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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 The Quarter Ended June 30, 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 July 31, 2001
Common Stock, $0.001 par value 20,889,657
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COINSTAR, INC. AND SUBSIDIARIES
FORM 10-Q
Index
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of June 30, 2001 (unaudited) and December 31,
2000................................................................................................ Page 3
Consolidated Statements of Operations for the three and six month periods ended June 30, 2001 and
June 30, 2000 (unaudited)........................................................................... Page 4
Consolidated Statement of Stockholders' Equity for the six month period ended
June 30, 2001 (unaudited)........................................................................... Page 5
Consolidated Statements of Cash Flows for the six month periods ended June 30, 2001 and
June 30, 2000 (unaudited)........................................................................... Page 6
Notes to Consolidated Financial Statements for the three and six month periods ended June 30, 2001
and June 30, 2000 (unaudited)....................................................................... Page 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................................... Page 11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...................................................................... Page 25
SIGNATURE......................................................................................................... Page 26
EXHIBIT INDEX..................................................................................................... Page 27
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
COINSTAR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2001 2000
------------- -------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................................... $ 86,445,122 $ 70,683,800
Prepaid expenses and other current assets........................................... 2,322,763 1,988,548
Cash and other current assets of discontinued operations, net....................... 526,598 7,137,383
------------- -------------
Total current assets............................................................. 89,294,483 79,809,731
PROPERTY AND EQUIPMENT:
Coinstar units...................................................................... 128,451,710 122,834,742
Computers........................................................................... 6,212,214 5,798,635
Office furniture and equipment...................................................... 1,488,137 1,421,804
Leased vehicles..................................................................... 4,141,461 3,941,144
Leasehold improvements.............................................................. 568,008 478,044
------------- -------------
140,861,530 134,474,369
Accumulated depreciation............................................................ (77,592,075) (66,142,376)
------------- -------------
63,269,455 68,331,993
OTHER ASSETS.......................................................................... 1,474,709 1,496,566
ASSETS OF DISCONTINUED OPERATIONS..................................................... 786,825 6,399,073
------------- -------------
TOTAL ASSETS.......................................................................... $ 154,825,472 $ 156,037,363
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................................................................... $ 4,617,002 $ 4,045,359
Accrued liabilities................................................................. 58,302,776 50,581,669
Current portion of long-term debt and capital lease obligations..................... 943,774 920,603
------------- -------------
Total current liabilities........................................................ 63,863,552 55,547,631
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS.......................................... 61,722,842 61,815,043
------------- -------------
Total liabilities................................................................ 125,586,394 117,362,674
MINORITY INTEREST-CONVERTIBLE PREFERRED STOCK......................................... -- 3,833,152
STOCKHOLDERS' EQUITY:
Common stock........................................................................ 164,556,915 159,517,516
Contributed capital................................................................. 1,488,731 1,821,647
Accumulated other comprehensive loss................................................ (17,658) (17,381)
Accumulated deficit................................................................. (136,788,910) (126,480,245)
------------- -------------
Total stockholders' equity.......................................................... 29,239,078 34,841,537
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............................................ $ 154,825,472 $ 156,037,363
============= =============
See notes to consolidated financial statements.
3
COINSTAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Six Months Ended Three Months Ended
June 30, June 30,
2001 2000 2001 2000
------------ ----------- ----------- -----------
REVENUE........................................................ $ 58,445,743 $45,694,768 $31,245,579 $24,670,829
EXPENSES:
Direct operating............................................. 26,676,071 22,155,011 13,797,960 11,733,171
Regional sales and marketing................................. 2,871,392 4,059,692 2,501,291 3,567,082
Product research and development............................. 1,986,783 1,674,107 989,436 866,880
Selling, general and administrative.......................... 10,913,591 8,250,624 5,945,993 4,110,686
Depreciation and amortization................................ 13,246,344 11,806,786 6,483,271 6,020,508
------------ ----------- ----------- -----------
Income (loss) from operations........................... 2,751,562 (2,251,452) 1,527,628 (1,627,498)
OTHER INCOME (EXPENSE):
Interest income.............................................. 383,128 816,676 203,386 335,003
Interest expense............................................. (4,159,303) (4,060,630) (2,079,899) (2,080,800)
Other income................................................. 4,434 127,450 3,844 63,726
------------ ----------- ----------- -----------
Loss from continuing operations......................... (1,020,179) (5,367,956) (345,041) (3,309,569)
DISCONTINUED OPERATIONS:
Loss from discontinued operations............................ (5,736,242) (4,029,858) (2,375,346) (2,147,784)
Loss on disposal of discontinued operations.................. (3,552,244) -- (3,552,244) --
------------ ----------- ----------- -----------
Loss from discontinued operations....................... (9,288,486) (4,029,858) (5,927,590) (2,147,784)
------------ ----------- ----------- -----------
NET LOSS....................................................... $(10,308,665) $(9,397,814) $(6,272,631) $(5,457,353)
============ =========== =========== ===========
LOSS PER SHARE:
Loss per share from continuing operations,
basic and diluted.......................................... $ ( 0.05) $ (0.27) $ (0.02) $ (0.16)
Loss per share from discontinued operations,
basic and diluted.................................. (0.45) (0.19) (0.28) (0.11)
------------ ----------- ----------- -----------
Net loss per share, basic and diluted........................ $ (0.50) $ ( 0.46) $ (0.30) $ (0.27)
============ =========== =========== ===========
Weighted average shares outstanding, basic and
diluted................................................... 20,612,083 20,216,385 20,720,542 20,239,226
See notes to consolidated financial statements.
4
COINSTAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Six Month Period Ended June 30, 2001
(Unaudited)
Accumulated
Common Stock Other
------------------------ Contributed Comprehensive Accumulated
Shares Amount Capital 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 common stock............ 3,324 63,987 63,987
Issuance of shares under employee
stock purchase plan.............. 26,844 345,806 345,806
Exercise of stock options........... 366,517 3,268,001 3,268,001
Net exercise of common
stock warrants................... 18,963 361,605 (361,605) --
Stock issued in connection with
purchase of minority interest of
subsidiary....................... 52,656 1,000,000 1,000,000
Non-cash stock-based
compensation expense............. 28,689 28,689
Comprehensive loss:
Unrealized loss on foreign
currency translation......... (277) (277)
------------
Other comprehensive loss......... (277)
Net loss............................ (10,308,665) (10,308,665)
------------
Comprehensive loss.................. (10,308,942)
---------------------------------------------------------------------- ------------
Balance at June 30, 2001............ 20,857,009 $164,556,915 $1,488,731 $(17,658) $(136,788,910) $ 29,239,078
========== ============ ========== ======== ============= ============
See notes to consolidated financial statements.
5
COINSTAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
2001 2000
------------ ------------
OPERATING ACTIVITIES:
Net loss......................................................................................... $(10,308,665) $ (9,397,814)
Net loss from discontinued operations.................................................... 5,736,242 4,029,858
Net loss from disposal of discontinued operations........................................ 3,552,244 --
------------ ------------
Net loss from continuing operations...................................................... (1,020,179) (5,367,956)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization............................................................ 13,246,344 11,806,786
Debt discount amortization............................................................... 62,757 93,321
Non-cash stock-based compensation........................................................ 28,689
Unrealized loss on short-term investments available for sale............................. -- (3,609)
Unrealized loss on foreign currency translation.......................................... (277) (10,940)
Changes in operating assets and liabilities:
Investment interest receivable........................................................... -- 126,996
Prepaid expenses and other current assets................................................ (170,929) (1,933,978)
Other assets............................................................................. (207,285) 174,157
Accounts payable......................................................................... 585,789 (22,295)
Accrued liabilities...................................................................... 7,721,107 2,953,678
------------ ------------
Net cash provided by continuing operations............................................. 20,246,016 7,816,160
Net cash provided by (used in) discontinued operations................................. 723,650 (15,467,079)
------------ ------------
Net cash provided by (used in) operations................................................ 20,969,666 (7,650,919)
------------ ------------
INVESTING ACTIVITIES:
Sale of short-term investments........................................................... -- 9,162,841
Purchase of property and equipment....................................................... (7,758,558) (12,118,316)
Net proceeds from the sale of property and equipment..................................... 3,941 9,760
Purchase of intangible assets............................................................ -- (345,670)
------------ ------------
Net cash used in continuing operations................................................. (7,754,617) (3,291,385)
Net cash used in discontinued operations............................................... (617,077) (1,622,697)
------------ ------------
Net cash used in investing activities.................................................... (8,371,694) (4,914,082)
------------ ------------
FINANCING ACTIVITIES:
Principle payments on capital lease obligations.......................................... (514,444) (368,995)
Proceeds from exercise of stock options and issuance of shares under employee stock
purchase plan........................................................................... 3,677,794 959,713
------------ ------------
Net cash provided by continuing operations............................................. 3,163,350 590,718
Net cash provided by discontinued operations........................................... -- 5,500,000
------------ ------------
Net cash provided by financing operations................................................ 3,163,350 6,090,718
------------ ------------
Net cash provided by continuing operations....................................................... 15,654,749 5,115,493
Net cash provided by (used in) discontinued operations........................................... 106,573 (11,589,776)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................................. 15,761,322 (6,474,283)
CASH AND CASH EQUIVALENTS:
Beginning of period...................................................................... 70,683,800 78,696,252
------------ ------------
End of period............................................................................ $ 86,445,122 $ 72,221,969
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest................................................. $ 4,012,337 $ 4,037,296
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Purchase of vehicles financed by capital lease obligation................................ $ 445,592 $ 643,885
Stock issued in connection with purchase of minority interest of subsidiary.............. $ 1,000,000 $ --
Net exercise of common stock warrants.................................................... $ 361,605 $ --
See notes to consolidated financial statements.
6
COINSTAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three and Six Month Periods Ended June 30, 2001 and 2000
(Unaudited)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The unaudited consolidated financial statements of
Coinstar, Inc. and subsidiaries (collectively, 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 and six month periods ended June 30, 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:
June 30, 2001 June 30, 2000
---------------------- ----------------------
Warrants........................................... 76,326 1,027,652
Options............................................ 2,648,566 2,462,709
Recent Accounting Pronouncements: In June 1998, the Financial Accounting
Standards Board ("FASB") 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 No. 133 and SFAS No. 138 as of
January 1, 2001. The impact of adoption was not material to the financial
statements, taken as a whole.
In July 2001, the FASB issued SFAS No. 141, Business Combinations ("SFAS
No. 141"), and SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS No.
142"). SFAS No. 141 requires the purchase method of accounting for business
combinations initiated after June 30, 2001 and eliminates the pooling-of-
interests method. SFAS No. 142, which is effective January 1, 2002, requires,
among other things, the discontinuance of goodwill amortization. In addition,
the standard includes provisions for the reclassification of certain existing
recognized intangibles as goodwill, reassessment of the useful lives of existing
recognized intangibles, reclassification of certain intangibles out of
previously reported goodwill and the identification of reporting units for
purposes of assessing potential future impairments of goodwill. SFAS No. 142
also requires the Company to complete a transitional goodwill impairment test
six months from the date of adoption. The Company does not believe that the
adoption of SFAS Nos. 141 or 142 will have a significant impact on its financial
position or results of its operations.
7
Reclassifications: Certain reclassifications have been made to the prior year
balances to conform to the current year presentation.
NOTE 2: DISCONTINUED OPERATIONS
The Company has adopted plans to discontinue the operations of its
Meals.com subsidiary. This business segment is accounted for as discontinued
operations in accordance with APB Opinion No. 30, Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions ("APB
No. 30"). Amounts in the financial statements and related notes for all periods
shown have been reclassified to reflect the discontinued operations.
Operating results for the discontinued operations are reported under the
caption "Loss from discontinued operations" on the accompanying consolidated
statements of operations. The Company has recorded under the caption, "Loss on
disposal of discontinued operations" its estimate of the loss on disposal of its
Meals.com business of approximately $3.6 million in the quarter ended June 30,
2001. Included in the estimate is a $2.4 million loss related primarily to the
write-down of assets of the Meals.com business. In addition, the Company has
recorded anticipated operating losses of $1.2 million resulting from the orderly
wind-down of the Meals.com business thru October 2001, the expected completion
date of the wind-down. Management believes that the estimated losses are
reasonable, however, they are based on preliminary data and are subject to
revision.
Summarized below are the operating results for the Meals.com business,
which are included in the accompanying consolidated statements of operations,
under the caption "Loss from discontinued operations." Also included below is
the estimated loss on the disposal of the Meals.com business, which is reported
in the accompanying consolidated statements of operations under the caption
"Loss on disposal of discontinued operations."
Six Months Ended Three Months Ended
June 30, June 30,
2001 2000 2001 2000
--------------- ----------------- ------------------ ----------------
(In thousands) (In thousands)
Revenue $ 619 $ 57 $ 291 $ 44
Operating expenses 7,321 4,844 3,063 2,623
--------------- ----------------- ------------------ ----------------
Operating loss (6,702) (4,787) (2,772) (2,579)
Interest, other income, and
minority interest, net (966) (757) (397) (431)
--------------- ----------------- ------------------ ----------------
Loss from discontinued operations (5,736) (4,030) (2,375) (2,148)
Loss on disposal of discontinued operations (3,552) -- (3,552) --
--------------- ----------------- ------------------ ----------------
Loss from discontinued operations $ (9,288) $ (4,030) $ (5,927) $ (2,148)
=============== ================= ================== ================
For financial reporting purposes, the assets, liabilities and provision for
losses of the discontinued operations are combined and classified in the
accompanying consolidated balance sheets as of June 30, 2001 and December 31,
2000 under the captions "Cash and other current assets of discontinued
operations, net" and "Assets of discontinued operations." Cash flows from the
discontinued operations are also stated separately on the accompanying
consolidated statements of cash flows.
8
Summarized below are the assets and liabilities of the Meals.com business,
which are included in the accompanying consolidated balance sheets under the
captions "Cash and other assets of discontinued operations, net" and "Assets of
discontinued operations."
June 30, December 31,
2001 2000
---------------- ----------------
(In thousands)
Current:
Cash and cash equivalents $ 1,877 $7,990
Prepaid expenses and
other current assets 163 897
Accounts payable (32) (837)
Accrued liabilities (1,481) (913)
---------------- ----------------
$ 527 $7,137
================ ================
Non-current:
Property and equipment $ 787 $6,399
================ ================
NOTE 3: AGREEMENTS WITH MINORITY STOCKHOLDERS OF MEALS.COM
The Company entered into a Securities Purchase Agreement dated as of June
21, 2001, with the minority stockholders of its majority owned subsidiary,
Meals.com, pursuant to which the Company agreed to purchase all outstanding
securities (including preferred stock and warrants) of Meals.com held by the
minority stockholders for a purchase price of $1.0 million. The purchase price
was payable in Coinstar's common stock based on the closing price of the stock
on June 8, 2001, which was $18.99. The common stock paid to the minority
stockholders of Meals.com is entitled to certain registration rights.
NOTE 4: 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 two reportable business segments; the North
American core business (which includes the United States and Canada) and the
International business (which includes the United Kingdom). As mentioned in
Note 2, the Company decided to discontinue operations of its Meals.com segment
in June 2001. Accordingly, Meals.com is not included in the segment disclosure
information below.
9
Six Months Ended Three Months Ended
June 30, June 30,
2001 2000 2001 2000
------- ------- ------- --------
(In thousands) (In thousands)
Revenue:
North American core business................... $58,051 $45,548 $31,004 $ 24,576
International business......................... 395 147 242 95
------- ------- ------- --------
Total revenues............................. $58,446 $45,695 $31,246 $ 24,671
======= ======= ======= ========
Net loss from continuing operations:
North American core business................... $ (597) $(4,922) $ (38) $ (3,092)
International business......................... (423) (446) (307) (218)
------- ------- ------- --------
Total net loss from continuing
operations............................ $(1,020) $(5,368) $ (345) $ (3,310)
======= ======= ======= ========
Total assets: June 30, 2001 December 31, 2000
---------------- -----------------
North American core business................... $ 157,140 $ 157,765
International business......................... 3,056 758
Net assets from discontinued operations........ 1,313 13,536
Intercompany eliminations...................... (6,684) (16,022)
----------- -------------
Total assets............................... $ 154,825 $ 156,037
=========== =============
10
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 our revenue from coin processing services generated by our
installed base of Coinstar coin-counting machines located in supermarket chains
in 46 states across the United States, 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 to date 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 58 Coinstar units in
Canada to determine the viability of the Canadian market for our services. On
May 1, 2001, we announced plans to rollout the Coinstar coin-counting 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 and
currently have 110 machines installed in the United Kingdom.
In December 1998, we formed a subsidiary, Meals.com, Inc., to explore the
development and deployment of e-services technology. We were not able to raise
sufficient funding for Meals to continue operating and in June 2001, we
announced that we were taking steps to prepare for the sale of the Meals product
lines and to pursue an orderly exit from the business. During this period, we
reduced the workforce significantly; however, we retained a core group of Meals
employees to assist in the sale of Meals' assets and the orderly wind-down of
its operations.
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 our 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 as well as 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. 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
11
consists primarily of depreciation charges on Coinstar units and, to a lesser
extent, depreciation on furniture and fixtures, leased automobiles and computer
equipment. Other income in the prior year quarter consisted primarily 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 coin-counting units. In 2000, we devoted significant resources
and capital to develop and market the Meals.com products and services, which we
discontinued in June 2001. 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 $136.8 million as of June
30, 2001. We expect to continue to evaluate new marketing and promotional
programs to increase the breadth and rate of customer utilization of our
Coinstar 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
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.
Discontinued Operations
We have adopted plans to discontinue the operations of our subsidiary,
Meals.com. This business segment is accounted for as discontinued operations in
accordance with APB Opinion No. 30, Reporting the Results of Operations-
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions ("APB No. 30").
In accordance with APB No. 30, we have estimated that the disposal of our
Meals.com business will result in a loss of approximately $3.6 million, which
was recorded in the quarter ended June 30, 2001. Included in the estimate is a
$2.4 million loss primarily related to the write-down of assets of the Meals.com
business. In addition, we have recorded anticipated operating losses of $1.2
million resulting from the orderly wind-down of the Meals.com business thru
October 2001, the expected completion date of the wind-down. We believe that
the estimated losses are reasonable, however, they are based on preliminary data
and are subject to revision.
12
Results of Continuing Operations
Our consolidated financial information presents the net effect of
discontinued operations separate from the results of our continuing operations.
Historical financial information has been reclassified to present consistently
the discontinued operations. The discussion and analysis that follows generally
focuses on continuing operations.
The following table shows revenue and expense as a percent of revenue for the
periods ended:
Six Months Ended Three Months Ended
June 30, June 30,
2001 2000 2001 2000
----- ----- ----- -----
Revenue................................................ 100.0% 100.0% 100.0% 100.0%
Expenses:
Direct operating.................................... 45.6 48.5 44.2 47.6
Regional sales and marketing........................ 4.9 8.9 8.0 14.4
Product research and development.................... 3.4 3.7 3.2 3.5
Selling, general and administrative................. 18.7 18.0 19.0 16.7
Depreciation and amortization....................... 22.7 25.8 20.7 24.4
----- ----- ----- -----
Income (loss) from continuing operations............... 4.7% (4.9)% 4.9% (6.6)%
===== ===== ===== =====
Three Months Ended June 30, 2001 and 2000
Revenue
Revenue increased to $31.2 million for the three months ended June 30, 2001
from $24.7 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 8,856 at June 30, 2001 from 7,730 units at June 30, 2000. The total
dollar value of coins processed worldwide increased to $351.5 million during the
three month period ended June 30, 2001 from $277.3 million in the comparable
period in the prior year.
Direct Operating Expenses
Direct operating expenses increased to $13.8 million in the three months ended
June 30, 2001 from $11.7 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 expansion into our existing regional markets, and an increase in
revenue sharing with our partners that corresponded to a 26.8% increase in coin
processing revenue from the quarter ended June 30, 2000. Direct operating
expenses as a percentage of revenue decreased to 44.2% in the three months ended
June 30, 2001 from 47.6% 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 less expensive and 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 $2.5 million in the quarter
ended June 30, 2001 from $3.6 million in the comparable prior year quarter. The
decrease in regional marketing expense was the result of a decreased level of
television, radio and newspaper advertising. Regional sales and marketing as a
percentage of revenue decreased to 8.0% in the three months ended June 30, 2001
from 14.4% in the same period of 2000.
13
Product Research and Development
Product research and development expenses increased to $1.0 million in the
quarter ended June 30, 2001 from $0.9 million in the comparable prior year
quarter. The increase in product research and development expense was due
primarily to staffing increases and consulting services related to researching
new product ideas. Product research and development as a percentage of revenue
decreased slightly to 3.2% in the three months ended June 30, 2001 from 3.5% in
the same period of 2000.
Selling, General and Administrative
Selling, general and administrative expenses increased to $5.9 million in the
quarter ended June 30, 2001 from $4.1 million in the comparable prior year
quarter. The principal component of such expenses was employee compensation,
including salaries, benefits, and related costs. Selling, general and
administrative expense as a percentage of revenue increased to 19.0% in the
quarter ended June 30, 2001 from 16.7% 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, (ii) increased
administrative expenses related to state registration and fees related to patent
prosecution, professional fees and other general administrative costs associated
with our ongoing operations and (iii) special fees and expenses paid to
professional service providers including JPMorgan to assist us in exploring
strategic alternatives.
Depreciation and Amortization
Depreciation and amortization expense increased to $6.5 million in the quarter
ended June 30, 2001 from $6.0 million in the comparable prior year quarter. The
increase was due primarily to the increase in the installed base of Coinstar
coin-counting units. Depreciation and amortization as a percentage of revenue
decreased to 20.7% in the three months ended June 30, 2001 from 24.4% in the
same period in the prior year. The decrease in depreciation and amortization as
a percentage of revenue was the result of a larger increase in coin processing
volumes processed through the network (resulting in higher revenue) compared to
a smaller increase in depreciation and amortization expense.
Other Income and Expense
Other income generated in the three months ended June 30, 2001 was
insignificant. In the quarter ended June 30, 2000, other income was $0.1
million resulting from subleasing excess office space.
Interest income decreased to $0.2 million in the three months ended June 30,
2001 from $0.3 million in the comparable period in 2000. The decrease in
interest income is attributed to lower interest rates earned on 2001 investments
than in the same period in the prior year.
Interest expense of $2.1 million remained consistent in the three month
periods ended June 30, 2001 and 2000.
Loss from Continuing Operations
In the three months ended June 30, 2001, our loss from continuing operations
decreased 90% from $3.3 million in the prior year quarter to $0.3 million in the
current quarter. The change in the net loss was due primarily to our improved
direct operating margin and a reduction in regional sales and marketing
expenditures. 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 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 regional marketing and
corporate expenses.
Six Months Ended June 30, 2001 and 2000
Revenue
Revenue increased to $58.4 million for the six months ended June 30, 2001 from
$45.7 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
8,856 at June 30, 2001 from 7,730 units at June 30, 2000. The total dollar value
of coins processed worldwide increased to $657.3 million during the six month
period ended June 30, 2001 from $513.6 million in the comparable period in the
prior year.
14
Direct Operating Expenses
Direct operating expenses increased to $26.7 million in the six months ended
June 30, 2001 from $22.2 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 expansion in the United Kingdom and into 13 new North American
regional markets, and an increase in revenue sharing with our partners that
corresponded to a 28.0% increase in coin processing revenue from the six months
ended June 30, 2000. Direct operating expenses as a percentage of revenue
decreased to 45.6% in the six months ended June 30, 2001 from 48.5% 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 less expensive
and 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 $2.9 million in the six
months ended June 30, 2001 from $4.1 million in the comparable prior year
period. The decrease in regional marketing expense was the result of a
decreased level of television, radio and newspaper advertising. Regional sales
and marketing as a percentage of revenue decreased to 4.9% in the six months
ended June 30, 2001 from 8.9% in the same period of 2000.
Product Research and Development
Product research and development expenses increased to $2.0 million in the six
months ended June 30, 2001 from $1.7 million in the comparable prior year
period. The increase in product research and development expense was due
primarily to (i) staffing and consulting services costs related to researching
new product ideas and (ii) staffing and consulting costs related to enhancing
our existing coin processing system. Product research and development as a
percentage of revenue decreased slightly to 3.4% in the six months ended June
30, 2001 from 3.7% in the same period of 2000.
Selling, General and Administrative
Selling, general and administrative expenses increased to $10.9 million in the
six months ended June 30, 2001 from $8.3 million in the comparable prior year
period. The principal component of such expenses was employee compensation,
including salaries, benefits and related costs. Selling, general and
administrative expense as a percentage of revenue increased to 18.7% in the six
months ended June 30, 2001 from 18.0% 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, (ii) increased
administrative expenses related to state registration and patent license fees,
professional fees and other general administrative costs associated with our
ongoing operations and (iii) special fees and expenses paid to professional
service providers, including JPMorgan to assist us in exploring strategic
alternatives.
Depreciation and Amortization
Depreciation and amortization expense increased to $13.2 million in the six
months ended June 30, 2001 from $11.8 million in the comparable prior year
period. The increase was due primarily to the increase in the installed base of
Coinstar coin-counting units as well as expenses associated with the periodic
replacement of certain machine components. Depreciation and amortization as a
percentage of revenue decreased to 22.7% in the six months ended June 30, 2001
from 25.8% in the same period in the prior year. The decrease in depreciation
and amortization as a percentage of revenue was the result of a larger increase
in coin processing volumes processed through the network (resulting in higher
revenue) compared to a smaller increase in depreciation and amortization
expense.
Other Income and Expense
Other income generated in the six months ended June 30, 2001 was
insignificant. In the six months ended June 30, 2000, other income was $0.1
million resulting from subleasing excess office space.
15
Interest income decreased to $0.4 million in the six months ended June 30,
2001 from $0.8 million in the comparable period in 2000. The decrease in
interest income is attributed to lower interest rates earned on 2001 investments
in the six months ended June 30, 2001 than in the same period in the prior year.
Interest expense increased slightly to $4.2 million in the six months ended
June 30, 2001 from $4.1 million in the comparable prior period.
Loss from Continuing Operations
In the six months ended June 30, 2001, our net loss from continuing operations
decreased by 81% from $5.4 million in the six months ended June 30, 2000 to $1.0
million in the in the six months ended June 30, 2001. The change in the net loss
was due primarily to our improved direct operating margin and a reduction in
regional sales and marketing expenditures. 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 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
regional marketing and corporate expenses.
Liquidity and Capital Resources
As of June 30, 2001, we had cash and cash equivalents of $86.4 million and
working capital of $24.9 million from continuing operations. Cash and cash
equivalents include $47.8 million of funds in transit to our retail partners.
Net cash provided by continuing operations was $20.2 million for the six months
ended June 30, 2001, compared to net cash provided by continuing operations of
$7.8 million for the six months ended June 30, 2000.
Net cash used by investing activities from continuing operations for the six
months ended June 30, 2001 was $7.8 million compared to $3.3 million in the
prior year period. In 2000, cash used by investing activities for the six
months ending June 30, 2000 resulted primarily from purchases of Coinstar units
offset by cash generated by sales of marketable securities totaling $9.2
million. There were no sales of marketable securities in the current year.
Capital expenditures during the six months ended June 30, 2001, were $7.8
million compared with $12.1 million in the comparable period in 2000. Capital
expenditures decreased due primarily to a decrease in Coinstar unit purchases
during the six months ended June 30, 2001. 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 from continuing operations for the
six months ended June 30, 2001 was $3.2 million, which was primarily the result
of proceeds from the exercise of stock options and employee stock purchases of
$3.7 million offset by principal payments on capital lease obligations. Net cash
provided by financing activities for the six months ended June 30, 2000 was $0.6
million resulting from the exercise of stock options and employee stock
purchases of $1.0 million offset by principal payments on capital lease
obligations.
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 the
minority stockholders for $5.5 million. On June 21, 2001, we entered into a
Securities Purchase Agreement with the minority stockholders of Meals.com
pursuant to which we agreed to purchase all outstanding securities (including
preferred stock and warrants) of Meals.com held by them for a purchase price of
$1.0 million. The purchase price was payable in Coinstar's common stock based
on the closing price of the stock on June 8, 2001, which was $18.99. The common
stock paid to the minority stockholders of Meals.com is entitled to certain
registration rights.
As of June 30, 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 June 30, 2001, we had secured
irrevocable letters of credit with two banks that totaled $5.8 million. These
letters of credit, which expire at various times through November 2001, are
available to collateralize certain obligations to third parties. As of June 30,
2001, no amounts were outstanding under these letters of credit agreements.
16
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.
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.
17
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 Months Ended
-------------------------------------------------------------------------------
June 30, March 31, Dec. 31, Sept. 30, June 30, March 31, Dec. 31, Sept. 30,
2001 2001 2000 2000 2000 2000 1999 1999
-------- -------- -------- -------- -------- -------- -------- --------
(Dollars in thousands except per unit data)
Consolidated Statements of Operations:
Revenue....................................... $ 31,245 $ 27,200 $ 28,251 $ 28,663 $ 24,671 $ 21,024 $ 21,921 $ 21,718
Expenses:
Direct operating............................. 13,798 12,878 12,984 13,045 11,733 10,422 10,938 10,783
Regional sales and marketing................. 2,501 370 2,402 4,906 3,567 493 2,704 1,245
Product research and development............. 989 997 916 907 867 807 1,045 1,752
Selling, general and administrative.......... 5,946 4,968 5,510 4,416 4,111 4,140 3,334 3,199
Depreciation and amortization................ 6,483 6,763 6,635 6,018 6,021 5,786 5,588 5,570
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) from continuing operations...... 1,528 1,224 (196) (629) (1,628) (624) (1,688) (831)
Other expense, net............................ (1,873) (1,899) (1,992) (1,669) (1,682) (1,434) (2,187) (1,893)
-------- -------- -------- -------- -------- -------- -------- --------
Loss before discontinued operations and
extraordinary item....................... (345) (675) (2,188) (2,298) (3,310) (2,058) (3,875) (2,724)
Discontinued operations:
Loss related to discontinued operations... (5,928) (3,361) (5,222) (3,588) (2,148) (1,882) (1,660) (1,179)
Extraordinary item:
Loss related to early retirement of debt.. -- -- -- -- -- -- (2,507) (743)
-------- -------- -------- -------- -------- -------- -------- --------
Net loss...................................... $ (6,273) $ (4,036) $ (7,410) $ (5,886) $ (5,458) $ (3,940) $ (8,042) $ (4,646)
======== ======== ======== ======== ======== ======== ======== ========
North American core business:
Number of new Coinstar units installed
during the period............................ 193 95 413 359 337 430 495 668
Installed base of Coinstar units at end of
period....................................... 8,770 8,577 8,482 8,069 7,710 7,373 6,934 6,448
Average age of network for the period
(months)..................................... 31.9 29.7 27.6 26.2 24.5 22.9 21.4 20.3
Number of regional markets.................... 123 123 122 118 110 106 104 102
Dollar value of coins processed............... $348,255 $303,799 $315,715 $320,655 $276,073 $235,594 $245,703 $243,550
Revenue....................................... 31,029 27,130 28,107 28,546 24,576 20,972 21,871 21,679
Annualized revenue per average installed
unit (1)..................................... 14,406 12,696 13,565 14,495 13,091 11,740 13,041 14,146
Direct contribution (2)....................... 17,461 14,373 15,195 15,569 12,890 10,638 10,973 10,936
Direct contribution margin (%)................ 56.3% 53.0% 54.1% 54.5% 52.4% 50.7% 50.2% 50.4%
Annualized direct contribution per
average installed unit (1)(2)................ $ 8,102 $ 6,747 $ 7,333 $ 7,906 $ 6,866 $ 5,955 $ 6,543 $ 7,136
Regional sales and marketing.................. 2,535 377 2,402 4,906 3,567 493 2,756 1,293
Product research and development.............. 945 915 886 825 804 751 919 1,643
Selling, general and administrative........... 5,685 4,942 4,789 4,281 3,993 4,077 3,172 3,100
EBITDA (3).................................... 8,296 8,139 7,118 5,557 4,526 5,317 4,126 4,900
EBITDA margin (%)............................. 27% 30% 25% 19% 18% 25% 19% 23%
___________
(1) Calculated based on annualized quarterly results 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 accounting principles generally
accepted in the United States of America (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.
18
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.
19
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.
Our future profitability and operating results remain uncertain. 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. 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,
. 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 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.
We rely on one source of revenue. We have derived, and expect to derive for
the foreseeable future, substantially all of our revenue from the operation of
Coinstar coin-counting 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. 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.
There are many risks associated with doing business in international markets.
We intend to increase our deployment of Coinstar units in the United Kingdom. We
have only recently begun this expansion 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
20
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.
We depend upon key personnel and need to hire additional personnel. Our
performance is substantially dependent on the continued services of our senior
executive officers who 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. On
November 15, 2000, our chief executive officer, Daniel Gerrity, resigned. The
nominating committee of the Board of Directors has been conducting a search for
a new chief executive officer to fill the vacancy left by Mr. Gerrity. 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 the use of our 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,
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
which are highly consolidated. 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.
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 six months ended June 30, 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.
21
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 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.
We have substantial indebtedness. As of June 30, 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 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.
We may face competition. We may face competition from supermarket retailers
that purchase and service their own coin-counting equipment. 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 to ours. Moreover, new
products that we intend to develop, such as those involving pre-paid cards, may
subject us to competition from companies with significantly greater
technological and capital 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, marking and public relations resources than we have. These potential
competitors may 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. 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
22
and its key components. We intend to continue to expand our installed base both
domestically and internationally and such expansion may be limited by the
manufacturing capacity of our third-party manufacturers and suppliers. Although
we expect that our current contract manufacturers will be able to produce
sufficient units to meet projected demand, in reality they 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.
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.
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
23
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.
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.
24
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit
Number Description of Document
---------- -----------------------------------------------------------------------------------------------------------------
3.1 Amended and Restated Certificate of Incorporation of the Registrant. /(1)/
3.2 Amended and Restated Bylaws of the Registrant. /(1)/
10.1 Employment Agreement between John P. Reilly and the Registrant dated April 26, 2001.
10.2 Employment Agreement between Michael L. Doran and the Registrant dated April 30, 2001.
10.3 Employment Agreement between Michael W. Parks and the Registrant dated May 3, 2001.
10.4 Employment Agreement between William W. Booth and the Registrant dated May 5, 2001.
10.5 Employment Agreement between Carol Lewis and the Registrant dated June 18, 2001.
10.6 Employment Agreement between Diane Renihan and the Registrant dated June 18, 2001.
10.7 Employment Agreement between Richard Stillman and the Registrant dated June 18, 2001.
10.8 Agreement between Jens Molbak and the Registrant dated June 14, 2001.
10.9 Securities Purchase Agreement Among the Registrant and Certain Stockholders of Meals.com, Inc.,
dated as of June 21, 2001. /(2)/
10.10 Form of Release Agreement. /(2)/
(b) Reports on Form 8-K:
On June 22, 2001, we filed a current report on Form 8-K dated June 21, 2001
under Item 5 whereby we announced that we entered into a Securities Purchase
Agreement with the minority stockholders of our majority owned subsidiary,
Meals.com, pursuant to which we have agreed to purchase all outstanding
securities (including preferred stock and warrants) of Meals.com held by the
minority stockholders.
___________
(1) Incorporated by reference to the Registrant's Registration Statement on
Form S-4 (No. 333-33233).
(2) Incorporated by reference to the Registrant's Current Report on Form 8-K
(No. 000-22555) filed by Coinstar, Inc. on June 22, 2001.
25
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
August 14, 2001
26
Exhibit Index
Exhibit
Number Description of Document
-----------------------
3.1 Amended and Restated Certificate of Incorporation of the Registrant. /(1)/
3.2 Amended and Restated Bylaws of the Registrant. (/1)/
10.1 Employment Agreement between John P. Reilly and the Registrant dated April 26, 2001.
10.2 Employment Agreement between Michael L. Doran and the Registrant dated April 30, 2001.
10.3 Employment Agreement between Michael W. Parks and the Registrant dated May 3, 2001.
10.4 Employment Agreement between William W. Booth and the Registrant dated May 5, 2001.
10.5 Employment Agreement between Carol Lewis and the Registrant dated June 18, 2001.
10.6 Employment Agreement between Diane Renihan and the Registrant dated June 18, 2001.
10.7 Employment Agreement between Richard Stillman and the Registrant dated June 18, 2001.
10.8 Agreement between Jens Molbak and the Registrant dated June 14, 2001.
10.9 Securities Purchase Agreement Among the Registrant and Certain Stockholders of Meals.com, Inc.,
dated as of June 21, 2001. /(2)/
10.10 Form of Release Agreement./ (2)/
_________________
(1) Incorporated by reference to the Registrant's Registration Statement on
Form S-4 (No. 333-33233).
(2) Incorporated by reference to the Registrant's Current Report on Form 8-K
(No. 000-22555) filed by Coinstar, Inc. on June 22, 2001.
27