================================================================================
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 AND
EXCHANGE ACT OF 1934
For Three Month Period Ended March 31, 2001
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
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 (IRS Employer
incorporation or organization) 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 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 30, 2001
Common Stock, $0.001 par value 20,636,707
================================================================================
COINSTAR, INC. AND SUBSIDIARIES
FORM 10-Q
Index
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of March 31, 2001 (unaudited) and December 31,
2000............................................................................................ Page 3
Consolidated Statements of Operations for the three month periods ended March 31, 2001 and
March 31, 2000 (unaudited)...................................................................... Page 4
Consolidated Statement of Stockholders' Equity for the three month period ended
March 31, 2001 (unaudited)...................................................................... Page 5
Consolidated Statements of Cash Flows for the three month periods ended March 31, 2001 and
March 31, 2000 (unaudited)...................................................................... Page 6
Notes to Consolidated Financial Statements for the three month periods ended March 31, 2001
and March 31, 2000 (unaudited).................................................................. Page 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations...................................................................................... Page 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................................. Page 21
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K....................................................................... Page 22
SIGNATURE......................................................................................................... Page 23
EXHIBIT INDEX..................................................................................................... Page 24
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
COINSTAR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2001 2000
---- ----
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ....................................................... $ 77,796,833 $ 78,674,152
Prepaid expenses and other current assets ....................................... 2,212,774 2,885,834
------------- -------------
Total current assets ....................................................... 80,009,607 81,559,986
PROPERTY AND EQUIPMENT:
Coinstar units .................................................................. 125,548,303 122,834,742
Computers ....................................................................... 7,805,273 7,516,588
Office furniture and equipment .................................................. 1,547,194 1,560,144
Leased vehicles ................................................................. 4,052,880 3,941,144
Leasehold improvements .......................................................... 599,335 527,017
------------- -------------
139,552,985 136,379,635
Accumulated depreciation ........................................................ (72,077,798) (66,478,763)
------------- -------------
67,475,187 69,900,872
OTHER ASSETS ......................................................................... 5,698,765 6,326,760
------------- -------------
TOTAL ................................................................................ $ 153,183,559 $ 157,787,618
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ................................................................ $ 2,907,981 $ 4,882,786
Accrued liabilities ............................................................. 51,528,247 51,494,497
Current portion of long-term debt and capital lease obligations ................. 929,082 920,603
------------- -------------
Total current liabilities .................................................. 55,365,310 57,297,886
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS ......................................... 61,814,482 61,815,043
------------- -------------
Total liabilities .......................................................... 117,179,792 119,112,929
MINORITY INTEREST-CONVERTIBLE PREFERRED STOCK ........................................ 3,351,954 3,833,152
STOCKHOLDERS' EQUITY:
Common stock .................................................................... 161,727,955 159,517,516
Contributed capital ............................................................. 1,460,042 1,821,647
Accumulated other comprehensive income (loss) ................................... (19,906) (17,381)
Accumulated deficit ............................................................. (130,516,278) (126,480,245)
-------------- -------------
Total stockholders' equity ...................................................... 32,651,813 34,841,537
------------- -------------
TOTAL ................................................................................ $ 153,183,559 $ 157,787,618
============= =============
See notes to consolidated financial statements.
3
COINSTAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Month Periods Ended
March 31,
---------
2001 2000
---- ----
REVENUE........................................................ $ 27,527,643 $ 21,037,493
EXPENSES:
Direct operating.......................................... 12,878,092 10,421,840
Regional sales and marketing.............................. 370,102 492,611
Product research and development.......................... 2,088,334 1,732,047
Selling, general and administrative....................... 7,145,500 5,056,543
Depreciation and amortization............................. 7,750,711 6,166,226
------------- -------------
Loss from operations............................... (2,705,096) (2,831,774)
OTHER INCOME (EXPENSE):
Interest income........................................... 266,950 557,272
Interest expense.......................................... (2,079,677) (1,979,831)
Other income.............................................. 592 63,724
------------- -------------
Loss before minority interest ..................... (4,517,231) (4,190,609)
Minority interest related to convertible
preferred stock........................................ 481,198 250,140
------------- -------------
NET LOSS....................................................... $ (4,036,033) $ (3,940,469)
============= =============
Net loss per share, basic and diluted.......................... $ (0.20) $ (0.20)
============= =============
Weighted average shares outstanding, basic and
diluted..................................................... 20,502,366 20,193,291
============= =============
See notes to consolidated financial statements.
4
COINSTAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Three Month Period Ended March 31, 2001
(Unaudited)
Accumulated
Common Stock Other
------------ Contributed Comprehensive Accumulated
Shares Amount Capital Income (Loss) Deficit Total
------ ------ ------- ------------- -------- -----
Balance at January 1, 2001......... 20,388,705 $159,517,516 $1,821,647 $ (17,381) $ (126,480,245) $34,841,537
Issuance of shares under employee
stock purchase plan............ 26,765 345,021 345,021
Exercise of stock options.......... 177,736 1,503,813 1,503,813
Net exercise of common
stock warrants................. 18,963 361,605 (361,605) --
Comprehensive loss
Unrealized loss on foreign
currency translation....... (2,525) (2,525)
------------
Other comprehensive loss...... (2,525)
Net loss........................... (4,036,033) (4,036,033)
-----------
Comprehensive loss................. (4,038,558)
---------- ------------ ---------- --------- -------------- -----------
Balance at March 31, 2001.......... 20,612,169 $161,727,955 $1,460,042 $ (19,906) $ (130,516,278) $32,651,813
========== ============ ========== ========= ============== ===========
See notes to consolidated financial statements.
5
COINSTAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Month Periods Ended
March 31,
2001 2000
---- ----
OPERATING ACTIVITIES:
Net loss...................................................................................... $(4,036,033) $ (3,940,469)
Adjustments to reconcile net loss to net cash provided (used) by operating activities:
Depreciation and amortization............................................................. 7,750,711 6,166,226
Minority interest related to convertible preferred stock.................................. (481,198) (250,140)
Debt discount amortization................................................................ 31,382 46,661
Unrealized loss on short-term investments available for sale.............................. -- (3,654)
Unrealized gain (loss) on foreign currency translation.................................... (2,525) 6,079
Cash provided (used) by changes in operating assets and liabilities:
Investment interest receivable............................................................ -- 83,960
Prepaid expenses and other current assets................................................. 816,012 (1,343,136)
Other assets.............................................................................. (73,943) 178,740
Accounts payable.......................................................................... (1,968,414) (1,033,878)
Accrued liabilities....................................................................... 33,750 (5,360,402)
----------- ------------
Net cash provided (used) by operating activities.......................................... 2,069,742 (5,450,013)
INVESTING ACTIVITIES:
Sale of short-term investments............................................................ -- 8,176,369
Purchase of property and equipment........................................................ (4,229,683) (5,268,024)
Net proceeds from the sale of property and equipment...................................... 3,010 --
Purchase of intangible assets............................................................. (306,226) (263,809)
----------- ------------
Net cash provided (used) by investing activities.......................................... (4,532,899) 2,644,536
FINANCING ACTIVITIES:
Payments on long-term debt................................................................ (262,996) (179,291)
Proceeds from sale of subsidiary convertible preferred stock and warrants, including
minority interest related to convertible preferred stock............................... -- 5,500,000
Proceeds from exercise of stock options and issuance of shares under employee stock
purchase plan......................................................................... 1,848,834 632,415
----------- ------------
Net cash provided by financing activities................................................. 1,585,838 5,953,124
----------- ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.............................................. (877,319) 3,147,647
CASH AND CASH EQUIVALENTS:
Beginning of period....................................................................... 78,674,152 78,736,908
------------ -----------
End of period............................................................................. $ 77,796,833 $81,884,555
============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest.................................................. $ 50,022 $ 3,999,277
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Purchase of vehicles financed by capital lease obligation................................. $ 291,427 $ 302,148
Net exercise of common stock warrants..................................................... $ 361,606 $ --
See notes to consolidated financial statements.
6
COINSTAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Month Periods Ended March 31, 2001 and 2000
(Unaudited)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The unaudited consolidated financial statements of
Coinstar, Inc. and subsidiaries (the "Company") included herein reflect all
adjustments, consisting only of normal recurring adjustments which, in the
opinion of management, are necessary to present fairly the Company's
consolidated financial position, results of operations and cash flows for the
periods presented.
These financial statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission (the "SEC") and in
accordance with accounting principles generally accepted in the United States of
America for interim financial information. Certain information and footnote
disclosures, normally included in annual financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America, have been omitted pursuant to such SEC rules and regulations. These
financial statements should be read in conjunction with the Company's audited
financial statements and the accompanying notes included in the Company's Form
10-K for the year ended December 31, 2000, filed with the SEC. The results of
operations for the three month period ended March 31, 2001 are not necessarily
indicative of the results to be expected for any subsequent quarter or for the
entire fiscal year.
Principles of Consolidation: The financial statements include the accounts
of the Company. All inter-company transactions have been eliminated upon
consolidation.
Loss Per Share: Because the results from operations reflect a net loss for
all periods presented, basic and diluted loss per share is calculated based on
the same weighted average number of shares outstanding. The following warrants
and options have been excluded from the calculation because they are
antidilutive:
March 31, 2001 March 31, 2000
-------------- --------------
Warrants.............................................. 76,326 1,027,652
Options............................................... 2,844,352 2,571,419
Recent Accounting Pronouncement: In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards ("SFAS") No.
133, Accounting for Derivative Instruments and Hedging Activities, which was
amended by SFAS No. 138. This pronouncement, as amended, requires an entity to
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The Company has
adopted the provisions of SFAS 133 and SFAS 138 as of January 1, 2001. The
impact of adoption was not material to the financial statements, taken as a
whole.
7
NOTE 2: BUSINESS SEGMENT INFORMATION
Operating segments as defined in SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information, are components of an enterprise for
which separate financial information is available and regularly reviewed by the
chief operating decision-maker.
The Company is organized into three reportable business segments; the North
American core business (which includes the United States and Canada), the
International business (which includes the United Kingdom), and the Meals.com
business. Information about these three segments has been disclosed in the table
below.
Three Month Periods
-------------------
Ended March 31,
---------------
2001 2000
---- ----
(In thousands)
Revenue:
North American core business..................... $ 27,130 $ 20,972
International business........................... 153 51
Meals.com business............................... 335 14
Intercompany eliminations........................ (90) --
---------- --------
Total revenues.............................. $ 27,528 $ 21,037
========== ========
Net income (loss):
North American core business..................... $ 11 $ (1,665)
International business........................... (116) (228)
Meals.com business............................... (4,419) (2,297)
Minority interest and eliminations............... 488 250
---------- --------
Total net loss.............................. $ (4,036) $ (3,940)
========== ========
Total assets:
North American core business..................... $ 172,036 $159,732
International business........................... 1,971 577
Meals.com business............................... 10,839 18,018
Intercompany eliminations........................ (31,662) (19,281)
---------- --------
Total assets................................ $ 153,184 $159,046
========== ========
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis should be read in conjunction with
the Financial Statements and related Notes thereto included elsewhere in this
Quarterly Report on Form 10-Q. Except for the historical information, the
following discussion contains forward-looking statements that involve risks and
uncertainties, such as our objectives, expectations and intentions. Our actual
results could differ materially from results that may be anticipated by such
forward-looking statements and discussed elsewhere herein. Factors that could
cause or contribute to such differences include, but are not limited to, those
discussed below, those discussed under the caption "Risk Factors", and those
discussed elsewhere in this Quarterly Report on Form 10-Q and our Annual Report
on Form 10-K for the year ended December 31, 2000. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date of this report. We undertake no obligation to revise any
forward-looking statements in order to reflect events or circumstances that may
subsequently arise. Readers are urged to carefully review and consider the
various disclosures made in this report and in our other reports filed with the
Securities and Exchange Commission that attempt to advise interested parties of
the risks and factors that may affect our business, prospects and results of
operations.
Overview
We currently derive substantially all our revenue from coin processing
services generated by our installed base of Coinstar units located in
supermarket chains in 46 states across the United States and the District of
Columbia as well as in the United Kingdom and Canada. We generate revenue based
on a processing fee charged on the total dollar amount of coins processed in a
transaction. Coin processing fee revenue is recognized at the time the
customers' coins are counted by the Coinstar unit. Overall revenue growth is
primarily dependent on the growth in coin processing volumes of our installed
base and, to a lesser degree, the rate of new installations. Our results show
that coin processing volumes per unit generally increase with the length of time
the unit is in operation as trial levels of the service increase, driving
initial trial and repeat usage for the service. There can be no assurance,
however, that unit volumes will continue to increase as a function of the time
the unit is in operation. We believe that coin processing volumes per unit may
also be affected by other factors such as (i) public relations, advertising and
other activities that promote trials of the units, (ii) the amount of consumer
traffic in the stores in which the units are located, and (iii) seasonality. We
believe the seasonality affecting our coin processing volumes mirrors the
seasonality patterns of our supermarket partners.
We formed a subsidiary, Coinstar International, Inc., in March 1998 to
explore expanding our operations internationally. We are piloting 59 Coinstar
units in Canada to determine the viability of the Canadian market for our
services and are piloting 27 Coinstar units in the United Kingdom. On May 1,
2001, we announced plans to rollout the Coinstar service in the United Kingdom
and reached agreements with Asda Stores Ltd and Sainsbury's Supermarkets Ltd to
begin installing additional machines in their stores. We also formed a
subsidiary, Meals.com, Inc., in December 1998 to explore the development and
deployment of e-services technology, including the in-store Shopper kiosk.
Our direct operating expenses are comprised of the regional expenses
associated with Coinstar coin-counting unit operations and support and consist
primarily of coin pick-up and processing, field operations support and related
expenses, retail operations support and the amount of our service fee that we
share with our retail partners. Coin pick-up and processing costs, which
represent a large portion of direct operating expenses, vary based on the level
of total coin processing volume and the density of the units within a region.
Field service operations and related expenses vary depending on the number of
geographic regions in which Coinstar units are located and the density of the
units within a region. Regional sales and marketing expenses are comprised of
ongoing marketing, advertising and public relations efforts in existing market
regions and startup marketing expenses incurred to launch our services in new
regional markets. Product research and development expense consists of the
development costs of the Coinstar unit software, network applications, Coinstar
unit improvements and new product development. Product research and development
expenses also consist of the development costs of network applications and new
product development for our subsidiary, Meals.com. Selling, general and
administrative expenses are comprised of management compensation, administrative
support for field operations, the customer service center, sales and marketing
support, systems and engineering support, computer network operations, finance
and accounting, human resources and occupancy expenses. Depreciation and
amortization consists primarily of depreciation charges on Coinstar units and
amortization of internally developed software costs, and to a lesser extent,
depreciation on furniture and fixtures, automobiles and computer equipment.
Other income in the prior year quarter consisted of sublease rental income of
unused and excess office space.
Since 1995, we have devoted significant resources to building the sales and
marketing organization, adding administrative personnel and developing the
network systems and infrastructure to support the rapid growth of our installed
base of Coinstar
9
coin-counting units. Additionally, since 2000, we have devoted significant
resources and capital to develop and market the Meals.com products and services,
including the Meals.com family of websites and the in-store Shopper kiosks. The
cost of this expansion and the significant depreciation expense of our installed
network have resulted in significant operating losses to date and an accumulated
deficit of $130.5 million as of March 31, 2001. We expect to continue to
evaluate new marketing and promotional programs to increase the breadth and rate
of customer utilization of our service and to engage in systems and product
research and development. We expect these expenses will negatively impact our
operating results. We believe that our future coin counting revenue growth,
operating margin gains and profitability will be dependent upon the penetration
of our installed base with retail partners in existing markets, expansion and
penetration of installations in new market regions and successful ongoing
marketing and promotional activities to sustain the growth in unit coin volume
over time. Given the unpredictability of the timing of installations with retail
partners and the resulting revenues, the growth in coin processing volumes of
our installed base, the limited operating history of our Meals.com subsidiary,
and the continued market acceptance of our services by consumers and retail
partners, our operating results for any quarter are subject to significant
variation, and we believe that period-to-period comparisons of our results of
operations are not necessarily meaningful and should not be relied upon as
indications of future performance.
Recent Developments
On February 8, 2001, we announced that we engaged JPMorgan & Co. as
financial advisor to assist us in exploring strategic alternatives for Coinstar
and our subsidiaries, Meals.com and Coinstar International to enhance Coinstar
stockholder value. In May 2001, our board of directors completed the initial
phase of its strategic alternatives analysis with JPMorgan. Based on a number of
factors, including our strong operating performance and the analysis provided by
JPMorgan, the board has determined that the long-term interests of our
stockholders are best served by continuing as an independent public company
executing on our strategic plan.
JPMorgan will continue to work on our behalf to consider strategic
alternatives for our subsidiary, Meals.com., including assessing financing
alternatives. In May 2001, Meals.com announced a corporate reorganization aimed
at managing cash while the company works to achieve profitability. One result of
the reorganization was a significant reduction in its workforce.
Results of Operations
The following table shows revenue and expense as a percent of revenue for
the periods ended:
Three Month
Periods Ended
March 31,
---------
2001 2000
---- ----
Revenue............................................................ 100.0 % 100.0 %
Expenses:
Direct operating.............................................. 46.8 49.6
Regional sales and marketing.................................. 1.3 2.3
Product research and development.............................. 7.6 8.2
Selling, general and administrative........................... 25.9 24.0
Depreciation and amortization................................. 28.2 29.3
---- ----
Loss from operations............................................... (9.8)% (13.4)%
==== ====
Three Month Periods Ended March 31, 2001 and 2000
Revenue
Revenue increased to $27.5 million for the three months ended March 31,
2001 from $21.0 million for the comparable 2000 period. The increase was due
principally to the increase in the number of Coinstar units in service during
the 2001 period and the increase in the volume of coins processed by the units
in service during this period. The total installed base of Coinstar units
increased to 8,604 at March 31, 2001 from 7,392 units at March 31, 2000. The
total dollar value of coins processed worldwide increased to $305.8 million
during the three month period ended March 31, 2001 from $236.3 million in the
comparable period in the prior year.
Direct Operating Expenses
Direct operating expenses increased to $12.9 million in the three months
ended March 31, 2001 from $10.4 million in the comparable prior year period. The
increase in direct operating expenses was attributable primarily to the
increased coin pick-up and processing costs resulting from the increased dollar
volumes processed during the year, an increase in field service personnel
expenses associated with the hiring and training of new field service personnel
to support our growth and related expansion into 15 new regional markets, and an
increase in revenue sharing with our partners that corresponded to a 28.7%
increase in coin
10
processing revenue from the quarter ended March 31, 2000. Direct operating
expenses as a percentage of revenue decreased to 46.8% in the three months ended
March 31, 2001 from 49.6% in the same period of 2000. The decrease in direct
operating expenses as a percentage of revenue resulted from (i) the realization
of coin pick-up and processing cost economies attributable to regional densities
and utilization of cheaper, more efficient coin pick-up methods, and (ii) a
decrease in per unit field service expenses as a percentage of revenue as we
increased our density in our existing markets.
Regional Sales and Marketing
Regional sales and marketing expenses decreased to $0.4 million in the
quarter ended March 31, 2001 from $0.5 million in the comparable prior year
quarter. The decrease in regional marketing expense was the result of a
decreased level of newspaper advertising and other promotional activity.
Regional sales and marketing as a percentage of revenue decreased to 1.3% in the
three months ended March 31, 2001 from 2.3% in the same period of 2000.
Product Research and Development
Product research and development expenses increased to $2.1 million in the
quarter ended March 31, 2001 from $1.7 million in the comparable prior year
quarter. The increase in product research and development expense was due
primarily to the continued expansion and growth by Meals.com resulting from its
e-services initiatives. Product research and development as a percentage of
revenue decreased to 7.6% in the three months ended March 31, 2001 from 8.2% in
the same period of 2000.
Selling, General and Administrative
Selling, general and administrative expense increased to $7.1 million in
the quarter ended March 31, 2001 from $5.1 million in the comparable prior year
quarter. The principal component of such expenses was employee compensation; the
period-to-period increase primarily reflects an investment in higher staffing
levels to support our rapid growth and expansion. Selling, general and
administrative expense as a percentage of revenue increased to 25.9% in the
quarter ended March 31, 2001 from 24.0% in the same period in the prior year.
The increase in selling, general and administrative expense as a percentage of
revenue was primarily the result of (i) increased staffing, particularly for our
Meals.com subsidiary, which hired most of its base sales and administrative
staff throughout the year 2000, and (ii) increased administrative expenses
related to insurance, occupancy, legal, professional fees and other general
administrative costs.
Depreciation and Amortization
Depreciation and amortization expense increased to $7.8 million in the
quarter ended March 31, 2001 from $6.2 million in the comparable prior year
quarter. The increase was due primarily to the increase in the installed base of
Coinstar units and amortization of software development costs. Depreciation and
amortization as a percentage of revenue decreased to 28.2% in the three months
ended March 31, 2001 from 29.3% in the same period in the prior year. The
decrease in depreciation and amortization as a percentage of revenue was the
result of increasing coin processing volumes processed through the network.
Other Income and Expense
Other income generated in the three months ended March 31, 2001 was
insignificant. In the quarter ended March 31, 2000, other income resulting from
subleasing excess office space was $0.1 million.
Interest income decreased to $0.3 million in the three months ended March
31, 2001 from $0.6 million in the comparable period in 2000. The decrease in
interest income is attributed to (i) lower interest rates on 2001 investments
and (ii) a lower amount of cash allocated to investments in the three months
ended March 31, 2001 than the same period in the prior year.
Interest expense increased slightly to $2.1 million in the three months
ended March 31, 2001 from $2.0 million in the comparable prior year period.
Net Loss
Net loss increased to $4.0 million in the quarter ended March 31, 2001 from
$3.9 million in the quarter ended March 31, 2000. The increase in the net loss
was due primarily to our Meals.com subsidiary's expenditures associated with the
on-going development of its infrastructure over the prior 12 month period. Of
the $4.0 million consolidated net loss for the quarter ended March 31, 2001, our
Meals.com subsidiary generated approximately $3.9 million of that loss, net of
minority interest. Net loss from our North American and International coin
processing businesses was $0.1 million. We expect that our coin processing
business segments will continue to reflect improved operating leverage of the
Coinstar network. In the future, we expect to
11
achieve profitability in our core business as our direct contribution margin
from our large base of installed Coinstar units grows proportionately faster
than the rate of growth of our expenses.
Liquidity and Capital Resources
As of March 31, 2001, we had cash and cash equivalents of $77.8 million and
working capital of $24.6 million. Cash and cash equivalents include $40.6
million of funds in transit to our retail partners, which represent amounts owed
to retail partners which is being processed by armored car carriers or residing
in Coinstar units. Net cash provided by operating activities was $2.1 million
for the three months ended March 31, 2001, compared to net cash used by
operating activities of $5.5 million for the three months ended March 31, 2000.
Net cash used by investing activities for the three months ended March 31,
2001 was $4.5 million compared to cash provided by investing activities of $2.6
million in the prior year quarter. Cash generated by investing activities for
the quarter ending March 31, 2000 was due primarily to sales of marketable
securities totaling $8.2 million; there were no sales of marketable securities
in the current year quarter. Additionally, capital expenditures during the three
months ended March 31, 2001, were $4.2 million compared with $5.3 million in the
comparable period in 2000. Capital expenditures decreased due primarily to a
decrease in Coinstar unit purchases during the quarter. As we continue to
selectively install new units nationwide in order to optimize our Coinstar
network and increase our profitability, we expect the rate of installations to
slow compared to historical levels.
Net cash provided by financing activities for the three months ended March
31, 2001 was $1.6 million, which was primarily the result of proceeds from the
exercise of stock options and employee stock purchases of $1.8 million offset by
principal payments on long-term debt. Net cash provided by financing activities
for the three months ended March 31, 2000 was $6.0 million resulting from
proceeds received for the sale of preferred stock of our subsidiary Meals.com of
$5.5 million and proceeds from the exercise of stock options and employee stock
purchases of $0.6 million offset by principal payments on long-term debt.
On February 10, 2000, Meals.com sold 5.5 million shares of its Series A
Convertible Preferred Stock, together with warrants to purchase 5.5 million
shares of its common stock at an exercise price of $0.125 per share to an
outside investor group for $5.5 million, which represented approximately an 11%
interest in the subsidiary. As part of the financing, we invested $10.0 million
in exchange for 10 million shares of Series A-1 Convertible Preferred Stock. The
holders of Series A Convertible Preferred Stock and Series A-1 Convertible
Preferred Stock generally have identical rights, except that the holders of
Series A Convertible Preferred Stock are entitled to one vote per share while
holders of Series A-1 Convertible Preferred Stock are entitled to five votes per
share on all matters to be voted on by the Meals.com shareholders. In addition,
the holders of the Series A and Series A-1 Convertible Preferred Stock have a
$5.5 million and $10.0 million liquidation preference, respectively. Also in
connection with the Meals.com financing, we provided a $15.6 million credit
facility. Meals.com has drawn the entire amount of the credit facility and we do
not anticipate increasing the credit facility to Meals.com. Interest accrues on
the credit facility at Imperial Bank's prime commercial lending rate plus 300
basis points.
As of March 31, 2001, we had outstanding $61.0 million of our senior
subordinated discount notes. We have debt service obligations of approximately
$7.9 million per year until October 2006 when the principal amount of $61.0
million plus accrued interest will be due. The indenture governing the notes
contains restrictive covenants that, among other restrictions, limit our ability
to pay dividends or make other restricted payments, engage in transactions with
affiliates, incur additional indebtedness, effect asset dispositions, or merge
or sell substantially all our assets. As of March 31, 2001, we had secured
irrevocable letters of credit with two banks that totaled $6.8 million. These
letters of credit, which expire at various times through August 2001, are
available to collateralize certain obligations to third parties. As of March 31,
2001, no amounts were outstanding under these letters of credit agreements.
On February 19, 1999, we entered into a credit agreement with Imperial
Bank, for itself and as agent of Bank Austria Creditanstalt Corporate Finance,
Inc. On September 26, 2000, we amended the credit agreement to release Bank
Austria from its obligations under the credit agreement. The amended credit
agreement provides for a credit facility of up to $13.0 million, consisting of a
revolving loan of $10.0 million and a term loan of $3.0 million. The amended
credit agreement expires in September 2006 and also releases us from our
obligation to maintain minimum deposits with Imperial Bank.
12
In connection with the credit agreement, we issued to each of the lenders a
warrant to purchase 51,326 shares of our common stock. The exercise price for
the warrants, which will expire on February 19, 2009, is $12.177 per share. The
value of these warrants are recorded as contributed capital and represent
discounts, which are being amortized ratably over the term of the related debt.
In February 2001, one of the lenders net exercised its warrant in full to
purchase 18,963 shares of our common stock.
We believe existing cash equivalents, short-term investments, and amounts
available to us under our credit agreement with Imperial Bank 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 will
depend on the success of our business. If we significantly increase
installations beyond planned levels or if unit coin processing volumes generated
are lower than historical levels, our cash needs will increase. Our future
capital requirements will depend on a number of factors, including the timing
and number of installations, the type and scope of service enhancements, the
level of market acceptance of our service, the feasibility of international
expansion, and the cost of developing potential new product and service
offerings and product and service enhancements.
13
Quarterly Financial Results
The following table sets forth selected unaudited quarterly financial
information and operating data for the last eight quarters. This information has
been prepared on the same basis as our unaudited consolidated financial
statements and includes, in the opinion of management, all normal and recurring
adjustments that management considers necessary for a fair statement of the
quarterly results for the periods. The operating results and data for any
quarter are not necessarily indicative of the results for future periods.
Three month periods ended
-------------------------
March 31, Dec. 31, Sept. 30, June 30, March 31, Dec. 31, Sept. 30, June 30,
--------- -------- -------
2001 2000 2000 2000 2000 1999 1999 1999
---- ---- ---- ---- ---- ---- ---- ----
(Dollars in thousands except per unit data)
Consolidated Statements of Operations:
Revenue................................. $ 27,528 $ 28,630 $ 28,707 $ 24,714 $ 21,038 $ 21,960 $ 21,723 $ 18,258
Expenses:
Direct operating...................... 12,878 12,984 13,045 11,733 10,422 10,938 10,783 9,176
Regional sales and marketing.......... 370 2,402 4,906 3,567 493 2,756 1,294 1,012
Product research and development...... 2,088 3,035 1,858 1,710 1,732 1,441 2,035 1,155
Selling, general and administrative... 7,146 8,748 6,911 5,502 5,057 4,135 3,877 3,628
Depreciation and amortization......... 7,751 7,638 6,852 6,409 6,166 5,934 5,698 4,580
-------- -------- -------- -------- -------- -------- -------- --------
Loss from operations.................... (2,705) (6,177) (4,865) (4,207) (2,832) (3,244) (1,964) (1,293)
Other income (expense), net............. (1,812) (1,902) (1,481) (1,538) (1,359) (2,291) (1,939) (2,856)
-------- -------- -------- -------- -------- -------- -------- --------
Loss before minority interest and
extraordinary item.................. (4,517) (8,079) (6,346) (5,745) (4,191) (5,535) (3,903) (4,149)
Minority interest related to
convertible preferred stock............. 481 669 461 288 250 -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Loss before extraordinary item.......... (4,036) (7,410) (5,885) (5,457) (3,941) (5,535) (3,903) (4,149)
Extraordinary item:
Loss related to early retirement
of debt............................. -- -- -- -- -- (2,507) (743) --
-------- -------- -------- -------- -------- -------- -------- --------
Net loss................................ $ (4,036) $ (7,410) $ (5,885) $ (5,457) $ (3,941) $ (8,042) $ (4,646) $ (4,149)
======== ======== ======== ======== ======== ======== ======== ========
North American core business:
Number of new Coinstar units installed
during the period................. 95 413 359 337 430 495 668 546
Installed base of Coinstar units at
end of period...................... 8,577 8,482 8,069 7,710 7,373 6,934 6,448 5,780
Average age of network for the period
(months)........................... 29.7 27.6 26.2 24.5 22.9 21.4 20.3 19.8
Number of regional markets.............. 123 122 118 110 106 104 102 97
Dollar value of coins processed......... $303,799 $315,715 $320,655 $276,073 $235,594 $245,703 $243,550 $204,864
Revenue................................. 27,130 28,107 28,546 24,576 20,972 21,871 21,679 18,235
Annualized revenue per average
installed unit (1)...................... 12,696 13,565 14,495 13,091 11,740 13,041 14,146 13,339
Direct contribution (2)................. 14,373 15,195 15,569 12,890 10,638 10,973 10,936 9,100
Direct contribution margin (%).......... 53.0% 54.1% 54.5% 52.4% 50.7% 50.2% 50.4% 49.9%
Annualized direct contribution per
average installed unit (1)(2)....... $ 6,747 $ 7,333 $ 7,906 $ 6,866 $ 5,955 $ 6,543 $ 7,136 $ 6,657
Regional sales and marketing............ 377 2,402 4,906 3,567 493 2,756 1,293 1,013
Research and development................ 915 886 825 804 751 919 1,643 838
Selling, general and administrative..... 4,942 4,789 4,281 3,993 4,077 3,172 3,100 3,185
EBITDA (3).............................. 8,139 7,118 5,557 4,526 5,317 4,126 4,900 4,064
EBITDA margin (%)....................... 30% 25% 19% 18% 25% 19% 23% 22%
_______________
(1) Based on actual quarterly results annualized divided by the monthly averages
of units in operation over the applicable period.
(2) Direct contribution is defined as revenue less direct operating expenses. We
use direct contribution as a measure of operating performance to assist in
understanding our operating results. Direct contribution is not a measure of
financial performance under generally accepted accounting principles (GAAP)
and should not be considered in isolation or an alternative to gross margin,
income (loss) from operations, net income (loss), or any other measure of
performance under GAAP.
(3) EBITDA represents earnings before interest expense, income taxes,
depreciation, amortization and other income/expense. EBITDA does not
represent and should not be considered as an alternative to net income or
cash flow from operations as determined by GAAP. However, we believe that
EBITDA provides useful information regarding our ability to service and/or
incur indebtedness.
14
Our coin processing volumes appear to be affected by seasonality that
mirrors the seasonality of our supermarket partners. There can be no assurance,
however, that such seasonal trends will continue. Any projections of future
seasonality are inherently uncertain due to our lack of comparable companies
engaged in the coin processing business.
In addition to fluctuations in revenue resulting from factors affecting
customer usage, timing of unit installations will result in significant
fluctuations in quarterly results. The rate of installations does not follow a
regular pattern, as it depends principally on installation schedules determined
by agreements between us and our retail distribution partners, variable length
of partner trial periods and the planned coordination of multiple partner
installations in a given geographic region.
Quarterly losses from operations during the periods presented were the
result of direct operating expenses associated with the significant increase in
our installed base, higher depreciation and amortization expense from the
expansion of the installed base and the significantly higher level of systems
infrastructure and management personnel to support our accelerated growth. We
expect to continue to incur substantial operating losses from our consolidated
operations (i) as we continue to increase our installed base of Coinstar units
internationally and (ii) as Meals.com continues investing in its operations to
achieve market acceptance.
Risk Factors
You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones facing our company. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial also may impair our business
operations. If any of the following risks actually occur, our business could be
harmed. In such case, the trading price of our common stock could decline and
you may lose all or part of your investment.
We have a history of sustained operating losses and we expect such losses
to continue. We have incurred substantial losses since inception. Our net loss
was $4.0 million for the three months ended March 31, 2001, $22.7 million in
fiscal 2000, $21.4 million in fiscal 1999 and $24.0 million in fiscal 1998. As
of March 31, 2001, we had an accumulated deficit of $130.5 million. Our
operating losses to date have resulted primarily from expenses incurred in the
development, marketing and operation of the Coinstar units, expansion and
maintenance of the network, administrative and occupancy expenses at our
headquarters, depreciation and amortization and losses attributable to our
Meals.com subsidiary. We expect to continue to incur operating losses on a
consolidated basis as we continue to develop and market new products, services
and enhancements, including the development of our Meals.com business and
increase our installed base of Coinstar units in the United Kingdom.
Our future profitability is uncertain and may be hampered by the continued
consolidation of Meals.com's losses. We cannot be certain that we will install a
sufficient number of our Coinstar units or maintain existing levels of customer
utilization to allow us to achieve profitability, or generate sufficient cash
flow to continue to meet our capital and operating expenses and debt service
obligations.
Our majority-owned subsidiary, Meals.com, is an early-stage infrastructure
provider that connects consumers, retailers and packaged goods manufacturers.
Meals.com is subject to the risks encountered by early-stage companies,
particularly those in the consumer e-commerce industry. Meals.com has incurred
substantial losses since its inception in 1998. Our portion of its net loss for
the three months ended March 31, 2001 was $3.9 million, and was $13.6 million in
fiscal 2000. As of March 31, 2001, our portion of Meals.com's accumulated
deficit was $21.0 million. Our profitability, on a consolidated basis, will
likely be delayed due to continuing losses of Meals.com. Meals.com's success
will be dependent upon various factors, including the ability to:
. raise additional funds to meet its working capital needs,
. achieve market acceptance of its products and services,
. achieve effective and measurable results for its supermarket and
packaged goods manufacturer customers,
. successfully execute on its customer contracts, and
. continue to develop and update its technologies to keep pace with the
growth of the Internet and changes in technology.
The market that Meals.com is entering is relatively untested and as a
result it is difficult to predict future performance.
15
Our future operating results remain uncertain. You should not consider
prior growth rates in our revenue to be indicative of our future operating
results. The timing and amount of future revenues will depend almost entirely on
our ability to obtain new agreements with potential retail partners for the
installation of Coinstar units, the successful deployment and operation of our
coin processing network and customer utilization of our service. Our future
operating results will depend upon many other factors, including:
. the level of product and price competition,
. the processing fee we charge consumers to use our service may change,
. the amount of our processing fee that we share with our retail partners,
. our success in expanding our network and managing our growth,
. our ability to develop and market product enhancements and new products,
such as those being developed by Meals.com, and the timing of such
product enhancements,
. our ability to enter into and penetrate new international markets, such
as the United Kingdom, and other selected foreign markets,
. activities of and acquisitions by competitors,
. the ability to hire additional employees,
. the timing of such hiring and the ability to control costs, and
. customer utilization at existing levels.
The success of our Meals.com subsidiary is uncertain. We have committed
significant resources and capital to develop and market the Meals.com products
and services including the Meals.com family of web-sites and the in-store
Shopper kiosk. The products and services offered by Meals.com are relatively
untested, and we cannot assure you that we will achieve market acceptance for
any such products and services. Moreover, these and other new products and
services may be subject to significant competition with offerings by potential
competitors in addition to companies that compete in our coin processing
business. Many of these competitors have significantly greater technological
expertise and financial and other resources than we do. In the absence of
significant market acceptance of Meals.com's products and services, Meals.com is
not likely to generate sufficient revenues to cover its operating expenses and
capital expenditures. In November 2000, our Board of Directors appointed a
special committee comprised of outside directors to evaluate alternatives
concerning a potential deconsolidation of Meals.com's financial results from our
financial results.
In February 2001, we engaged JPMorgan & Co. to advise us in exploring
strategic alternatives for Coinstar and our subsidiaries, Meals.com and Coinstar
International. The analysis of strategic alternatives is ongoing for Meals.com,
which includes, among other things, assessing financing alternatives. At March
31, 2001, Meals.com had cash totaling $4.5 million and had drawn the entire
amount of the credit facility from Coinstar. We do not anticipate increasing the
credit facility to Meals.com. In May 2001, Meals.com announced a corporate
reorganization aimed at managing cash usage while the company works to
achieve profitability. One result of this reorganization was a significant
reduction in its workforce. There can be no assurance that JPMorgan & Co. will
be successful in its evaluation of strategic alternatives for Meals.com or in
obtaining additional funding for Meals.com. As a result, Meals.com may be unable
to successfully execute its business plan.
We rely on one source of revenue. We have derived until now, and expect for
the foreseeable future to derive, substantially all of our revenue from the
operation of Coinstar units. Accordingly, continued market acceptance of our
coin processing service is critical to our future success. If demand for our
coin processing service does not continue to grow due to technological change,
competition, market saturation or other factors, our business, financial
condition and results of operations and ability to achieve sufficient cash flow
to service our indebtedness could be seriously harmed. As a consequence, our
future success may be dependent on our ability to develop and commercialize new
products and services. To date, we have not derived any significant revenue from
our e-services technology and do not anticipate significant revenue from this
source in the near future. In addition, new products, services and enhancements
may pose a variety of technical challenges and require us to enhance the
capabilities of our network and attract additional qualified employees. The
failure to develop and market new products, services or enhancements
successfully could seriously harm our business, financial condition and results
of operations and ability to achieve sufficient cash flow to service our
indebtedness.
We depend upon key personnel and need to hire additional personnel. Our
performance is substantially dependent on the continued services of our
executive officers, some of whom have employment contracts, and key employees,
whom we employ on an at-will basis. Our long-term success will depend on our
ability to recruit, retain and motivate highly skilled personnel. Competition
for such personnel is intense. We have at times experienced difficulties in
recruiting qualified personnel, and we may experience difficulties in the
future. Effective November, 15, 2000, our chief executive officer, Daniel
Gerrity, resigned. We have formed a search committee of the Board of Directors
to recruit a new chief executive officer to fill the vacancy left by Mr.
Gerrity.
16
The inability to attract and retain a new chief executive officer or other
necessary technical and managerial personnel could seriously harm our business,
financial condition and results of operations and our ability to achieve
sufficient cash flow to service our indebtedness.
Our stock price has been and may continue to be volatile. Our common stock
price has fluctuated substantially since our initial public offering in July
1997. The market price of our common stock could decline from current levels or
continue to fluctuate. The market price of our common stock may be significantly
affected by the following factors:
. operating results below market expectations,
. trends and fluctuations in use of Coinstar units,
. changes in, or our failure to meet financial estimates by securities
analysts,
. period-to-period fluctuations in our financial results,
. announcements of technological innovations or new products or services
by us or our competitors,
. the termination of one or more retail distribution contracts,
. timing of installations relative to financial reporting periods,
. release of analyst reports,
. industry developments,
. market acceptance of the Coinstar service by retail partners and
consumers,
. market acceptance of Meals.com and our e-services technology,
. the outcome of our investigation of strategic alternatives for
Meals.com, including the potential deconsolidation of Meals.com, and
. economic and other external factors.
In addition, the securities markets have from time to time experienced
significant price and volume fluctuations that are unrelated to the operating
performance of particular companies. These market fluctuations may seriously
harm the market price of our common stock.
Our business is dependent on maintaining our retail partner relationships.
The success of our business depends on the willingness of potential retail
partners, primarily supermarkets, to agree to installation of Coinstar units in
their stores and to the continued retention of those units. We must continue to
demonstrate that our Coinstar units provide a benefit to our retail partners to
ensure that such partners do not request deinstallation of units or develop or
purchase their own coin-counting system.
Our customer base is highly consolidated. We generally have separate
agreements with each of our retail partners providing for our exclusive right to
provide coin processing services in retail locations. Coinstar units in service
in three supermarket chains, The Kroger Co., Albertson's, Inc. and Safeway
accounted for approximately 28%, 11% and 11%, respectively, of our revenue in
2000. For the quarter ended March 31, 2001, these three chains accounted for
approximately 26%, 13% and 11%, respectively, of our revenue. The termination of
our contracts with any one or more of our retail partners could seriously harm
our business, financial condition, results of operations and ability to achieve
sufficient cash flow to service our indebtedness.
Our quarterly operating results may fluctuate due to different usage rates
of individual Coinstar units, seasonality of use and other factors. Customer
utilization of our coin processing service varies substantially from unit to
unit, making our revenue difficult to forecast. Customer utilization is affected
by the timing and success of promotions by us and our retail partners, age of
the installed unit, adverse weather conditions and other factors, many of which
are not in our control. We believe that coin processing volumes are affected by
seasonality. This trend mirrors the seasonality patterns of our supermarket
partners. We cannot be certain, however, that such seasonal trends will
continue. Any projections of future trends are inherently uncertain due to a
variety of factors, including success in the timely deployment of a substantial
number of additional Coinstar units, consumer
17
awareness and demand for our coin processing services, and the lack of
comparable companies engaged in the coin processing business.
The timing and number of installations of new Coinstar units during the
quarter affect future quarterly operating results. The timing of Coinstar unit
installations during a particular quarter is largely dependent on installation
schedules determined by agreements with our retail partners, the variable length
of trial periods of our retail partners and the planned coordination of multiple
installations in a given geographic region.
As a result of these and other factors, revenue for any quarter is subject
to significant variation, and we believe that period-to-period comparisons of
our results of operations are not necessarily meaningful and should not be
relied upon as indications of future performance. Because our operating expenses
are based on anticipated revenue trends and because a large percentage of our
expenses are relatively fixed, revenue variability could cause significant and
disproportionate variations in operating results from quarter to quarter and
could result in significant losses. To the extent such expenses are not followed
by increased revenue, our operating results would be seriously harmed.
Control of our shares is concentrated with a relatively small number of
stockholders. A significant portion of our shares is controlled by a relatively
small number of stockholders. Two such stockholders each recently filed
separately with the Securities and Exchange Commission a Schedule 13D. One
stockholder's filing stated that the stockholder had been communicating with our
Board of Directors, officers and other stockholders regarding ways to enhance
stockholder value, but that such stockholder had no present plans or intentions
to acquire or dispose of any of our securities other than for the purpose of
investment. Another stockholder's filing stated that the stockholder had
requested our Board of Directors to review our ownership of Meals.com and
consider divesting Meals.com or reducing our financial position in the Meals.com
business. In addition, the filing stated that such stockholder may use his
influence to support divesting or reducing our financial position in the
Meals.com business, but that such stockholder had no present plans or intentions
of acquiring additional shares but reserved the right to make additional
purchases on the open market and in private transactions. There can be no
assurance that such stockholders' intentions will not change in the future, that
other stockholders will not make similar filings, or that such stockholders
would support our directors at our 2001 annual shareholder meeting.
We have substantial indebtedness. As of March 31, 2001, we had outstanding
indebtedness of $62.7 million, which included $61.0 million of our 13.0% senior
subordinated discount notes due 2006 and our capital lease obligations. We paid
our first semi-annual cash interest payment on the senior notes on March 31,
2000. We will have debt service obligations of approximately $7.9 million per
year until October 2006, when the principal amount of $61.0 million will be due.
Our ability to continue to meet our debt service requirements will depend upon
continuing to achieve significant and sustained growth in our expected operating
cash flow, which will be affected by our success in implementing our business
strategy, prevailing economic conditions and financial, business and other
factors, some of which are beyond our control. Accordingly, we cannot be certain
as to whether we will continue to have sufficient resources to meet our debt
service obligations. If we are unable to generate sufficient cash flow to
service our indebtedness, we will have to reduce or delay planned capital
expenditures, sell assets, restructure or refinance our indebtedness or seek
additional equity capital. We cannot assure you that any of these strategies can
be effected on satisfactory terms, if at all, particularly in light of our high
levels of indebtedness. In addition, the extent to which we continue to have
substantial indebtedness could have significant consequences which may
materially limit or impair our ability to obtain additional financing in the
future for working capital, capital expenditures, product research and
development, acquisitions and other general corporate purposes. A substantial
portion of our cash flow from operations may need to be dedicated to the payment
of principal and interest on our indebtedness and therefore not available to
finance our business, and our high degree of indebtedness may make us more
vulnerable to economic downturns, limit our ability to withstand competitive
pressures or reduce our flexibility in responding to changing business and
economic conditions.
There are many risks associated with doing business in international
markets. We intend to increase our deployment of Coinstar units in select
international markets. We have only recently begun to expand our business
internationally in the United Kingdom and, accordingly, have limited experience
in operating in international markets. We anticipate that our international
operations will become increasingly significant to our business. International
transactions pose a number of risks, including failure of customer acceptance,
risks of regulatory delays or disapprovals with respect to our products and
services, and competition from potential and current coin-counting businesses.
Exposure to exchange rate risks, restrictions on the repatriation of funds,
political instability, adverse changes in tax, tariff and trade regulations,
difficulties with foreign distributors, difficulties in managing an organization
spread over several countries, and weaker legal protection for intellectual
property rights. These risks could seriously harm our business, financial
condition, and results of operations and ability to achieve sufficient cash flow
to service our indebtedness.
18
Our market is competitive. We compete regionally with several direct
competitors that operate self-service coin processing machines. We cannot be
certain that these competitors have not or will not substantially increase their
installed units and expand their service nationwide. We compete indirectly with
manufacturers of machines and devices that enable consumers to count or sort
coins themselves, and we also compete or may compete directly or indirectly with
banks and similar depository institutions for coin conversion customers. We also
compete with supermarket retailers that purchase and service their own
coin-counting equipment. We believe banks are the primary alternative available
to consumers for converting coins into cash, and they generally do not charge a
fee for accepting rolled coins. As the market for coin processing develops,
banks and other businesses may decide to offer additional coin processing
services, either as a customer service or on a self-service basis, and compete
directly with us.
In addition, we may face new competition as we seek to expand into
international markets and develop new products, services and enhancements. Our
ability to expand internationally may subject us to competition with banks that
offer services competitive with ours and with manufacturers and other companies
that have established or are seeking to establish coin-counting networks
competitive with ours. Many of the competitors have greater experience than we
do in operating in these international markets. Moreover, new products that we
intend to develop, such as those involving the Internet, may subject us to
competition from companies with significantly greater technological resources
and experience.
Many of our potential competitors with respect to the development of new
products, services and enhancements have longer operating histories, greater
name recognition, larger customer bases and significantly greater financial,
technical, marketing and public relations resources than we have. These
competitors may be able to undertake more extensive marketing campaigns, adopt
more aggressive pricing policies and make more attractive offers to consumers
and businesses. Our competitors might succeed in developing technologies,
products or services that are more effective, less costly or more widely used
than those that have been or are being developed by us or that would render our
technologies or products obsolete or noncompetitive. We cannot be certain that
we will be able to compete effectively with current or future competitors.
Competitive pressures could seriously harm our business, financial condition and
results of operations and our ability to achieve sufficient cash flow to service
our indebtedness.
We depend upon third-party manufacturers and service providers, and
sole-source manufacturers. We do not conduct manufacturing operations and
depend, and will continue to depend, on outside parties for the manufacture of
the Coinstar unit and its key components. We intend to continue to expand our
installed base, and such expansion may be limited by the manufacturing capacity
of our third-party manufacturers and suppliers. Although we expect that our
current contract manufacturer, SeaMed (a division of Plexus Corporation), will
be able to produce sufficient units to meet projected demand, SeaMed or other
manufacturers in reality may not be able to meet our manufacturing needs in a
satisfactory and timely manner. If there is an unanticipated increase in demand
for Coinstar unit installations, we may be unable to meet such demand due to
manufacturing constraints.
Although we have a contract with SeaMed, SeaMed does not have an obligation
to continue manufacturing the Coinstar unit or its components. In July 1999,
SeaMed merged with Plexus Corp. of Neenah, Wisconsin. SeaMed's management has
assured us that the combined entity will continue to meet our manufacturing
needs. However, we cannot be certain that Plexus will continue to operate in
Redmond, Washington or continue to meet our manufacturing needs.
In addition, we obtain some key hardware components used in the Coinstar
units from sole-source suppliers. We cannot be certain that we will be able to
continue to obtain an adequate supply of these components in a timely manner or,
if necessary, from alternative sources. If we are unable to obtain sufficient
quantities of components or to locate alternative sources of supply on a timely
basis, we may experience delays in installing or maintaining Coinstar units,
either of which could seriously harm our business, financial condition and
results of operations and ability to achieve sufficient cash flow to service our
indebtedness.
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 armored carriers and other third-party providers to arrange for
pick-up, processing and deposit of coins. We generally contract with one
transportation provider and coin processor to service a particular region. Many
of these service providers do not have long-standing relationships with us and
either party generally can terminate the contracts with advance notice ranging
from 30 to 90 days. We do not currently have nor do we expect to have in the
foreseeable future the internal capability to provide back up coin processing
service in the event of 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 would harm our business, financial condition and results of
operations and our ability to achieve sufficient cash flow to service our
indebtedness.
Moreover, as with any business that handles large volumes of cash, we are
susceptible to theft, counterfeit and other forms of fraud, including security
breaches of our computing system that performs important accounting functions.
We cannot be certain that we will be successful in developing product
enhancements and new services to thwart such activities.
19
We may be unable to adequately protect or enforce our patents and
proprietary rights. Our future 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 18 U.S. patents and 5 international patents relevant to aspects
of self-service coin processing. We also have additional patents pending in the
United States and several foreign jurisdictions.
We cannot assure you that any of our patents will be held valid if
challenged, that any pending patent applications will issue, or that other
parties will not claim rights in or ownership of our patents and other
proprietary rights. Moreover, patents issued to us may be circumvented or fail
to provide adequate protection. Our competitors might independently develop or
patent technologies that are substantially equivalent or superior to our
technologies.
Since patent applications in the United States are not publicly disclosed
until the patent is issued, others may have filed applications, which, if issued
as patents, could cover our products. We cannot be certain that others will not
assert patent infringement claims or claims of misappropriation against us based
on current or pending United States and/or foreign patents, copyrights or trade
secrets or that such claims will not be successful. In addition, defending our
company and our retail partners 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 our
ability to provide our coin processing service and use our processing equipment
in the United States and abroad, and could result in an award of substantial
damages. In the event of a successful claim of infringement, we may need or be
required to obtain one or more licenses from, as well as grant one or more
licenses to, others. We cannot assure you that we could obtain necessary
licenses from others at a reasonable cost or at all. We are engaged in
discussions with a former supplier, ScanCoin, in an effort to clarify certain
contract rights and obligations as well as ownership of certain of our
intellectual property.
We also rely on trade secrets to develop and maintain our competitive
position. Although we protect our proprietary technology in part by
confidentiality agreements with our employees, consultants and corporate
partners, we cannot assure you that these agreements will not be breached, that
we will have adequate remedies for any breach or that our trade secrets will not
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 could seriously harm our
business, financial condition and results of operations and ability to achieve
sufficient cash flow to service our indebtedness.
Defects in or failures of our operating system could harm our business.
We collect financial and operating data, and monitor performance of Coinstar
units, through a wide-area communications network connecting each of the
Coinstar units with a central computing system at our headquarters. This
information is used to track the flow of coins, verify coin counts and schedule
the dispatch unit service and coin pick-up. The operation of Coinstar units
depends on sophisticated software, computing systems and communication services
that may contain undetected errors or may be subject to failures. These errors
may arise particularly when new services or service enhancements are added or
when the volume of services provided increases. Although each Coinstar unit is
designed to store all data collected, thereby helping to ensure that critical
data is not lost due to an operating systems failure, our inability to collect
the data from our Coinstar units could lead to a delay in processing coins and
crediting the accounts of our retail partners for vouchers already redeemed. The
design of the operating systems to prevent loss of data may not operate as
intended. Any loss or delay in collecting coin processing data would seriously
harm our operations.
We have in the past experienced limited delays and disruptions resulting
from upgrading or improving our operating systems. Although such disruptions
have not had a material effect on our operations, future upgrades or
improvements could result in delays or disruptions that would seriously harm our
operations.
We rely on the long distance telecommunication network that is not owned by
us and is subject to service disruptions. Further, while we have taken
significant steps to protect the security of our network, any breach of security
whether intentional or from a computer virus could seriously harm us. Any
service disruptions, either due to errors or delays in our software or computing
systems or interruptions or breaches in the communications network, or security
breaches of the system, could seriously harm our business, financial condition
and results of operations and ability to achieve sufficient cash flow to service
our indebtedness.
We must keep pace with rapid technological changes to remain competitive.
The self-service coin processing market is relatively new and evolving. We
anticipate that, as the market matures, it will be subject to technological
change, new services and product enhancements, particularly as we expand our
service offerings. Accordingly, our success may depend in part upon our ability
to keep pace with continuing changes in technology and consumer preferences
while remaining price competitive. Our failure to develop technological
improvements or to adapt our products and services to technological change on a
timely basis could, over time, seriously harm our business, financial condition
and results of operations and our ability to achieve sufficient cash flow to
service our indebtedness.
20
Some anti-takeover provisions may affect the price of our common stock and
make it harder for a third party to acquire us without the consent of our board
of directors. We have implemented anti-takeover provisions that may discourage
takeover attempts and depress the market price of our stock. Provisions of our
certificate of incorporation, bylaws and rights plan could make it more
difficult for a third party to acquire us, even if doing so would be beneficial
to our stockholders. Delaware law also imposes some restrictions on mergers and
other business combinations between us and any acquirer of 15% or more of our
outstanding common stock, and Washington law may impose additional restrictions
on mergers and other business combinations between us and any acquirer of 10% or
more of our outstanding common stock. These provisions may make it harder for a
third party to acquire us without the consent of our board of directors, even if
the offer from a third party may be considered beneficial by some stockholders.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are subject to the risk of fluctuating interest rates in the normal
course of business, primarily as a result of our senior revolving debt and
investment activities that generally bear interest at variable rates. Because
the investments have maturities of three months or less, and our revolving debt
is renewable annually, we believe that the risk of material loss is low, and
that the carrying amount approximates fair value.
The table below presents principal amounts, at book value, by year of
maturity, and related weighted average interest rates. The fair value of
long-term debt (including current maturities), is calculated using quoted market
prices of the same or similar issues with the same remaining term to maturity.
Three Months Expected Maturity Date
Liabilities Ended March 31, Year Ended December 31, March 31, 2001
--------------- ----------------------- --------------
2001 2001 2002 2003 2004 2005 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---- ---------- ----- ----------
In Thousands
Fixed long-term debt........ -- -- -- -- -- -- $ 60,980 $ 60,980 $ 62,809
Average interest rate....... -- -- -- -- -- -- 13.0% 13.0%
Senior revolving debt....... $ 500 $ 500 $ 500 $ 500 $ 500 $ 500 $ 500 $ 500 $ 500
Average interest rate(*).... 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5%
* Interest rate represents Imperial Bank's prime rate plus 50 basis points
(8.5% at March 31, 2001).
21
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit
Number Description of Document
------ -----------------------
10.1 Amendment No. 1 to Registrant's 1997 Equity Incentive Plan dated
March 15, 2001.
10.2 Amendment No. 1 to Registrant's 2000 Equity Incentive Plan dated
March 15, 2001.
10.3 Employment Agreement between Jens H. Molbak and the Registrant dated
March 19, 2001.
(b) Reports on Form 8-K:
None
22
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.
(registrant)
By: /s/ Diane L. Renihan
----------------------------------
Diane L. Renihan
Chief Financial Officer
May 14, 2001
23
Exhibit Index
Exhibit
Number Description of Document
------- -----------------------
10.1 Amendment No. 1 to Registrant's 1997 Equity Incentive Plan dated
March 15, 2001.
10.2 Amendment No. 1 to Registrant's 2000 Equity Incentive Plan dated
March 15, 2001.
10.3 Employment Agreement between Jens H. Molbak and the Registrant dated
March 19, 2001.
_____________
24