 in the first quarter of 2013 did not have a material impact on our financial position, results of operations or cash flows.

On February 5, 2013, the FASB issued ASU No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” This ASU was issued to address concerns raised in the initial issuance of ASU No. 2011-05, “Presentation of Comprehensive Income”, for which the Board deferred the effective date of certain provisions relating to the presentation of reclassification adjustments in the income statement. With the issuance of ASU 2013-02 entities are now required to disclose:

•

For items reclassified out of accumulated other comprehensive income (AOCI) and into net income in their entirety, the effect of the reclassification on each affected net income line item; and

•

For AOCI reclassification items that are not reclassified in their entirety into net income, a cross reference to other required U.S. GAAP disclosures.

This information may be provided either in the notes or parenthetically on the face of the statement that reports net income as long as all the information is disclosed in a single location. However, an entity is prohibited from providing this information parenthetically on the face of the statement that reports net income if it has items that are not reclassified in their entirety into net income. For public entities, the guidance is effective for annual reporting periods beginning after December 15, 2012 and interim periods within those years. Our adoption of ASU 2013-02 in the first quarter of 2013 did not have a material impact on our financial position, results of operations or cash flows.

NOTE 2: ORGANIZATION AND BUSINESS

Description of Business

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 Redbox and Coin segments. Our Redbox segment consists of self-service kiosks where consumers can rent or purchase movies and video games and, in select markets, purchase tickets for events. Our Coin segment consists of self-service coin-counting kiosks where consumers can convert their coins to cash or stored value products. Our New Ventures segment is focused on identifying, evaluating, building, and developing innovative self-service concepts in the marketplace. Our kiosks are located primarily in supermarkets, drug stores, mass merchants, financial institutions, convenience stores, and restaurants. Our kiosk and location counts as of March 31, 2013, are as follows:


	Kiosks		Locations
Redbox⁽¹⁾		43,700		36,100
Coin		20,600		20,400
New Ventures		220		220

Total⁽¹⁾		64,520		56,720

(1)	Excludes approximately 300 kiosks acquired from NCR that had not been replaced with Redbox kiosks or removed at March 31, 2013. See Note 3: Business Combination for more information on the NCR Asset Acquisition.

NOTE 3: BUSINESS COMBINATION

On June 22, 2012, Redbox acquired certain assets of NCR Corporation (“NCR”) related to NCR’s self-service entertainment DVD kiosk business (the “NCR Asset Acquisition”). The purchased assets include, among others, self-service DVD kiosks, content library, intellectual property, and certain related contracts, including with certain retailers. In consideration, Redbox paid NCR $100.0 million in cash and assumed certain liabilities of NCR related to the purchased assets. The operating results of NCR’s self-service entertainment DVD kiosk business are included in our Redbox segment results.

We accounted for the NCR Asset Acquisition as a business combination. The measurement period for purchase price allocation ends as soon as information regarding the assessment of the quality and quantity of the kiosks and certain facts as well as circumstances becomes available; such measurement period will not exceed twelve months from the acquisition date. Adjustments in the purchase price allocation may require recasting the amounts allocated to goodwill retroactively to the period in which the NCR Asset Acquisition occurred.

The purchase price is preliminarily allocated based on the fair value of the assets acquired and liabilities assumed at the NCR Asset Acquisition date as follows:


	June 22,
Dollars in thousands	2012
Assets acquired:
Content library	$	4,330
Prepaid expenses		240
Deferred income taxes		1,500
Property and equipment		9,130
Intangible assets		46,960
Goodwill		42,110

Total assets acquired		104,270
Liabilities assumed:
Accrued liabilities		(4,270	)

Total consideration paid in cash	$	100,000

Goodwill of $42.1 million, attributable primarily to the future expected synergies and operational efficiencies, as well as market expansion, has been assigned to our Redbox segment. The majority of the goodwill is deductible for tax purposes.

We estimated the fair value of the acquired identifiable intangible assets based on the forecasted future cash flows discounted at a rate of approximately 11%. A portion of the purchase price is allocated to the following identifiable intangible assets:


Dollars in thousands	Purchase Price		Estimated Useful Life in Years
Intangible assets:
Retailer relationships	$	40,000		10
Patents		6,300		8
Trademark and trade name		500		1
Internal use software		160		1

Total	$	46,960

As of the date of acquisition we estimated the weighted-average useful life of the acquired identifiable intangible assets to be 9.60 years.

Based on the identified intangible assets recorded as of the closing date and assuming no subsequent impairment of the underlying assets, the estimated remaining amortization as of March 31, 2013 is as follows:


Dollars in thousands	Amortization Expense
Remainder of 2013	$	3,789
2014		4,788
2015		4,788
2016		4,788
2017		4,788
2018		4,788
Thereafter		15,178

Total remaining amortization	$	42,907

NOTE 4: CASH AND CASH EQUIVALENTS

Cash and Cash Equivalents

We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents. Our cash equivalents were $232.5 million and $60.4 million at March 31, 2013, and December 31, 2012, respectively, consisting of money market demand accounts and investment grade fixed income securities such as money market funds, certificate of deposits, and commercial paper. Our cash balances with financial institutions may exceed the deposit insurance limits.

Included in our cash and cash equivalents at March 31, 2013, and December 31, 2012, were $82.2 million and $91.8 million, respectively that we identified for settling our accrued payable to our retailer partners in relation to our Coin kiosks.

NOTE 5: SHORT TERM INVESTMENTS

During the first quarter of 2013, we purchased $53.0 million of short-term investments, which consists of high credit quality, tax-exempt Variable Rate Demand Notes (VRDN). VRDNs have a put option that allows them to be liquidated generally on a same day or a five business day settlement basis. All of the put options are secured by a pledged liquidity source and are backed by highly rated financial institutions.

We classify these short-term investments as available for sale. VRDN securities have variable interest rates that reset at regular intervals. Because our VRDNs have short reset periods, their cost approximates fair value and there were no realized or unrealized gains or losses related to the securities.

NOTE 6: PROPERTY AND EQUIPMENT


Dollars in thousands	March 31, 2013			December 31, 2012
Kiosks and components	$	1,048,084		$	1,026,989
Computers, servers, and software		203,687			195,756
Office furniture and equipment		6,713			6,538
Vehicles		7,140			7,278
Leasehold improvements		21,672			19,743

Property and equipment, at cost		1,287,296			1,256,304
Accumulated depreciation and amortization		(726,175	)		(684,946	)

Property and equipment, net	$	561,121		$	571,358

During the first quarter of 2013, we began exploring strategic alternatives for our New Ventures self-service concept for refurbished electronics called Orango^TM. We determined that certain assets related to this concept would be sold or otherwise disposed of before the end of their previously established useful lives and estimated that their fair value less costs to sell utilizing a cash flow approach exceeded their carrying value by $3.0 million. We consequently recorded charges of $2.5 million to depreciation expense and $0.5 million to direct operating expense in our Consolidated Statements of Comprehensive Income. We did not separately present the assets or liabilities as held for sale in our Consolidated Balance Sheets because the amount is immaterial.

NOTE 7: GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

The carrying amount of goodwill was as follows:


	March 31,		December 31,
Dollars in thousands	2013		2012
Goodwill	$	309,860	$	309,860

Other Intangible Assets

The gross amount of our other intangible assets and the related accumulated amortization were as follows:


Dollars in thousands	Amortization Period	March 31, 2013			December 31, 2012
Retailer relationships	5 -10 years	$	53,344		$	53,344
Accumulated amortization			(13,095	)		(11,518	)

			40,249			41,826

Other	1 -40 years		9,404			9,404
Accumulated amortization			(2,701	)		(2,261	)

			6,703			7,143

Intangible assets, net		$	46,952		$	48,969

Amortization expense was as follows:


	Three Months Ended March 31,
Dollars in thousands	2013		2012
Retailer relationships	$	1,577	$	614
Other		440		73

Total amortization of intangible assets	$	2,017	$	687

Expected future amortization is as follows:


Dollars in thousands	Retailer Relationships		Other
Remainder of 2013	$	4,673	$	794
2014		5,432		970
2015		4,012		940
2016		4,012		828
2017		4,012		806
2018		4,012		802
Thereafter		14,096		1,563

Total expected amortization	$	40,249	$	6,703

NOTE 8: EQUITY METHOD INVESTMENTS AND RELATED PARTY TRANSACTIONS

Redbox Instant^TM by Verizon

In February 2012, Redbox and Verizon Ventures IV LLC (“Verizon”), a wholly owned subsidiary of Verizon Communications Inc., entered into a Limited Liability Company Agreement (the “LLC Agreement”) and related arrangements. The LLC Agreement governs the relationship of the parties with respect to a joint venture, Redbox Instant by Verizon (the “Joint Venture”) formed for the primary purpose of developing, launching, marketing and operating a nationwide “over-the-top” video distribution service to provide consumers with access to video programming content, including linear content, delivered via broadband networks to video enabled viewing devices and offering rental of physical DVDs and Blu-ray^TM Discs from Redbox kiosks. Redbox initially acquired a 35.0% ownership interest in the Joint Venture and made an initial capital contribution of $14.0 million in cash in February 2012 subsequent to the formation of the Joint Venture. The Joint Venture board of managers may request each member to make additional capital contributions, on a pro rata basis relative to its respective ownership interest. If a member does not make any or all of its requested capital contributions, as the case may be, the other contributing member generally may make such capital contributions. So long as Redbox contributes its pro rata share of the first $450.0 million of capital contributions to the Joint Venture, Redbox’s interest cannot be diluted below 10.0%. During the first quarter of 2013, at the request of the Joint Venture board of managers, Redbox made a cash payment of $14.0 million representing its pro-rata share of the requested capital contribution.

In addition to the initial cash capital contribution, Redbox granted the Joint Venture a limited, non-exclusive, non-transferable, royalty-free right and license to use certain Redbox trademarks, of which the estimated fair value was approximately $30.0 million based on an evaluation of information available as of the date of the grant. As a result, we recognized a gain of $19.5 million related to the pro-rata amount of fair value given up in exchange for our 35.0% interest in the Joint Venture. See Note 14: Fair Value for additional information about how we estimated the fair value of the Redbox trademarks. The initial excess of our cost of the investment in the Joint Venture over our share of the Joint Venture’s equity will be used to adjust future amortization expense.

We account for Redbox’s ownership interest in the Joint Venture using the equity method of accounting. During the first quarter of 2012, the transaction related costs of $4.4 million were recorded as a part of the equity investment in the Joint Venture. We recognized a loss of approximately $6.4 and $3.9 million from our equity method investment, representing our share of the Joint Venture’s operating results as well as the amortization of differences in carrying amount and underlying equity for the three month periods ended March 31, 2013, and 2012, respectively. Separate from equity method accounting for our ownership interest in the Joint Venture, we record revenue attributable with the rental of DVDs and Blu-ray Discs from our Redbox kiosks within our Redbox segment.

Redbox has certain rights to cause Verizon to acquire Redbox’s interest in the Joint Venture at fair value (generally following the fifth anniversary of the LLC Agreement or in limited circumstances, at an earlier period of time) and Verizon has certain rights to acquire Redbox’s interest in the Joint Venture at fair value (generally following the seventh anniversary of the LLC Agreement, or, in limited circumstances, the fifth anniversary of the LLC Agreement).

Other Equity Method Investments

We make strategic equity investments in external companies that provide automated self-service kiosk solutions. Our equity method investments and ownership percentages as of March 31, 2013, were as follows:


Dollars in thousands	Equity Investment		Ownership Percentage
Redbox Instant by Verizon	$	33,471	35%
Other equity investments		12,710	11% - 26%

Equity method investments	$	46,181

Income (loss) from Equity Method Investments

Income from equity method investments within our Consolidated Statements of Comprehensive Income is composed of the following:


	Three Months Ended March 31,
Dollars in thousands	2013			2012
Trademark gain	$	—		$	19,500
Proportionate share of net loss of equity method investees:
Redbox Instant by Verizon		(5,822	)		(3,257	)
Other		(584	)		(421	)

Total proportionate share of net loss of equity method investees		(6,406	)		(3,678	)
Amortization of difference in carrying amount and underlying equity in Redbox Instant by Verizon		(619	)		(663	)

Total income (loss) from equity method investments	$	(7,025	)	$	15,159

Related Party Transactions

At March 31, 2013 and December 31, 2012, included within accounts receivable, net of allowance, on our Consolidated Balance Sheets, was $6.3 million and $0.9 million, respectively, due from the Joint Venture related to costs incurred by Redbox on behalf of the Joint Venture during the normal course of business.

NOTE 9: DEBT AND OTHER LONG-TERM LIABILITIES


As of March 31, 2013	Debt and Other Liabilities
Dollars in thousands	Current		Long-term		Total
Senior unsecured notes	$	—	$	350,000	$	350,000
Convertible debt		132,103		—		132,103
Term loan		16,405		140,000		156,405
Redbox rollout agreement		73		2		75
Asset retirement obligation		—		13,373		13,373
Other long-term liabilities		—		11,551		11,551

Total	$	148,581	$	514,926	$	663,507


As of December 31, 2012	Debt and Other Liabilities
Dollars in thousands	Current		Long-term		Total
Convertible debt	$	—	$	172,810	$	172,810
Term loan		15,312		144,375		159,687
Redbox rollout agreement		217		3		220
Asset retirement obligation		—		14,020		14,020
Other long-term liabilities		—		9,971		9,971

Total	$	15,529	$	341,179	$	356,708

Senior unsecured notes

On March 12, 2013, we and certain subsidiaries of ours, as subsidiary guarantors (the “Subsidiary Guarantors”), entered into an indenture (the “Indenture”) with Wells Fargo Bank, National Association, as trustee, pursuant to which we issued $350.0 million principal amount of 6.000% Senior Notes due 2019 (the “Notes”) at par for proceeds, net of expenses, of $343.8 million and the Subsidiary Guarantors would guarantee the Notes (the “Guarantees”). We will use the proceeds of this offering primarily toward Convertible Note repayment and other corporate purposes. The Notes and the Guarantees are general unsecured obligations and are effectively subordinated to all of our and Subsidiary Guarantors’ existing and future secured debt to the extent of the collateral securing that secured debt. In addition, the Notes will be effectively subordinated to all of the liabilities of our existing and future subsidiaries that are not guaranteeing the Notes. Interest on the Notes will be payable on March 15 and September 15 of each year, beginning on September 15, 2013, with the Notes maturing on March 15, 2019.

We may redeem any of the Notes beginning on March 15, 2016, at a redemption price of 103% of their principal amount plus accrued and unpaid interest (and additional interest, if any); then the redemption price for the Notes will be 101.5% of their principal amount plus accrued and unpaid interest (and additional interest, if any) for the twelve-month period beginning March 15, 2017; and then the redemption price for the Notes will be 100% of their principal amount plus accrued interest and unpaid interest (and additional interest, if any) beginning on March 15, 2018. We may also redeem some or all of the Notes before March 15, 2016, at a redemption price of 100% of the principal amount, plus accrued and unpaid interest (and additional interest, if any), to the redemption date, plus an applicable “make-whole” premium. In addition, before March 15, 2016, we may redeem up to 35% of the aggregate principal amount of the Notes with the proceeds of certain equity offerings at 106% of their principal amount plus accrued and unpaid interest (and additional interest, if any); the Company may make such redemption only if, after any such redemption, at least 65% of the aggregate principal amount of Notes originally issued remains outstanding.

Upon a change of control (as defined in the Indenture), we will be required to make an offer to purchase the Notes or any portion thereof. That purchase price will equal 101% of the principal amount of the Notes on the date of purchase plus accrued and unpaid interest (and additional interest, if any). If we make certain asset sales and do not reinvest the proceeds or use such proceeds to repay certain debt, we will be required to use the proceeds of such asset sales to make an offer to purchase the Notes at 100% of their principal amount, together with accrued and unpaid interest and additional interest, if any, to the date of purchase.

The terms of the Notes restrict our ability and the ability of certain of its subsidiaries to, among other things: incur additional indebtedness; create liens; pay dividends or make distributions in respect of capital stock; purchase or redeem capital stock; make investments or certain other restricted payments; sell assets; enter into transactions with stockholders or affiliates; or effect a consolidation or merger. However, these and other limitations set forth in the Indenture will be subject to a number of important qualifications and exceptions.

The Indenture provides for customary events of default which include (subject in certain cases to grace and cure periods), among others: nonpayment of principal or interest or premium; breach of covenants or other agreements in the Indenture; defaults in failure to pay certain other indebtedness; the failure to pay certain final judgments; the invalidity of certain of the Subsidiary Guarantors’ Guarantees; and certain events of bankruptcy, insolvency or reorganization. Generally, if an event of default occurs and is continuing under the Indenture, either the trustee or the holders of at least 25% in aggregate principal amount of the Notes then outstanding may declare the principal amount plus accrued and unpaid interest on the Notes to be immediately due and payable.

Revolving Line of Credit and Term Loan

Our current credit facility, entered into on July 15, 2011, provides for a five-year, $175.0 million term loan and a $450.0 million revolving line of credit. Subject to additional commitments from lenders, we have the option to increase the aggregate facility size by $250.0 million, which can comprise additional term loans and a revolving line of credit.

The credit facility is secured by a first priority security interest in substantially all of our assets and the assets of our domestic subsidiaries, as well as a pledge of a substantial portion of certain equity interests in our subsidiaries. As of March 31, 2013, there was no outstanding revolving line of credit borrowing and we were in compliance with the covenants of the credit facility.

On July 15, 2011, we borrowed $175.0 million under the term loan facility. The Credit Facility matures on July 15, 2016, at which time all outstanding borrowings must be repaid. The annual interest rate on the credit facility is variable, based on an index plus a margin determined by our consolidated net leverage ratio. In 2013, the applicable LIBOR Rate margin was fixed at 125 basis points and the applicable Base Rate margin was fixed at 25 basis points. The interest rate on amounts outstanding under the term loan at March 31, 2013, was 1.45%.

The term loan is subject to mandatory debt repayments of the outstanding borrowings. The schedule of future principal repayments is as follows:


Dollars in thousands	Repayment Amount
Remaining due in 2013	$	12,031
2014		19,687
2015		21,875
2016		102,812

Total	$	156,405

Convertible Debt

The aggregate outstanding principal of our 4.0% Convertible Senior Notes (the “Convertible Notes”) is $140.4 million. The Convertible Notes bear interest at a fixed rate of 4.0% per annum, payable semi-annually in arrears on each March 1 and September 1, and mature on September 1, 2014. The effective interest rate at issuance was 8.5%. As of March 31, 2013, we were in compliance with all covenants.

The Convertible Notes become convertible (the “Conversion Event”) when the closing price of our common stock exceeds $52.38, 130% of the Convertible Notes’ conversion price, for at least 20 trading days during the 30 consecutive trading days prior to each quarter-end date. If the Convertible Notes become convertible and should the holders elect to convert, we will be required to pay them up to the full face value of the Convertible Notes in cash as well as deliver shares of our common stock for any excess conversion value. The number of potentially issued shares increases as the market price of our common stock increases. As of March 31, 2013, such early conversion event was met. As a result the Convertible Notes were classified as a current liability and the debt conversion feature was classified as temporary equity on our Consolidated Balance Sheets. In the three months ended March 31, 2013, we repurchased 44,607 Convertible Notes or $44.6 million in face value of Convertible Notes for $62.5 million in cash. The amount by which the cash paid exceeds the fair value of the Notes is recorded as a reduction of stockholders’ equity. The loss from early extinguishment of these Convertible Notes was approximately $1.9 million and is recorded in interest expense in our Consolidated Statements of Comprehensive Income. Additional details of our Convertible Notes are as follows:


Dollars in thousands	Principal			Discount			Net
Outstanding December 31, 2012	$	184,983		$	(12,173	)	$	172,810
Early extinguishments		(44,607	)		2,237			(42,370	)
Amortization of discount		—			1,663			1,663

Outstanding March 31, 2013	$	140,376		$	(8,273	)	$	132,103

The following interest expense was related to our Convertible Notes:


	Three Months Ended
	March 31,
Dollars in thousands	2013		2012
Contractual interest expense	$	1,701	$	2,000
Amortization of debt discount		1,663		1,717

Total interest expense related to the Convertible Notes	$	3,364	$	3,717

The remaining unamortized debt discount is expected to be recognized as non-cash interest expense as follows (in thousands):


	Non-cash
Year	Interest Expense
Remainder of 2013	$	4,259
2014		4,014

Total unamortized discount	$	8,273

Total interest expense for the first quarter of 2013 and 2012 was $6.7 million and $5.2 million, respectively.

NOTE 10: REPURCHASES OF COMMON STOCK

The following table presents a summary of our Board authorization of the stock repurchases during 2013:


	Board
Dollars in thousands	Authorization
Authorized repurchase - as of January 1, 2013	$	133,640
Additional board authorization		250,000
Proceeds from the exercise of stock options		4,655
Repurchase of common stock from open market		(46,482	)

Authorized repurchase - as of March 31, 2013	$	341,813

Board Authorization

On January 31, 2013, our Board of Directors approved an additional repurchase program of up to $250.0 million of our common stock plus the cash proceeds received from the exercise of stock options by our officers, directors, and employees.

NOTE 11: SHARE-BASED PAYMENTS

We currently grant share-based awards to our employees, non-employee directors and consultants under our 2011 Incentive Plan (the “Plan”). The Plan permits the granting of stock options, restricted stock, restricted stock units, and performance-based restricted stock.

Certain information regarding our share-based payments is as follows:


	Three Months Ended
	March 31,
Dollars in thousands	2013		2012
Share-based payments expense:
Share-based compensation - stock options	$	577	$	769
Share-based compensation - restricted stock		2,615		2,680
Share-based payments for content arrangements		1,645		5,343

Total share-based payments expense	$	4,837	$	8,792

Tax benefit on share-based payments expense	$	1,799	$	3,334


	March 31, 2013
	Unrecognized Share- Based		Weighted-Average
Dollars in thousands	Payments Expense		Remaining Life
Unrecognized share-based payments expense:
Share-based compensation - stock options	$	2,555		2.8 years
Share-based compensation - restricted stock		25,907		2.9 years
Share-based payments for content arrangements		2,927		1.6 years

Total unrecognized share-based payments expense	$	31,389

Share-Based Compensation

Stock options

Shares of common stock are issued upon exercise of stock options. Certain other information regarding our stock-based awards is as follows:

•

Stock options are granted only to our executives and non-employee directors.

•

Options granted during the current year vest annually in equal installments over 4 years, and expire after 10 years.

The following table summarizes the weighted average valuation assumptions we used in the Black-Scholes-Merton Valuation model for stock options granted during 2013:


	Three Months Ended
	March 31, 2013
Expected term (in years)		6.3
Expected stock price volatility		40.0	%
Risk-free interest rate		1.2	%
Expected dividend yield		0.0	%

The following table presents a summary of stock option activity for 2013:


				Weighted
				Average
				Exercise
Shares in thousands	Options			Price
OUTSTANDING, December 31, 2012		669		$	34.86
Granted		85		$	53.40
Exercised		(155	)	$	30.26
Cancelled, expired, or forfeited		(62	)	$	44.89

OUTSTANDING, March 31, 2013		537		$	37.98

Certain information regarding stock options outstanding as of March 31, 2013, is as follows:


	Options		Options
Shares and intrinsic value in thousands	Outstanding		Exercisable
Number		537		370
Weighted average per share exercise price	$	37.98	$	33.09
Aggregate intrinsic value	$	11,039	$	9,391
Weighted average remaining contractual term (in years)		3.62		1.65

Restricted stock awards

Restricted stock awards are granted to eligible employees, including executives, and non-employee directors. Awards granted to employees and executives vest annually in equal installments over four years. Non-employee director awards vest one year after the grant date. Performance-based restricted stock awards are granted to executives only, with established performance criteria approved by the Compensation Committee of the Board of Directors. Awards of performance-based restricted stock made prior to 2013, once earned, vest in equal installments over three years from the date of grant. Awards of performance-based restricted stock made in 2013, once earned, vest in two installments over three years from the date of grant (65% of the award vests two years from the date of grant and the remaining 35% of the award vests three years from the date of grant). The restricted shares require no payment from the grantee. The fair value of performance-based awards is based on achieving specific performance conditions and is recognized over the vesting period. The fair value of non-performance-based awards is based on the market price on the grant date and is recognized on a straight-line basis over the vesting period.

The following table presents a summary of restricted stock award activity for 2013:


				Weighted
				Average
	Restricted			Grant Date
Shares in thousands	Stock Awards			Fair Value
NON-VESTED, December 31, 2012		604		$	48.95
Granted		354			53.45
Vested		(189	)		45.23
Forfeited		(71	)		49.62

NON-VESTED, March 31, 2013		698			52.17

Share-Based Payments for Content Arrangements

We granted restricted stock as part of content license agreements with certain movie studios. The expense related to these agreements is included within direct operating expenses in our Consolidated Statements of Comprehensive Income and is adjusted based on the number of unvested shares and market price of our common stock each reporting period.

Information related to the shares of restricted stock granted as part of these agreements as of March 31, 2013, is as follows:


							Remaining
	Granted		Vested		Unvested		Vesting Period
Sony		193,348		116,009		77,339		1.3 years
Paramount		300,000		180,000		120,000		1.8 years

Total		493,348		296,009		197,339

NOTE 12: EARNINGS PER SHARE

Basic earnings per share (“EPS”) is computed by dividing the net income for the period by the weighted average number of common shares outstanding during the period. Diluted EPS is computed by dividing the net income for the period by the weighted average number of common and dilutive potential common shares outstanding during the period. We consider restricted stock that provides the holder with a non-forfeitable right to receive dividends to be a participating security. Net income available to participating securities was not material for the periods presented.

Net income used for calculating basic and diluted EPS is the same for all periods presented. The following table sets forth the computation of shares used for the basic and diluted EPS calculations:


	Three Months Ended
	March 31,
In thousands	2013		2012
Weighted average shares used for basic EPS		27,493		30,590
Dilutive effect of stock options and other share-based awards		494		704
Dilutive effect of convertible debt		950		1,334

Weighted average shares used for diluted EPS		28,937		32,628

Stock options and share-based awards not included in diluted EPS calculation because their effect would be antidilutive		254		197

NOTE 13: BUSINESS SEGMENTS AND ENTERPRISE-WIDE INFORMATION

Management, including our chief operating decision maker, who is our CEO, evaluates the performances of our business segments primarily on segment revenue and segment operating income before depreciation, amortization and other, and share-based compensation granted to executives, non-employee directors and employees (“segment operating income”). Segment operating income contains internally allocated costs of our shared service support functions, including corporate executive management, business development, sales, finance, legal, human resources, information technology, and risk management. We also review depreciation and amortization allocated to each segment. Shared-based payments expense related to share-based compensation granted to executives, non-employee directors and employees is not allocated to our segments and is included in the corporate unallocated column in the analysis and reconciliation below; however, share-based payments expense related to our content arrangements with certain movie studios has been allocated to our Redbox segment and is included within direct operating expenses. Our performance evaluation does not include segment assets.

During the second quarter of 2012, we completed the NCR Asset Acquisition. The assets acquired and liabilities assumed, as well as the results of operations, are included in our Redbox segment. See Note 3: Business Combination for additional information about the acquisition.

Our analysis and reconciliation of our segment information to the consolidated financial statements that follows covers our results of operations, which consists of our Redbox, Coin and New Ventures segments. Unallocated general and administrative expenses relate to share-based compensation.


Dollars in thousands							New			Corporate
Three Months Ended March 31, 2013	Redbox			Coin			Ventures			Unallocated			Total
Revenue	$	507,920		$	65,383		$	1,383		$	—		$	574,686
Expenses:
Direct operating		366,681			37,656			3,121			341			407,799
Marketing		6,199			1,053			638			67			7,957
Research and development		4			1,768			2,545			80			4,397
General and administrative		42,862			6,289			3,361			2,704			55,216

Segment operating income (loss)		92,174			18,617			(8,282	)		(3,192	)		99,317
Less: depreciation and amortization		(40,377	)		(8,184	)		(2,894	)		—			(51,455	)

Operating income (loss)		51,797			10,433			(11,176	)		(3,192	)		47,862
Loss from equity method investments, net		—			—			—			(7,025	)		(7,025	)
Interest expense, net		—			—			—			(5,533	)		(5,533	)
Other, net		—			—			—			59			59

Income (loss) before income taxes	$	51,797		$	10,433		$	(11,176	)	$	(15,691	)	$	35,363


Dollars in thousands							New			Corporate
Three Months Ended March 31, 2012	Redbox			Coin			Ventures			Unallocated			Total
Revenue	$	502,942		$	64,826		$	411		$	—		$	568,179
Expenses:
Direct operating		352,268			36,926			1,098			118			390,410
Marketing		4,911			1,720			305			21			6,957
Research and development		481			1,180			2,168			101			3,930
General and administrative		36,464			5,681			2,457			3,209			47,811

Segment operating income (loss)		108,818			19,319			(5,617	)		(3,449	)		119,071
Less: depreciation and amortization		(32,443	)		(8,341	)		(7	)		—			(40,791	)

Operating income (loss)		76,375			10,978			(5,624	)		(3,449	)		78,280
Loss from equity method investments, net		—			—			—			15,159			15,159
Interest expense, net		—			—			—			(4,114	)		(4,114	)
Other, net		—			—			—			43			43

Income (loss) before income taxes	$	76,375		$	10,978		$	(5,624	)	$	7,639		$	89,368

Significant Retailer Relationships

Our Redbox and Coin kiosks are primarily located within retailers. The following retailers accounted for 10.0% or more of our consolidated revenue:


	Three Months Ended
	March 31,
	2013			2012
Wal-Mart Stores Inc.		15.5	%		16.6	%
Walgreen Co.		15.1	%		17.0	%
The Kroger Company		10.1	%		11.0	%

NOTE 14: FAIR VALUE

Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. To measure fair value, we use a three-tier valuation hierarchy based upon observable and non-observable inputs:

•

Level 1: Observable inputs such as quoted prices in active markets for identical assets or liabilities;

•

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; or

•

Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.

The factors or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.

Assets and Liabilities Measured and Reported at Fair Value on a Recurring Basis

The following table presents our financial assets and (liabilities) that are measured and reported at fair value in our Consolidated Balance Sheets on a recurring basis, by level within the fair value hierarchy (in thousands):


Fair Value at March 31, 2013	Level 1		Level 2		Level 3
Money market demand accounts and investment grade fixed income securities	$	232,539	$	—	$	—
Short term investments	$	—	$	53,000	$	—

Fair Value at December 31, 2012	Level 1		Level 2		Level 3
Money market demand accounts and investment grade fixed income securities	$	60,425	$	—	$	—

Money Market Demand Accounts and Investment Grade Fixed Income Securities

We determine fair value for our money market demand accounts and investment grade fixed income securities based on quoted market prices. The fair value of these assets is included in cash and cash equivalents on our Consolidated Balance Sheets.

Short Term Investments

Our short term investments composed of variable rate demand notes are measured using Level 2 inputs for which quoted prices may not be available on active exchanges for identical instruments. Their fair value is principally based on market values determined by management with assistance of a third party pricing service. Since quoted prices in active markets for identical assets are not available, these prices are determined by the pricing service using observable market information such as quotes from less active markets and/or quoted prices of securities with similar characteristics, among other factors.

There were no changes to our valuation techniques in 2013.

Assets and Liabilities Measured and Reported at Fair Value on a Nonrecurring Basis

We recognize or disclose the fair value of certain assets such as notes receivable and non-financial assets, primarily long-lived assets, goodwill, intangible assets and certain other assets in connection with impairment evaluations. All of our nonrecurring valuations use significant unobservable inputs and therefore fall under Level 3 of the fair value hierarchy.

Trademarks License

During the first quarter of 2012, Redbox granted the Joint Venture a limited, non-exclusive, non-transferable, royalty-free right and license to use certain Redbox trademarks. We estimated the fair value of the trademarks to be approximately $30.0 million as of the date of grant based on the relief-from-royalty method. We estimated the preliminary fair value using the information available on the grant date, which consisted of the expected future discounted and tax-effected cash flows attributable to the projected gross revenue stream of the Joint Venture, estimated market royalty rates of approximately 1.5%, as well as a discount rate of approximately 45.0%, which reflected our view of the risks and uncertainties associated with an early development stage entity. See Note 8: Equity Method Investments and Related Party Transactions.

Notes Receivable

On June 9, 2011, we completed the sale transaction of the Money Transfer Business to Sigue Corporation (“Sigue”). We received $19.5 million in cash and a note receivable of $29.5 million (the “Sigue Note”). In December 2011, as part of the sale transaction, we were required to provide Sigue with an additional loan of $4.0 million under terms consistent with the Sigue Note. We estimated the fair value of the Sigue Note based on the future note payments discounted at a market rate for similar risk profile companies, approximately 18.0%, which reflected our best estimate of default risk, and was not an exit price based measure of fair value or the stated value on the face of the Sigue Note. We evaluate the Sigue Note for collectability on a quarterly basis. Based on our evaluation at March 31, 2013, an allowance for credit losses was not established. We recognized interest income on the Sigue Note on an accrual basis based on the imputed interest rate unless it is determined that collection of all principal and interest is unlikely. As of March 31, 2013, the carrying value of the Sigue Note of $26.7 million approximated its estimated fair value and was reported in our Consolidated Balance Sheets.

Fair Value of Other Financial Instruments

The carrying value of our term loan approximates its fair value and falls under Level 2 of the fair value hierarchy.

We estimate the fair value of our convertible debt outstanding using a market rate of approximately 6.0% and 4.5% for similar high-yield debt at March 31, 2013, and December 31, 2012, respectively. The estimated fair value of our convertible debt was approximately $137.2 million and $183.7 million at March 31, 2013, and December 31, 2012, respectively, and was determined based on its stated terms, maturing on September 1, 2014, and an annual interest rate of 4.0%. The fair value estimate of our convertible debt falls under Level 3 of the fair value hierarchy. We have reported the carrying value of our convertible debt, face value less the unamortized debt discount, in our Consolidated Balance Sheets.

We estimated the fair value of our senior unsecured notes outstanding using a market rate of approximately 6.0% for similar high-yield debt at March 31, 2013. The estimated fair value of our senior unsecured notes was approximately $350.0 million at March 31, 2013, and was determined based on their stated terms, maturing on March 15, 2019, and an annual interest rate of 6.0%. The fair value estimate of our convertible debt falls under Level 3 of the fair value hierarchy. We have reported the carrying value of our senior unsecured notes, issued at par, in our Consolidated Balance Sheets.

NOTE 15: COMMITMENTS AND CONTINGENCIES

Purchase commitments

Pursuant to the manufacturing and services agreement entered into as part of the NCR Asset Acquisition, Coinstar, Redbox or an affiliate were committed to purchase goods and services from NCR for a period of five years from June 22, 2012. At the end of the five-year period, if the aggregate amount paid in margin to NCR for goods and services delivered were to equal less than $25.0 million, Coinstar was to pay NCR the difference between such aggregate amount and $25.0 million. As of March 31, 2013, the remaining commitment is $19.0 million under this arrangement.

Letters of Credit

As of March 31, 2013, we had five irrevocable standby letters of credit that totaled $6.8 million. These standby letters of credit, which expire at various times through 2013, are used to collateralize certain obligations to third parties. As of March 31, 2013, no amounts were outstanding under these standby letter of credit agreements.

Legal Matters

judgment. In November 2011, the plaintiff moved for class certification, and Redbox moved for summary judgment. The court denied Redbox’s motion for summary judgment in February 2012. The plaintiff filed an amended complaint on April 19, 2012, and an amended motion for class certification on June 5, 2012. The court denied Redbox’s motion to dismiss the complaint. The class certification motion has been briefed and argued, and the court has not yet ruled on the motion for class certification. The plaintiff has dismissed its claims regarding Redbox’s fees and is only pursuing its claims under the Illinois Rental Purchase Agreement Act and the Illinois Automatic Contract Renewal Act. We believe that the claims against us are without merit and intend to defend ourselves vigorously in this matter. Currently, no accrual has been established as it was not possible to estimate the possible loss or range of loss because this matter had not advanced to a stage where we could make any such estimate.

In March 2011, a California resident, Blake Boesky, individually and on behalf of all others similarly situated, filed a putative class action complaint against our Redbox subsidiary in the U.S. District Court for the Northern District of Illinois. The plaintiff alleges that Redbox retains personally identifiable information of consumers for a time period in excess of that allowed under the Video Privacy Protection Act, 18 U.S.C. §§ 2710, et seq. A substantially similar complaint was filed in the same court in March 2011 by an Illinois resident, Kevin Sterk. Since the filing of the complaint, Blake Boesky has been replaced by a different named plaintiff, Jiah Chung, and an amended complaint has been filed alleging disclosures of personally identifiable information, in addition to plaintiffs’ claims of retention of such information. Plaintiffs are seeking statutory damages, injunctive relief, attorneys’ fees, costs of suit, and interest. The court has consolidated the cases. The court denied Redbox’s motion to dismiss the plaintiffs’ claims upon interlocutory appeal. The U.S. Court of Appeals for the Seventh Circuit reversed the district court’s denial of Redbox’s motion to dismiss plaintiff’s claims involving retention of information, holding that the plaintiffs could not maintain a suit for damages under this theory. On April 25, 2012, the plaintiffs amended their complaint to add claims under the Stored Communications Act, 18 U.S.C. § 2707, and for breach of contract. On May 9, 2012, Redbox moved to dismiss the amended complaint. On July 23, 2012, the court dismissed the added retention claims, except to the extent that plaintiffs seek injunctive, non-monetary relief. On April 8, 2013, Redbox filed a motion seeking summary judgment in its favor on all remaining claims, and requested that the court stay further class proceedings pending resolution of the summary judgment motion. The court has yet to set a briefing schedule on the two motions. We believe that the claims against us are without merit and intend to defend ourselves vigorously in this matter. Currently, no accrual has been established as it is not possible to estimate the possible loss or range of loss because this matter had not advanced to a stage where we could make any such estimate.

In February 2011, a California resident, Michael Mehrens, individually and on behalf of all others similarly situated, filed a putative class action complaint against our Redbox subsidiary in the Superior Court of the State of California, County of Los Angeles. The plaintiff alleges that, among other things, Redbox violated California’s Song-Beverly Credit Card Act of 1971 (“Song-Beverly”) with respect to the collection and recording of consumer personal identification information, and violated the California Business and Professions Code § 17200 based on the alleged violation of Song-Beverly. A similar complaint alleging violations of Song-Beverly and the right to privacy generally was filed in March 2011 in the Superior Court of the State of California, County of Alameda, by a California resident, John Sinibaldi. A third similar complaint alleging only a violation of Song-Beverly, was filed in March 2011 in the Superior Court of the State of California, County of San Diego, by a California resident, Richard Schiff. Plaintiffs are seeking compensatory damages and civil penalties, injunctive relief, attorneys’ fees, costs of suit, and interest. Redbox removed the Mehrens case to the U.S. District Court for the Central District of California, the Sinibaldi case to the U.S. District Court for the Northern District of California, and the Schiff case to the U.S. District Court for the Southern District of California. The Sinibaldi case was subsequently transferred to the U.S. District Court for the Central District of California, where the Mehrens case is pending, and these two cases have been consolidated. At the same time, the plaintiffs substituted Nicolle DiSimone as the named plaintiff in the Mehrens case. After Redbox filed a motion to dismiss, stay, or transfer, the Schiff case was transferred to the U.S. District Court for the Central District of California. On January 4, 2013, the Court dismissed with prejudice the Schiff case for failure to prosecute and failure to comply with court rules and orders. Redbox moved to dismiss the DiSimone/Sinibaldi case, and DiSimone/Sinibaldi moved for class certification. In January 2012, the Court granted Redbox’s motion to dismiss with prejudice and denied DiSimone/Sinibaldi’s motion for class certification as moot. On February 2, 2012, Plaintiffs filed their notice of appeal. After a stay pending the California Supreme Court’s decision in a case presenting similar issues involving Song-Beverly in a case to which Redbox is not a party, Plaintiffs filed their opening brief on April 15, 2013. Redbox’s response is due May 31, 2013. We believe that the claims against us are without merit and intend to defend ourselves vigorously in this matter. Currently, no accrual has been established as it is not possible to estimate the possible loss or range of loss because this matter had not advanced to a stage where we could make any such estimate.

Other Contingencies

During the three months ended March 31, 2013, we resolved a previously disclosed loss contingency related to a supply agreement and recorded a benefit of $11.4 million in the direct operating line item in our Consolidated Statements of Comprehensive Income.

NOTE 16: SUBSEQUENT EVENT

As of April 22, 2013, we have received notification from certain Convertible Note holders of their intent to convert $36.8 million in principal value of notes. Upon conversion we will pay the full face value of the Convertible Notes in cash as well as deliver shares of our common stock for any excess conversion value above the face value determined based on a formula utilizing our stock price during a 25 consecutive trading day period from the time we receive a conversion notice and will record a loss if the fair value of the debt exceeds its net carrying value upon conversion.

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 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 1A of Part II of this Quarterly Report on Form 10-Q and in Item 1A of Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2012 (our “2012 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.

In the following discussion, unless otherwise noted, references to increases or decreases in revenue and expense items, cash flows and financial measures are based on the quarter ended March 31, 2013, compared with the quarter ended March 31, 2012.

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. Collectively our business segments and strategic investments operate within six consumer sectors; Entertainment, Money, Food & Beverage, Beauty & Consumer Packaged Goods, Health and Electronics.

Our automated retail business model leverages technology advancements that allow delivery of new and innovative consumer products in a compact, automated format. We believe this model positions us to address retailers’ increasing need to provide more in less space driven by increased urbanization and consumers’ increasing expectation of instant gratification. Our products and services can be found at approximately 64,520 kiosks in leading supermarkets, drug stores, mass merchants, financial institutions, convenience stores, and restaurants.

Core Offerings

We have two core businesses:

•

Our Redbox business segment (“Redbox”), where consumers can rent or purchase movies and video games and, in select markets, purchase tickets for events from self-service kiosks is focused on the entertainment consumer sector.

•

Our Coin business segment (“Coin”) is focused on the money consumer sector and provides self-service kiosks where consumers can convert their coins to cash, convert coins and paper bills to stored value products or, from an increasing number of locations, withdraw cash from their stored value accounts and exchange gift cards.

New Ventures

We identify, evaluate, build and develop innovative new self-service concepts in the automated retail space in our New Ventures business segment (“New Ventures”). Self-service kiosk concepts we are currently exploring in the marketplace represent the Food & Beverage, Entertainment, Beauty & Consumer Packaged Goods and Electronics consumer sectors.

Strategic Investments and Joint Venture

We make strategic investments in external companies that provide automated self-service kiosk solutions. Current investments address the Health and Electronics consumer sectors and the Entertainment sector through our Redbox Instant by Verizon joint venture. See Note 8: Equity Method Investments and Related Party Transactions in our Notes to Consolidated Financial Statements for more information.

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 deploying, scaling and managing kiosk businesses. We build strong retailer relationships by providing retailers with turnkey solutions that complement their businesses without significant outlays of time and financial resources. We believe we have significant opportunities to continue to grow our revenues, profitability and cash flow by capitalizing on our strengths and favorable industry trends through the execution of the following strategies:

•

Continue growing our Redbox business profitably. We believe we will continue to profitably grow Redbox as our newly installed Redbox kiosks continue to become established in their respective locations. In addition, we believe there are a number of other ways Redbox will continue to grow profitability including through the distribution of more Blu-ray^TM discs as well as investment in other analytic tools that will allow for personalized recommendations among other features.

•

Leverage our existing platforms to drive new revenue opportunities. We believe that our extensive Redbox and Coin networks lend themselves to additional revenue opportunities with limited incremental investments. At Redbox, we launched video game rentals and Redbox Tickets^TM both of which leverage existing kiosk infrastructure. In the Coin business we have announced an offering with PayPal^®, expanded fee-free options, and launched a gift card exchange business. We will continue to develop consumer oriented products and services that take advantage of our existing points of presence.

•

Develop and expand Redbox Instant by Verizon. We believe Redbox Instant^TM by Verizon provides consumers with a unique and compelling value proposition that combines new release physical and curated digital content. Although we believe that physical DVD rentals will remain a popular content choice with consumers for the foreseeable future, we are committed to addressing the changing needs and preferences of our consumers. Due to the variable cost structure of Redbox Instant by Verizon’s content arrangements and the joint venture’s current plans, we do not presently anticipate significant funding requirements by us after this year. However, we believe there is considerable opportunity for us to grow our consumer base, increase frequency of kiosk use, and achieve strong financial returns from our investment in this joint venture, including through our sale of kiosk rental nights and potential receipt of future dividend distributions if available under the joint venture’s mandatory cash distribution plan.

•

Optimize revenues from our existing Redbox and Coin kiosk offerings. While we have substantially completed the build out of our Redbox and Coin networks in the U.S., we believe we can improve financial performance through kiosk optimization. We will continue to focus on finding attractive locations for our kiosks, including through redeployment of underperforming kiosks to lower kiosk density or higher consumer traffic areas. Specific to Redbox, we are retrofitting a significant percentage of our existing kiosks to provide increased capacity which will enable Redbox to retain discs in the kiosks longer thereby allowing us to provide greater title selection and copy depth to generate incremental rentals. We also continuously improve our proprietary algorithms allowing Redbox to more accurately predict daily film availability and demand at individual kiosk locations.

•

Use our expertise to continue to develop innovative automated retail solutions. Through Redbox and Coin, we have demonstrated our ability to profitably scale automated retail solutions. We are leveraging those core competencies to identify and develop new automated retail concepts. For example, we have developed the Rubi^TM self-service coffee kiosk, which is in over 130 locations. In addition, we continue to invest in additional self-service concepts including a gift card exchange business which is in over 50 locations.

Recent Events

•

On March 12, 2013, we issued $350.0 million principal amount of 6.000% Senior Notes due 2019. See Note 9: Debt and Other Long-Term Liabilities in our Notes to Consolidated Financial Statements.

•

During the three months ended March 31, 2013, we retired $44.6 million in principal of our Convertible Senior Notes. See Note 9: Debt and Other Long-Term Liabilities in our Notes to Consolidated Financial Statements.

•

During the three months ended March 31, 2013, we repurchased 937,446 shares of our common stock for $46.5 million. See Note 10: Repurchases of Common Stock in our Notes to Consolidated Financial Statements

•

On March 14, 2013, Redbox Instant by Verizon concluded testing and began commercial launch of its nationwide “over-the-top” video distribution service delivered via broadband networks combined with physical DVD and Blu-ray discs rentals from our kiosks.

Results of Operations

Consolidated Results

The discussion and analysis that follows covers our results of operations:


	Three Months Ended
	March 31,				Change
Dollars in thousands, except per share amounts	2013		2012		$			%
Revenue	$	574,686	$	568,179	$	6,507			1.1	%
Operating income	$	47,862	$	78,280	$	(30,418	)		(38.9	)%
Net Income	$	22,604	$	53,696	$	(31,092	)		(57.9	)%
Diluted earnings per share	$	0.78	$	1.65	$	(0.87	)		(52.7	)%

Comparing the first quarter of 2013 to the first quarter of 2012

Revenue increased $6.5 million, or 1.1%, primarily due to new kiosk installations and kiosks acquired from NCR in our Redbox segment.

Operating income decreased $30.4 million, or 38.9%, primarily due to our Redbox segment where the revenue growth was offset by increased expenses that reflect several factors including the high number of Redbox kiosks deployed in the second half of 2012, increased product costs related to increased copy depth, and higher payment card processing fees, as well as increased depreciation and amortization, and general and administrative expenses.

Net income decreased $31.1 million, or 57.9%, primarily due to:

•

Lower operating income in our Redbox and Coin segments and higher operating loss in our New Ventures segment;

•

Loss from equity method investments compared to a gain in the 2012 period; partially offset by

•

Lower income tax expenses due to lower pretax income and a lower effective tax rate.

For additional information refer to our Segment Results in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Share-Based Payments

Our share-based payments consist of share-based compensation granted to executives, non-employee directors and employees and share-based payments granted to movie studios as part of content agreements. We grant stock options, restricted stock and performance-based restricted stock to executives and non-employee directors and grant restricted stock to our employees. We also granted restricted stock to certain movie studios as part of content agreements with our Redbox segment. The expense associated with the grants to movie studios is allocated to our Redbox segment and included within direct operating expenses. The expense associated with share-based compensation to our executives, non-employee directors and employees is part of our shared services support function and is not allocated to our segments. The components of our unallocated share-based compensation expense are presented in the following table.

Unallocated Share-Based Compensation


	Three Months Ended
	March 31,				Change
Dollars in thousands	2013		2012		$			%
Direct operating	$	341	$	118	$	223			189.0	%
Marketing		67		21		46			219.0	%
Research and development		80		101		(21	)		(20.8	)%
General and administrative		2,704		3,209		(505	)		(15.7	)%

Total	$	3,192	$	3,449	$	(257	)		(7.5	)%

Unallocated share-based compensation expense decreased $0.3 million, or 7.5%, due to a decrease in the fair value of restricted stock awards granted. See Note 11: Share-Based Payments in our Notes to Consolidated Financial Statements for more information.

Segment Results

Our discussion and analysis that follows covers results of operations for our Redbox, Coin and New Ventures segments.

We manage our business by evaluating the financial results of our segments, focusing primarily on segment revenue and segment operating income before depreciation, amortization and other and share-based compensation granted to executives, non-employee directors and employees (“segment operating income”). Segment operating income contains internally allocated costs of our shared services support functions, including corporate executive management, business development, sales, customer service, finance, legal, human resources, information technology, and risk management. We also review depreciation and amortization allocated to each segment.

We utilize segment revenue and segment operating income 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, 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 segment’s revenue increases more than expected, our CEO may consider allocating more financial or other resources to that segment in the future. We continually evaluate our shared services support function’s allocation methods used for segment reporting purposes, which may result in changes to segment allocations in future periods.

We also review same store sales, which we calculate for our segments on a location basis. Most of our locations have a single kiosk, but in locations with a high-performing kiosk, we may add additional kiosks to drive incremental revenue and provide a broader product offering. Same store sales reflects the change in revenue from locations that have been operating for more than 13 months by the end of the reporting period compared with the same locations in the same period of the prior year.

Detailed financial information about our business segments, including significant customer relationships is provided in Note 13: Business Segments and Enterprise-Wide Information in our Notes to Consolidated Financial Statements.

Redbox


	Three Months Ended
Dollars in thousands, except net revenue per rental amounts	March 31,						Change
Dollars in thousands, except net revenue per rental amounts	2013			2012			$			%
Revenue	$	507,920		$	502,942		$	4,978			1.0	%
Expenses:
Direct operating		366,681			352,268			14,413			4.1	%
Marketing		6,199			4,911			1,288			26.2	%
Research and development		4			481			(477	)		(99.2	)%
General and administrative		42,862			36,464			6,398			17.5	%

Segment operating income		92,174			108,818			(16,644	)		(15.3	)%
Less: depreciation and amortization		(40,377	)		(32,443	)		(7,934	)		24.5	%

Operating income	$	51,797		$	76,375		$	(24,578	)		(32.2	)%

Operating income as a percentage of revenue		10.2	%		15.2	%
Same store sales growth (decline)		(11.8	)%		28.1	%
Effect on change in revenue from same store sales growth (decline)	$	(58,634	)	$	99,884		$	(158,518	)		(158.7	)%
Ending number of kiosks*		43,700			36,800			6,900			18.8	%
Total rentals (in thousands)*		197,543			196,226			1,317			0.7	%
Net revenue per rental	$	2.56		$	2.56		$	—			—

Excludes kiosks and the impact of kiosks acquired as part of the 2012 NCR Asset Acquisition. As part of the NCR Asset Acquisition, we acquired approximately 6,200 active kiosks. Approximately 1,900 of these kiosks remained in service at December 31, 2012. During the first quarter of 2013, we replaced 100 of these kiosks with Redbox kiosks and we removed but did not replace 1,500 more. As a result there were approximately 300 of these kiosks still in service at March 31, 2013. In the first quarter of 2013, kiosks acquired as part of the NCR acquisition generated revenue of approximately $2.7 million from 0.8 million rentals.

2013 Events

•

Starting in January in conjunction with our rental revenue sharing agreement entered into on October 19, 2012 (the “Warner Agreement”) with Warner Home Video, a division of Warner Bros. Home Entertainment Inc., we began offering Warner content on a 28-day delay from “street date”. Under the Warner Agreement, Redbox agrees to license minimum quantities of theatrical and direct-to-video Blu-ray Disc and DVD titles for rental. The Warner Agreement covers titles that have a street date through December 31, 2014.

•

In January, we signed a five-year renewal with Walgreen Company (“Walgreens”). The renewal with Walgreens will run through December 31, 2017.

•

On January 22, we expanded our Redbox Tickets offering to the Los Angeles market providing customers better access to event tickets at affordable prices.

•

On March 25, we amended the terms of our existing content licensing agreement with Universal Studios Home Entertainment LLC (“Universal”) to extend the end date from August 2014 to December 2014. Universal received, at its sole discretion, the option to extend the agreement for an additional year through December 2015.

Comparing first quarter 2013 to first quarter 2012

Revenue increased $5.0 million, or 1.0%, primarily due to the following:

•

$60.9 million from new kiosk installations including the replacement of NCR kiosks; and

•

$2.7 million from kiosks acquired from NCR; partially offset by

•

$58.6 million from an 11.8% decline in same store sales due primarily to a considerably weaker start to the quarter’s release schedule, which has a significant influence on rentals, with only 36% of the total box office (representing titles with total North American box office receipts of at least $5.0 million) available to rent in January versus 50% last year and an increase in single night rentals and cannibalization of rentals as we installed over 5,200 new kiosks during the second half of 2012. Partially offsetting this was substantial growth in Blu-ray and video game rentals, up a combined 55%.

Net kiosk revenue per rental was flat due to higher than expected customer response to promotions which drove discounted rentals and an increase in single night rentals. These increases were offset by the increases in Blu-ray and video game rentals, which have a higher daily rental fee, as a percentage of our total rentals. Our share of the physical rental market continued to grow during the quarter and reached an all-time high of 47.3%. Blu-ray rentals continued prior quarter trends and increased to 12.0% of total rentals. We consider Blu-ray a key focus for future revenue growth as it has a higher revenue and margin dollar per rental and offers consumers a better viewing experience due to superior picture and sound quality compared to other options such as digital streaming and video on demand. Video game rentals increased from 1.9% to 2.2% of total rentals despite having fewer new releases in 2013.

Operating income decreased $24.6 million, or 32.2%, primarily due to the following:

•

$14.4 million increase in direct operating expenses with product costs increasing to $223.3 million for the quarter primarily due to a $26.3 million increase in product costs related to higher DVD content purchases as a result of the growth in the installed kiosk base and increased purchases under our Warner agreement that was signed in the fourth quarter of 2012 relative to our purchases in February and March of 2012 when we procured content through alternative sources as our previous contract with Warner had expired, as well as increases in copy depth to improve content availability and rental conversion, partially offset by a $3.7 million reduction in studio related share-based expense due to a lower number of unvested shares on the last day of the calculation period. In addition, we had increases in revenue share expense and payment card processing fees directly attributable to the revenue growth, kiosk field operation costs, support function costs due to the growth in the installed kiosk base, and certain costs incurred to service the kiosks under the transition services agreement with NCR. Benefitting Q1 2013 was an $11.4 million reduction in a loss contingency accrual, of which $8.4 million had been previously expensed in Q1 2012. Due to the above factors and the absence in 2013 of special interchange rates from debit card brands, direct operating expenses as a percent of revenue for 2013 was 72.2%, up from 70.0% in the prior period. We expect to improve our financial performance through kiosk optimization, which will focus on redeploying underperforming kiosks to lower kiosk density or higher consumer traffic areas and allow us to increase our rentals and kiosk productivity;

•

$7.9 million increase in depreciation and amortization expenses primarily due to incremental depreciation associated with our 2012 installed kiosks, including the NCR acquisition, as well as higher depreciation from the continued investment in our technology infrastructure and the launch of Redbox Instant by Verizon;

•

$6.4 million increase in general and administrative expenses primarily due to higher expenses related to facilities expansion, human resource programs, the continued implementation and maintenance of our enterprise resource planning system, and overall higher costs to support the continued growth in our installed kiosk base;

•

$1.3 million increase in marketing costs due to initiatives to increase our revenue by improving consumer insight and data capabilities to offer a better consumer experience through personalized recommendations for the latest new releases, search engine marketing, promotional email campaigns and social media, as well as the launch of our Redbox Tickets platform, and our expansion into Canada; partially offset by

•

$5.0 million increase in revenue as described above.

Coin


	Three Months Ended
Dollars in thousands, except average transaction size	March 31,						Change
Dollars in thousands, except average transaction size	2013			2012			$			%
Revenue	$	65,383		$	64,826		$	557			0.9	%
Expenses:
Direct operating		37,656			36,926			730			2.0	%
Marketing		1,053			1,720			(667	)		(38.8	)%
Research and development		1,768			1,180			588			49.8	%
General and administrative		6,289			5,681			608			10.7	%

Segment operating income		18,617			19,319			(702	)		(3.6	)%
Less: Depreciation and amortization		(8,184	)		(8,341	)		157			(1.9	)%

Operating income	$	10,433		$	10,978		$	(545	)		(5.0	)%

Operating income as a percentage of revenue		16.0	%		16.9	%
Same store sales growth/(decline)		0.2	%		1.6	%
Ending number of kiosks		20,600			20,200			400			2.0	%
Total transactions		17,387			17,720			(333	)		(1.9	)%
Average transaction size	$	39.22		$	38.00		$	1.22			3.2	%

2013 Events

•

In the first quarter of 2013, we began deploying kiosks to TD Canada Trust (“TDCT”) locations as part of a service provider contract to place over 350 kiosks at TDCT locations across Canada. We completed this rollout in the first week of April. Coin processing will be available to personal banking customers at no fee and to business customers and the general public at a competitive rate. We have been servicing coin counting kiosks in multiple financial institutions over the last eight years. The financial institution channel provides an opportunity to us as the majority of bank customers are already converting coins at the teller window. We bring an automated solution to financial institutions allowing reduced teller lines while enhancing the consumer experience.

•

In the first quarter of 2013, we began to rollout an offering with PayPal allowing consumers to load money into or withdraw money from their PayPal accounts. We believe this offering allows us to leverage our existing Coin kiosk network to give consumers access to e-payment alternatives. As of March 31, 2013, over 1,800 kiosks were activated with our PayPal services.

Comparing first quarter 2013 to first quarter 2012

Revenue increased $0.6 million, or 0.9%, primarily due to growth of U.S. and Canada same store sales. The average coin-to-voucher transaction size continued to increase and the volume of non-cash voucher products increased by 0.8%. Same store sales growth in the U.S. was driven by the fact that revenue from kiosks installed in 2011 was fully included in this quarter’s same store sales measurement and in Canada by a significant increase in the conversion of the penny related to the Royal Canadian Mint’s penny reclamation efforts.

Operating income decreased $0.5 million, or 5.0%, primarily due to the following:

•

$0.7 million increase in direct operating expenses primarily due to higher revenue share expense attributable to both revenue growth and increased revenue share rates with certain retail partners as a result of long-term contract renewals; higher direct field costs composed of increased parts and supplies and fleet vehicle costs, higher coin processing and transportation related expenses arising from higher revenue in 2013 partially offset by lower expenses from the sales function;

•

$0.6 million increase in general and administrative expenses primarily due to continued investment in technology initiatives and infrastructure, as well as increases in payroll and facilities spend related to headcount growth; and

•

$0.6 million increase in research and development expenses primarily due to the increase in kiosk software engineering efforts; partially offset by

•

$0.7 million decrease in marketing expenses primarily due to timing of advertising and spending to support our retailer card program in the first quarter of 2013; and

•

$0.6 million increase in revenue as described above.

New Ventures


	Three Months Ended
Dollars in thousands	March 31,						Change
Dollars in thousands	2013			2012			$			%
Revenue	$	1,383		$	411		$	972			236.5	%
Expenses:
Direct operating		3,121			1,098			2,023			184.2	%
Marketing		638			305			333			109.2	%
Research and development		2,545			2,168			377			17.4	%
General and administrative		3,361			2,457			904			36.8	%

Segment operating loss		(8,282	)		(5,617	)		(2,665	)		47.4	%
Less: depreciation and amortization		(2,894	)		(7	)		(2,887	)		NM	*

Operating loss	$	(11,176	)	$	(5,624	)	$	(5,552	)		98.7	%

Ending number of kiosks		220			60			160

(*)	Not meaningful

2013 Events

Comparing first quarter 2013 to first quarter 2012

Revenue increased 236.5% primarily due to 160 additional kiosks which includes the growth of our Rubi coffee concept.

Operating loss increased $5.6 million, or 98.7%, primarily due to the following:

•

$2.0 million increase in direct operating expenses primarily due to additional sales volume from existing concepts, additional headcount to support growth and the $0.5 million charge noted above;

•

$0.9 million increase in general and administrative expenses primarily due to additional headcount to support growth;

•

$0.4 million increase in research and development expenses due to the development of new kiosk hardware and software for our existing concepts;

•

$2.9 million increase in depreciation and amortization primarily due to the $2.5 million charge noted above and an increase in kiosks; and

•

$0.3 million increase in marketing expense primarily due to increased headcount to support business growth.

Loss from equity method investments

Loss from equity method investments increased to $7.0 million in 2013 from a $15.2 million gain in 2012, primarily due to a gain recognized on formation of the Redbox Instant by Verizon joint venture in February 2012. Additional financial information about our equity method investments is provided in Note 8: Equity Method Investments and Related Party Transactions in our Notes to Consolidated Financial Statements.

Interest Expense, Net


Dollars in thousands	Three Months Ended March 31,						Change
	Three Months Ended March 31,						Change
	2013			2012			$			%
Cash interest expense	$	2,907		$	3,407		$	(500	)		(14.7	)%
Non-cash interest expense		1,810			1,810			—			—
Loss from early retirement of debt		1,938			—			1,938
Interest income		(1,122	)		(1,103	)		(19	)		1.7	%

Total interest expense, net		5,533		$	4,114		$	1,419			34.5	%

Net interest expense increased $1.4 million, or 34.5%, primarily due to an approximate loss of $1.9 million from the early retirement of $44.6 million in face value of our convertible notes partially offset by decreased interest expense resulting from the lower principal balance.

Income Tax Expense

Our effective tax rate was 36.1% and 39.9% for the three months ended March 31, 2013 and 2012, respectively. Our effective tax rate was higher than the U.S. Federal statutory rate of 35.0% due primarily to state income taxes offset by federal tax credits. The decrease in our effective tax rate for the three month period was due primarily to the absence of federal research and general business tax credits in 2012. The 2012 federal research credit was recorded in the first quarter of 2013 upon enactment of the American Taxpayer Relief Act of 2012 on January 2, 2013.

Non-GAAP Financial Measures

Non-GAAP measures may be provided as a complement to results provided in accordance with United States generally accepted accounting principles (“GAAP”).

We use the following non-GAAP financial measures to evaluate our financial results:

•

Core adjusted EBITDA;

•

Core diluted earnings per share (“EPS”); and

•

Free cash flow.

These measures, the definitions of which are presented below, are non-GAAP because they exclude certain amounts which are included in the most directly comparable measure calculated and presented in accordance with GAAP. Our non-GAAP financial measures are not meant to be considered in isolation or as a substitute for our GAAP financial measures and may not be comparable with similarly titled measures of other companies.

Core and Non-Core Results

We distinguish our core activities, those associated with our primary operations, from non-core activities. Non-core activities are primarily nonrecurring events or events we do not control. Our non-core adjustments include i) deal fees primarily related to the NCR Asset Acquisition, ii) income or loss from equity method investments, which represents our share of income or loss from entities we do not consolidate or control, and iii) a gain on the grant of a license to use certain Redbox trademarks to Redbox Instant by Verizon (“Non-Core Adjustments”). We believe investors should consider our core results because they are more indicative of our ongoing performance and trends and are more consistent with how management evaluates our operational results and trends.

Core Adjusted EBITDA

Our non-GAAP financial measure core adjusted EBITDA is defined as earnings before depreciation, amortization and other; interest expense, net; income taxes; share-based payments expense; and Non-Core Adjustments.

A reconciliation of core adjusted EBITDA to net income, the most comparable GAAP financial measure, is presented in the following table:


	Three Months Ended March 31,					Change
	Three Months Ended March 31,					Change
Dollars in thousands	2013		2012			$			%
Net income	$	22,604	$	53,696		$	(31,092	)		(57.9	)%
Depreciation, amortization and other		51,455		40,791			10,664			26.1	%
Interest expense, net		5,533		4,114			1,419			34.5	%
Income taxes		12,759		35,672			(22,913	)		(64.2	)%
Share-based payments expense⁽¹⁾		4,837		8,792			(3,955	)		(45.0	)%

Adjusted EBITDA		97,188		143,065			(45,877	)		(32.1	)%
Non-core adjustments:
Deal fees		—		1,203			(1,203	)		(100.0	)%
Loss from equity method investments		7,025		4,341			2,684			61.8	%
Gain on formation of Redbox Instant by Verizon		—		(19,500	)		19,500			(100.0	)%

Core adjusted EBITDA	$	104,213	$	129,109		$	(24,896	)		(19.3	)%

(1)	Includes both non-cash share-based compensation for executives, non-employee directors and employees as well as share-based payments for content arrangements.

The decrease in our core adjusted EBITDA was primarily due to lower operating income in our Redbox segment. The other components of core adjusted EBITDA have been discussed previously in the Results of Operations section above.

Core Diluted EPS

Our non-GAAP financial measure core diluted EPS is defined as diluted earnings per share excluding Non-Core Adjustments, net of applicable taxes.

A reconciliation of core diluted EPS to diluted EPS, the most comparable GAAP financial measure, is presented in the following table:


	Three Months Ended March 31,					Change
	Three Months Ended March 31,					Change
	2013		2012			$			%
Diluted EPS	$	0.78	$	1.65		$	(0.87	)		(52.7	)%
Non-core adjustments, net of tax:⁽¹⁾
Deal fees		—		0.02			(0.02	)		(100.0	)%
Loss from equity method investments		0.15		0.08			0.07			87.5	%
Gain on formation of the Joint Venture		—		(0.36	)		0.36			(100.0	)%

Core diluted EPS	$	0.93	$	1.39		$	(0.46	)		(33.1	)%

(1)	Non-Core Adjustments are presented after-tax using the applicable effective tax rate for the respective periods.

Free Cash Flow

Our non-GAAP financial measure free cash flow is defined as net cash provided by operating activities after capital expenditures. We believe free cash flow is an important non-GAAP measure as it provides additional information to users of the financial statements regarding our ability to service, incur or pay down indebtedness and repurchase our common stock. A reconciliation of free cash flow to net cash provided by operating activities, the most comparable GAAP financial measure, is presented in the following table:


	Three Months Ended March 31,						Change
Dollars in thousands	2013			2012			$			%
Net cash provided by operating activities	$	41,102		$	54,918		$	(13,816	)		(25.2	)%
Purchase of property and equipment		(33,231	)		(38,007	)		4,776			(12.6	)%

Free cash flow	$	7,871		$	16,911		$	(9,040	)		(53.5	)%

An analysis of our net cash from operating activities and used in investing and financing activities is provided below.

Liquidity and Capital Resources

We believe our existing cash, cash equivalents and amounts available to us under our current 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 kiosk installations beyond planned levels or if our Redbox or Coin kiosks generate lower than anticipated revenue, then 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 kiosks, the type and scope of service enhancements, the cost of developing potential new product service offerings, and enhancements and cash required to fund potential future acquisitions and investment. The following is an analysis of our year-to-date cash flows:

Net Cash from Operating Activities

Our net cash from operating activities decreased by $13.8 million primarily due to the following:

•

$31.1 million decrease in net income to $22.6 million primarily due to decreased operating income in our Redbox segment and increased loss from our New Ventures segment, partially offset by

•

$11.3 million net increase in non-cash expenses primarily due to loss from equity method investments in the current period compared to a gain in the prior year period, increased depreciation and other and increased amortization of intangible assets and deferred financing fees partially offset by a decrease in the impact of deferred income taxes; and

•

$6.0 million net increase in cash flows from changes in working capital primarily due to increased amortization of our content library relative to cash purchases and timing of settlement of accounts payable and other liabilities.

Net Cash Used in Investing Activities

We used $100.0 million of net cash in our investing activities primarily due to the following:

•

$33.2 million used for purchases of property and equipment for kiosks and corporate infrastructure, including information technology related to our Enterprise Resource Planning implementation;

•

$53.0 million used for purchases of short-term investments; and

•

$14.0 million used for capital contribution to our Redbox Instant by Verizon Joint Venture.

Net Cash from Financing Activities

We obtained $231.2 million of net cash from our financing activities primarily due to the following:

•

$343.5 million obtained in net proceeds from issuance of our senior unsecured notes;

•

$65.7 million used to pay our term loan and retire a portion of our convertible debt;

•

$46.5 million used to repurchase our common stock; and

•

$3.3 million used to pay capital lease obligations and other debt;

Cash and Cash Equivalents

A portion of our business involves collecting and processing large volumes of cash, most of it in the form of coins. As of March 31, 2013, our cash and cash equivalent balance was $453.5 million, of which $82.2 million was identified for settling our payable to the retailer partners in relation to our Coin kiosks. The remaining balance of our cash and cash equivalents was available for use to support our liquidity needs.

Short Term Investments

Debt

Debt comprises the following:


	March 31,		December 31,
Dollars in thousands	2013		2012
Senior unsecured notes	$	350,000	$	—
Term loan		156,405		159,687
Convertible debt (Outstanding face value)		140,376		184,983

Total debt	$	646,781	$	344,670

Senior Unsecured Notes

Revolving Line of Credit and Term Loan

On July 15, 2011, we entered into a new credit facility (the “Credit Facility”), to replace our prior credit facility. The Credit Facility provides for a five-year, $175.0 million senior secured term loan and a $450.0 million senior secured revolving line of credit. Subject to additional commitments from lenders, we have the option to increase the aggregate facility size by $250.0 million. The term loan is subject to mandatory debt repayments and matures on July 15, 2016, at which time all outstanding borrowings are due. The annual interest rate on the Credit Facility is variable, based on an index plus a margin determined by our consolidated net leverage ratio. The Credit Facility is secured by a first priority security interest in substantially all of our assets and the assets of our domestic subsidiaries, as well as a pledge of a substantial portion of our equity interests in our subsidiaries. The Credit Facility contains certain financial covenants, ratios and tests. See Note 9: Debt and Other Long-Term Liabilities in our Notes to Consolidated Financial Statements.

Convertible Debt

The aggregate outstanding principal of our 4.0% Convertible Senior Notes (the “Convertible notes”) is $140.4 million. The Convertible notes bear interest at a fixed rate of 4.0% per annum, payable semi-annually in arrears on each March 1 and September 1, and mature on September 1, 2014. As of March 31, 2013, we were in compliance with all covenants.

The Convertible notes become convertible (the “Conversion Event”) when the closing price of our common stock exceeds $52.38, 130% of the Convertible notes’ conversion price, for at least 20 trading days during the 30 consecutive trading days prior to each quarter-end date. If the Convertible notes become convertible and should the holders elect to convert, we will be required to pay them up to the full face value of the Convertible notes in cash as well as deliver shares of our common stock for any excess conversion value. The number of potentially issued shares increases as the market price of our common stock increases. As of March 31, 2013, such early conversion event was met. As a result the Convertible notes were classified as a current liability and the debt conversion feature was classified as temporary equity on our Consolidated Balance Sheets. In the three months ended March 31, 2013, we repurchased 44,607 Convertible notes or $44.6 million in face value of Convertible notes for $62.5 million in cash. The loss from early extinguishment of these Convertible notes was approximately $1.9 million.

See Note 9: Debt and Other Long-Term Liabilities in our Notes to Consolidated Financial Statements for more information on our debt instruments.

Letters of Credit

Other Contingencies

CONTRACTUAL PAYMENT OBLIGATIONS

As of March 31, 2013, other than the following, there have been no material changes during the period covered by this report to our contractual obligations specified in the table of contractual obligations included in our 2012 Form 10-K:

•

A reclassification on our Consolidated Balance Sheets of $132.1 million of callable convertible debt from long-term liabilities at December 31, 2012 to current liabilities at March 31, 2013.

•

An incremental purchase commitment of approximately $44.6 million related to the amended content licensing agreement with Universal;

•

An incremental purchase commitment of approximately $5.4 million associated with an outsourced customer service call center;

•

An additional purchase commitment for kiosks, and related parts and components of approximately $14.7 million;

•

CRITICAL ACCOUNTING POLICIES

Our consolidated financial statements have been prepared in accordance with U.S. 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 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, “Management’s 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 2012 Form 10-K.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in our reported market risks and risk management policies since the filing of our 2012 Form 10-K.

ITEM 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure 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.

Changes in Internal Control over Financial Reporting

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 year-to-date period ended March 31, 2013 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 October 2009, an Illinois resident, Laurie Piechur, individually and on behalf of all others similarly situated, filed a putative class action complaint against our Redbox subsidiary 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 that Redbox’s rental terms violate the Illinois Rental Purchase Agreement Act or the Illinois Automatic Contract Renewal Act and the plaintiff is seeking monetary damages and other relief. In November 2009, Redbox removed the case to the U.S. District Court for the Southern District of Illinois. In February 2010, the District Court remanded the case to the Circuit Court for the Twentieth Judicial Circuit, St. Clair County, Illinois. In May 2010, the court denied Redbox’s motion to dismiss the plaintiff’s claims, and also denied the plaintiff’s motion for partial summary judgment. In November 2011, the plaintiff moved for class certification, and Redbox moved for summary judgment. The court denied Redbox’s motion for summary judgment in February 2012. The plaintiff filed an amended complaint on April 19, 2012, and an amended motion for class certification on June 5, 2012. The court denied Redbox’s motion to dismiss the complaint. The class certification motion has been briefed and argued, and the court has not yet ruled on the motion for class certification. The plaintiff has dismissed its claims regarding Redbox’s fees and is only pursuing its claims under the Illinois Rental Purchase Agreement Act and the Illinois Automatic Contract Renewal Act. We believe that the claims against us are without merit and intend to defend ourselves vigorously in this matter. Currently, no accrual has been established as it was not possible to estimate the possible loss or range of loss because this matter had not advanced to a stage where we could make any such estimate.

Schiff case for failure to prosecute and failure to comply with court rules and orders. Redbox moved to dismiss the DiSimone/Sinibaldi case, and DiSimone/Sinibaldi moved for class certification. In January 2012, the Court granted Redbox’s motion to dismiss with prejudice and denied DiSimone/Sinibaldi’s motion for class certification as moot. On February 2, 2012, Plaintiffs filed their notice of appeal. After a stay pending the California Supreme Court’s decision in a case presenting similar issues involving Song-Beverly in a case to which Redbox is not a party, Plaintiffs filed their opening brief on April 15, 2013. Redbox’s response is due May 31, 2013. We believe that the claims against us are without merit and intend to defend ourselves vigorously in this matter. Currently, no accrual has been established as it is not possible to estimate the possible loss or range of loss because this matter had not advanced to a stage where we could make any such estimate.

ITEM 1A.

RISK FACTORS

You should carefully consider the following risk factors that may affect our business, including our financial condition and results of operations. The risks and uncertainties described below are not the only risks we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business. If any of the following risks or uncertainties actually occur, our business could be harmed, the trading price of our common stock could decline and you could lose all or part of your investment in us.

Risks Related to Competition, Evolving Technologies and Consumer Preferences in Our Industry

There are many risks related to our Redbox business that may negatively impact our business.

The home video industry is highly competitive with many factors affecting our ability to profitably manage our Redbox business. We have invested, and plan to continue to invest, substantially to establish and maintain our infrastructure of Redbox kiosks in the U.S. and Canada. The home video distribution market is rapidly evolving as newer technologies and distribution channels compete for market share, and demand for physical distribution of movies may decrease over the long-term. If it does, our business, operating results and financial condition could be materially and adversely affected. Some of the risks that could negatively impact our participation in this industry include:

•

Changes in consumer content delivery preferences, including increased use of digital video recorders, pay-per-view delivered by cable or satellite providers and similar technologies, digital downloads, online streaming, portable devices, and other mediums, video on demand, subscription video on demand, disposable or download-to-burn DVDs, DVDs with enhanced picture, sound quality or bonus content, or less demand for high volume of new movie content due to such things as larger home DVD and downloaded movie libraries;

•

Increased availability of digital movie content inventory through digital video recorders, pay-per-view delivered by cable or satellite providers and similar technologies, online streaming, digital downloads, portable devices, digital lockers, and other mediums;

•

Decreased quantity and quality of movie content availability for DVD distribution due to movie content failing to appeal to consumers’ tastes, increased focus on digital sales, and other general industry-related factors, including financial disruptions, and labor conflicts;

•

Due to arrangements with certain studios that provide content on a delayed basis, the availability of some new releases in our kiosks may shift to times when consumers are relatively less likely to rent movies, or may be in genres that are off seasonally, such as a holiday movie unavailable until January; and

•

Decreased costs for consumers to purchase or receive movie content, including less expensive DVDs, more aggressive competitor pricing strategies and piracy.

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.

Competitive pressures could seriously harm our business, financial condition and results of operations.

Our Redbox business faces competition from many 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 and video game industries, than we have, including:

•

mail-delivery and online retailers, like Netflix or Amazon;

•

cable, satellite, and telecommunications providers, like Comcast or DISH Network;

•

traditional movie programmers, like HBO or Showtime;

•

other forms of movie content providers like Internet sites including iTunes, YouTube, Hulu or Google;

•

traditional brick and mortar video retailers, and other DVD kiosk businesses;

•

other retailers like Walmart and other chain stores selling DVDs and video games;

•

other forms of video game rental providers, like GameFly;

•

other ticket distributors, like TicketMaster;

•

noncommercial sources like libraries; and;

•

general competition from other forms of entertainment such as movie theaters, television and sporting events.

Our Coin business 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 kiosks with competitor machines and operate such kiosks themselves or through a third party, or not carry coin-counting kiosks 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.

In addition, the nature and extent of consolidations and bankruptcies, which often occur during or as a result of economic downturns, in markets where we install our kiosks, 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 kiosks could be significantly reduced. See the risk factor below entitled, “—Events outside of our control, including the current economic environment, have negatively affected, and could continue to negatively affect, consumers’ use of our products and services.”

Risks Related to the Business

The termination, non-renewal or renegotiation on materially adverse terms of our contracts or relationships with one or more of our significant retailers, studios or game publishers 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. A typical Redbox or Coin retail contract ranges from three to five years and automatically renews until we or the retailer gives notice of termination. Certain contract provisions with our retailers vary, including product and service offerings, the service fees we are committed to pay each retailer, 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 or alternative uses of the floor space that our kiosks 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 The Kroger Company, which accounted for approximately 16.0%, 16.0%, and 10.7% of our consolidated revenue from continuing operations, respectively, during 2012. Although we have had, and expect to continue to have, a successful relationship with these retailers, changes to these relationships will continue to occur both in the long and short-term, some of which could adversely affect our business and reputation. For example, our Coin and Redbox relationship with Walmart is governed by contracts that provide either party the right to terminate the contracts in their entirety, or as to any store serviced by the contracts, with or without cause, on as little as 90 days’ notice. Cancellation, adverse renegotiation of or other changes to these relationships could seriously harm our business and reputation.

In addition, our business depends on our ability to obtain adequate content from movie studios and video game publishers. We have entered into licensing agreements with certain studios to provide delivery of their DVDs by the “street date,” the first date on which DVD releases are available to the general public for home entertainment purposes on either a rental or sell-through basis. In addition, we have licensing arrangements with other studios that make DVDs available for rent 28 days or more after the street date. If we are unable to maintain or renew our current relationships to obtain movie or video game content on acceptable terms, our business, financial condition and results of operations may suffer.

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 Redbox business.

Traditionally, businesses that rented movies in physical formats, such as DVDs, had enjoyed a competitive advantage over other movie distribution rental channels. After the initial theatrical release of a movie, the major studios generally had made 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 changed or are changing and other movie studios could change their practices, including shortening or discontinuing altogether, or otherwise restricting, movie distribution windows, including making video-on-demand or other digital delivery methods available prior to or simultaneous with the physical DVD release. For example, 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, and certain movies have been made available via premium video-on-demand while they are still in theaters. Further, some studios have implemented restrictions on renting DVDs for weeks following the initial release of the same title for purchase. For example, Redbox has entered into arrangements with certain studios that include delayed rental windows. Entering into these studio licensing arrangements that contain a delayed rental window may decrease consumer satisfaction and consumer demand, and we may lose consumers to our competitors that offer DVD titles without a delayed rental window. In addition, studios may seek to impose longer delays, or studios that currently provide content on street date may seek similar delays. Any of these developments could have a material adverse effect on our business, financial condition and results of operations. For example, we believe that the 28-day delayed rental window of certain of our DVD titles during the holiday season negatively impacted our fourth quarter 2010 rental and financial results.

If we do not manage our content library effectively, our business, financial condition and results of operations could be materially and adversely affected.

A critical element of our Redbox business model is to optimize our library of DVD titles, formats, and copy depth to achieve satisfactory availability rates to meet consumer demand while also maximizing 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 consumer demand, which could decrease consumer satisfaction and we could lose consumers 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 library utilization would become less efficient and our margins for the Redbox business would be adversely affected. Our ability to accurately predict consumer 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, formats and product destruction, among others, or if the price of DVDs increases or decreases generally or for certain titles, our library may become unbalanced and our margins may be adversely affected. For example, we believe that in the fourth quarter of 2010, we purchased too many copies of DVDs for our kiosks, and removed older titles too early, negatively impacting our revenues and gross margins.

Further, the delay in our ability to rent certain studios’ DVD titles pursuant to a delayed rental window may negatively affect consumer satisfaction and demand, and we could lose consumers to our competitors because of the timing of our library. In addition, if we are unable to comply with, or lack the necessary internal controls to ensure appropriate documentation and tracking of our content library, we may, among other things, violate certain of our studio licensing arrangements, be forced to pay a fee for unaccounted for DVDs and be susceptible to risks of theft and misuse of property, any of which may negatively affect our margins in the Redbox business. 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 certain studios to provide delivery of their DVDs by the “street date,” and with other studios to make DVDs available for rent 28 days or more after the street date. 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, these agreements require us to license minimum quantities of theatrical and direct-to-video DVDs for rental at our kiosks. If the titles or format provided are not attractive to our consumers, 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 Redbox business by decreasing consumer

demand for offered DVD titles and consumer satisfaction with our services or negatively impacting margins. If studios that do not have a delayed rental window 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. If consumers choose to rent these DVD titles from our competitors, purchase the DVD titles rather than rent from us, or find our DVD title selection unbalanced or unappealing, our business, operating results and financial condition could be materially and adversely affected. In addition, we have incurred, and may continue to incur, additional non-cash increases to operating expenses, which are 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 certain of our existing studio 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 maintain similar arrangements in the future with these or other studios or distributors, or these arrangements do not provide the expected benefits to us, our business could suffer.

Our failure to meet consumer expectations with respect to pricing our products and services may adversely affect our business and results of operations.

Demand for our products and services may be sensitive to pricing changes. We evaluate and update our pricing strategies from time to time, and changes we institute may have a significant impact on, among other things, our revenue and net income. For example, in March 2010, we increased the typical coin-counting transaction fee from 8.9% to 9.8%, and, in October 2011, we increased the daily rental fee for standard definition DVDs from $1.00 to $1.20. In the future, other fee increases or pricing changes may deter consumers from using our kiosks or reduce the frequency of their usage.

Payment of increased fees to retailers or other third party service providers could negatively affect our business results.

We face ongoing pricing pressure from our retailers to increase the service fees we pay to them on our products and services or to make other financial concessions to win or retain their 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, long-term, non-cancelable contracts, installation of our kiosks in high-traffic, geographic 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. In addition, we accept payment for DVD and game rentals through debit and credit card transactions. For these payments, we pay interchange and other fees, which have increased and may increase further over time. Further, because Redbox processes millions of small dollar amount transactions, and interchange fees represent a larger percentage of card processing costs compared to a typical retailer, we are relatively more susceptible to any fee increase. When interchange or other fees increase, it generally raises our operating costs and lowers our profit margins or requires that we charge our customers more for our products and services.

We may be unable to attract new retailers, broaden current retailer relationships, and penetrate new markets and distribution channels.

In order to increase our Redbox, coin-counting and other kiosk installations, we need to attract new retailers, broaden relationships with current retailers, and develop operational efficiencies that make it feasible for us to penetrate lower density markets or new distribution channels, such as coin-counting kiosks in banks and credit unions. We may be unable to attract retailers or drive down costs relating to the manufacture, installation or servicing of our kiosks 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 financial performance could be adversely affected.

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 Redbox and Coin kiosks, our ability to develop and commercialize new products and services, including through New Ventures, and the costs incurred to do so, and our ability to successfully integrate acquisitions and other third-party relationships) into our operations. Our operating results have a history of fluctuating and may continue to fluctuate based upon many factors, including:

•

fluctuations in revenue generated by our Redbox and Coin businesses;

•

fluctuations in operating expenses, such as the amortization of our content library, and transaction fees and commissions we pay to our retailers;

•

our ability to establish or maintain effective relationships with significant partners, retailers and suppliers on acceptable terms, including partners with whom we are jointly managing a business of which we are a minority owner (such as our joint venture, Redbox Instant by Verizon);

•

the amount of service fees that we pay to our retailers;

•

the transaction fees we charge consumers to use our services;

•

fluctuations in consumer rental patterns, including the number of movies rented per visit, the type of DVDs they want to rent and for how long, and the level of DVD migration between kiosks;

•

the successful operation of our network;

•

the commercial success of our retailers, which could be affected by such factors as general economic conditions, severe weather or strikes;

•

the successful use and integration of assets and businesses acquired or invested in, including those acquired from NCR;

•

the level of product and price competition;

•

fluctuations in interest rates, which affects our debt service obligations;

•

the timing and cost of, and our ability to develop and successfully commercialize, new or enhanced products and services, including potential offerings made through joint ventures;

•

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 and divestitures.

We have historically experienced seasonality in our revenue from our Redbox segment. December and the summer months have historically been high rental months, while September and October have been low rental months, due, in part, to the beginning of the school year and the introduction of the new fall television season. However, we have entered into licensing agreements with certain studios that contain delayed rental windows. This has shifted the availability of certain titles relative to historic patterns, most notably certain titles have shifted from the fourth quarter holiday season into the first quarter of the following year. Despite this shift, we believe the fourth quarter will remain our highest revenue quarter, consistent with our historical experience. Seasonal affects, however, may be minimized by the actual release slate and the relative attractiveness of movie titles in a particular quarter or year. Our Coin segment generally experiences its highest revenue in the second half of the year due to increased retailer foot traffic and holiday shopping in the fourth quarter and an increase in consumers’ desire for disposable income in the summer months.

If we cannot manage our growth effectively, we could experience a material adverse effect on our business, financial condition and results of operations.

We have experienced substantial growth in our business, particularly due to the rapid expansion of Redbox. This growth 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 consumer products and services and those relating to our administration and internal systems, processes and controls. For example, management has had to adapt to and provide for oversight of a more decentralized organization as Redbox’s operations have remained primarily in Oakbrook Terrace, Illinois, while Coinstar’s 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 provide popular and reliable product and service levels, including for our New Ventures, for our consumers, 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.

Although we believe that the total addressable market for DVD kiosks is large, we cannot be certain about its size, the most effective plan for locating kiosks, or the optimum market density. Because the DVD kiosk market and our business model for Redbox is continually evolving, we have incomplete 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, and we cannot be certain that historical revenue ramps for new kiosks will be sustainable in the future.

Managing our growth will require significant expenditures and allocation of valuable management and operational resources. If we fail to achieve the necessary level of efficiency in our organization, including otherwise effectively growing our business lines, our business, operating results and financial condition could be harmed.

If we cannot execute on our strategy and offer new automated retail products and services, including through our New Ventures segment, our business could suffer.

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. 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. We are exploring new businesses to enter, and new products and services to offer, including through our New Ventures segment, however, the complexities and structures of these new businesses could create conflicting priorities, constrain limited resources, and negatively impact our core businesses. We may use our financial resources and management’s time and focus to invest in other companies offering automated retail services, such as our investment in ecoATM, a company that provides an automated eCycling station that captures, tracks and recycles mobile devices, or we may seek to grow businesses organically, such as our Rubi^TM coffee kiosk venture, or we may seek to offer new products on our current kiosks, such as video games or tickets on the Redbox kiosk, or new Coin-to-Commerce products on our Coin kiosk. We may enter into joint ventures, such as Redbox Instant by Verizon, through which we may expand our product offerings. Any new business opportunity also may have its own unique risks related to operations, finances, intellectual property, technology, legal and regulatory issues, corporate

governance or other challenges, for which we may have limited or no prior experience. In addition, if we fail to timely establish or maintain relationships with significant retailers and suppliers, we may not be able to provide our consumers with desirable new products and services. Further, in order to develop and commercialize certain new products and services, we will need to create new kiosks or enhance the capabilities of our DVD and coin-counting kiosks, as well as adapt 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 or profitable.

Our investment in Redbox Instant by Verizon may not be successful, and may limit our ability to provide or participate in other “over the top” video distribution services in the United States.

We have a minority ownership interest in Redbox Instant by Verizon, a joint venture with Verizon Communications to provide “over-the-top” video distribution services that also offers rental of physical DVDs and Blu-ray Discs from our kiosks. As of March 31, 2013, we have invested $38.5 million in cash in the joint venture and granted it a license to use certain Redbox trademarks. We could be requested to make substantial additional cash contributions to the joint venture, but we do not control the timing or amount of such requested capital contributions. Under the joint venture agreement, if we do not contribute our pro rata portion of the first $450.0 million in requested capital contributions, our ownership interest in the joint venture could be diluted and we could lose certain contractual rights in the joint venture, such as the right to veto certain material decisions by the joint venture. As long as we fund our pro rata portion of the first $450.0 million in capital contributions, our ownership interest in the joint venture cannot be diluted below a floor of 10% if the joint venture makes additional capital requests and we are not able fund our pro rata portion of such requests. In addition, each of our Credit Facility and the indenture governing the Notes restricts our ability to make investments in the joint venture above certain thresholds. Under the joint venture agreement, we have also agreed to certain restrictions on our ability in the United States to participate in the marketing or operation of an “over-the-top” video distribution service, or to provide physical DVD or Blu-Ray disc rental services in connection with certain other video services. These restrictions may substantially limit our ability to participate in the digital video distribution market except through the joint venture, which we do not control. In addition, Verizon has certain rights to acquire our ownership interest in the joint venture following February 3, 2019, or in limited circumstances, following February 3, 2017. These exclusivity provisions and rights in favor of Verizon could leave us without an interest in an “over the top” video distribution business in the future. Further, the joint venture agreement contains certain restrictions on the transfer or encumbrance of our ownership interest in the joint venture, including not generally being able to sell or transfer our interest to an unaffiliated third party before February 3, 2017. After February 3, 2017, we are permitted to transfer our ownership interest in the joint venture only under certain circumstances. These transfer restrictions as well other restrictions, including those discussed above, could substantially reduce the value of our ownership interest in the joint venture as well as negatively affect our ability to run our business.

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 2012, Redbox acquired certain assets of NCR Corporation related to its self-service DVD kiosk business and also entered into a joint venture arrangement to launch Redbox Instant by Verizon. 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. In addition, we may not have the right or power to direct the management or policies of companies we have invested in. For example, Redbox Instant by Verizon may take action contrary to our interests, although we may nonetheless be called to invest additional sums. Further, the evaluation and negotiation of potential acquisitions and investments, as well as the integration of acquired businesses, divert management time and other resources. Accordingly, 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;

•

managing relationships with other investors and the companies in which we have made investments, including, in some cases, as minority partner;

•

reduced liquidity, including through the use of cash resources and incurrence of debt and contingent liabilities in funding acquisitions and investments;

•

entrance into markets in which we have no direct prior experience, such as the digital market through our joint venture, Redbox Instant by Verizon;

•

impairment of goodwill and acquired intangible assets arising from our arrangements and investments;

•

difficulties and expenses in assimilating the operations, products, technology, information systems or personnel of an acquired company, acquired assets or joint ventures;

•

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 or investment;

•

amortization expenses related to acquired intangible assets and other adverse accounting consequences;

•

costs incurred in identifying and performing due diligence on potential targets and negotiating agreements that may or may not be successful, including payment of break-up fees if transactions are not closed; and

•

impairment of relationships with employees, retailers and affiliates of our business and the acquired business.

We depend upon third-party manufacturers, suppliers and service providers for key components and substantial support for our kiosks.

We conduct limited manufacturing operations and depend on outside parties to manufacture key components of our kiosks. We intend to continue to expand our installed base of kiosks. 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 our kiosks or our manufacturing needs are not met in a timely and satisfactory manner, we may be unable to meet demand due to manufacturing limitations.

Some key hardware components used in our kiosks are obtained from a limited number of suppliers. We may be unable to continue to obtain an adequate supply of these components from our suppliers in a timely manner or, if necessary, from alternative sources. If we are unable to obtain sufficient quantities of components from our current suppliers or locate alternative sources of supply on a timely basis, we may experience delays in installing or maintaining our kiosks, either 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 depositing of coins, as well as to provide limited servicing of our kiosks. We generally contract with a single transportation provider and coin processor to service a particular region. 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.

There are risks associated with conducting our business and sourcing goods internationally.

We currently have Redbox operations in Canada and Coin operations in Canada, the United Kingdom and Ireland. We expect to continue our deployment of kiosks internationally. Accordingly, political uncertainties, economic changes, 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.

Events outside of our control, including the current economic environment, have negatively affected, and could continue to negatively affect, consumers’ use of our products and services.

Our consumers’ 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 economic uncertainty still affecting potential consumers, we may be impacted by more conservative purchasing tendencies with fewer non-essential products and services purchases during the coming periods if the current economic environment continues. In addition, because our business relies in part on consumers initially visiting retailers to purchase products and services that are not necessarily our products and services, if consumers are visiting retailers less frequently and being more careful with their money when they do, these tendencies may also negatively impact our business.

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. 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.

Our business can be adversely affected by severe weather, natural disasters and other events beyond our control, such as earthquakes, fires, power failures, telecommunication loss and terrorist attacks.

A catastrophic event that results in the destruction or disruption of any of our critical business or information technology systems could harm our ability to conduct normal business operations and our operating results. For example, our corporate headquarters and certain critical business operations are located in the Bellevue, Washington area, which is near major earthquake faults. While we have taken steps to protect the security of critical business processes and systems and have established certain back-up systems and disaster recovery procedures, any disruptions, whether due to inadequate back-up or disaster recovery planning, failures of information technology systems, interruptions in the communications network, or other factors, could seriously harm our business, financial condition and results of operations.

In addition, our operational and financial performance is a direct reflection of consumer use of and the ability to operate and service our kiosks used in our business. Severe weather, natural disasters and other events beyond our control can, for extended periods of time, significantly reduce consumer use of our products and services as well as interrupt the ability of our employees and third-party providers to operate and service our kiosks. For example, in October 2012, Hurricane Sandy caused disruptions to our normal operations in the impacted region for an extended period of time. 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 kiosks used to provide our products and services, which losses may not be fully covered by insurance.

Defects, failures or security breaches in and inadequate upgrades of, or changes to, our operating systems could harm our business.

The operation of 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.

Further, certain aspects of the operating systems relating to our business are provided by third parties, including telecommunications. Accordingly, the effectiveness of these operating systems is, to a certain degree, dependent on the actions and decisions of third parties over whom we may have limited control.

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, such as Redbox Instant by Verizon, Redbox Tickets, and Coin-to-Commerce, 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 generally 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 consumers, 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. A breach or purported 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 legal action and related costs and damage our business reputation, financial position, 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. Our Coin business requires the effective transfer of large sums of money between many different locations. 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, secure, and error-free handling of the money. We rely on the ability of our employees and our operating systems and network to process these transactions in an efficient, uninterrupted and error-free manner. 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 employees, or third party vendors, we could suffer financial loss, loss of consumers, regulatory sanctions and damage to our reputation.

We may be unable to adequately protect our intellectual property 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 100 United States and international patents, for example, patents regarding kiosk security and inventory management related to our Redbox business, and patents regarding kiosk networking, fraud avoidance and voucher authentication related to our Coin business. We also have additional patents and patent applications pending in the United States and several foreign jurisdictions related to our New Venture kiosk technologies. In addition, we may apply for or obtain (through development, acquisition or otherwise) additional patents regarding technologies used in our businesses.

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, certain United States patent rights based on an early patent application primarily relating to our coin-counting business expired in September 2012 and a patent relating to Redbox’s “Rent and Return Anywhere” feature expired 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 ourselves, our retailers or other third parties 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 DVD or coin-counting products and services or other new products and 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 or services infringe, we may be unable to obtain necessary licenses from others at a reasonable cost or at all. 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. 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 and other 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.

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 management’s time. For example, in recent years we have been involved in consumer class action lawsuits, a securities class action and derivative lawsuit, and studio litigation, as well as other litigation in the ordinary course of business. In addition, there may be adverse publicity associated with any such developments that could decrease consumer 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.

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, including those relating to copyright law, access to kiosks in public places, consumer privacy and protection, data protection and information security, taxes, vehicle safety, charitable fundraising, the transfer of money or things of value, coins, currency controls, weights and measures, payment cards and other payment instruments, food and beverages, sweepstakes, and contests. The application of existing laws and regulations, changes in laws 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.

For example, if U.S. copyright law were altered to amend or eliminate the First Sale Doctrine, our business could be adversely affected. Under U.S. copyright law, the First Sale Doctrine provides that once a copyright owner sells a copy of his work, the copyright owner relinquishes all further rights to sell or otherwise dispose of that copy. While the copyright owner retains the underlying copyright to the expression fixed in the work, the copyright owner gives up his ability to control the fate of the work once sold. As such, once we purchase a DVD in the market, we are permitted to re-sell it, rent it or otherwise dispose of it. Although the majority of our content library is licensed directly from studios, and not purchased, if Congress or the courts were to change, or substantially limit, this First Sale Doctrine, our ability to obtain certain purchased content and then rent it could be adversely affected.

In addition, many jurisdictions require us to obtain certain licenses in connection with the operations of our businesses. 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 may 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.

The loss of key personnel or the inability of replacements to quickly and successfully perform in their new roles could adversely affect our business.

In recent years, we have experienced significant changes in our senior management team, including our CEO and CFO succession plan announced in January 2013. Further changes in senior management could result in disruptions to our operations. If we lose 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.

Risks Related to Our Indebtedness

Our obligations under our substantial debt could adversely affect our cash flow and our business.

As of March 31, 2013, we have total outstanding debt of approximately $646.8 Our level of indebtedness could have important consequences for you, including:

•

increasing our vulnerability to general adverse economic and industry conditions;

•

requiring a substantial portion of our cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, thereby reducing our ability to use our cash flow to fund our operations, capital expenditures and future business opportunities;

•

restricting us from making strategic acquisitions or investments or causing us to make non-strategic divestitures;

•

limiting our ability to obtain additional financing for working capital, capital expenditures, product development, debt service requirements, acquisitions and general corporate or other purposes;

•

limiting our flexibility in planning for, or reacting to, changes in our business or the industry in which we operate, placing us at a competitive disadvantage compared to our competitors who are less highly leveraged and who, therefore, may be able to take advantage of opportunities that our leverage prevents us from exploiting; and

•

exposing us to variability in interest rates, as our Credit Facility bears interest at variable rates determined by prevailing interest rates and our leverage ratio.

If we are unable to meet our debt obligations, we could be forced to restructure or refinance such obligations, seek additional equity financing or sell assets, which we may not be able to do on satisfactory terms or at all. As a result, we could default on those obligations, which could prevent or impede us from fulfilling our debt obligations and adversely affect our business.

To service our indebtedness, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control.

Our ability to make payments on our indebtedness, including without limitation any payments required to be made under our Credit Facility or to holders of the Notes or the Convertible notes, and to fund our operations, will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. In addition, although we paid only $9.2 million in cash taxes in fiscal year 2012 due in part to the utilization of net operating loss carryforwards, we expect to exhaust our net operating loss carryforwards in fiscal year 2013. Excluding the favorable impact on cash outflows due to the utilization of these net operating loss carryforwards, we would have had to pay approximately $61.1 million in cash taxes in fiscal year 2012. If we continue to be profitable, we expect our cash tax obligations in fiscal 2013 and future periods to be significantly higher than in prior periods, which may have an adverse impact on our ability to service our indebtedness.

Further, if a fundamental change occurs under the indenture governing the Convertible notes, holders of the Convertible notes may require us to repurchase, for cash, all or a portion of their Convertible notes. In addition, upon satisfaction of certain conversion conditions (including conditions outside of our control, such as market price or trading price) and proper conversion of the Convertible notes by a holder, we will be required to make cash payments of up to $1,000 for each $1,000 in principal amount of such Convertible notes at the option of each holder because the closing sale price of our common stock for at least 20 trading days in a period of 30 consecutive trading days ending on the last trading day of such quarter exceeded 130% of the applicable conversion price. Depending on the amount and timing of the payment requirements, we may not be able to meet all of the obligations relating to Convertible note payment requirements, which could have had a material adverse effect.

In addition, our Credit Facility prohibits us from making any cash payments due upon the repurchase or conversion of the Convertible notes if (i) an event of default then exists or would result from the relevant payment under that facility or (ii) after giving effect to the relevant cash payment, we would not be in pro forma compliance with our consolidated leverage ratio test specified in that facility. Any agreements or indebtedness we enter into or incur in the future may further restrict our ability to pay interest on, carry out the fundamental change repurchase obligations relating to, or make payments (including cash) upon conversion of, the Convertible notes.

We cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings will be available to us in an amount sufficient to enable us to pay our indebtedness when due or to fund our other liquidity needs. We may need to refinance all or a portion of our indebtedness on or before maturity, sell assets, reduce or delay capital expenditures, seek additional equity financing or seek other third-party financing to satisfy such obligations. We cannot assure you that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all. Our failure to fund indebtedness obligations at any time could constitute an event of default under the instruments governing such indebtedness, and could trigger a cross default under our other outstanding debt, which could result in an acceleration of such indebtedness.

If we do not comply with the covenants in the credit agreement that governs our Credit Facility and the indenture that governs the Notes or otherwise default under them or the indenture governing our Convertible notes, we may not have the funds necessary to pay all of our indebtedness that could become due.

The credit agreement governing our Credit Facility and the indentures governing the Notes and our Convertible notes will require us to comply with certain covenants that may limit our ability to engage in activities that may be in our long-term best interests. For example, our credit agreement prohibits us from incurring any additional indebtedness, except in specified circumstances, without lender approval. Further, our credit agreement restricts our ability to acquire and dispose of assets, engage in mergers or reorganizations, pay dividends or make investments or capital expenditures. Other restrictive covenants require that we meet a maximum consolidated net leverage ratio and a minimum consolidated interest coverage ratio, each as defined in our credit agreement. A violation of any of these covenants could cause an event of default under our credit agreement, which could result in the acceleration of our outstanding indebtedness.

Our failure to comply with these covenants or others under our indentures could result in an event of default which, if not cured or waived, could result in the acceleration of all of our indebtedness, which would adversely affect our financial health. We cannot assure you that we would have sufficient funds to repay all the outstanding amounts, and any acceleration of amounts due under our credit agreement or either of the indentures governing our outstanding indebtedness likely would have a material adverse effect on us.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table summarizes information regarding shares repurchased during the quarter ended March 31, 2013:


	Total Number of Shares Repurchased			Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Repurchase Plans or Programs		Maximum Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs⁽²⁾
1/1/13 - 1/31/13		799,188		$	49.53		797,562	$	383,640	⁽³⁾
2/1/13 - 2/28/13		184,603		$	50.80		139,884	$	344,185
3/1/13- 3/31/13		19,385		$	55.74		—	$	339,403

		1,003,176	⁽¹⁾	$	49.88		937,446	$	341,813

(1)	Includes 65,730 shares tendered for tax withholding on vesting of restricted stock awards, none of which are included against the dollar value of shares that may be purchased under programs approved by our Board of Directors.

(2)	Dollars in thousands

(3)

As of December 31, 2012, the maximum approximate dollar value of shares that could be purchased under the plans or programs was $133.6 million plus the cash proceeds received from the exercise of stock options by our officers, directors, and employees. On January 31, 2013 the Board of Directors authorized up to $250 million in additional repurchases. Repurchases may be made through open market purchases, negotiated transactions or other means, including accelerated share repurchases and 10b5-1 trading plans in accordance with applicable securities laws and other restrictions. The share repurchase program will continue until the amount of Coinstar common stock authorized is repurchased, the Board of Directors determines to discontinue or otherwise modify the share repurchase program or our credit facility agreement is terminated. The repurchases on the dates indicated above occurred in the open market and pursuant to a 10b5-1 trading plan which was completed during the quarter.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.

OTHER INFORMATION

None.

ITEM 6.

EXHIBITS

The following exhibits are filed herewith and this list is intended to constitute the exhibit index.

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 Company’s other public filings, which are available without charge through the SEC’s website at http://www.sec.gov.


Exhibit Number		Description of Document

4.1		Indenture, dated as of March 12, 2013, among Coinstar, certain subsidiary guarantors and Wells Fargo Bank, National Association. (1)

4.2		Registration Rights Agreement, dated as of March 12, 2013, among Coinstar, certain subsidiary guarantors and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as representative of the initial purchasers. (1)

4.3		Form of 6.000% Senior Note due 2019 (included in Exhibit 4.1). (1)

10.1*		Form of Stock Option Grant Notice and Form of Stock Option Agreement for grants made to executives under the 2011 Incentive Plan.

10.2*		Form of Restricted Stock Award Notice and Form of Restricted Stock Award Agreement for awards made to executives under the 2011 Incentive Plan.

10.3*		Form of Restricted Stock Award Notice and Form of Restricted Stock Award Agreement for performance-based awards made to executives under the 2011 Incentive Plan.

10.4		Consent, Waiver and Amendment dated March 7, 2013 under Second Amended and Restated Credit Agreement, dated July 15, 2011, as amended. (1)

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Section 302 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.

101.INS		XBRL Instance Document.

101.SCH		XBRL Taxonomy Extension Schema Document.

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB		XBRL Taxonomy Extension Label Linkbase Document.

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document.

*	Indicates a management contract or compensatory plan or arrangement.

(1)	Incorporated by reference to the Registrant’s Form 8-K filed on March 12, 2013 (File Number 000-22555).

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


COINSTAR, INC.

By:		/s/ Galen C. Smith
		Galen C. Smith
		Chief Financial Officer
		April 25, 2013