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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
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)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No ______
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the voting and non-voting stock held by non-
affiliates of the registrant, based upon the closing price of Common Stock on
February 28, 2001 as reported on the NASDAQ National Market, was approximately
$190,947,784. Shares of Common Stock held by each executive officer and
director and by each shareholder whose beneficial ownership exceeds 5% of the
outstanding Common Stock at February 28, 2001 have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
As of February 28, 2001, there were 20,594,069 shares of the registrant's
Common Stock outstanding.
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FORM 10-K
Index
PART I
Item 1. Business................................................. Page 3
Item 2. Properties............................................... Page 17
Item 3. Legal Proceedings........................................ Page 17
Item 4. Submission of Matters to a Vote of Security Holders...... Page 17
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters...................................... Page 18
Item 6. Selected Financial and Other Data........................ Page 19
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... Page 21
Item 7a. Quantitative and Qualitative Disclosures About Market
Risk..................................................... Page 29
Item 8. Financial Statements and Supplementary Data.............. Page 29
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...................... Page 29
PART III
Item 10. Directors and Executive Officers of the Registrant....... Page 30
Item 11. Executive Compensation................................... Page 32
Item 12. Security Ownership of Certain Beneficial Owners and
Management............................................... Page 36
Item 13. Certain Relationships and Related Transactions........... Page 38
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K................................................. Page 39
SIGNATURES ......................................................... Page 41
PART I
Item 1. Business.
Our disclosure and analysis in this Annual Report on Form 10-K contains
forward-looking statements regarding our business, prospects and results of
operations that involve risks and uncertainties. Our actual results could
differ materially from the results that may be anticipated by such forward-
looking statements and discussed elsewhere in this report. Factors that could
cause or contribute to such differences include, but are not limited to, those
discussed under the captions "Risk Factors" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" as well as those
discussed elsewhere in this report. 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 by us 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.
Summary
We are the first and only company to own and operate a nationwide fully-
automated network of self-service coin-counting machines installed in
supermarkets across the United States. We have relationships with 19 of the 20
largest supermarket chains in the United States, a well-trained field service
organization and a sophisticated, highly secure and scalable nationwide
communications network. We consider this our core business segment. We are
also developing other business segments that leverage the core business's
established platform and that offer growth opportunities. Our wholly-owned
international coin-counting business, Coinstar International, Inc. is piloting
27 Coinstar(R) units in the United Kingdom with Tesco Stores Ltd, Sainsbury's
Supermarkets Ltd and Asda Stores Ltd, the three largest grocery retailers in
the United Kingdom. Coinstar International is also piloting 58 units in
Canada. We are also capitalizing on our extensive retail relationships and our
fully-automated network of self-service coin-counting machines through our
89%-owned subsidiary, Meals.com, Inc. Meals.com is an online and in-store
grocery marketing business designed to drive sales for supermarket retailers
and consumer packaged goods manufacturers by directly targeting individual
consumers at various points in the "plan-shop-cook-eat" cycle and by
influencing consumer purchasing behavior.
We launched our U.S. core business with the installation of the first
Coinstar unit in 1994. Since inception, our core business has counted and
processed more than 76 billion coins with a value of over $3.3 billion in more
than 100 million customer transactions. Our coin-counting units provide
consumers with a fun, accurate and convenient means of converting accumulated
change into cash. With over 200 retail partners, primarily supermarket chains,
we currently operate more than 8,400 Coinstar units in approximately 121
regional markets across the United States. Our network of machines is
available to over 137 million consumers in 46 states and the District of
Columbia.
The Coinstar coin-counting unit, which is about the size of an ATM, is
highly accurate, durable, easy to use, easy to service and capable of
processing up to 600 coins per minute. It accepts consumers' loose change and
then prints out a voucher listing the total number of coins counted by
denomination and dollar value, less our processing fee. Consumers may then
apply the vouchers to their retail purchases or redeem the vouchers for cash.
Our coin-counting service provides consumers with a convenient and reliable
means of converting loose coins into spendable cash. Our service also benefits
our retail partners by enhancing customer service, increasing store traffic,
promoting sales, reducing internal store coin handling expenses and providing
an additional source of revenue.
Our Coinstar units, each of which is powered by a Pentium(R) PC, are
designed to operate as part of a scalable, two-way, wide-area communications
network. Our highly sophisticated logistics organization relies on this
network to manage the process of efficiently collecting and processing over
2.5 billion coins per month. Our
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intelligent fully-automated network enables us to track each machine 24 hours
a day and provides key financial data and operating statistics to our field
service representatives, coin transportation partners, processing partners,
banks and our headquarters.
Our dedicated field service organization of approximately 250 technicians is
linked to the Coinstar network, and each field service technician receives a
report every morning via modem detailing which units in their technical
service territory require maintenance or repair work. In addition, they
receive real-time information throughout the day via wireless paging. The
field service organization provides highly responsive service to our customers
and retail partners by performing preventive maintenance and repair on each
Coinstar unit which enables us to maintain a system-wide unit availability of
98% and 99.9996% accuracy.
Our transportation partners are also linked into the central control system
of our network and receive daily reports that detail which Coinstar units need
to be emptied of accumulated change. This enables dynamic route scheduling.
The transportation partners pick up the accumulated change and deliver it to a
commercial processing facility where the coins are counted and sorted. The
counts are re-verified and checked against the central control system's unit
count to ensure accuracy. When the verification process is completed, the
coins are deposited in the local bank. An automatic wire is sent to the
supermarket retailer for 91.1% of the coin value (as reimbursement for cash
paid to the consumer) and the remaining 8.9% of the coin value is wired to our
core business' operating bank account. We then pay 1.0% of the coin value to
our supermarket retailer as revenue sharing.
Our intelligent network and well-trained field service organization,
combined with our prime retail locations, has enabled us to form a strategic
platform from which we can deliver additional value-added services to consumer
and retail partners. During 2000, we ran national promotions with the U.S.
Mint, Disney Channel, Wherehouse Music and J.C. Penney Portraits. Promotions
such as these, through which customers receive something free in return for
using the Coinstar machine, help drive increased traffic to the Coinstar
machine and attract new consumers. We are also building awareness and
attracting new customers by offering the opportunity to donate coins to non-
profit organizations through a cause-marketing program called Coins that
Count(R). A customer who makes a donation through the Coins the Count program
receives a receipt for the coins deposited, which is fully tax deductible (the
non-profit organization receives 92.5% of the total funds). We now have
strategic relationships with the American Red Cross and The U.S. Fund for
UNICEF. In addition, we work closely with our supermarket partners to support
numerous local non-profit organizations.
Recent Developments
On February 8, 2001, we announced that we engaged JPMorgan & Co. as
financial advisor to assist us in exploring strategic alternatives to enhance
stockholder value. See Risk Factors, "Our exploration of strategic
alternatives may not be successful".
Significant Coin Recycling Opportunity in the United States
We believe the market for coin recycling is very large and virtually
untapped. Traditionally, banks and other depository institutions have been the
primary means by which consumers could convert coins into cash, but they
typically have provided the service only to their customers and generally only
after the customer has pre-sorted, counted and wrapped the coins--a very
inefficient and labor intensive process. We estimate that approximately 290
billion cash transactions occur on an annual basis in the United States.
Assuming the change generated by each such cash transaction averages fifty
cents, the resulting annual coin flow from such transactions would be
approximately $145 billion. Based on the current population in the United
States, we believe the average person handles approximately $600 in coins each
year. The prevalence of coins in cash transactions and the lack of a
convenient alternative for converting coins into cash have resulted in the
continual accumulation of coins. According to U.S. Mint data, only $8 billion
of the $15 billion in coins produced over the last 25 years, the useful life
of a coin, are regarded as circulating, and we believe there is an estimated
$7 billion of non-circulating coins.
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Growth Strategy
Our objective is to enhance our position as the leading provider of self-
service coin-counting and processing services and to develop new value-added
services that can be delivered through the Coinstar network. Key elements of
our growth strategy include:
Expanding the U.S. core Coinstar network. We plan to continue to expand our
presence in supermarkets as our primary retail location because of the
prevalence of large regional chains, geographic concentration of stores and
recurring consumer traffic. We are targeting supermarkets in the 100 largest
metropolitan areas in the country, which include approximately 22,000 of the
approximately 30,000 supermarkets in the United States. We believe that
between 11,000 and 15,000 of these supermarkets are viable primary retail
locations. We believe an opportunity exists to increase the number of Coinstar
units installed through increased penetration of existing retail partner
stores as well as by entering into contracts with new partners. Supermarkets
offer a large market of potential consumers, a convenient location for
multiple consumer visits and opportunities for large-scale deployments.
The following table sets forth data that highlight our growth in U.S. unit
installations:
Year Ended December 31,
----------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- ----------
Installed base of Coinstar
units......................... 1,501 3,204 4,810 6,922 8,424
Number of regional markets..... 38 66 84 103 121
Value of coins processed (in
thousands).................... $115,476 $332,526 $623,258 $870,415 $1,145,262
Increasing consumer use of our coin-counting service. We promote consumer
trials of the Coinstar unit through commercial media, such as television and
radio, and in-store promotions. We believe that building greater awareness of
our service will significantly enhance the growth of our core coin recycling
business. During 2000, we commissioned NFO WorldGroup, an independent research
company, to perform a study regarding customer awareness and usage of our
machines. Their November 2000 study indicated that approximately 13% of the
people living in markets where Coinstar machines have been installed for 12
months or more have tried our service. According to a follow-up research study
by NFO WorldGroup in January 2001, 78% of people who have tried our service
indicate a likelihood to use it again. In addition, we are developing other
value-added services to broaden consumer appeal of the Coinstar units and
promote greater trial and use.
Improving our U.S. core profit margins through increased efficiencies. Over
the past seven years, we have continued to improve and/or maintain our profit
margins in our U.S. core business through increased efficiencies resulting
from our expansion, including i) increased regional densities and ii) more
effective utilization of the Coinstar network and our field service
organization. In addition, we have built an effective management, marketing,
sales and administrative team. We believe this infrastructure can support
substantial growth in Coinstar unit installations and the introduction of new
products and services.
Leveraging our existing network of over 8,400 U.S. core Coinstar
machines. With our expanding base of Coinstar units, we are able to conduct
national promotions that increase usage and awareness while delivering
additional value and products to consumers in a retail environment through our
secure printers. During 2000, we ran national promotions with the U.S. Mint,
Disney Channel, Wherehouse Music and J.C. Penney Portraits. These types of
promotions, through which the customer receives something free of charge if
they utilize the Coinstar machine, help drive increased traffic to the
Coinstar machine and attract new consumers. We are also building awareness and
attracting new customers by offering the opportunity to donate coins to non-
profit organizations through a cause-marketing program called Coins that
Count. In addition, we believe significant growth opportunities exist by
leveraging our existing network through the addition of value enhancing, high
margin services such as selling pre-paid cash cards and other items through
our Coinstar machines.
Leveraging the U.S. core's platform with Coinstar International. Coinstar
International is expanding in the United Kingdom. As of December 31, 2000, we
have installed 28 Coinstar units on a trial basis in Tesco
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Stores Ltd, Sainsbury's Supermarkets Ltd and ASDA Stores Ltd, the three
largest grocery retailers in the United Kingdom. We believe the United Kingdom
offers an attractive market opportunity given the higher coin content of
British currencies and similar customer profiles to the United States. In
addition, British supermarkets are leaders in providing financial services to
their customers and in using technology in their stores to add value to the
shopping experience.
Leveraging our U.S. core relationships, prime retail locations and the
Internet to provide value-added services to consumers and our retail partners
through Meals.com. Our relationships with leading supermarket chains, our
prime retail locations and the Coinstar network form a strategic platform from
which we are able to deliver additional value-added services to consumers and
our retail partners. Meals.com connects consumers, grocery store retailers and
manufacturers through online and in-store technologies that provide shoppers
with relevant information and special offers based on their personal
preferences.
The Coinstar Network
Coinstar Unit
Our coin processing unit is comprised of a coin input and patented cleaning
process, a coin counter that is designed to be jam-resistant, coin collection
bins, a computer, a thermal printer, an input keypad, an internal phone and a
color monitor. Our Coinstar unit is highly accurate, durable, easy to use,
easy to service and capable of processing up to 600 coins per minute. The
counter system in our Coinstar unit detects and removes foreign coins, slugs,
debris and damaged coins and directs the coins processed to collection
trolleys located inside the Coinstar unit. Since the first commercial
introduction of our Coinstar unit in 1994, we have improved the unit to
decrease problems from clogging or malfunctioning from moisture, dirt, lint,
and other debris. These improvements in Coinstar units have reduced downtime
and as a result, reduced maintenance costs. Since October 1996, Coinstar has
received 18 United States patents and 5 international patents relating to
aspects of self-service coin processing. Our proprietary technology has
enabled our coin processing units to be available to customers on a more
consistent basis. In the event of any malfunction, our units have a telephone
handset so our retail partners can connect directly to our customer service
center using a toll free number. The reliability of our Coinstar unit and the
utilization of our communications network have resulted in a unit availability
rate of 98%.
An internal computer that runs a multi-tasking operating system controls our
Coinstar unit. In addition to controlling and coordinating coin sorting and
other functions, the computer electronically records nearly all unit
operations. For each coin counting and processing transaction, the unit
produces a unique transaction number, records the dollar amount, time and
duration of the transaction, and identifies the number of each type of coin
processed and the number of rejected coins. This information is sent daily
over our wide-area communications network to our headquarters for analysis and
backup.
Intelligent Communications and Information Systems
Our Coinstar units are designed to operate as part of a scalable, two-way,
wide-area communications network. This network allows Coinstar units to
transmit key financial data and operating statistics to our headquarters on a
daily basis. We use this information to accurately track unit coin flow and
operating performance, enabling us to schedule just-in-time coin pick-ups,
provide unit service and perform essential accounting and reporting functions.
In addition, this network enables us to configure and update the units
remotely with a variety of operational and marketing data. The network and
associated features provide the following key benefits:
. Downloadable Information, Software Programs and Systems
Enhancements. With a scalable, two-way network, we can send information
to a Coinstar unit, customized to each unit's location, store specific
advertising, on-screen promotions and coupons. In addition, our network
enables us to download new versions of application and operating system
software to Coinstar units. This ability to perform multiple functions
remotely eliminates costly on-site visits and lowers our per unit
operating costs.
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. Enhancement of Field Service Productivity. Each Coinstar unit generates
daily performance and operating reports that are transmitted over the
network to our headquarters for consolidation. We can then electronically
distribute this information through our network to our field service
employees, which enables us to better utilize field service and
transportation personnel. Information on individual unit usage and
operations help us manage the efficiency of coin collection and
transportation activities and reduce downtime resulting from units that
are full of coins.
. Financial Reporting and Reconciliation. We receive financial data and
operating statistics through the network on a daily basis. The financial
and accounting information is reconciled with bank records and coin
collection and transportation processing data logged into the network to
ensure the accuracy, speed and control of each deposit. In addition, our
retail partners automatically receive weekly facsimile or email reports
generated by the network detailing information such as transaction
volumes and deposits made for each store.
. Automated Tracking of Coin Collection, Processing and Deposits. Our wide-
area and local-area networks are securely linked using sophisticated
networking equipment that enables us to accurately track all coin flow
activity from the Coinstar unit to the depository institution. The
Coinstar network is linked with our transportation and coin processing
partners, which enables us to generate key coin tracking data.
. Coinstar Network Scalability. The Coinstar network is scalable to support
the increasing demands resulting from our rapid installation of Coinstar
units. The components of the Coinstar network that reside at headquarters
operate on widely available personal computers with advanced reliability
features. In addition, we have built an extensive and secure Intranet on
top of our infrastructure using standard client/server tools provided by
leading industry vendors, allowing for efficient and effective
communication between our employees, supermarket partners and armored car
carriers.
Field Service Organization
We have retained a dedicated field service organization of third party
providers and approximately 250 field service personnel and supporting
employees. Our field service organization provides highly responsive service
to our retail partners by ensuring the efficient collection and handling of
coins and by performing preventive maintenance and repairs. Key components of
the field service organization include:
. Field Service Personnel. In all our markets, our field service employees
have the primary direct contact with our consumers and retail partners.
Each field service team member is connected to our wide-area
communications network by laptop computer, mobile phone and pager. Each
Coinstar unit provides specific service information to the responsible
field service employee by directly paging the employee with current
operating information based on a series of predetermined performance
criteria.
. Transportation and Processing Services. Generally, we contract with third
parties to transport and process coins deposited in Coinstar units. We
believe the use of these contracted resources allows growth with minimal
investment in facilities and equipment. The transportation service
typically includes removing the coin trolleys, tagging them for deposit,
cleaning the Coinstar unit, transporting the coins for processing at the
coin processing facilities and depositing the coins to our local
depository. We have an automated tracking system for tracking each
deposit to each retail partner's account, as well as our bank account.
. Installation Personnel. An individual account manager manages each
installation. For a typical installation, an operations representative
visits the store prior to the delivery of the Coinstar unit to coordinate
with the store manager on the location of the Coinstar unit within the
store and review site requirements. On the day of delivery, our field
service representative unpacks the unit and conducts a training and
orientation session for store personnel.
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Key Benefits of the Coinstar Network to Our Retail Partners
Our retail partner marketing strategy is to significantly increase our
penetration with existing leading retail partners as well as to establish
relationships with new leading retail partners in the 100 largest metropolitan
areas in the United States. Our Coinstar units are located in a majority of
the leading supermarket chains, such as Kroger's, Safeway, Albertson's, and
Ahold.
When marketing to supermarkets, we highlight the benefits of our service,
including an additional revenue source, increased store traffic and sales and
decreased internal store coin handling expenses. In addition, we highlight our
belief that our Coinstar unit enables supermarkets to provide an additional
convenient service to their customers using minimal store space, while
incurring virtually no additional cost.
. Increases Revenues. We provide our retail partners an additional source
of revenue through the sharing of our processing fee.
. Increased Store Traffic. We believe the Coinstar unit helps to increase
store traffic by providing consumers with a fun, accurate and convenient
means of converting accumulated change into cash. A January 2001 research
study by NFO WorldGroup indicated that 59% of the Coinstar users were
"very likely" or "somewhat likely" to visit another store to use a
Coinstar unit if no unit were installed in the store they regularly
visit.
. Promotes Sales. The January 2001 research study by NFO WorldGroup also
found that Coinstar units promote incremental sales for retailers by
adding new disposable income in shoppers' hands. Forty percent of
Coinstar users spend part or all of their cash voucher in the store.
Consumers often view their coin jars as "found money" and retailers enjoy
access to this additional disposable income.
. Reduces Internal Coin Handling Expenses. We offer our retail partners
the ability to process and count coins without any processing fee subject
to certain restrictions, such as day of the week. We believe that this
service reduces our retail partners' internal coin handling expenses and
losses.
Our Marketing Strategies
Since we offer a unique consumer service through our convenient, self-
service coin processing units, an important element of our marketing strategy
is to increase consumer trials of our service. Nationally, we promote the
Coinstar unit to consumers through public relations and various media,
including freestanding newspaper advertisements, billboards, radio and
television commercials and targeted mailings. On a local basis, we market to
our retail partners' existing customer base by communicating through
advertising media already used by our partners. These joint marketing efforts
include cooperative newspaper advertisements and direct mail circulars, window
signs, bag stuffers or printed bags, shelf talkers, in-store demonstrations
and other merchandising aids. We plan to continue to use effective promotional
opportunities in new markets and in the expansion of existing markets with new
or existing retail partners. We have generally found local, regional and
national press interested in our coin processing service and willing to devote
space and airtime to help us communicate our message.
Our Coinstar unit has been designed to be prominently branded, highly
identifiable, easily recognized and capable of self-promotion to consumers.
The Coinstar unit is generally located near the primary entrance areas of our
retail partners and in clear view of the checkout counters or service centers.
We are continually developing additional techniques including point of sale
material and the use of sound and animation that, when added to the Coinstar
unit, are intended to attract consumers and stimulate trials and repeat use.
We are also developing other programs designed to increase the breadth and
volume of consumer usage. For example, in May 1997, we began the Coins That
Count cause-marketing program that we believe provides non-profit
organizations with a very cost- effective means of raising money. This
philanthropic service provides consumers with a simple means for making tax-
deductible donations. Instead of receiving vouchers to be
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redeemed at the retail partner's checkout counter, consumers receive printed
receipts evidencing the value of their donations. The non-profit organization
receives 92.5% of the total funds, which is one of the highest pass-through
rates for non-profit organizations. In 1998, we began a national relationship
with The U.S. Fund for UNICEF as the designated coin processor for their
annual Trick or Treat for Unicef program. During 2000, we initiated a
relationship with the American Red Cross whereby the Coinstar network will
help raise money for Red Cross disaster relief. The American Red Cross
prominently mentions this donation capability in their information to the
press during times of disaster. In addition, we work closely with our
supermarket partners to support numerous local non-profit organizations.
Product Research and Development
We believe that strong product research and development capabilities are
essential to maintaining the competitiveness of our product and service
offerings. Since inception, we have focused our research and development
efforts on developing and enhancing our operating system and support network
for continued expansion of our network and addition of value-added services.
As of December 31, 2000, we employed 54 software engineers, information
technology specialists and other professional staff in these efforts. We also
contract with a number of specialized outside consultants for additional
services.
Manufacturing and Supply
Coinstar units are assembled by SeaMed, a division of Plexus Corporation.
SeaMed is a contract manufacturer in Redmond, Washington that utilizes several
subsuppliers to provide components and subassemblies. Each Coinstar unit is
manufactured to our proprietary designs and specifications. We own all
designs, documentation, tooling, specialized fixtures and test equipment.
SeaMed inspects and tests each unit for quality assurance prior to shipment.
We believe that using contract manufacturers has several advantages including
decreasing capital investment in property, plant and equipment, the ability to
leverage contract manufacturers' purchasing relationships for lower material
costs, minimal fixed costs of maintaining unused manufacturing capacity,
greater capacity flexibility and the ability to utilize suppliers' broad
technical and process expertise.
Proprietary Rights
We regard the protection of our patents, copyrights, service marks,
trademarks, trade dress and trade secrets as important to our success. We rely
on a combination of patent, copyright, trademark, service mark and trade
secret laws and contractual restrictions to protect our proprietary rights in
products and services. We have also entered into confidentiality and invention
assignment agreements with our employees and contractors.
We have made several technological advances relating to self-service coin
processing that we believe are important to the successful operation of the
Coinstar unit in a self-service environment. These advancements are
implemented both mechanically and through our wide-area network software.
These technologies enable the Coinstar unit to operate effectively in light of
moisture, dust, lint, dirt, paper, paper clips, and other debris with
infrequent clogging or malfunctioning. Since October 1996, Coinstar has
received 18 United States patents and 5 international patents relating to
aspects of self-service coin processing.
Competition
We are the first and only company to own and operate a national network of
self-service coin processing machines. We believe that our key competitive
advantages include our technology and expertise developed over the past seven
years, the nationwide Coinstar network, our dedicated field service
organization, our strong relationships with a majority of the leading
supermarket chains in the United States and our proven ability to execute our
rollout strategy. We compete on a regional basis with several direct
competitors that operate self-service coin processing machines. We compete
indirectly with manufacturers of machines and devices that enable consumers to
count or sort coins themselves, and we also compete directly or indirectly
with banks and
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similar depository institutions for coin conversion customers. We may also
compete with supermarket retailers that decide to purchase and service their
own coin-counting equipment. Banks are the primary alternative available to
consumers for converting coins into cash, and they generally do not charge a
fee for accepting rolled coins. As the market for coin processing develops,
banks and other businesses may decide to offer additional coin processing
services, either as a customer service or on a self-service basis, and compete
directly with us.
Employees
As of December 31, 2000, we employed 504 full-time employees and 48 part-
time employees including employees at our international and Meals.com
subsidiaries. None of our employees is represented by a union and management
believes our employee relations are good.
Risk Factors
You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones facing our company. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial also may impair our business
operations. If any of the following risks actually occur, our business could
be harmed. In such case, the trading price of our common stock could decline
and you may lose all or part of your investment.
We have a history of sustained operating losses and we expect such losses to
continue. We have incurred substantial losses since inception. Our net loss
was $24.0 million in 1998, $21.4 million in 1999 and $22.7 million in 2000. As
of December 31, 2000, we had an accumulated deficit of $126.5 million. Our
operating losses to date have resulted primarily from expenses incurred in the
development, marketing and operation of the Coinstar units, expansion and
maintenance of the network, administrative and occupancy expenses at our
headquarters, depreciation and amortization and losses attributable to our
Meals.com subsidiary. We expect to continue to incur operating losses as we
continue to increase our installed base of Coinstar units in the United States
and other countries and seek to develop and market new products, services and
enhancements, including the development of our Meals.com business.
Our future profitability is uncertain and may be hampered by the continued
consolidation of Meals.com's losses. We cannot be certain that we will install
a sufficient number of our Coinstar units or maintain existing levels of
customer utilization to allow us to achieve profitability, or generate
sufficient cash flow to continue to meet our capital and operating expenses
and debt service obligations.
Our majority-owned subsidiary, Meals.com, is an early-stage infrastructure
provider that connects consumers, retailers and packaged goods manufacturers.
Meals.com is subject to the risks encountered by early-stage companies,
particularly those in the consumer e-commerce industry. Meals.com has incurred
substantial losses since its inception in 1998. Our portion of its net loss
for 2000 was $13.6 million. As of December 31, 2000, our portion of
Meals.com's accumulated deficit was $17.1 million. Our future profitability
will likely be delayed due to continuing losses of Meals.com. Meals.com's
success will be dependent upon various factors, including the ability to:
. raise additional funds to meet its working capital needs,
. in market acceptance of its products and services,
. achieve effective and measurable results for its supermarket and packaged
goods manufacturer customers,
. successfully execute on its customer contracts, and
. continue to develop and update its technologies to keep pace with the
growth of the Internet and changes in technology.
The market that Meals.com is entering is relatively untested and as a result
it is difficult to predict future performance.
10
Our future operating results remain uncertain. You should not consider prior
growth rates in our revenue to be indicative of our future operating results.
The timing and amount of future revenues will depend almost entirely on our
ability to obtain new agreements with potential retail partners for the
installation of Coinstar units, the successful deployment and operation of our
coin processing network and customer utilization of our service. Our future
operating results will depend upon many other factors, including:
. the level of product and price competition,
. the processing fee we charge consumers in the United States to use our
service which has been 8.9% since December 1998,
. the amount of our processing fee that we share with our retail partners,
. our success in expanding our network and managing our growth,
. our ability to develop and market product enhancements and new products,
such as those being developed by Meals.com, and the timing of such
product enhancements,
. our ability to enter into and penetrate new international markets, such
as the United Kingdom, and other selected foreign markets,
. activities of and acquisitions by competitors,
. the ability to hire additional employees,
. the timing of such hiring and the ability to control costs, and
. customer utilization at existing levels.
The success of our Meals.com subsidiary is uncertain. We have committed
significant resources and capital to develop and market the Meals.com products
and services including the Meals.com family of web-sites and the in-store
Shopper(TM) kiosk. The products and services offered by Meals.com are
relatively untested, and we cannot assure you that we will achieve market
acceptance for any such products and services. In addition, the in-store
Shopper kiosk is currently only in a pilot phase. Moreover, these and other
new products and services may be subject to significant competition with
offerings by potential competitors in addition to companies that compete in
our coin processing business. Many of these competitors have significantly
greater technological expertise and financial and other resources than we do.
In the absence of significant market acceptance of Meals.com's products and
services, Meals.com is not likely to generate sufficient revenues to cover its
operating expenses and capital expenditures.
Our exploration of strategic alternatives may not be successful. In November
2000, our Board of Directors appointed a special committee comprised of
outside directors to evaluate alternatives concerning a potential
deconsolidation of Meals.com's financial results from our financial results.
In addition, in February 2001, we engaged JPMorgan & Co. to advise us in
exploring a broader range of strategic alternatives for enhancing Coinstar's
stockholder value. We are uncertain as to what strategic alternatives may be
available to us or what impact any particular strategic alternative will have
on our stock price if accomplished. Uncertainties and risks relating to our
exploration of strategic alternatives include:
. the exploration of strategic alternatives may disrupt operations and
distract management, which could have a material adverse effect on our
operating results,
. the process of exploring strategic alternatives may be more time
consuming and expensive than we currently anticipate,
. we may not be able to successfully achieve the benefits of the strategic
alternative recommended to us by our financial advisor and our board,
. perceived uncertainties as to the future direction of our company may
result in the loss of employees or business partners,
11
. the cash flow impact of a potential Meals.com deconsolidation is
uncertain, and
. the expense impact of a potential Meals.com deconsolidation, including
the potential write-off of Meals.com's obligations to us and to third
parties and the related costs we will incur, is uncertain.
We rely on one source of revenue. We have derived until now, and expect for
the foreseeable future to derive, substantially all of our revenue from the
operation of Coinstar units. Accordingly, continued market acceptance of our
coin processing service is critical to our future success. If demand for our
coin processing service does not continue to grow due to technological change,
competition, market saturation or other factors, our business, financial
condition and results of operations and ability to achieve sufficient cash
flow to service our indebtedness could be seriously harmed. As a consequence,
our future success may be dependent on our ability to develop and
commercialize new products and services. To date, we have not derived any
significant revenue from our e-services technology and do not anticipate
significant revenue from this source in the near future. In addition, new
products, services and enhancements may pose a variety of technical challenges
and require us to enhance the capabilities of our network and attract
additional qualified employees. The failure to develop and market new
products, services or enhancements successfully could seriously harm our
business, financial condition and results of operations and ability to achieve
sufficient cash flow to service our indebtedness.
We depend upon key personnel and need to hire additional personnel. Our
performance is substantially dependent on the continued services of our
executive officers, some of whom have employment contracts, and key employees,
whom we employ on an at-will basis. Our long-term success will depend on our
ability to recruit, retain and motivate highly skilled personnel. Competition
for such personnel is intense. We have at times experienced difficulties in
recruiting qualified personnel, and we may experience difficulties in the
future. Our chief executive officer, Daniel Gerrity, resigned effective
November 15, 2000. We have formed a search committee of the Board of Directors
to recruit a new chief executive officer to fill the vacancy left by Mr.
Gerrity. 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, including:
. operating results below market expectations,
. trends and fluctuations in use of Coinstar units,
. changes in, or our failure to meet financial estimates by securities
analysts,
. period-to-period fluctuations in our financial results,
. announcements of technological innovations or new products or services by
us or our competitors,
. the termination of one or more retail distribution contracts,
. timing of installations relative to financial reporting periods,
. release of analyst reports,
. industry developments,
. market acceptance of the Coinstar service by retail partners and
consumers,
. market acceptance of Meals.com and the potential deconsolidation of
Meals.com,
. the outcome of our investigation of strategic alternatives, and
. economic and other external factors.
12
In addition, the securities markets have from time to time experienced
significant price and volume fluctuations that are unrelated to the operating
performance of particular companies. These market fluctuations may seriously
harm the market price of our common stock.
Our business is dependent on maintaining our retail partner
relationships. The success of our business depends on the willingness of
potential retail partners, primarily supermarkets, to agree to installation of
Coinstar units in their stores and to the continued retention of those units.
We must continue to demonstrate that our Coinstar units provide a benefit to
our retail partners to ensure that such partners do not request deinstallation
of units or develop or purchase their own coin-counting system.
Our customer base is highly consolidated. We generally have separate
agreements with each of our retail partners providing for our exclusive right
to provide coin processing services in retail locations. Coinstar units in
service in three supermarket chains, The Kroger Co., Albertson's, Inc. and
Safeway accounted for approximately 28%, 11% and 11%, respectively, of our
revenue in 2000. In the quarter ended December 31, 2000, these three chains
accounted for approximately 27%, 12% and 11%, respectively, of our revenue.
The termination of our contracts with any one or more of our retail partners
could seriously harm our business, financial condition, results of operations
and ability to achieve sufficient cash flow to service our indebtedness.
Our quarterly operating results may fluctuate due to different usage rates
of individual Coinstar units, seasonality of use and other factors. Customer
utilization of our coin processing service varies substantially from unit to
unit, making our revenue difficult to forecast. Customer utilization is
affected by the timing and success of promotions by us and our retail
partners, age of the installed unit, adverse weather conditions and other
factors, many of which are not in our control. We believe that coin processing
volumes are affected by seasonality. In particular, we believe that on a
relative basis, coin processing volumes have been lower in the months of
January, February, September and October. 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 our quarterly operating results. The timing of Coinstar unit
installations during a particular quarter is largely dependent on installation
schedules determined by agreements with our retail partners, the variable
length of trial periods of our retail partners and the planned coordination of
multiple installations in a given geographic region.
As a result of these and other factors, revenue for any quarter is subject
to significant variation, and we believe that period-to-period comparisons of
our results of operations are not necessarily meaningful and should not be
relied upon as indications of future performance. Because our operating
expenses are based on anticipated revenue trends and because a large
percentage of our expenses are relatively fixed, revenue variability could
cause significant and disproportionate variations in operating results from
quarter to quarter and could result in significant losses. To the extent such
expenses are not followed by increased revenue, our operating results would be
seriously harmed.
Control of our shares is concentrated with a relatively small number of
stockholders. A significant portion of our shares is controlled by a
relatively small number of stockholders. Two such stockholders each recently
filed separately with the Securities and Exchange Commission a Schedule 13D.
One stockholder's filing stated that the stockholder had been communicating
with our Board of Directors, officers and other stockholders regarding ways to
enhance stockholder value, but that such stockholder had no present plans or
intentions to acquire or dispose of any of our securities other than for the
purpose of investment. Another stockholder's filing stated that the
stockholder had requested our Board of Directors to review our ownership of
Meals.com and consider divesting Meals.com or reducing our financial position
in the Meals.com business. In addition, the filing stated that such
stockholder may use his influence to support divesting or reducing our
financial position in the Meals.com business, but that such stockholder had no
present plans or intentions of acquiring additional shares
13
but reserved the right to make additional purchases on the open market and in
private transactions. There can be no assurance that such stockholders'
intentions will not change in the future, that other stockholders will not
make similar filings, or that such stockholders would support our directors at
our 2001 annual shareholder meeting.
We have substantial indebtedness. As of December 31, 2000, we had
outstanding indebtedness of $62.7 million, which included $61.0 million of our
13.0% senior subordinated discount notes due 2006 and our capital lease
obligations. We paid our first semi-annual cash interest payment on the senior
notes on March 31, 2000. We will have debt service obligations of
approximately $7.9 million per year until October 2006, when the principal
amount of $61.0 million will be due. Our ability to meet our debt service
requirements will depend upon achieving significant and sustained growth in
our expected 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.
Our market is competitive. We compete regionally with several direct
competitors that operate self-service coin processing machines. We cannot be
certain that these competitors have not or will not substantially increase
their installed units and expand their service nationwide. We compete
indirectly with manufacturers of machines and devices that enable consumers to
count or sort coins themselves, and we also compete or may compete directly or
indirectly with banks and similar depository institutions for coin conversion
customers. We also compete with supermarket retailers that purchase and
service their own coin-counting equipment. We believe banks are the primary
alternative available to consumers for converting coins into cash, and they
generally do not charge a fee for accepting rolled coins. As the market for
coin processing develops, banks and other businesses may decide to offer
additional coin processing services, either as a customer service or on a
self-service basis, and compete directly with us.
In addition, we may face new competition as we seek to expand into
international markets and develop new products, services and enhancements. Our
ability to expand internationally may subject us to competition with banks
that offer services competitive with ours and with manufacturers and other
companies that have established or are seeking to establish coin-counting
networks competitive with ours. Many of the competitors have greater
experience than we do in operating in these international markets. Moreover,
new products that we intend to develop, such as those involving the Internet,
may subject us to competition from companies with significantly greater
technological resources and experience.
Many of our potential competitors with respect to the development of new
products, services and enhancements have longer operating histories, greater
name recognition, larger customer bases and significantly greater financial,
technical, marketing and public relations resources than we have. These
competitors may be able to undertake more extensive marketing campaigns, adopt
more aggressive pricing policies and make more attractive offers to consumers
and businesses. Our competitors might succeed in developing technologies,
products or services that are more effective, less costly or more widely used
than those that have been or are being developed by us or that would render
our technologies or products obsolete or noncompetitive. We cannot be certain
that we will be able to compete effectively with current or future
competitors. Competitive pressures
14
could seriously harm our business, financial condition and results of
operations and our ability to achieve sufficient cash flow to service our
indebtedness.
We depend upon third-party manufacturers and service providers, and sole-
source manufacturers. We do not conduct manufacturing operations and depend,
and will continue to depend, on outside parties for the manufacture of the
Coinstar unit and its key components. We intend to continue to expand our
installed base, and such expansion may be limited by the manufacturing
capacity of our third-party manufacturers and suppliers. Although we expect
that our current contract manufacturer, SeaMed (a division of Plexus
Corporation), will be able to produce sufficient units to meet projected
demand, SeaMed or other manufacturers in reality may not be able to meet our
manufacturing needs in a satisfactory and timely manner. If there is an
unanticipated increase in demand for Coinstar unit installations, we may be
unable to meet such demand due to manufacturing constraints.
Although we have a contract with SeaMed, SeaMed does not have an obligation
to continue manufacturing the Coinstar unit or its components. In July 1999,
SeaMed merged with Plexus Corp. of Neenah, Wisconsin. SeaMed's management has
assured us that the combined entity will continue to meet our manufacturing
needs. However, we cannot be certain that Plexus will continue to operate in
Redmond, Washington or continue to meet our manufacturing needs.
In addition, we obtain some key hardware components used in the Coinstar
units from sole-source suppliers. We cannot be certain that we will be able to
continue to obtain an adequate supply of these components in a timely manner
or, if necessary, from alternative sources. If we are unable to obtain
sufficient quantities of components or to locate alternative sources of supply
on a timely basis, we may experience delays in installing or maintaining
Coinstar units, either of which could seriously harm our business, financial
condition and results of operations and ability to achieve sufficient cash
flow to service our indebtedness.
We rely on third-party service providers for substantial support and service
efforts that we currently do not provide directly. In particular, we contract
with armored carriers and other third-party providers to arrange for pick-up,
processing and deposit of coins. We generally contract with one transportation
provider and coin processor to service a particular region. Many of these
service providers do not have long-standing relationships with us and either
party generally can terminate the contracts with advance notice ranging from
30 to 90 days. We do not currently have nor do we expect to have in the
foreseeable future the internal capability to provide back up coin processing
service in the event of sudden disruption in service from a commercial coin
processor. Any failure by us to maintain our existing coin processing
relationships or to establish new relationships on a timely basis or on
acceptable terms would harm our business, financial condition and results of
operations and our ability to achieve sufficient cash flow to service our
indebtedness.
Moreover, as with any business that handles large volumes of cash, we are
susceptible to theft, counterfeit and other forms of fraud, including security
breaches of our computing system that performs important accounting functions.
We cannot be certain that we will be successful in developing product
enhancements and new services to thwart such activities.
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.
15
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.
There are many risks associated with doing business in international
markets. We intend to increase our deployment of Coinstar units in select
international markets. We have only recently begun to expand our business
internationally in the United Kingdom and, accordingly, have limited
experience in operating in international markets. We anticipate that our
international operations will become increasingly significant to our business.
International transactions pose a number of risks, including failure of
customer acceptance, risks of regulatory delays or disapprovals with respect
to our products and services, and competition from potential and current coin-
counting businesses. Exposure to exchange rate risks, restrictions on the
repatriation of funds, political instability, adverse changes in tax, tariff
and trade regulations, difficulties with foreign distributors, difficulties in
managing an organization spread over several countries, and weaker legal
protection for intellectual property rights. These risks could seriously harm
our business, financial condition, and results of operations and ability to
achieve sufficient cash flow to service our indebtedness.
Defects in or failures of our operating system could harm our business. We
collect financial and operating data, and monitor performance of Coinstar
units, through a wide-area communications network connecting each of the
Coinstar units with a central computing system at our headquarters. This
information is used to track the flow of coins, verify coin counts and
schedule the dispatch unit service and coin pick-up. The operation of Coinstar
units depends on sophisticated software, computing systems and communication
services that may contain undetected errors or may be subject to failures.
These errors may arise particularly when new services or service enhancements
are added or when the volume of services provided increases. Although each
Coinstar unit is designed to store all data collected, thereby helping to
ensure that critical data is not lost due to an operating systems failure, our
inability to collect the data from our Coinstar units could lead to a delay in
processing coins and crediting the accounts of our retail partners for
vouchers already redeemed. The design of the operating systems to prevent loss
of data may not operate as intended. Any loss or delay in collecting coin
processing data would seriously harm our operations.
We have in the past experienced limited delays and disruptions resulting
from upgrading or improving our operating systems. Although such disruptions
have not had a material effect on our operations, future upgrades or
improvements could result in delays or disruptions that would seriously harm
our operations.
We rely on the long distance telecommunication network that is not owned by
us and is subject to service disruptions. Further, while we have taken
significant steps to protect the security of our network, any breach of
16
security whether intentional or from a computer virus could seriously harm us.
Any service disruptions, either due to errors or delays in our software or
computing systems or interruptions or breaches in the communications network,
or security breaches of the system, could seriously harm our business,
financial condition and results of operations and ability to achieve
sufficient cash flow to service our indebtedness.
We must keep pace with rapid technological changes to remain
competitive. The self-service coin processing market is relatively new and
evolving. We anticipate that, as the market matures, it will be subject to
technological change, new services and product enhancements, particularly as
we expand our service offerings. Accordingly, our success may depend in part
upon our ability to keep pace with continuing changes in technology and
consumer preferences while remaining price competitive. Our failure to develop
technological improvements or to adapt our products and services to
technological change on a timely basis could, over time, seriously harm our
business, financial condition and results of operations and our ability to
achieve sufficient cash flow to service our indebtedness.
Some anti-takeover provisions may affect the price of our common stock and
make it harder for a third party to acquire us without the consent of our
board of directors. We have implemented anti-takeover provisions that may
discourage takeover attempts and depress the market price of our stock.
Provisions of our certificate of incorporation, bylaws and rights plan could
make it more difficult for a third party to acquire us, even if doing so would
be beneficial to our stockholders. Delaware law also imposes some restrictions
on mergers and other business combinations between us and any acquirer of 15%
or more of our outstanding common stock, and Washington law may impose
additional restrictions on mergers and other business combinations between us
and any acquirer of 10% or more of our outstanding common stock. These
provisions may make it harder for a third party to acquire us without the
consent of our board of directors, even if the offer from a third party may be
considered beneficial by some stockholders.
Item 2. Properties.
Our principal administrative, marketing and product development facility is
located in a 46,070 square foot facility in Bellevue, Washington, under a
lease that expires in August 2004. We also lease a 10,196 square foot facility
in Bellevue, Washington, under an agreement that expires in March 2002. This
space is currently occupied by our subsidiary, Meals.com. During 2000, our
subsidiary also leased an 8,909 square foot facility in Bellevue, Washington,
under an agreement that expires in July 2005.
Item 3. Legal Proceedings.
We are subject to various legal proceedings and claims arising in the
ordinary course of business. Our management does not expect that the results
in any of these legal proceedings would have a material adverse effect on our
financial position, results of operations or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the fourth
quarter of 2000.
17
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters.
Market Information
Our common stock is traded on the Nasdaq National Market under the symbol
"CSTR". The following table sets forth the high and low bid prices per share
as reported by the Nasdaq National Market for our common stock for each
quarter during the last two fiscal years. The quotations represent inter-
dealer prices without retail markup, markdown or commission and may not
necessarily represent actual transactions.
High Low
------ ------
Fiscal 1999:
First Quarter................................................. $17.88 $ 9.38
Second Quarter................................................ 29.38 14.13
Third Quarter................................................. 30.81 8.69
Fourth Quarter................................................ 14.63 7.03
Fiscal 2000:
First Quarter................................................. $14.50 $ 9.00
Second Quarter................................................ 12.69 6.69
Third Quarter................................................. 13.56 9.22
Fourth Quarter................................................ 16.75 10.00
The last reported sale price of our common stock on the Nasdaq National
Market on February 28, 2001 was $16.688 per share.
Holders
As of February 28, 2001, there were approximately 154 holders of record of
our common stock. This does not include the number of persons whose stock is
in nominee or "street name" accounts through brokers.
Dividends
We have never paid cash dividends on our common stock. We intend to retain
any future earnings to fund the development and growth of our business and
therefore do not anticipate paying any cash dividends in the foreseeable
future. Furthermore, our line of credit agreement prohibits the payment of
dividends without the lender's prior written consent and the indenture
governing our senior subordinated discount notes limits our ability to pay
dividends.
18
Item 6. Selected Financial and Other Data.
The following selected financial data is qualified by reference to, and
should be read in conjunction with, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the consolidated Financial
Statements of Coinstar and related Notes thereto included elsewhere in this
Annual Report on Form 10-K.
Year Ended December 31,
----------------------------------------------------
2000 1999 1998 1997 1996
---------- -------- -------- -------- --------
(Dollars and shares in thousands, except per
share, per unit data and where noted)
Consolidated Statements
of Operations:
Revenue................. $ 103,089 $ 77,733 $ 47,674 $ 25,007 $ 8,312
Expenses:
Direct operating....... 48,184 38,836 26,565 17,899 7,258
Regional sales and
marketing............. 11,368 6,381 3,778 3,088 1,505
Product research and
development........... 8,335 5,571 4,744 6,362 3,969
Selling, general and
administrative........ 26,218 15,021 14,112 11,079 5,351
Depreciation and
amortization.......... 27,065 20,315 13,237 8,679 4,135
---------- -------- -------- -------- --------
Loss from operations.... (18,081) (8,391) (14,762) (22,100) (13,906)
Other income (expense)
Interest income........ 1,976 2,350 1,367 2,329 848
Interest expense....... (8,517) (11,314) (10,817) (9,822) (2,661)
Other income
(expense)............. 261 (768) 240 -- --
---------- -------- -------- -------- --------
Net loss before minority
interest and
extraordinary item..... (24,361) (18,123) (23,972) (29,593) (15,719)
Minority interest
related to convertible
preferred stock........ 1,668 -- -- -- --
---------- -------- -------- -------- --------
Net loss before
extraordinary item..... (22,693) (18,123) (23,972) (29,593) (15,719)
Extraordinary item:
Loss related to early
retirement of debt..... -- (3,250) -- -- (248)
---------- -------- -------- -------- --------
Net loss................ $ (22,693) $(21,373) $(23,972) $(29,593) $(15,967)
========== ======== ======== ======== ========
Loss per share before
extraordinary item,
basic and diluted(1)... $ (1.12) $ (1.02) $ (1.58) $ (3.81) $ (20.06)
Extraordinary item per
share, basic and
diluted(1)............. -- (0.18) -- -- (0.31)
---------- -------- -------- -------- --------
Loss per share, basic
and diluted(1)......... $ (1.12) $ (1.20) $ (1.58) $ (3.81) $ (20.37)
========== ======== ======== ======== ========
Weighted average shares
outstanding(1)......... 20,271 17,857 15,150 7,761 784
========== ======== ======== ======== ========
Other Data--U.S. core:
Number of new Coinstar
units installed during
the period............. 1,502 2,112 1,606 1,703 1,238
Installed base of
Coinstar units at end
of the period.......... 8,424 6,922 4,810 3,204 1,501
Average age of network
for the period
(months)............... 25.3 20.1 15.5 10.0 6.5
Number of regional
markets................ 121 103 84 66 38
Dollar value of coins
processed.............. $1,145,262 $870,415 $623,258 $332,526 $115,476
Revenue................. 101,928 77,467 47,654 25,007 8,312
Revenue per average
installed unit(2)...... 13,294 13,341 11,942 10,709 9,860
Direct contribution(3).. 54,329 38,924 21,089 7,108 1,054
Direct contribution
margin(%).............. 53.3% 50.2% 44.3% 28.4% 12.7%
Direct contribution per
average installed
unit(2)(3)............. $ 7,086 $ 6,703 $ 5,285 $ 3,044 $ 1,250
Regional marketing...... 11,355 6,381 3,778 3,088 1,505
Research and
development............ 3,262 4,179 4,744 6,362 3,969
Selling, general and
administrative......... 17,626 12,632 13,358 11,079 5,351
EBITDA(4)............... 22,086 15,732 (792) (13,421) (9,771)
EBITDA margin(%)........ 21.7% 20.3% (1.7%) (53.7%) (117.6%)
International--100%
owned subsidiary
International revenue... $ 681 $ 222 $ 20 $ -- $ --
International operating
expenses(5)............ 1,697 1,496 754 -- --
Meals.com--89%-owned
subsidiary
Meals.com revenue....... $ 480 $ 44 $ -- $ -- $ --
Meals.com operating
expenses(6)............ 12,912 2,850 -- -- --
19
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
Consolidated Balance Sheet
Data:
Cash, cash equivalents and
short-term investments(7)..... $ 78,674 $ 88,032 $ 41,871 $ 56,803 $ 56,310
Total assets................... 157,788 163,380 98,833 103,546 82,531
Total debt, including current
portion....................... 62,736 61,831 88,056 78,945 70,065
Mandatorily redeemable
preferred stock............... -- -- -- -- 24,972
Paid in capital................ 161,339 159,054 62,372 61,553 6,871
Total stockholders' equity
(deficit)..................... 157,788 55,266 (20,039) 3,109 (21,976)
- ---------------------
(1) See Note 10 to Financial Statements for an explanation of the
determination of the number of shares used in computing loss per share
information, basic and diluted.
(2) Based on actual yearly results divided by the monthly averages of units
in operation over the applicable period.
(3) Direct contribution is defined as revenue less direct operating expenses.
We use direct contribution as a measure of operating performance to
assist in understanding our operating results. Direct contribution is not
a measure of financial performance under generally accepted accounting
principles (GAAP) and should not be considered in isolation or an
alternative to gross margin, income (loss) from operations, net income
(loss), or any other measure of performance under GAAP.
(4) 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. We, however, believe
that EBITDA, as defined, provides useful information regarding our
ability to service and/or incur indebtedness.
(5) International operating expenses exclude depreciation and amortization
charges and represent the costs incurred by Coinstar International, Inc.
related to the exploration of international expansion. All costs related
to international development (such as market research and travel) are
expensed as incurred in accordance with the American Institute of
Certified Public Accountants Statement of Position 98-5, Reporting on the
Costs of Start-up Activities, issued on April 3, 1998.
(6) Meals.com operating expenses exclude depreciation and amortization
charges and represent the operating costs incurred by Meals.com. These
costs include overhead allocations from Coinstar.
(7) Cash, cash equivalents and short-term investments include funds in
transit of $42.6 million, $31.4 million, $23.0 million and $14.2 million
at December 31, 2000, 1999, 1998 and 1997, respectively, which represent
amounts in transit to our supermarket partners that are being processed
by armored car carriers or residing in Coinstar units. Funds in transit
prior to 1997 are not significant.
20
Item 7. 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
Annual Report on Form 10-K. 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 Annual Report on Form 10-K. Readers are
cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date of this report. We undertake no obligation to
revise any forward-looking statements in order to reflect events or
circumstances that may subsequently arise. Readers are urged to carefully
review and consider the various disclosures made in this report and in our
other reports filed with the Securities and Exchange Commission that attempt
to advise interested parties of the risks and factors that may affect our
business, prospects and results of operations.
Overview
We currently derive substantially all our revenue from coin processing
services generated by our installed base of Coinstar units located in
supermarket chains in 46 states across the United States and the District of
Columbia as well as in the United Kingdom and Canada. We generate revenue
based on a processing fee charged on the total dollar amount of coins
processed in a transaction. In December 1998, we changed this processing fee
at most locations to 8.9% from the previous rate of 7.5%. Coin processing fee
revenue is recognized at the time the customers' coins are counted by the
Coinstar unit. Overall revenue growth is dependent on both the rate of new
installations and the growth in coin processing volumes of our installed base.
Our experience to date is that coin processing volumes per unit have generally
increased 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.
Given our limited operating history, 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 expect that as we continue to expand installations, the
average revenue per unit may decrease even as the per unit dollar volume of
more mature units increases. We believe that coin processing volumes per unit
may also be affected by other factors such as public relations, advertising
and other activities that promote trials of the units, as well as the amount
of consumer traffic in the stores in which the units are located and
seasonality. We believe that seasonality affects coin processing volumes
because on a relative basis, coin processing volumes have been lower in the
months of January, February, September, and October. This trend mirrors the
seasonality patterns of our supermarket partners.
We formed a subsidiary, Coinstar International, Inc., in March 1998 to
explore expanding our operations internationally. Coinstar International is
piloting 58 Coinstar units in Canada to determine the viability of the
Canadian market for our services and is piloting 27 Coinstar units in the
United Kingdom.
We also formed a subsidiary, Meals.com, Inc. in December 1998 to explore the
development and deployment of e-services technology, including the in-store
Shopper kiosk. On February 10, 2000, Meals.com sold 5.5 million shares of its
Series A Convertible Preferred Stock, together with warrants to purchase 5.5
million shares of its common stock at an exercise price of $0.125 per share to
an outside investor group for $5.5 million, which represented approximately an
11% interest in the subsidiary. As part of the financing, we invested
$10.0 million in exchange for 10 million shares of Series A-1 Convertible
Preferred Stock. The holders of Series A Convertible Preferred Stock and
Series A-1 Convertible Preferred Stock generally have identical rights, except
that the holders of Series A Convertible Preferred Stock are entitled to one
vote per share while holders of Series A-1 Convertible Preferred Stock are
entitled to five votes per share on all matters to be voted on by the
Meals.com shareholders. In addition, the holders of the Series A and Series A-
1 Convertible Preferred Stock have a $5.5 million and $10.0 million
liquidation preference, respectively. Also in connection with the Meals.com
financing, we provided a $15.6 million credit facility. As of December 31,
2000, Meals.com had drawn the entire amount of the credit facility. We do not
anticipate increasing the credit facility to Meals.com. Interest accrues on
the credit facility at Imperial Bank's prime commercial lending rate plus 300
basis points.
21
Our direct operating expenses are comprised of the regional expenses
associated with Coinstar coin-counting unit operations and support and consist
primarily of coin pick-up and processing, field operations support and related
expenses, retail operations support and the amount of our service fee that we
share with our retail partners. Coin pick-up and processing costs, which
represent a large portion of direct operating expenses, vary based on the
level of total coin processing volume and the density of the units within a
region. We believe that while coin pick-up and processing costs are variable
based on units in service and coin volume generated, economies related to
these direct expense components can be achieved through increasing the density
of units in operation in regional markets. Field service operations and
related expenses vary depending on the number of geographic regions in which
Coinstar units are located and the density of the units within a region.
Regional sales and marketing expenses are comprised of ongoing marketing,
advertising and public relations efforts in existing market regions and
startup marketing expenses incurred to launch our services in new regional
markets. Product research and development expense consists of the development
costs of the Coinstar unit software, network applications, Coinstar unit
improvements and new product development. Selling, general and administrative
expenses are comprised of management compensation, administrative support for
field operations, the customer service center, sales and marketing support,
systems and engineering support, computer network operations, finance and
accounting, human resources and occupancy expenses. Depreciation and
amortization consists primarily of depreciation charges on Coinstar units and
amortization of intangibles, and to a lesser extent, depreciation on furniture
and fixtures, automobiles and computer equipment. Other income consists 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. 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 $126.5
million as of December 31, 2000. We expect to continue to evaluate new
marketing and promotional programs to increase the breadth and rate of
customer utilization of our service and to engage in systems and product
research and development. We expect these expenses will negatively impact our
operating results. We believe that our future 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 our limited operating history, unpredictability of the timing
of installations with retail partners and the resulting revenues, and the
continued market acceptance of our service 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.
Results of Operations
The following table shows revenue and expense as a percent of revenue for
the last three years:
Year Ended
December 31,
---------------------
2000 1999 1998
----- ----- -----
Revenue................... 100 % 100 % 100 %
Expenses:
Direct operating........ 46.7 50.0 55.7
Regional sales and
marketing.............. 11.0 8.2 7.9
Product research and
development............ 8.1 7.2 10.0
Selling, general and
administrative......... 25.4 19.3 29.6
Depreciation and
amortization........... 26.3 26.1 27.8
----- ----- -----
Loss from operations...... (17.5)% (10.8)% (31.0)%
22
Years Ended December 31, 2000 and 1999
Revenue
Revenue increased to $103.1 million in 2000 from $77.7 million in 1999. The
increase was due principally to the increase in the number of Coinstar units
in service during 2000 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 8,509 as of December 31, 2000 from 6,952 units as of
December 31, 1999. The total dollar value of coins processed worldwide
increased to $1.2 billion during 2000 from $873.4 million in 1999.
Direct Operating Expenses
Direct operating expenses increased to $48.2 million in 2000 from $38.8
million in 1999. 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, the increase in field
service personnel expenses associated with the hiring and training of new
field service personnel to support our growth and related expansion into 18
new regional markets during 2000, and an increase in revenue sharing with our
partners, which corresponds to a 32.6% increase in revenue from 1999 to 2000.
Direct operating expenses as a percentage of revenue decreased to 46.7% in the
2000 period from 50.0% in 1999. The decrease in direct operating expenses as a
percentage of revenue was the result of (i) the realization of coin pick-up
and processing cost economies from regional densities and utilization of
cheaper, more efficient coin pick-up methods, and (ii) a decrease in per unit
field service expenses as a percentage of revenue as we increased our density
in our existing markets.
Regional Sales and Marketing
Regional sales and marketing expenses increased to $11.4 million in 2000
from $6.4 million in 1999. The increase in regional marketing expense was the
result of an increased level of television advertising and other promotional
activity. Regional sales and marketing as a percentage of revenue increased to
11.0% in 2000 from 8.2% in 1999.
Product Research and Development
Product research and development expenses increased to $8.3 million in 2000
from $5.6 million in 1999. The increase in product research and development
was due primarily to the continued expansion and growth by Meals.com resulting
from its e-services initiatives. Product research and development as a
percentage of revenue increased to 8.1% in 2000 from 7.2% in 1999.
Selling, General and Administrative
Selling, general and administrative expense increased to $26.2 million in
2000 from $15.0 million in 1999. The principal component of such expenses was
employee compensation and the period-to-period increase reflects primarily an
investment in higher staffing levels needed to support our rapid growth and
expansion. Selling, general and administrative expense as a percentage of
revenue increased to 25.4% in 2000 from 19.3% in 1999, primarily as a result
of an increase in staffing levels for Meals.com as they continued investing in
and expanding their operations in 2000.
Depreciation and Amortization
Depreciation and amortization expense increased to $27.1 million in 2000
from $20.3 million in 1999. The increase was due primarily to the increase in
the installed base of Coinstar units and amortization of software development
costs. Depreciation and amortization as a percentage of revenue increased to
26.3% in 2000 from 26.1% in 1999, as a result of increased amortization of
intangible assets by Meals.com.
23
Other Income and Expense
We generated other income of $261,000 in 2000 due primarily to subleasing
our excess office space. In September 2000, the original sublessee vacated
this available excess office space and Meals.com has occupied this office
space since October 2000.
Interest income decreased to $2.0 million in 2000 from $2.4 million in 1999.
The decrease in interest income is attributable to a decrease in invested cash
balances in 2000 resulting from our repurchase of $34.0 million of our senior
subordinated discount notes during 1999.
Interest expense decreased to $8.5 million in 2000 from $11.3 million in
1999. The decrease was due primarily to the repurchase of $34.0 million of our
senior subordinated discount notes during 1999.
Net Loss
Net loss increased to $22.7 million in 2000 from $21.4 million in 1999. The
increase in the net loss was due primarily to an increase in expenses
associated with Meals.com. Meals.com spent the majority of 2000 focused on
developing an infrastructure to support its online and in-store consumer
services. Of the total net loss in 2000, $13.6 million was attributed to
Meals.com.
Net loss associated with our U.S. core coin processing business was $8.0
million in 2000 compared with a loss of $16.7 million in 1999. This decrease
was a result of an improvement in the direct contribution margin of our core
business from 50% in 1999 to 53% in 2000. The increase in the direct
contribution margin of our core business as well as a reduction in the rate of
growth of expenses reflects our improved operating leverage of the Coinstar
network. In the longer term, we expect that we will not be required to add as
much infrastructure as we have in the past to support our installed base and
as a result we expect our core business to achieve profitability as the direct
contribution margin from our larger base of installed units grows
proportionately faster than expenses. There can be no assurance, however, that
we will install a sufficient number of units or obtain sufficient market
acceptance to allow us to achieve or sustain profitability for our U.S. core
business.
Years Ended December 31, 1999 and 1998
Revenue
Revenue increased to $77.7 million in 1999 from $47.7 million in 1998. The
increase was principally due to the increase in the number of Coinstar units
in service during 1999, the increase in the volume of coins processed by the
units in service during this period and an 18.6% increase in the processing
fee effective December 1998. The total installed base of Coinstar units
increased to 6,952 as of December 31, 1999, from 4,813 units as of December
31, 1998. The total dollar value of coins processed worldwide increased to
$873.4 million during 1999 from $623.3 million in 1998.
Direct Operating Expenses
Direct operating expenses increased to $38.8 million in 1999 from $26.6
million in 1998. The increase in direct operating expenses was attributable
primarily to the increased coin pick-up and processing costs resulting from
the increased dollar volumes processed during the year, an increase in field
service personnel expenses associated with the hiring and training of new
field service personnel to support our growth and related expansion into 27
new regional markets during 1999, and an increase in revenue sharing with our
partners that corresponded to a 63% increase in revenue from 1998 to 1999. The
increase is also as a result of an increase in the revenue sharing percentage
from an effective rate of .50% in 1998 to a flat 1.0% in 1999. Direct
operating expenses as a percentage of revenue decreased to 50.0% in the 1999
period from 55.7% in 1998. The decrease in direct operating expenses as a
percentage of revenue resulted from (i) the realization of coin pick-up and
processing cost economies attributable to regional densities and utilization
of cheaper, more efficient coin pick-up methods, and (ii) a decrease in per
unit field service expenses as a percentage of revenue as we increased our
density in our existing markets.
24
Regional Sales and Marketing
Regional sales and marketing expenses increased to $6.4 million in 1999 from
$3.8 million in 1998. The increase in regional marketing expense was the
result of an increased level of television advertising and other promotional
activity. Regional sales and marketing as a percentage of revenue increased to
8.2% in 1999 from 7.9% in 1998.
Product Research and Development
Product research and development expenses increased to $5.6 million in 1999
from $4.7 million in 1998. The increase in product research and development
was primarily due to investments made in e-services initiatives. Product
research and development as a percentage of revenue decreased to 7.2% in 1999
from 10.0% in 1998.
Selling, General and Administrative
Selling, general and administrative expense increased to $15.0 million in
1999 from $14.1 million in 1998. The principal component of such expenses was
employee compensation and the period-to-period increase primarily reflects an
investment in higher staffing levels to support our rapid growth and
expansion. Selling, general and administrative expense as a percentage of
revenue decreased to 19.3% in 1999 from 29.6% in 1998. The decrease in
selling, general and administrative expense as a percentage of revenue was the
result of (i) increasing volumes processed by the network combined with (ii)
the realization of improved operating efficiencies.
Depreciation and Amortization
Depreciation and amortization expense increased to $20.3 million in 1999
from $13.2 million in 1998. The increase was primarily due to the increase in
the installed base of Coinstar units and amortization of software development
costs. Depreciation and amortization as a percentage of revenue decreased to
26.1% in 1999 from 27.8% in 1998. The decrease in depreciation and
amortization as a percentage of revenue was the result of increasing volumes
processed through the network.
Other Income and Expense
We generated other income of $104,000 in 1999 primarily due to subleasing
excess office space. On March 12, 1999, the sublessee vacated the lease, and
we entered into a new sublease in October 1999.
Interest income increased to $2.4 million in 1999 from $1.4 million in 1998.
The increase in interest income is attributed to an increase in invested cash
balances resulting from a follow-on stock offering completed in June 1999.
Interest expense increased to $11.3 million in 1999 from $10.8 million in
1998. The increase was primarily due to the compounding interest accretion on
the senior subordinated discount notes and amortization of the related
discount. No cash interest payments were due on the notes until April 2000.
Other expenses of $768,000 in 1999 related primarily to a litigation
settlement.
The loss related to the early retirement of debt of $3.2 million was related
to the repurchase of $34 million of high yield notes during 1999.
Net Loss
Net loss decreased to $21.4 million in 1999 from $24.0 million in 1998. The
decrease in the net loss was primarily due to an increase in our contribution
margin combined with a reduction in the rate of growth of expenses. As a
result, the reduction in net loss reflects improved operating leverage of the
Coinstar network. In the longer term, we expect that it will not be required
to add as much infrastructure as we have in the past to support our installed
base and as a result we expect to achieve profitability as our direct
contribution margin from our larger base of installed units grows
proportionately faster than expenses.
25
Income Taxes
At December 31, 2000, 1999 and 1998, we had net deferred tax assets of
approximately $44.2 million, $35.2 million and $28.0 million, respectively,
resulting primarily from net operating loss and credit carryforwards available
to offset future income tax obligations. Such federal carryforwards expire
through 2020. Based upon our history of operating losses and expiration dates
of the loss carryforwards, we have recorded a valuation allowance to the full
extent of our net deferred tax assets.
Liquidity and Capital Resources
As of December 31, 2000, we had cash and cash equivalents of $78.7 million
and working capital of $24.3 million. Cash and cash equivalents include $42.6
million of funds in transit to our retail partners, which represent amounts
owed to retail partners which is being processed by armored car carriers or
residing in Coinstar units. Net cash provided by operating activities was
$13.6 million for the twelve months ended December 31, 2000, compared to net
cash provided by operating activities of $21.7 million for 1999. The decrease
in cash provided by operating activities was the result of a $1.3 million
increase in our net loss offset by a $4.5 million decrease in the change in
accrued liabilities.
Net cash used by investing activities for the twelve months ended December
31, 2000 was $20.2 million compared to $41.1 million used in 1999. Capital
expenditures during the twelve months ended December 31, 2000, were $24.9
million compared with $36.5 million in 1999. Capital expenditures decreased
primarily due to the decreased rate of installations and therefore, purchases
of Coinstar units.
Net cash provided by financing activities for the twelve months ended
December 31, 2000 was $6.5 million, which primarily was the result of (i) the
minority interest investment of $5.5 million into our subsidiary, Meals.com,
and (ii) proceeds from the exercise of stock options and employee stock
purchases. Net cash provided by financing activities for 1999 was $60.5
million which was the result of (i) issuance of additional shares of common
stock with net proceeds of $93.6 million and (ii) proceeds from the exercise
of stock options and employee stock purchases, offset by early retirement of
long term debt.
On February 10, 2000, Meals.com sold 5.5 million shares of its Series A
Convertible Preferred Stock, together with warrants to purchase 5.5 million
shares of its common stock at an exercise price of $0.125 per share to an
outside investor group for $5.5 million, which represented approximately an
11% interest in the subsidiary. As part of the financing, we invested $10.0
million in exchange for 10 million shares of Series A-1 Convertible Preferred
Stock. The holders of Series A Convertible Preferred Stock and Series A-1
Convertible Preferred Stock generally have identical rights, except that the
holders of Series A Convertible Preferred Stock are entitled to one vote per
share while holders of Series A-1 Convertible Preferred Stock are entitled to
five votes per share on all matters to be voted on by the Meals.com
shareholders. In addition, the holders of the Series A and Series A-1
Convertible Preferred Stock have a $5.5 million and $10.0 million liquidation
preference, respectively. Also in connection with the Meals.com financing, we
provided a $15.6 million credit facility. As of December 31, 2000, Meals.com
had drawn the entire amount of the credit facility. We do not anticipate
increasing the credit facility to Meals.com. Interest accrues on the credit
facility at Imperial Bank's prime commercial lending rate plus 300 basis
points.
As of December 31, 2000, we had outstanding $61.0 million of our senior
subordinated discount notes after repurchasing a total of $34.0 million of the
outstanding notes in 1999. 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 December 31, 2000, we had secured irrevocable letters of credit with
two banks that totaled $6.8 million. These letters of credit, which expire at
various times through August 2001, are available to
26
collateralize certain obligations to third parties. As of December 31, 2000,
no amounts were outstanding under these letters of credit agreements.
On February 19, 1999, we entered into a credit agreement with Imperial Bank,
for itself and as agent of Bank Austria Creditanstalt Corporate Finance, Inc.
On September 26, 2000, we amended the credit agreement to release Bank Austria
from its obligations under the credit agreement. The amended credit agreement
provides for a credit facility of up to $13.0 million, consisting of a
revolving loan of $10.0 million and a term loan of $3.0 million. The amended
credit agreement expires in September 2006 and also releases us from our
obligation to maintain minimum deposits with Imperial Bank.
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 their warrant to
purchase 18,963 shares of our common stock.
In June 1999, we completed a public offering of 4,000,000 shares of common
stock at a purchase price of $22.375 per share for net proceeds of
approximately $83.8 million, net of issuance costs. The net proceeds received
have been and will continue to be used to expand the network in the United
States, to support planned expansion internationally, to develop and market
new products and product enhancements, for working capital and general
corporate purposes. In July 1999, the underwriters exercised their option to
purchase an additional 466,400 shares of common stock at a purchase price of
$22.375 per share for net proceeds of approximately of $9.8 million, net of
issuance costs.
On March 3, 1999, we acquired from Compucook, Inc., assets consisting of
Internet domain names, software, fixed assets, contracts, and web site
content. In consideration of the purchase, we issued 25,000 common stock
warrants at an exercise price of $15.63 per warrant, which expire on March 2,
2004. On April 15, 1999, we acquired from Nu World Marketing Limit, Inc.,
assets consisting of Internet domain names, fixed assets, contracts, and web
site content. As consideration for this purchase, we issued 25,000 shares of
common stock at $15.45 per share.
In October 1999, we issued 30,000 shares of our common stock in partial
consideration for a purchase option to purchase CoinBank Automated Systems,
Inc. Upon the expiration of the option, we decided not to buy CoinBank
Automated Systems, Inc.
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.
27
Quarterly Financial Results
The following table sets forth selected unaudited quarterly financial
information for Coinstar on a consolidated basis and operating data for the
U.S. core business for the last eight quarters. This consolidated information
has been prepared on the same basis as our unaudited consolidated financial
statements and includes, in the opinion of management, all normal and
recurring adjustments that management considers necessary for a fair statement
of the quarterly results for the periods. The operating results and data for
any quarter are not necessarily indicative of the results for future periods.
Three-month periods ended
---------------------------------------------------------------------------------
Dec. 31, Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31,
2000 2000 2000 2000 1999 1999 1999 1999
-------- --------- -------- -------- -------- --------- -------- ---------
(Dollars in thousands except per unit data)
Consolidated Financial
Information:
Revenue................. $ 28,630 $ 28,707 $ 24,714 $ 21,038 $ 21,960 $ 21,723 $ 18,258 $ 15,791
Expenses:
Direct operating....... 12,984 13,045 11,733 10,422 10,938 10,783 9,176 7,939
Regional sales and
marketing............. 2,402 4,906 3,567 493 2,756 1,294 1,012 1,318
Product research and
development........... 3,035 1,858 1,710 1,732 1,441 2,035 1,155 940
Selling, general and
administrative........ 8,748 6,911 5,502 5,057 4,135 3,877 3,628 3,381
Depreciation and
amortization.......... 7,638 6,852 6,409 6,166 5,934 5,698 4,580 4,103
-------- -------- -------- -------- -------- -------- -------- ---------
Loss from operations.... (6,177) (4,865) (4,207) (2,832) (3,244) (1,964) (1,293) (1,890)
Other income (expense),
net.................... (1,902) (1,481) (1,538) (1,359) (2,291) (1,939) (2,856) (2,646)
-------- -------- -------- -------- -------- -------- -------- ---------
Loss before minority
interest and
extraordinary item..... (8,079) (6,346) (5,745) (4,191) (5,535) (3,903) (4,149) (4,536)
Minority interest
related to convertible
preferred stock........ 669 461 288 249 -- -- -- --
-------- -------- -------- -------- -------- -------- -------- ---------
Loss before
extraordinary item..... (7,410) (5,885) (5,457) (3,942) (5,535) (3,903) (4,149) (4,536)
Extraordinary item:
Loss related to early
retirement of debt..... -- -- -- -- (2,507) (743) -- --
-------- -------- -------- -------- -------- -------- -------- ---------
Net loss................ $ (7,410) $ (5,885) $ (5,457) $ (3,942) $ (8,042) $ (4,646) $ (4,149) $ (4,536)
======== ======== ======== ======== ======== ======== ======== =========
Operating Data--U. S.
core business:
Number of new Coinstar
units installed during
the period............. 411 340 328 423 488 668 540 416
Installed base of
Coinstar units at end
of period.............. 8,424 8,013 7,673 7,345 6,922 6,434 5,766 5,226
Average age of network
for the period
(months)............... 27.6 26.2 24.5 22.9 21.4 20.3 19.8 19.0
Number of regional
markets................ 121 117 109 105 103 101 96 91
Dollar value of coins
processed.............. $314,797 $319,828 $275,512 $235,125 $245,315 $243,213 $204,629 $177, 258
Revenue................. 28,017 28,465 24,521 20,926 21,833 21,646 18,212 15,776
Annualized revenue per
average installed
unit(1)................ 13,616 14,539 13,118 11,740 13,052 14,158 13,350 12,717
Direct contribution(2).. 15,211 15,578 12,894 10,646 10,978 10,938 9,121 7,887
Direct contribution
margin (%)............. 54.3% 54.7% 52.6% 50.9% 50.3% 50.5% 50.1% 50.0%
Annualized direct
contribution per
average installed
unit(1)(2)............. $ 7,393 $ 7,957 $ 6,898 $ 5,973 $ 6,563 $ 7,153 $ 6,686 $ 6,357
Regional marketing...... 2,389 4,906 3,567 493 2,756 1,317 989 1,319
Research and
development............ 885 825 808 744 919 1,643 838 779
Selling, general and
administrative......... 5,289 4,275 3,987 4,075 3,167 3,094 3,178 3,193
EBITDA(3)............... 6,648 5,572 4,532 5,334 4,136 4,884 4,116 2,596
EBITDA margin (%)....... 24% 20% 19% 25% 19% 23% 23% 16%
- ---------------------
(1) Based on actual quarterly results annualized divided by the monthly
averages of units in operation over the applicable period.
(2) Direct contribution is defined as revenue less direct operating expenses.
We use direct contribution as a measure of operating performance to
assist in understanding our operating results. Direct contribution is not
a measure of financial performance under generally accepted accounting
principles (GAAP) and should not be considered in isolation or an
alternative to gross margin, income (loss) from operations, net income
(loss), or any other measure of performance under GAAP.
(3) EBITDA, as defined, 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.
28
Our coin processing volumes appear to be affected by seasonality that
mirrors the seasonality of our supermarket partners. In particular, coin
processing volumes have been lower in the months of January, February,
September and October. There can be no assurance, however, that such seasonal
trends will continue. Any projections of future seasonality are inherently
uncertain due to our lack of comparable companies engaged in the coin
processing business.
In addition to fluctuations in revenue resulting from factors affecting
customer usage, timing of unit installations will result in significant
fluctuations in quarterly results. The rate of installations does not follow a
regular pattern, as it depends principally on installation schedules
determined by agreements between us and our retail distribution partners,
variable length of partner trial periods and the planned coordination of
multiple partner installations in a given geographic region.
Quarterly losses from operations during the periods presented were the
result of higher direct operating expenses associated with the significant
increase in our installed base, higher depreciation and