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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 March 31, 2002
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, 2002
Common Stock, $0.001 par value 21,757,679
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COINSTAR, INC.
FORM 10-Q
Index
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of March 31, 2002 (unaudited) and December 31,
2001 ............................................................................................. Page 3
Consolidated Statements of Operations for the three month periods ended March 31, 2002 and
March 31, 2001 (unaudited) ....................................................................... Page 4
Consolidated Statement of Stockholders' Equity for the three month period ended
March 31, 2002 (unaudited) ....................................................................... Page 5
Consolidated Statements of Cash Flows for the three month periods ended March 31, 2002 and
March 31, 2001 (unaudited) ....................................................................... Page 6
Notes to Consolidated Financial Statements for the three month periods ended March 31, 2002
and March 31, 2001 (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 21
SIGNATURE ..................................................................................................... Page 22
EXHIBIT INDEX ................................................................................................. Page 23
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
COINSTAR, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
March 31, December 31,
2002 2001
--------- ---------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................................................................... $ 44,266 $ 52,267
Cash due to retailers ........................................................................ 53,384 53,668
Prepaid expenses and other current assets .................................................... 2,052 1,978
--------- ---------
Total current assets .................................................................... 99,702 107,913
PROPERTY AND EQUIPMENT:
Coinstar units ............................................................................... 140,599 137,308
Computers .................................................................................... 8,306 7,751
Office furniture and equipment ............................................................... 1,252 1,490
Leased vehicles .............................................................................. 4,353 4,183
Leasehold improvements ....................................................................... 572 572
--------- ---------
155,082 151,304
Accumulated depreciation ..................................................................... (94,840) (89,215)
--------- ---------
60,242 62,089
OTHER ASSETS ...................................................................................... 933 1,185
--------- ---------
TOTAL ............................................................................................. $ 160,877 $ 171,187
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................................................................. $ 4,614 $ 5,810
Accrued liabilities payable to retailers ..................................................... 53,384 53,668
Accrued liabilities .......................................................................... 9,862 11,839
Current portion of long-term debt and capital lease obligations .............................. 4,484 898
--------- ---------
Total current liabilities ............................................................... 72,344 72,215
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS ...................................................... 48,305 61,745
--------- ---------
Total liabilities ....................................................................... 120,649 133,960
STOCKHOLDERS' EQUITY:
Convertible preferred stock, $0.001 par value--Authorized, 5,000,000 shares; no
shares issued and outstanding ................................................................ -- --
Common stock, $0.001 par value--Authorized, 45,000,000 shares; issued and
outstanding, 21,682,400 and 21,403,656 shares at 2002 and 2001, respectively ................. 174,435 171,059
Accumulated other comprehensive income (loss) ................................................ (55) 34
Accumulated deficit .......................................................................... (134,152) (133,866)
--------- ---------
Total stockholders' equity ................................................................... 40,228 37,227
--------- ---------
TOTAL ............................................................................................. $ 160,877 $ 171,187
========= =========
See notes to consolidated financial statements.
3
COINSTAR, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three Month Periods Ended
March 31,
2002 2001
-------- ----------
REVENUE ...................................................................... $ 33,165 $ 27,200
EXPENSES:
Direct operating ........................................................ 15,189 12,878
Regional sales and marketing ............................................ 534 370
Product research and development ........................................ 1,234 997
Selling, general and administrative ..................................... 5,774 4,968
Depreciation and amortization ........................................... 6,610 6,763
-------- ----------
Income from operations ........................................... 3,824 1,224
OTHER INCOME (EXPENSE):
Interest income ......................................................... 93 180
Interest expense ........................................................ (1,701) (2,079)
Other expense ........................................................... (30) --
-------- ----------
Income (loss) from continuing operations ......................... 2,186 (675)
DISCONTINUED OPERATIONS:
Loss from discontinued operations ......................................... -- (3,361)
-------- ----------
Income (loss) before extraordinary item .............................. 2,186 (4,036)
EXTRAORDINARY ITEM:
Loss related to early retirement of debt .................................. (2,472) --
-------- ----------
NET LOSS ..................................................................... $ (286) $ (4,036)
======== ==========
NET INCOME (LOSS) PER SHARE:
Basic:
Continuing operations ................................................... $ 0.10 $ (0.03)
Discontinued operations ................................................. -- (0.17)
Extraordinary item ...................................................... (0.11) --
-------- ----------
Net loss per share .................................................. $ (0.01) $ (0.20)
======== ==========
Diluted:
Continuing operations ................................................... $ 0.10 $ (0.03)
Discontinued operations ................................................. -- (0.17)
Extraordinary item ...................................................... (0.11) --
-------- ----------
Net loss per share .................................................. $ (0.01) $ (0.20)
======== ==========
See notes to consolidated financial statements.
4
COINSTAR, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Three Month Period Ended March 31, 2002
(in thousands, except share data)
(unaudited)
Accumulated
Other
Common Stock Comprehensive Accumulated
---------------------
Shares Amount Income (Loss) Deficit Total
--------- -------- ------------- ----------- ---------
BALANCE, January 1, 2002 ............. 21,403,656 $171,059 $ 34 $ (133,866) $37,227
Issuance of shares under employee
stock purchase plan ............... 16,668 344 344
Exercise of stock options ............. 262,076 2,424 2,424
Non-cash stock-based
compensation expense ............... 608 608
Comprehensive loss:
Net loss ......................... (286) (286)
Other comprehensive loss:
Foreign currency translation
adjustments ................... (89) (89)
---------
Comprehensive loss .................... (375)
---------- --------- ------- ---------- ---------
BALANCE, March 31, 2002 ............... 21,682,400 $174,435 $ (55) $(134,152) $ 40,228
========== ========= ======= ========== =========
See notes to consolidated financial statements.
5
COINSTAR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Month Periods Ended
March 31,
2002 2001
--------- ---------
OPERATING ACTIVITIES:
Net loss ........................................................................ $ (286) $ (4,036)
Loss from discontinued operations ........................................... -- 3,361
Loss related to early retirement of debt .................................... 2,472 --
--------- ---------
Income (loss) from continuing operations ........................................ 2,186 (675)
Adjustments to reconcile net loss to net cash provided (used) by operating
activities:
Depreciation and amortization ............................................... 6,610 6,763
Debt discount amortization .................................................. 28 31
Non-cash stock-based compensation ........................................... 608 --
Unrealized gain (loss) on foreign currency translation ...................... (89) (2)
Cash provided (used) by changes in operating assets and liabilities:
Prepaid expenses and other current assets ................................... (84) 400
Other assets ................................................................ (183) (69)
Accounts payable ............................................................ (1,178) (1,629)
Payables to retailers ....................................................... (284) --
Accrued liabilities ......................................................... (1,977) 298
--------- ---------
Net cash provided by continuing operations ...................................... 5,637 5,117
Net cash provided by discontinued operations .................................... -- 474
--------- ---------
Net cash provided by operating activities ................................... 5,637 5,591
INVESTING ACTIVITIES:
Purchase of fixed assets .................................................... (4,462) (4,113)
Proceeds from sale of fixed assets .......................................... 27 3
--------- ---------
Net cash used by continuing operations .......................................... (4,435) (4,110)
Net cash used by discontinued operations ........................................ -- (423)
--------- ---------
Net cash used by investing activities ....................................... (4,435) (4,533)
FINANCING ACTIVITIES:
Principal payments on long-term debt ........................................ (25,255) (263)
Borrowings on long-term debt obligations .................................... 15,000 --
Proceeds from exercise of stock options and issuance of shares under employee
stock purchase plan ....................................................... 2,768 1,848
--------- ---------
Net cash provided (used) by continuing operations ............................... (7,487) 1,585
Net cash used for early retirement of debt ...................................... (2,000) --
--------- ---------
Net cash provided (used) by financing activities ............................ (9,487) 1,585
Net cash provided (used) by continuing operations ............................... (6,285) 2,592
Net cash provided by discontinued operations .................................... -- 51
Net cash used for early retirement of debt ...................................... (2,000) --
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............................ (8,285) 2,643
CASH AND CASH EQUIVALENTS:
Beginning of period ......................................................... 105,935 70,684
--------- ---------
End of period ............................................................... $ 97,650 $ 73,327
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest .................................... $ 1,271 $ 50
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Purchase of vehicles financed by capital lease obligation ................... $ 248 $ 291
Financing costs on retirement of debt ....................................... $ 472 $ --
Cashless exercise of warrants ............................................... $ -- $ 362
See notes to consolidated financial statements.
6
COINSTAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Month Periods Ended March 31, 2002 and 2001
(unaudited)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Company: We develop, own and operate a network of automated,
self-service coin-counting and processing machines that provide consumers with a
convenient means to convert loose coins into cash. We have increased our
installed base every year since inception, and as of March 31, 2002, had an
installed base of 9,854 units located in supermarkets and financial institutions
in 46 states, the District of Columbia, Canada and the United Kingdom.
Basis of Presentation: The unaudited consolidated financial statements of
Coinstar, Inc. included herein reflect all adjustments, consisting only of
normal recurring adjustments which, in the opinion of management, are necessary
to present fairly our consolidated financial position, results of operations and
cash flows for the periods presented.
These financial statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission (the "SEC") and in
accordance with accounting principles generally accepted in the United States of
America 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 our audited financial
statements and the accompanying notes included in our Annual Report on Form 10-K
for the year ended December 31, 2001, filed with the SEC. The results of
operations for the three month period ended March 31, 2002, are not necessarily
indicative of the results to be expected for any future quarter or for the
entire fiscal year.
Principles of Consolidation: The accompanying consolidated financial
statements include the accounts of Coinstar and our wholly owned subsidiary,
Coinstar International. All significant intercompany balances and transactions
have been eliminated in consolidation. The results of the operations of
Meals.com are presented as discontinued operations (see Note 6) and the amounts
in the financial statements and related notes have been reclassified to reflect
the discontinued operations.
NOTE 2: DEBT RESTRUCTURING
Revolving Credit Facility: On December 21, 2001, we amended our credit
agreement with Comerica Bank - California to increase the credit facility to
allow us to repurchase a portion of our 13% senior subordinated discount notes,
and on February 22, 2002, we amended the credit agreement again to modify
certain existing covenants. The amended credit agreement provides for a credit
facility of up to $25.0 million, consisting of a revolving loan of $10.0 million
and a term loan of $15.0 million. The maturity date of the revolving loan, as
amended, is October 15, 2003. The maturity date of the term loan is December 4,
2006. If, however, the revolving loan is not renewed, any amounts outstanding
under the term loan becomes payable when the revolving loan matures. The amended
credit agreement bears interest at LIBOR plus 250 basis points (4.4% at March
31, 2002). The amended credit agreement requires us to maintain certain
financial covenants during the term of the agreement, which, among other things,
prohibits us from paying dividends without Comerica Bank's consent.
Early Retirement of Debt: On January 3, 2002, we repurchased $10.0 million
of our 13% senior subordinated discount notes with our available cash, and on
March 15, 2002, we repurchased an additional $15.0 million of these notes
through the use of our $15.0 million term loan with Comerica Bank. In connection
with these repurchases, we recorded an extraordinary charge of $2.5 million in
the quarter ended March 31, 2002 consisting of the write-off of the remaining
debt acquisition costs and the payment of premium associated with the early
retirement of the indebtedness. As of March 31, 2002, the outstanding balance of
our 13% senior subordinated discount notes is $36.0 million and the outstanding
balance of our credit facility is $15.5 million.
Subsequent Event: On April 18, 2002, we entered into a credit agreement
with Bank of America, N.A., for itself and as agent for US Bank National
Association, Silicon Valley Bank, KeyBank National Association and Comerica Bank
- California. The credit agreement provides for a senior secured credit facility
of $90.0 million, consisting of a revolving loan commitment of $50.0 million and
a term loan commitment of $40.0 million. Loans made pursuant to the credit
agreement are secured by a first priority security interest in substantially all
of our assets and the assets of our subsidiary, including the pledge of its
capital stock.
7
Advances under this credit facility may be made as either base rate loans
or LIBOR rate loans at our election. Applicable interest rates are based upon
either the LIBOR or base rate plus an applicable margin dependent upon a
consolidated leverage ratio of certain outstanding indebtedness to EBITDA (to be
calculated in accordance with the terms specified in the credit agreement).
Initially, interest rates payable upon advances will be based upon either an
initial rate of LIBOR plus 225 basis points or the base rate plus 75 basis
points.
The credit facility contains standard negative covenants and restrictions
on actions by us including, without limitation, restrictions on liens,
investments, capital expenditures, indebtedness, restricted payments,
fundamental changes or dispositions of our assets, among other restrictions. In
addition, the credit agreement requires that we meet certain financial
covenants, ratios and tests, including maintaining a minimum quarterly
consolidated net worth and quarterly consolidated EBITDA, a minimum fixed charge
coverage ratio, a maximum consolidated leverage ratio, and a minimum net cash
balance, all as defined in the credit agreement.
Quarterly principal payments on the outstanding term loan begin September
30, 2002 and are based on the repayment terms as specified in the credit
agreement. The credit facility matures on May 21, 2005 at which time all
outstanding principal and interest is due. Commitment fees on the unused portion
of the facility, initially equal to 40 basis points, may vary and are based on
us maintaining certain consolidated leverage ratios. We have not drawn on this
credit facility, however, we anticipate doing so on May 21, 2002, in order to
pay off the remaining principal on our 13% senior subordinated discount notes
totaling $36.0 million and our existing $15.5 million credit facility with
Comerica.
NOTE 3: STOCK BASED COMPENSATION PLANS
On March 8, 2002, a senior executive resigned and, in accordance with her
employment agreement, began receiving certain benefits effective as of the date
of her resignation. Such benefits include separation pay totaling approximately
$133,000 payable over a nine-month period, nine months of continued health
insurance benefits, including dependent care coverage, and vesting of all
unvested stock options. In connection with the accelerated stock option vesting,
we have recorded compensation expense of approximately $450,000 in the quarter
ending March 31, 2002.
NOTE 4: INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed by dividing the net income
(loss) available to common stockholders for the period by the weighted average
number of common shares outstanding during the period. Diluted net income (loss)
per share is computed by dividing the net income (loss) for the period by the
weighted average number of common and potential common shares outstanding (if
dilutive) during the period. Potential common shares, composed of incremental
common shares issuable upon the exercise of stock options and warrants, are
included in the calculation of diluted net income (loss) per share to the extent
such shares are dilutive.
The following table sets forth the computation of basic and diluted net
income (loss) per share for the periods indicated:
Three Month Periods
Ended March 31,
2002 2001
------- --------
Numerator:
Net income (loss) from continuing operations .......... $ 2,186 $ (675)
Net loss from discontinued operations ................. -- (3,361)
Net loss from extraordinary item ...................... (2,472) --
------- --------
Net loss ............................................. $ (286) $ (4,036)
======= ========
Denominator:
Weighted average shares for basic calculation ......... 21,539 20,502
Warrants ............................................. 12 --
Incremental shares from employee stock options ....... 1,072 --
------- --------
Weighted average shares for diluted calculation .......... 22,623 20,502
======= ========
8
NOTE 5: BUSINESS SEGMENT INFORMATION
Operating segments as defined in SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information, are components of an enterprise for
which separate financial information is available and regularly reviewed by the
chief operating decision-maker.
We are organized into two reportable business segments: the North American
core business (which includes the United States and Canada), and our
International business (which includes the United Kingdom). In 2001, we
discontinued operations of our Meals.com business segment. Accordingly,
information regarding Meals.com has been excluded from the segment disclosure
set forth below. Information about our two reportable business segments is
disclosed in the table below.
Three Month Periods
Ended March 31,
2002 2001
--------- ------------
(in thousands)
Revenue:
North American core business ...................... $ 32,282 $ 27,130
International business ............................ 883 153
Intercompany eliminations and reclassifications ... -- (83)
--------- ----------
Total revenues ............................... $ 33,165 $ 27,200
========= ==========
Net income (loss) from continuing operations:
North American core business ...................... $ 2,503 $ 11
International business ............................ (317) (113)
Intercompany eliminations and reclassifications ... -- (573)
--------- ----------
Total net income (loss) ...................... $ 2,186 $ (675)
========= ==========
March 31, December 31,
2002 2001
--------- ------------
(in thousands)
Total assets:
North American core business ...................... $ 162,669 $ 172,598
International business ............................ 7,537 6,327
Intercompany eliminations and reclassifications ... (9,329) (7,738)
--------- ---------
Total assets ................................. $ 160,877 $ 171,187
========= =========
9
NOTE 6: DISCONTINUED OPERATIONS
We have discontinued the operations of our Meals.com subsidiary. We have
accounted for this business segment 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.
In October 2001, we sold certain assets of Meals.com to Nestle USA, Inc.,
including certain contracts, web site content and database information,
applicable trademarks, as well as specified software and licenses relating to
the Meals.com branded and Nestle branded web sites. All other web site
operations of Meals.com ceased as of September 30, 2001. The loss on disposal of
our Meals.com business was $3.4 million. Included in the loss was a write-down
of the value of Meals.com assets totaling $2.4 million and costs incurred as a
result of the wind-down of the Meals.com business, which totaled $1.0 million.
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."
Three Month Period
Ended March 31,
2001
------------------
(in thousands)
Revenue ............................................. $ 327
Operating expenses .................................. 4,256
---------
Operating loss ................................. (3,929)
Interest, other income and minority interest, net ... 568
---------
Loss from discontinued operations .............. $ (3,361)
=========
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, 2001. 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(R) units located in
supermarket chains and financial institutions in 46 states across the United
States, the District of Columbia and Canada as well as in the United Kingdom. We
generate revenue based on a processing fee charged on the total dollar amount of
coins processed in a transaction. 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 usage 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 launched our North American core business with the installation of the
first Coinstar unit in 1993. Since inception, our core business has counted and
processed more than 110 billion coins worth over $5.0 billion in more than 150
million customer transactions. With over 200 retail partners (including
supermarket chains and independent operators,) we currently operate more than
9,500 Coinstar units in 130 regional markets across North America. Our North
American network of machines is installed in 46 states, the District of Columbia
and Canada.
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. We are continuing the pilot with Tesco Stores Ltd and recently announced
a new pilot with Makro Self Service Wholesalers Limited, the second largest
wholesale warehouse club in the United Kingdom. We currently operate over 330
Coinstar units in the United Kingdom.
In June 2001, we announced that we were taking steps to sell the assets of
our Meals.com subsidiary in order to pursue an orderly wind-down of the
business. We formed this subsidiary in December 1998 to explore the development
and deployment of e-services technology. In October 2001, we sold certain assets
of Meals.com to Nestle USA, Inc., including certain contracts, web site content
and database information, applicable trademarks, as well as specified software
and licenses relating to the Meals.com web site. All other operations of
Meals.com ceased as of September 30, 2001.
Our direct operating expenses are comprised of the regional expenses
associated with our coin-counting unit operations and support and consist
primarily of coin pick-up, transportation and processing, field operations
support and related expenses, retail operations support and the amount of our
service fee that we share with our retail partners, which we define as revenue
sharing. Coin pick-up, transportation and processing costs, which represent a
large portion of direct operating expenses, vary based on the level of total
coin processing volume and the density of the units within a region. Field
service operations and related expenses vary depending on the number of
geographic regions in which Coinstar units are located and the density of the
units within a region. Regional sales and marketing expenses are comprised of
ongoing marketing, advertising and public relations efforts in existing market
regions and, to a lesser degree, startup marketing expenses incurred to launch
our services in new regional
11
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, our customer service center, sales and marketing support,
systems and engineering support, computer network operations, finance and
accounting, human resources, occupancy expenses, legal expenses and insurance.
Depreciation and amortization consists primarily of depreciation charges on
Coinstar units, and to a lesser extent, depreciation on furniture and fixtures,
leased automobiles, computer equipment and amortization of our deferred
financing fees.
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. 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 $134.2
million as of March 31, 2002. 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 believe our prime retail locations form a strategic
platform from which we are able to deliver additional value-added new products
and services to consumers and our retail partners that may create additional
revenue streams independent of coin counting. We envision the Coinstar unit as
the touch-point for a range of consumer products and services. There can be no
assurance, however, that any of these new initiatives will prove successful.
We believe that our future coin counting revenue growth, operating margin
gains and profitability will be dependent upon an increase in customer usage,
the penetration of our installed base with retail partners in existing markets,
expansion and penetration of installations in new geographies and distribution
formats, 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.
Recent Developments
We recently announced that we do not intend, at this time, to expand our
pilot of the prepaid MasterCard program or initiate a rollout because the
parties involved have been unable to reach agreement on all material terms
necessary to proceed.
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:
Three Month Periods
Ended March 31,
2002 2001
--------- ---------
Revenue .......................................... 100.0 % 100.0 %
Expenses:
Direct operating ............................ 45.8 47.3
Regional sales and marketing ................ 1.6 1.3
Product research and development ............ 3.7 3.7
Selling, general and administrative ......... 17.4 18.3
Depreciation and amortization ............... 20.0 24.9
------ ------
Income from operations ........................... 11.5 % 4.5 %
====== ======
12
Three Month Periods Ended March 31, 2002 and 2001
Revenue
Revenue increased to $33.2 million for the three months ended March 31,
2002 from $27.2 million for the comparable 2001 period. The increase was due
principally to an increase in the number and frequency of users, the increase in
the number of Coinstar units in service during the 2002 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 in North America and the United Kingdom
increased to 9,854 at March 31, 2002 from 8,604 units at March 31, 2001. The
total dollar value of coins processed worldwide increased to $374.4 million
during the three month period ended March 31, 2002 from $305.8 million in the
comparable period in the prior year.
Direct Operating Expenses
Direct operating expenses increased to $15.2 million in the three months
ended March 31, 2002 from $12.9 million in the comparable prior year period. The
increase in direct operating expenses was attributable primarily to an increase
in the amount paid to our retail partners in the form of revenue sharing
resulting from a 21.9% increase in coin processing revenue, increases in field
service and machine refurbishment expenses related to our expansion into new
international and domestic regional markets, and an increase in coin pick-up and
processing costs resulting from the increased coin volumes processed during the
three month period. Direct operating expenses as a percentage of revenue
decreased to 45.8% in the three months ended March 31, 2002 from 47.3% in the
same period of 2001. The decrease in direct operating expenses as a percentage
of revenue resulted from (i) a decrease in per unit field service expenses as a
percentage of revenue as we increased our density in our existing markets, and
(ii) the realization of coin pick-up and processing cost economies attributable
to regional densities and the utilization of cheaper, more efficient coin
pick-up methods.
Regional Sales and Marketing
Regional sales and marketing expenses increased to $0.5 million in the
quarter ended March 31, 2002 from $0.4 million in the comparable prior year
quarter. The increase in regional marketing expense was the result of an
increased level of advertising and other promotional activity, primarily in the
United Kingdom. Regional sales and marketing as a percentage of revenue
increased slightly to 1.6% in the three months ended March 31, 2002 from 1.3% in
the same period of 2001.
Product Research and Development
Product research and development expenses increased to $1.2 million in the
quarter ended March 31, 2002 from $1.0 million in the comparable prior year
quarter. The increase in product research and development expense was due
primarily to (i) an increase in compensation expenses including payroll taxes
and employee benefits and (ii) an increase in consulting services for new
product development. Product research and development as a percentage of revenue
remained consistent at 3.7% in the three months ended March 31, 2002 and 2001.
Selling, General and Administrative
Selling, general and administrative expense increased to $5.8 million in
the quarter ended March 31, 2002 from $5.0 million in the comparable prior year
quarter. The principal component of such expenses was employee compensation. The
increase of $0.8 million was due primarily to a non-cash stock-based
compensation charge totaling $0.6 million as well as increased expenses
attributed to our international operations in the United Kingdom. Selling,
general and administrative expense as a percentage of revenue decreased to 17.4%
in the quarter ended March 31, 2002 from 18.3% in the same period in the prior
year.
Depreciation and Amortization
Depreciation and amortization expense decreased to $6.6 million in the
quarter ended March 31, 2002 from $6.8 million in the comparable prior year
quarter. The decrease in depreciation expense was due primarily to the net
decrease in the number of Coinstar machines being depreciated. A greater number
of Coinstar machines were fully depreciated between March 31, 2001 and March 31,
2002 than were newly installed in the same period. Depreciation and amortization
as a percentage of revenue decreased to 20.0% in the three months ended March
31, 2002 from 24.9% in the same period in the prior year.
13
Other Income and Expense
Interest income decreased to $0.1 million in the three months ended
March 31, 2002 from $0.2 million in the comparable period in 2001. The decrease
in interest income is attributed to (i) a lower amount of cash allocated to
investments associated with our decision to retire a portion of our long-term
debt and (ii) lower interest rates on investments in the three months ended
March 31, 2002, than in the same period in the prior year.
Interest expense decreased to $1.7 million in the three months ended March
31, 2002 from $2.1 million in the comparable prior year period. The decrease in
interest expense is primarily due to the retirement of $25.0 million of our 13%
senior subordinated discount notes during the three months ended March 31, 2002,
of which $15.0 million was replaced with a lower interest term loan.
Net Income (Loss) from Continuing Operations
In the quarter ended March 31, 2002, income from continuing operations was
$2.2 million compared to a loss from continuing operations of $0.7 million in
the same period in 2001. Income from continuing operations was due primarily to
an increase in revenue and an improved direct operating margin. We expect that
our coin processing business segments will continue to reflect improved
operating leverage of the Coinstar coin-counting machine network.
Loss Related to Early Retirement of Debt
On January 3, 2002, we repurchased $10.0 million of our 13% senior
subordinated discount notes with our available cash, and on March 15, 2002, we
repurchased an additional $15.0 million of these notes through the use of our
$15.0 million term loan with Comerica Bank. In connection with these
repurchases, we recorded an extraordinary charge of $2.5 million in the quarter
ended March 31, 2002 consisting of the write-off of remaining debt acquisition
costs and the payment of premiums associated with the early retirement of the
indebtedness. As of March 31, 2002, the outstanding balance of our 13% senior
subordinated discount notes was $36.0 million and the outstanding balance of our
credit facility was $15.5 million.
Liquidity and Capital Resources
As of March 31, 2002, we had cash and cash equivalents of $97.7
million and working capital of $27.4 million. Cash and cash equivalents include
$53.4 million which represents cash due to our supermarket retail partners which
were being processed by armored car carriers, or residing in Coinstar units at
March 31, 2002. Net cash provided by continuing operating activities was $5.6
million for the three months ended March 31, 2002, compared to net cash provided
by continuing operating activities of $5.1 million for the three months ended
March 31, 2001. The increase in cash provided by operating activities was
primarily the result of a $2.9 million increase in our net income from
continuing operations and an increase in non-cash expenses of $0.4 million,
offset by an increased use of cash for operating assets and liabilities during
the three months ended March 31, 2002 compared to the prior year period. The
increased use of cash for operating assets and liabilities in 2002 was primarily
as a result of our payment of bonuses in February 2002 for amounts earned in
2001, as well as prepayments for insurance premiums, contractor services and
software licenses.
Net cash used by investing activities from continuing operations for the
three months ended March 31, 2002 was $4.4 million compared to net cash used by
investing activities of $4.1 million in the prior year quarter. Net cash used by
investing activities was for capital expenditures incurred in each of the three
months ended March 31, 2002 and 2001.
Net cash used by financing activities for the three months ended March 31,
2002 was $9.5 million, which was primarily the result of retiring $25.0 million
of our 13% senior subordinated discount notes and the payment of $2.0 million in
premiums associated with the retirement of this debt. These payments were offset
by cash provided by financing activities in the form of new borrowings on our
lower interest debt of $15.0 million and proceeds from the exercise of stock
options and employee stock purchases of $2.8 million. Net cash provided by
financing activities for the three months ended March 31, 2001 was $1.6 million
primarily relating to proceeds from the exercise of stock options and employee
stock purchases of $1.8 million offset by principal payments on long-term debt.
As of March 31, 2002, we had two irrevocable letters of credit that totaled
$8.7 million. These letters of credit, which expire and are replaced at various
times, are available to collateralize certain obligations to third parties. As
of March 31, 2002, no amounts were outstanding under these letters of credit
agreements. On March 31, 2002 our $3.2 million letter of credit expired and was
replaced on April 1, 2002 with a $3.9 million letter of credit that expires on
June 30, 2002.
On January 3, 2002, we repurchased $10.0 million of our 13% senior
subordinated discount notes with our available cash, and on March 15, 2002, we
repurchased an additional $15.0 million of these notes through the use of our
$15.0 million term loan with Comerica Bank. In connection with these
repurchases, we recorded an extraordinary charge of $2.5 million in the quarter
ended March 31, 2002 consisting of the write-off of debt acquisition costs and
the payment of premiums associated with the early retirement of the
indebtedness. As of March 31, 2002, the outstanding balance of our 13% senior
subordinated discount notes was $36.0 million and the outstanding balance of our
credit facility was $15.5 million.
14
On April 18, 2002, we entered into a credit agreement with Bank of America,
N.A., for itself and as agent for US Bank National Association, Silicon Valley
Bank, KeyBank National Association and Comerica Bank - California. The credit
agreement provides for a senior secured credit facility of $90.0 million,
consisting of a revolving loan commitment of $50.0 million and a term loan
commitment of $40.0 million. Loans made pursuant to the credit agreement are
secured by a first priority security interest in substantially all of our assets
and the assets of our subsidiary, including the pledge of its capital stock.
Advances under this credit facility may be made as either base rate loans
or LIBOR rate loans at our election. Applicable interest rates are based upon
either the LIBOR or base rate plus an applicable margin dependent upon a
consolidated leverage ratio of certain outstanding indebtedness to EBITDA (to be
calculated in accordance with the terms specified in the credit agreement).
Initially, interest rates payable upon advances will be based upon either an
initial rate of LIBOR plus 225 basis points or the base rate plus 75 basis
points.
The credit facility contains standard negative covenants and restrictions
on actions by us including, without limitation, restrictions on liens,
investments, capital expenditures, indebtedness, restricted payments,
fundamental changes or dispositions of our assets, among other restrictions. In
addition, the credit agreement requires that we meet certain financial
covenants, ratios and tests, including maintaining a minimum quarterly
consolidated net worth and quarterly consolidated EBITDA, a minimum fixed charge
coverage ratio, a maximum consolidated leverage ratio, and a minimum net cash
balance, all as defined in the agreement.
Quarterly principal payments on the outstanding term loan begin September
30, 2002 and are based upon the repayment terms as specified in the agreement.
The credit facility matures on May 21, 2005 at which time all outstanding
principal and interest is due. Commitment fees on the unused portion of the
facility, initially equal to 40 basis points, may vary and are based on the
company maintaining certain consolidated leverage ratios. We have not yet drawn
on this credit facility, however, we anticipate doing so on May 21, 2002, in
order to pay off the remaining principal on our 13% senior subordinated discount
notes totaling $36.0 million and our $15.5 million credit facility with
Comerica. We will have quarterly principal payments of $2.7 million beginning
September 30, 2002, increasing to $3.8 million per quarter beginning June 30,
2003 and ultimately increasing to $4.3 million per quarter beginning June 30,
2004, with all remaining principle and interest due May 21, 2005.
We believe existing cash, cash equivalents, short-term investments, and
amounts available to us under our new $90.0 million credit facility with Bank of
America, N.A., for itself and as agent for US Bank National Association, Silicon
Valley Bank, KeyBank National Association and Comerica Bank - California will be
sufficient to fund our cash requirements and capital expenditure needs for at
least the next 12 months. After that time, the extent of additional financing
needed, if any, will depend on the success of our business. If we significantly
increase installations beyond planned levels or if unit coin processing volumes
generated are lower than historical levels, our cash needs may increase. Our
future capital requirements will depend on a number of factors, including
customer usage, the timing and number of installations, the type and scope of
service enhancements, our expansion into the United Kingdom and the cost of
developing potential new product and service offerings and product and service
enhancements.
15
Quarterly Financial Results
Our quarterly 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 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.
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.
Three month periods ended
March 31, Dec. 31, Sept. 30, June 30, March 31, Dec. 31, Sept. 30, June 30,
2002 2001 2001 2001 2001 2000 2000 2000
--------- -------- --------- -------- --------- -------- --------- --------
(in thousands, except per unit data)
Consolidated Statements of Operations:
Revenue ..................................... $ 33,165 $ 35,731 $ 35,176 $ 31,245 $ 27,200 $ 28,251 $ 28,663 $ 24,671
Expenses:
Direct operating .......................... 15,189 15,729 15,667 13,798 12,878 12,984 13,045 11,733
Regional sales and marketing .............. 534 3,141 3,176 2,501 370 2,402 4,906 3,567
Product research and development .......... 1,234 1,068 1,108 989 997 916 907 867
Selling, general and administrative ....... 5,774 5,931 5,400 5,946 4,968 5,510 4,416 4,111
Depreciation and amortization ............. 6,610 6,709 6,394 6,483 6,763 6,635 6,018 6,021
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) from operations ............... 3,824 3,153 3,431 1,528 1,224 (196) (629) (1,628)
Other income (expense), net ................. (1,638) (1,961) (1,862) (1,873) (1,899) (1,992) (1,669) (1,682)
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) from continuing
operations ................................ 2,186 1,192 1,569 (345) (675) (2,188) (2,298) (3,310)
Discontinued operations:
Loss related to discontinued operations ... -- 162 -- (5,928) (3,361) (5,222) (3,588) (2,148)
-------- -------- -------- -------- -------- -------- -------- --------
Extraordinary item:
Loss related to early retirement of debt .. (2,472) -- -- -- -- -- -- --
-------- -------- --------- -------- -------- -------- -------- -------
Net income (loss) ........................... $ (286) $ 1,354 $ 1,569 $ (6,273) $ (4,036) $ (7,410) $ (5,886) $ (5,458)
======== ======== ======== ======== ======== ======== ======== ========
Net income (loss) per share, basic and
diluted:
Continuing operations .................... $ 0.10 $ 0.05 $ 0.07 $ (0.02) $ (0.03) $ (0.11) $ (0.11) $ (0.16)
Discontinued operations .................. -- 0.01 -- (0.28) (0.17) (0.25) (0.18) (0.11)
Extraordinary items ..................... (0.11) -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) per share ........... (0.01) $ 0.06 $ 0.07 $ (0.30) $ (0.20) $ (0.36) $ (0.29) $ (0.27)
======== ======== ======== ======== ======== ======== ======== ========
Selected Operating Data -- North American
core business:
Number of new Coinstar units installed
during the period ......................... 192 487 70 193 95 413 359 337
Installed base of Coinstar units at
end of period ............................. 9,519 9,327 8,840 8,770 8,577 8,482 8,069 7,710
Average age of network for the period
(months) .................................. 36.8 35.3 33.8 31.9 29.7 27.6 26.2 24.5
Designated marketing areas .................. 130 130 124 123 123 122 118 110
Dollar value of coins processed ............. 362,607 $393,186 $389,208 $348,255 $303,799 $315,715 $320,655 $276,073
Revenue ..................................... 32,282 35,005 34,652 31,029 27,130 28,107 28,546 24,576
Annualized revenue per average installed
unit (1) .................................. 13,739 15,371 15,737 14,406 12,696 13,565 14,495 13,091
Direct contribution (2) ..................... 17,670 19,968 19,412 17,461 14,373 15,195 15,569 12,890
Direct contribution margin (%) .............. 54.7% 57.0% 56.0% 56.3% 53.0% 54.1% 54.5% 52.4%
Annualized direct contribution per
average installed unit (1)(2) ............. $ 7,520 $ 8,768 $ 8,816 $ 8,102 $ 6,708 $ 7,333 $ 7,906 $ 6,866
Regional sales and marketing ................ 420 2,858 3,000 2,535 377 2,402 4,906 3,567
Product research and development ............ 1,228 1,019 1,083 945 915 886 825 804
Selling, general and administrative ......... 4,691 5,586 4,958 5,685 4,942 4,789 4,281 3,993
EBITDA (3) .................................. 11,061 10,505 10,371 8,296 8,139 7,118 5,557 4,526
EBITDA margin (%) ........................... 34% 30% 30% 27% 30% 25% 19% 18%
_____________________
(1) Calculated and 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 continuing operations,
net income (loss), or any other measure of performance under GAAP.
(3) EBITDA represents earnings before interest expense, income taxes,
depreciation, amortization, non-cash stock-based compensation 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.
16
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 ability to maintain sustained profitability remains uncertain. On a
consolidated basis, we achieved net income from continuing operations of $2.2
million for the quarter ended March 31, 2002. We cannot be certain that we will
maintain existing levels of customer utilization to sustain the level of
profitability that we achieved in the first quarter of 2002, 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 continue to
drive new and repeat customer utilization of our service. Our future operating
results also will depend upon many other factors, including:
. the timing of, and our ability to, develop and successfully commercialize
product enhancements and new products,
. the level of product and price competition,
. the processing fee we charge consumers to use our service and the amount
of our fee that we share with our retail partners,
. our success in expanding our network and managing our growth,
. the successful deployment and operation of our coin processing network,
. our ability to control costs, and
. activities of and acquisitions by competitors.
We rely on one source of revenue. We have derived, and expect to derive for
the near term, substantially all of our revenue from the operation of our
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 changes,
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. The development and successful commercialization of new
products, services and enhancements pose a variety of technical challenges
requiring us to enhance the capabilities of our network and hire additional
qualified employees. Furthermore, as demonstrated by our strategic alliance with
DataWave and Standard Federal Bank in connection with the testing of our
pre-paid MasterCard product, we may need to enter into relationships with third
parties to assist in the development and commercialization of new products and
enhancements and there can be no assurance that such relationships can be
established or, if once established, they will prove successful.
Our business is dependent on maintaining our retail partner relationships
which are highly concentrated. The success of our business depends on the
willingness of potential retail partners, primarily supermarkets, to agree to
the 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.
17
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 24%, 13% and 11%,
respectively, of our revenue in the quarter-ended March 31, 2002. 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.
We depend upon key 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 retain and motivate highly skilled
personnel. Competition for such personnel is intense. Any inability to retain
our executive officers or other essential 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 stock price
has fluctuated substantially since our initial public offering in July 1997. The
market price of our stock could decline from current levels or continue to
fluctuate. The market price of our stock may be significantly affected by the
following factors:
. operating results below market expectations and changes in, or our
failure to meet, financial estimates by securities analysts,
. trends and fluctuations in the use of our Coinstar units,
. period-to-period fluctuations in our financial results,
. timing of installations relative to financial reporting periods,
. market acceptance of the Coinstar service by retail partners and
consumers,
. the termination of one or more retail partner relationships,
. announcements of technological innovations or new products or services by
us or our competitors,
. industry developments,
. release of analyst reports, 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.
There are many risks associated with doing business in the United Kingdom.
We intend to increase our deployment of Coinstar units in the United Kingdom. In
2001, we began our expansion in the United Kingdom and, accordingly, have
limited experience operating in the international arena. Exposure to exchange
rate risks, restrictions on the repatriation of funds, adverse changes in tax,
tariff and trade regulations, difficulties with foreign distributors and
difficulties in managing an organization that is not based in the United States
are risks that could seriously harm the development of our business in the
United Kingdom.
We have substantial indebtedness. As of March 31, 2002, we had outstanding
indebtedness of $52.8 million which included $36.0 million of our 13% senior
subordinated discount notes, $15.0 million of term debt, lease obligations
totaling approximately $1.3 million and a revolving line of credit totaling
$500,000. On April 18, 2002, we entered into a credit agreement with Bank of
America, N.A., for itself and as agent for US Bank National Association, Silicon
Valley Bank, KeyBank National Association and Comerica Bank - California. The
credit agreement provides for a senior secured credit facility of $90.0 million,
consisting of a revolving loan commitment of $50.0 million and a term loan
commitment of $40.0 million. We have not yet drawn on this credit facility,
however, we anticipate doing so on May 21, 2002, in order to pay off the
remaining principal on our 13% senior subordinated discount notes totaling $36.0
million and our $15.5 million credit facility with Comerica. We will have
quarterly principal payments of $2.7 million beginning September 30, 2002,
increasing to $3.8 million per quarter beginning June 30, 2003 and ultimately
increasing to $4.3 million per quarter beginning June 30, 2004, with all
remaining principle and interest due May 21, 2005.
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 customer usage, prevailing
economic conditions and financial, business and other factors, some of which are
beyond our control. 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.
18
We face competition. We face competition from supermarket retailers and
banks that purchase and service their own coin-counting equipment. In addition,
we may face new competition as we seek to develop new products, services and
enhancements. Moreover, new products that we are developing, such as those
involving pre-paid cards and other similar products, may subject us to
competition from companies with significantly greater marketing, 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, marketing 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, service providers and suppliers.
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 both domestically
and in the United Kingdom 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 a
limited number of 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 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 significant U.S. and international patents relevant to aspects of
self-service coin counting. We also have additional patent applications pending
in the United States and several foreign jurisdictions directed to this
technology.
We cannot assure you that any of our patents will be held valid if
challenged, that any pending patent applications will be issued, 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 to our technologies. Further, our competitors
might independently develop or patent technologies that are substantially
equivalent or superior to our technologies.
Since many patent applications in the United States are not publicly
disclosed until the patent issues, others may have filed applications, which, if
issued as patents, could cover our products. Accordingly, we cannot be certain
that others will not assert claims of patent infringement or 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. 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.
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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 or lack of confidence 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. The accuracy of the coin counting functionality of our
machines is important to our customers; the failure to maintain customer
confidence in our technology and systems, could have a material adverse impact
on our results of operations. 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 a 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.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit
Number Description of Document
------- -----------------------
10.1 Registrant's Outside Director's Deferred Compensation Plan
10.2 Registrant's Executive Deferred Compensation Plan
10.3 Credit Agreement dated as of April 18, 2002 among Registrant and Bank
of America, N.A., for itself and as agent for US Bank National
Association, Silicon Valley Bank, KeyBank National Association and
Comerica Bank - California.
(b) Reports on Form 8-K:
On March 8, 2002, we filed a current report on Form 8-K dated March 8, 2002
under Item 9 whereby we clarified newly introduced information about expanding
the size of the Coinstar market.
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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 13, 2002
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Exhibit Index
Exhibit
Number Description of Document
------- -----------------------
10.1 Registrant's Outside Director's Deferred Compensation Plan
10.2 Registrant's Executive Deferred Compensation Plan
10.3 Credit Agreement dated as of April 18, 2002 among Registrant and
Bank of America, N.A., for itself and as agent for US Bank National
Association, Silicon Valley Bank, KeyBank National Association and
Comerica Bank - California.
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