<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For Three Month Period Ended March 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)
<TABLE>
<S> <C>
Delaware 91-3156448
(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)
</TABLE>
(425) 943-8000
(Registrant's telephone number, including area code)
----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
----------------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Class Outstanding at April 30, 2000
<S> <C>
Common Stock, $0.001 par value 20,224,011
</TABLE>
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<PAGE>
COINSTAR, INC. AND SUBSIDIARIES
FORM 10-Q
Index
<TABLE>
<C> <S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of March 31, 2000
(unaudited) and December 31, 1999.......................... Page 3
Consolidated Statements of Operations for the three month
periods ended March 31, 2000 and 1999 (unaudited).......... Page 4
Consolidated Statement of Stockholders' Equity for the
three month period ended March 31, 2000 (unaudited)........ Page 5
Consolidated Statements of Cash Flows for the three month
periods ended March 31, 2000 and 1999 (unaudited).......... Page 6
Notes to Consolidated Financial Statements for the three
month periods ended March 31, 2000 and 1999 (unaudited).... Page 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. Page 8
Item 3. Quantitative and Qualitative Disclosures About Market
Risk....................................................... Page 22
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K........................... Page 23
SIGNATURES........................................................... Page 25
EXHIBIT INDEX........................................................ Page 26
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
COINSTAR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------ ------------
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents......................... $ 81,884,555 $ 78,736,908
Short-term investments available for sale......... 1,034,495 9,294,825
Prepaid expenses and other current assets......... 3,680,792 2,337,456
------------ ------------
Total current assets............................ 86,599,842 90,369,189
PROPERTY AND EQUIPMENT:
Coinstar units.................................... 107,323,003 102,669,587
Computers......................................... 4,857,132 4,481,264
Office furniture and equipment.................... 1,352,043 1,241,198
Leased vehicles................................... 3,120,374 2,825,155
Leasehold improvements............................ 437,593 437,593
Coinstar components............................... 65,882 94,473
------------ ------------
117,156,027 111,749,270
Accumulated depreciation.......................... (49,225,646) (43,649,321)
------------ ------------
67,930,381 68,099,949
OTHER ASSETS........................................ 4,515,530 4,911,337
------------ ------------
TOTAL............................................... $159,045,753 $163,380,475
============ ============
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable............................... $ 3,835,421 $ 4,866,539
Accrued liabilities............................ 36,040,153 41,417,592
Current portion of long-term debt and capital
lease obligations............................. 695,271 649,640
------------- -------------
Total current liabilities.................... 40,570,845 46,933,771
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS..... 61,265,157 61,181,184
------------- -------------
Total liabilities............................ 101,836,002 108,114,955
COMMITMENTS AND CONTINGENCIES (Note 2)
MINORITY INTEREST................................ 1,167,721 --
STOCKHOLDERS' EQUITY:
Common stock................................... 158,369,919 157,737,504
Preferred stock................................ 3,898,301 --
Contributed capital for warrants and stock
options....................................... 1,497,439 1,316,128
Accumulated other comprehensive income (loss).. 1,121 (1,304)
Accumulated deficit............................ (107,724,750) (103,786,808)
------------- -------------
Total stockholders' equity..................... 56,042,030 55,265,520
------------- -------------
TOTAL............................................ $ 159,045,753 $ 163,380,475
============= =============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
COINSTAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Month Periods
Ended March 31,
------------------------
2000 1999
----------- -----------
<S> <C> <C>
REVENUE............................................. $21,037,493 $15,791,424
EXPENSES:
Direct operating................................... 10,421,840 7,938,563
Regional sales and marketing....................... 492,611 1,318,144
Product research and development................... 1,732,047 939,915
Selling, general and administrative................ 5,056,543 3,380,651
Depreciation and amortization...................... 6,166,226 4,102,747
----------- -----------
Loss from operations............................... (2,831,774) (1,888,596)
OTHER INCOME (EXPENSE):
Interest income.................................... 557,272 162,636
Interest expense................................... (1,979,831) (2,850,614)
Other income....................................... 63,724 42,119
----------- -----------
Net loss before minority interest.................. (4,190,609) (4,534,455)
Minority interest.................................. 252,667 --
----------- -----------
NET LOSS............................................ $(3,937,942) $(4,534,455)
=========== ===========
Net loss per share, basic and diluted............... $ (0.20) $ (0.30)
Weighted average shares outstanding, basic and
diluted............................................ 20,193,291 15,357,980
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
COINSTAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
For the Three Month Period Ended March 31, 2000
(Unaudited)
<TABLE>
<CAPTION>
Preferred Stock Accu.
Common Stock Series A Convertible Contributed Other
----------------------- -------------------- Capital for Comp. Accumulated
Shares Amount Shares Amount warrants Income Deficit Total
---------- ------------ --------- ---------- ----------- ------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, January 1,
2000................... 20,141,207 $157,737,504 -- $ -- $1,316,128 $(1,304) $ (103,786,808) $55,265,520
Issuance of shares under
employee stock purchase
plan................... 42,914 426,308 426,308
Exercise of stock
options................ 36,505 206,107 206,107
Issuance of shares -
Meals.com, Inc. ....... 5,500,000 3,898,301 3,898,301
Contributed capital for
warrants .............. 181,311 181,311
Comprehensive income
Other comprehensive
income
Unrealized loss on
short-term investments
available for sale.... (3,654) (3,654)
Unrealized gain on
foreign currency
translation........... 6,079 6,079
-----------
Other comprehensive
income................ 2,425
-----------
Net loss................ (3,937,942) (3,937,942)
-----------
Comprehensive income.... (3,935,517)
---------- ------------ --------- ---------- ---------- ------- -------------- -----------
BALANCE, March 31,
2000................... 20,220,626 $158,369,919 5,500,000 $3,898,301 $1,497,439 $ 1,121 $(107,724, 750) $56,042,030
========== ============ ========= ========== ========== ======= ============== ===========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
COINSTAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Month
Periods Ended March 31,
------------------------
2000 1999
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss............................................. $(3,937,942) $(4,534,455)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization...................... 6,166,226 4,102,747
Minority interest.................................. (252,667) --
Debt discount amortization......................... 46,661 2,765,950
Unrealized loss on short-term investments available
for sale.......................................... (3,654) (5,298)
Unrealized gain on foreign currency translation.... 6,079 (916)
Cash provided (used) by changes in operating assets
and liabilities:
Investment interest receivable..................... 83,960 79,528
Prepaid expenses and other current assets.......... (1,343,136) (500,466)
Other assets....................................... 178,740 (85,664)
Accounts payable................................... (1,033,878) 889,378
Accrued liabilities................................ (5,360,402) 721,960
----------- -----------
Net cash provided (used) by operating activities... (5,450,013) 3,432,764
INVESTING ACTIVITIES:
Sale of short-term investments..................... 8,176,369 2,004,140
Purchase of fixed assets........................... (5,268,024) (4,986,790)
Other.............................................. (263,809) (923)
----------- -----------
Net cash provided (used) by investing activities... 2,644,536 (2,983,573)
FINANCING ACTIVITIES:
Principal payments on long-term debt............... (179,291) (467,257)
Proceeds from sale of preferred stock, including
minority interest................................. 5,255,562 --
Proceeds from sale of common stock warrants,
including minority interest....................... 244,438 --
Financing costs associated with long-term credit
facility.......................................... -- (419,133)
Proceeds from exercise of stock options and
issuance of shares under employee stock purchase
plan.............................................. 632,415 614,214
----------- -----------
Net cash provided (used) by financing activities... 5,953,124 (272,176)
----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS................ 3,147,647 177,017
CASH AND CASH EQUIVALENTS:
Beginning of period................................ 78,736,908 37,688,205
----------- -----------
End of period...................................... $81,884,555 $37,865,222
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest........... $ 3,999,277 $ 109,731
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Purchase of vehicles financed by capital lease
obligation........................................ 302,148 308,235
Cashless exercise of warrants...................... -- 137,156
Purchase of assets with warrants................... -- 169,167
Issuance of warrants under revolving credit
facility.......................................... -- 723,211
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
COINSTAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three-Month Periods Ended March 31, 2000 and 1999
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The unaudited consolidated financial statements of
Coinstar, Inc. and its subsidiaries (the "Company") included herein reflect
all adjustments, consisting only of normal recurring adjustments which, in the
opinion of management, are necessary to present fairly the Company's
consolidated financial position, results of operations and cash flows for the
periods presented.
These financial statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission (the "SEC") and in
accordance with generally accepted accounting principles for interim financial
information. Certain information and footnote disclosures, normally included
in annual financial statements prepared in accordance with generally accepted
accounting principles, have been omitted pursuant to such SEC rules and
regulations. These financial statements should be read in conjunction with the
Company's audited financial statements and the accompanying notes included in
the Company's Form 10-K for the year ended December 31, 1999, filed with the
SEC. The results of operations for the three month period ended March 31, 2000
are not necessarily indicative of the results to be expected for any
subsequent quarter or for the entire fiscal year.
Principles of Consolidation: The financial statements include the accounts
of Coinstar, Inc. and its subsidiaries. All inter-company transactions have
been eliminated upon consolidation.
Loss Per Share: Because the results from operations reflect a net loss for
both quarters presented, basic and diluted loss per share is calculated based
on the same weighted average number of shares outstanding. Warrants of
1,027,652 and options of 2,606,919 have been excluded from the calculation
because they are antidilutive.
NOTE 2: TERMINATION OF SUPPLIER RELATIONSHIP
Through April 1999, Scan Coin AB of Malmo, Sweden was the Company's sole
source provider of its coin-counting device. Coinstar and Scan Coin have been
in a contract dispute since September 1998, at which time Scan Coin claimed
that the Company had breached the contract and made claims to certain of the
Company's intellectual property. On May 5, 1999, Scan Coin terminated its
agreement with the Company and reasserted the breach of contract claim and the
claim to certain of the Company's intellectual property. The parties have been
working to settle the dispute amicably since that time. There is no assurance,
however, that the disagreement will be settled amicably, and litigation may
commence.
NOTE 3: FUNDING OF SUBSIDIARY AND ISSUANCE OF OPTIONS
On February 10, 2000, Meals.com, Inc., the Company's e-services subsidiary,
sold 5.5 million shares of its Series A 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, Coinstar, Inc. invested $10.0 million of cash in exchange for 10
million shares of Series A-1 Preferred Stock. The holders of Series A
Preferred Stock and Series A-1 Preferred Stock generally have identical
rights, except that the holders of Series A Preferred Stock are entitled to
one vote per share while holders of Series A-1 Preferred Stock are entitled to
five votes per share on all matters to be voted on by the Meals.com, Inc.
stockholders. Also in connection with the Meals.com, Inc. financing, Coinstar,
Inc. provided a $15.6 million credit facility. At March 31, 2000, the credit
facility's available balance was $10.0 million. Interest accretes on the
credit facility at Imperial Bank's prime commercial lending rate plus 300
basis points.
On March 24, 2000, Meals.com, Inc. granted options to buy shares of its
common stock to its employees and non-employee directors of Coinstar, Inc.
Such options were issued with an exercise price equal to the fair
7
<PAGE>
market value of the common stock on the date of grant. Meals.com, Inc. has
recorded unearned compensation for the options issued to certain Coinstar,
Inc. employees and non-employee directors based on the requirements outlined
in SFAS No. 123, Accounting for Stock Based Compensation, and Emerging Issues
Task Force Bulletin No. 96-18, Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services. As required by FASB Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation, which was issued in March
2000, the unearned compensation has been eliminated in the consolidated
financial statements.
NOTE 4: BUSINESS SEGMENT INFORMATION
Operating segments as defined in SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information, are components of an enterprise for
which separate financial information is available and regularly reviewed by
the chief operating decision-maker.
The Company is organized into three reportable business segments which are
the United States core business, the International business and the E-services
business. Information about these three segments has been disclosed in the
table below.
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, 2000 March 31, 1999
-------------- --------------
(In thousands)
<S> <C> <C>
Revenue:
United States core business.................. $ 20,925 $15,776
International business....................... 98 15
E-services business.......................... 14 --
-------- -------
Total revenues............................. 21,037 15,791
======== =======
Net loss:
United States core business.................. (1,644) (4,088)
International business....................... (250) (322)
E-services business.......................... (2,044) (124)
-------- -------
Total net loss............................. (3,938) (4,534)
======== =======
Total assets:
United States core business.................. 159,575 99,573
International business....................... 734 95
E-services business.......................... 18,018 --
Intercompany eliminations.................... (19,281) (383)
-------- -------
Total assets............................... $159,046 $99,285
======== =======
</TABLE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The discussion in this Form 10-Q contains forward-looking statements
regarding us, our business, prospects and results of operations that involve
risks and uncertainties. Our actual business, prospects and results of
operations could differ materially from those discussed herein. Factors that
could cause or contribute to such differences include, but are not limited to,
those discussed herein as well as those discussed under the caption "Risk
Factors" herein and in our Form 10-K for the year ended December 31, 1999. You
are cautioned not to place undue reliance on these forward-looking statements,
which reflect management's analysis only as of the date hereof. We undertake
no obligation to publicly release the results of any revision to these
forward-looking statements, which may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events. You 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.
8
<PAGE>
Overview
We currently derive substantially all our revenue from coin processing
services generated by our installed base of Coinstar(R) coin-counting units
located in supermarket chains in 41 states across the United States. We
generate revenue based on a processing fee charged on the total dollar amount
of coins processed in a transaction. Coin processing fee revenue is recognized
at the time the customers' coins are counted by the Coinstar unit. Overall
revenue growth is 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, or that unit volumes will be affected by other factors. We expect
that as we continue to aggressively expand installations relative to the size
of our installed base, 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. Based on our limited operating history, 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 wholly owned subsidiary, Coinstar International, Inc., in March
1998 to explore expanding our operations internationally. Coinstar
International is piloting 28 Coinstar units in Canada to determine the
viability of the Canadian market for our services and is piloting 19 Coinstar
units in the United Kingdom. In addition, Coinstar International is
investigating the viability of our services in certain European countries.
We also formed a wholly owned subsidiary, Meals.com, Inc., in December 1998
to explore the development and deployment of e-services technology, including
the in-store Shopper(TM) kiosk. On February 10, 2000, Meals.com, Inc. sold 5.5
million shares of its Series A 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 of cash in exchange for 10 million shares of Series A-1
Preferred Stock. The holders of Series A Preferred Stock and Series A-1
Preferred Stock generally have identical rights, except that the holders of
Series A Preferred Stock are entitled to one vote per share while holders of
Series A-1 Preferred Stock are entitled to five votes per share on all matters
to be voted on by the Meals.com, Inc. stockholders. Also in connection with
the Meals.com, Inc. financing, we provided a $15.6 million credit facility. At
March 31, 2000, the credit facility's available balance was $10.0 million.
Interest accretes on the credit facility at Imperial Bank's prime commercial
lending rate plus 300 basis points.
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, accounting,
human resources and occupancy expenses. Depreciation and amortization consists
9
<PAGE>
primarily of depreciation charges on Coinstar units and, to a lesser extent,
depreciation on furniture and fixtures, automobiles, computer equipment and
amortization of intangibles. Other income consists of rental income from a
sublease of unused 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 $107.7
million as of March 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 periods ended:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------
2000 1999
--------- ---------
<S> <C> <C>
Revenue............................................ 100.0 % 100.0 %
Expenses:
Direct operating................................. 49.5 50.3
Regional sales and marketing..................... 2.3 8.3
Product research and development................. 8.2 6.0
Selling, general, and administrative............. 24.0 21.4
Depreciation and amortization.................... 29.3 26.0
--------- ---------
Loss from operations............................... (13.50)% (12.0)%
========= =========
</TABLE>
Three Months Ended March 31, 2000 and 1999
Revenue
Revenue increased by 33% to $21.0 million for the quarter ended March 31,
2000 from $15.8 million in the comparable 1999 period. The increase was due
principally to the increase in the number of Coinstar units in service during
the 2000 period. The installed base of Coinstar units increased to 7,392 as of
March 31, 2000 from 5,241 units as of March 31, 1999.
Direct Operating Expenses
Direct operating expenses increased to $10.4 million for the quarter ended
March 31, 2000 from $7.9 million in the comparable 1999 period. The increase
in direct operating expenses was primarily attributable to (1) an increase in
revenue sharing with our partners as a result of a 33% increase in revenue
compared to the first quarter of 1999 and (2) an increase in field service
personnel and direct support expenses associated with our growth and expansion
into 21 new regional markets. Direct operating expenses as a percentage of
revenue decreased slightly to 49.5% in the quarter ended March 31, 2000 from
50.3% in the comparable 1999 period. The decrease in direct operating expenses
as a percentage of revenue was the result of (1) the realization of coin pick-
up and processing cost economies from increased regional densities and
utilization of cheaper, more efficient coin pick-up methods, and (2) the
decline in field service expenses per unit as a percentage of revenue brought
about by our increased density in our existing markets.
10
<PAGE>
Regional Sales and Marketing
Regional sales and marketing expenses decreased to $493,000 for the quarter
ended March 31, 2000 from $1.3 million in the comparable 1999 period. The
decrease in regional marketing expense was the result of decreased advertising
in selected markets. Regional sales and marketing as a percentage of revenue
decreased to 2.3% in the quarter ended March 31, 2000 from 8.3% in the
comparable 1999 period. The decrease in regional sales and marketing as a
percentage of revenue was the result of (1) increasing volumes processed by
the network and (2) lower advertising costs. We anticipate increasing
marketing expenses over the remaining quarters of the year as a result of
increased marketing initiatives.
Product Research and Development
Product research and development expenses increased to $1.7 million for the
quarter ended March 31, 2000 from $940,000 in the comparable 1999 period. The
increase in product research and development costs was primarily due to
investments made in e-services initiatives. Product research and development
as a percentage of revenue increased to 8.2% in the quarter ended March 31,
2000 from 6.0% in the comparable 1999 period.
Selling, General and Administrative
Selling, general and administrative expense increased to $5.1 million for
the quarter ended March 31, 2000 from $3.4 million in the comparable 1999
period. Selling, general and administrative as a percentage of revenue
increased to 24.0% in the quarter ended March 31, 2000 from 21.4% in the
comparable 1999 period. The increase in selling, general, and administrative
as a percentage of revenue was the result of (1) increasing volumes processed
by the network combined with (2) the investments in Meals.com, Inc. marketing
and staffing.
Depreciation and Amortization
Depreciation and amortization expense increased to $6.2 million for the
quarter ended March 31, 2000 from $4.1 million in the comparable 1999 period.
The increase was primarily due to the increase in the installed base of
Coinstar units and amortization of software development during the period.
Depreciation and amortization as a percentage of revenue increased to 29.3% in
the quarter ended March 31, 2000 from 26.0% in the comparable 1999 period. The
increase in depreciation and amortization as a percentage of revenue was the
result of the increase in installed units over the periods and the
amortization of software development costs related to our Meals.com, Inc.
subsidiary.
Other Income and Expense
We generated other income of $64,000 for the quarter ended March 31, 2000
primarily due to the subleasing of excess office space.
Interest income increased to $557,000 for the quarter ended March 31, 2000
from $163,000 in the comparable 1999 period. The increase in interest income
is attributed to an increase in invested cash balances during the period
resulting from a follow-on stock offering completed in June 1999.
Interest expense decreased to $2.0 million for the quarter ended March 31,
2000 from $2.9 million in the comparable 1999 period. The decrease was
primarily due to the reduced accretion of the Senior Subordinated Discount
Notes due 2006 since $34 million was repaid during 1999 using proceeds from
the follow-on stock offering.
Net Loss
Net loss decreased to $3.9 million for the quarter ended March 31, 2000 from
$4.5 million in the comparable 1999 period. The decrease in the net loss was
primarily due to an increase in our direct contribution (i.e., revenue minus
direct operating expenses) combined with a reduction in the rate of growth of
expenses. As a result, the
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reduction in net loss reflects the operating leverage of the Coinstar network
resulting from the relatively fixed nature of a number of our costs. 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 expect to achieve profitability as our revenue from our larger base of
installed units grows proportionately faster than our 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.
Liquidity and Capital Resources
As of March 31, 2000, we had cash and cash equivalents of $81.9 million,
short-term investments of $1.0 million and working capital of $46.0 million.
Cash and cash equivalents include $29.7 million of funds in transit, which
represent amounts being processed by armored car carriers or residing in
Coinstar units. Net cash used by operating activities was $5.5 million for the
three months ended March 31, 2000, compared to net cash provided by operating
activities of $3.4 million for 1999. The increase in cash used by operating
activities quarter over quarter was primarily the result of an $8.0 million
decrease in accounts payable and accrued liabilities and a $2.1 million
increase in depreciation and amortization offset slightly by a $2.7 million
reduction in debt discount amortization.
Net cash provided by investing activities for the three months ended March
31, 2000 was $2.6 million compared to $3.0 million used in 1999. Capital
expenditures during the three months ended March 31, 2000 were $5.3 million
and in 1999 were $5.0 million. Capital expenditures increased primarily due to
the increased purchases of Coinstar units. Net cash provided by financing
activities for the three months ended March 31, 2000 was $6.0 million, which
primarily was the result of (1) proceeds from the sale of preferred stock and
(2) proceeds from the exercise of stock options and employee stock purchases,
offset by (3) payments on long-term debt. Net cash used by financing
activities for 1999 was $272,000, which was the result of the proceeds of the
exercise of employee stock options and stock purchases, offset by the
repayment of long-term debt, and financing costs associated with the long-term
credit facility.
With respect to financing activities, we completed a public offering of
4,000,000 shares of common stock in June 1999 at a purchase price of $22.375
per share for proceeds, net of issuance costs, of approximately $83.8 million.
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.
As of March 31, 2000, we had available secured irrevocable letters of credit
with three banks that totaled $6.6 million. These letters of credit, which
expire through June 30, 2000, are available to collateralize certain
obligations to third parties. As of March 31, 2000, no amounts were
outstanding under these letters of credit agreements.
As of March 31, 2000, we had outstanding $61.0 million of our senior notes.
We paid our first cash interest payment of $4.0 million on March 31, 2000. We
will have debt service obligations of over $7.9 million per year until October
2006 when the principal amount of $61.0 million will be due. The Indenture
governing the notes contains 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.
On February 10, 2000, Meals.com, Inc. sold 5.5 million shares of its Series
A 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 of cash in exchange for 10 million shares of Series A-1 Preferred
Stock. The holders of Series A Preferred Stock and Series A-1 Preferred Stock
generally have identical rights, except that the holders of Series A Preferred
Stock are entitled to one vote per share while holders of Series A-1 Preferred
Stock are entitled to five votes per share on all matters to be voted on by
the Meals.com, Inc. stockholders. Also in connection with the Meals.com, Inc.
financing, we provided a $15.6 million credit facility.
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At March 31, 2000, the credit facility's available balance was $10.0 million.
Interest accretes on the credit facility at Imperial Bank's prime commercial
lending rate plus 300 basis points.
We believe existing cash equivalents, short-term investments, and our $25.0
million credit agreement will be sufficient to fund our cash requirements and
capital expenditure needs for at least the next 12 months for the continued
expansion of the domestic Coinstar network at the recent installation rate, to
continue to fund the pilot deployment of Coinstar units internationally, and
to fund the development and marketing of new products and enhancements. 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 be increased. 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
success of our marketing initiatives, the level of market acceptance of our
service, the feasibility of international expansion, and potential new product
and service offerings and product and service enhancements.
Quarterly Financial Results
The following table sets forth selected unaudited quarterly financial
information and operating data for the last eight quarters. This information
has been prepared on the same basis as our unaudited consolidated financial
statements and includes, in the opinion of management, all normal and
recurring adjustments that management considers necessary for a fair statement
of the quarterly results for the periods. The operating results and data for
any quarter are not necessarily indicative of the results for future periods.
<TABLE>
<CAPTION>
Three-month periods ended
------------------------------------------------------------------------------
Mar. 31, Dec. 31, Sep. 30, June 30, Mar. 31, Dec. 31, Sep. 30, June 30,
2000 1999 1999 1999 1999 1998 1998 1998
-------- -------- -------- -------- -------- -------- -------- --------
(Dollars in thousands except per unit data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statements of Operations Data
Revenue............................... $ 21,037 $ 21,959 $ 21,723 $ 18,258 $ 15,791 $ 14,802 $ 13,576 $ 10,472
Expenses:
Direct operating..................... 10,422 10,938 10,783 9,176 7,939 7,458 7,141 6,142
Regional sales and marketing......... 493 2,756 1,294 1,012 1,318 1,077 930 854
Product research and development..... 1,732 1,441 2,035 1,155 940 1,138 867 1,329
Selling, general and administrative.. 5,056 4,135 3,877 3,628 3,381 3,579 3,531 3,726
Depreciation and amortization........ 6,166 5,934 5,698 4,580 4,103 3,669 3,635 3,120
-------- -------- -------- -------- -------- -------- -------- --------
Loss from operations.................. $ (2,832) $ (3,245) $ (1,964) $ (1,293) $ (1,890) $ (2,119) $ (2,528) $ (4,699)
======== ======== ======== ======== ======== ======== ======== ========
Other Data: United States Core Business
Number of new Coinstar units installed
during the period.................... 423 488 668 540 416 375 406 498
Installed base of Coinstar units at
end of period........................ 7,345 6,922 6,434 5,766 5,226 4,810 4,435 4,029
Average age of network for the period
(months)............................. 22.9 21.4 20.3 19.8 19.0 17.6 15.9 14.8
Number of designated marketing areas
(DMA's).............................. 83 83 80 72 62 57 56 48
Dollar value of coins processed....... $235,125 $245,315 $243,213 $204,629 $177,258 $187,241 $180,893 $139,625
Revenue............................... 20,926 21,833 21,646 18,212 15,776 14,792 13,567 10,472
Annualized revenue per average
installed unit(1).................... 11,740 13,052 14,158 13,350 12,717 12,936 12,704 11,052
Direct contribution(2)................ 10,646 11,363 11,469 9,312 7,887 7,334 6,426 4,330
Direct contribution margin............ 50.9% 52.1% 53.0% 51.1% 50.0% 49.6% 47.4% 41.4%
Annualized direct contribution per
average installed unit(1)(2)......... $ 5,973 $ 6,793 $ 7,501 $ 6,826 $ 6,357 $ 6,414 $ 6,017 $ 4,570
EBITDA(3)............................. 5,334 4,046 4,883 4,116 2,596 1,910 1,213 (1,339)
Other Data: International business
Revenue............................... 98 88 73 46 15 11 9 --
Total operating expenses.............. 331 382 283 496 335 369 116 241
Other Data: E-Services business
Revenue............................... 14 39 5 -- -- -- -- --
Total operating expenses.............. 1,841 1,159 1,010 469 122 -- -- --
</TABLE>
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- --------
(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 as an
alternative to gross margin, income (loss) from operations, net income
(loss), or any other measure of performance under GAAP.
(3) EBITDA represents earnings before interest expense, income taxes,
depreciation, amortization and other income/expense. EBITDA, as defined,
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.
Based on our limited operating history, we believe that coin processing
volumes have been affected by seasonality. In particular, 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. There can be no assurance, however, that such seasonal trends will
continue. Any projections of future seasonality are inherently uncertain due
to our limited operating history and the 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 amortization expense
from the expansion of the installed base and the significantly higher level of
systems infrastructure and management personnel to support our accelerated
growth. We expect to continue to incur substantial operating losses from
operations as we continue to increase our installed base of Coinstar units.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities. This pronouncement requires an entity to
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. While
management is continuing to evaluate the potential impacts of the standard, as
amended, we believe the impact of adoption will not be material to the
financial statements, taken as a whole. SFAS No. 133, as amended by SFAS No.
137, is effective for fiscal years beginning after June 15, 2000.
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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 in 1991. Our net
loss was $29.6 million for 1997, $24.0 million for 1998, and $21.4 million for
1999. As of March 31, 2000, we had an accumulated deficit of $107.7 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 and depreciation and amortization. We expect to continue to incur
operating losses as we continue to increase our installed base of Coinstar
units and seek to develop and market new products, services and enhancements,
including the development and deployment of our electronic commerce
technology, including Meals.com and the in-store Shopper kiosk.
We have a limited operating history and face uncertainty in our ability to
become a profitable company. After several years of development, we commenced
commercial deployment of Coinstar units in 1994 and placed approximately 78%
of our current installed base in 1997, 1998 and 1999. Therefore, there is
limited historical financial information on which to base an evaluation of our
performance. You should consider our prospects in light of the risks, expenses
and difficulties frequently encountered by companies in an early stage of
development and operation, particularly companies in new or rapidly evolving
markets. We cannot be certain that we will install a sufficient number of our
Coinstar units or obtain sufficient market acceptance to allow us to achieve
or sustain profitability, or generate sufficient cash flow to meet our capital
and operating expenses and debt service obligations.
Our coin processing service is our major source of revenue and our current
market is limited. 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, market acceptance of our coin processing service
is critical to our future success. Since there is only a limited current
market for our coin processing service, we cannot assure you that an
acceptable level of demand will be achieved or sustained. If sufficient demand
for our coin processing service does not develop due to lack of market
acceptance, technological change, competition 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. 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.
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 on customer utilization of our service. Our future
operating results will depend upon many other factors, including:
. the level of product and price competition,
. the processing fee we charge consumers to use our service, which we
increased to 8.9% in December 1998 and which may change again in the
future,
. the amount of our processing fee that we share with our retail partners,
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. 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, Inc.,
. our ability to enter into and penetrate new international markets, such
as the United Kingdom, Canada, the European Union and other selected
foreign markets,
. the timing of product enhancements, activities of and acquisitions by
competitors,
. the ability to hire additional employees, and
. the timing of such hiring and the ability to control costs.
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 reports,
. industry developments,
. market acceptance of the Coinstar service by retail partners and
consumers, and
. economic and other external factors.
In addition, the securities markets have from time to time experienced
significant price and volume fluctuations that are unrelated to the operating
performance of particular companies. These market fluctuations may seriously
harm the market price of our common stock.
Our business is dependent on continued market acceptance by consumers. We
are substantially dependent on continued market acceptance of our coin
processing service by consumers. The self-service coin processing market is
relatively new and evolving and we cannot predict the future growth rate and
size of this market. While consumers to date have been somewhat receptive to
our existing installed base of Coinstar units, we cannot be certain that the
operating results of the installed units will continue to be favorable or that
past results will be indicative of future market acceptance of our service.
We believe that market acceptance of the Coinstar unit is dependent on the
consumer's perception that the units are conveniently located, easy to use,
accurate and reliable. Even if we are successful in promoting awareness of the
Coinstar unit among consumers, consumers may not utilize the Coinstar units in
sufficient numbers and frequency to make us profitable. In addition, the
increasing use of alternatives to coin and currency transactions such as
credit and debit cards, checks, wire transfers, smart cards and other forms of
electronic payment may adversely affect market acceptance and ongoing use of
the Coinstar service. If our coin-processing service does not achieve general
market acceptance among consumers or does so less rapidly than expected, our
business, financial condition and results of operations and ability to achieve
sufficient cash flow to service our indebtedness could be seriously harmed.
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<PAGE>
Our business is dependent on our retail partners, which are primarily
supermarket chains. Market acceptance of the Coinstar unit depends on the
willingness of potential retail partners to agree to installation and
retention of Coinstar units in their stores, primarily supermarkets. We
believe that market acceptance by potential retail partners will depend on our
ability to demonstrate the utility of the Coinstar unit as a customer service
and as a means to provide other tangible benefits to potential and existing
retail partners, including increased customer traffic and customer spending in
the form of voucher dollars in the store. If our service does not achieve
market acceptance, especially among supermarket chains, or does so less
rapidly than expected, our business, financial condition and results of
operations and ability to achieve sufficient cash flow to service our
indebtedness could be seriously harmed.
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 two supermarket chains, The
Kroger Co. and Safeway, Inc., accounted for approximately 32% and 11%,
respectively, of our revenue in 1999. (In May 1999, Kroger and Fred Meyer
merged to become The Kroger Co.). In the quarter ended March 31, 2000, these
two chains accounted for approximately 29% and 12%, respectively, of our
revenue. The termination of any one or more of our contracts with 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. Based on our limited operating
history, 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 in use 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, our limited operating history, and the lack of comparable
companies engaged in the coin processing business.
The timing and number of Coinstar units installed 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 precede, or are not followed by, increased revenue, our operating
results would be seriously harmed.
We have substantial indebtedness. As of March 31, 2000, we had outstanding
indebtedness of $62.0 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 or when we will have sufficient resources to meet our
debt service obligations. If we are unable to generate sufficient cash flow to
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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, including
our ability to obtain additional financing in the future for working capital,
capital expenditures, product research and development, acquisitions and other
general corporate purposes may be materially limited or impaired. 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 increasingly competitive. We are the first company to provide
a national network of self-service coin processing machines that provide a
fun, convenient, accurate and reliable means for consumers to convert loose
coins into cash. 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
may also compete with supermarket retailers that decide to 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 have longer operating histories, greater
name recognition, larger customer bases and significantly greater financial,
technical, marketing and public relations resources than we have. These
competitors may be able to undertake more extensive marketing campaigns, adopt
more aggressive pricing policies and make more attractive offers to consumers
and businesses. Our competitors might succeed in developing technologies,
products or services that are more effective, less costly or more widely used
than those that have been or are being developed by us or that would render
our technologies or products obsolete or noncompetitive. We cannot be certain
that we will be able to compete effectively with current or future
competitors. Competitive pressures could seriously harm our business,
financial condition and results of operations and our ability to achieve
sufficient cash flow to service our indebtedness.
The success of our potential new services and products is uncertain. We have
committed, and expect to continue to commit, significant resources and capital
to develop and market existing product and service enhancements and new
products and services such as through value-added services and promotions. Two
examples are Meals.com and the in-store Shopper kiosk. The products and
services offered by Meals.com are relatively untested, and we cannot assure
you that we will achieve market acceptance for any such products and services.
In addition, the in-store Shopper kiosk is in early trials. Moreover, these
and other new products and services may be subject to significant competition
with offerings by potential Internet competitors in addition to companies that
compete in our coin processing business. Many of these potential Internet
competitors have significantly greater technological expertise and financial
and other resources than we do. In addition, new products, services and
enhancements may pose a variety of technical challenges and require us to
enhance the
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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.
Our failure to manage growth could harm our business. We have experienced
rapid growth and intend to continue to expand our operations aggressively. The
growth in the size and scale of our business has placed, and we expect it will
continue to place, significant demands on our operational, administrative and
financial personnel and operating systems. Our additional planned expansion
may further strain management and other resources. Our ability to manage
growth effectively will depend on our ability to improve our operating
systems, to expand, train and manage our employee base, to identify additional
manufacturing capacity and to develop additional service capacity. In
addition, we will be required to establish relationships with additional
third-party service providers. We may be unable to effectively manage the
expansion of our operations, to implement and develop our systems, procedures
or controls, to adequately support our operations or to achieve and manage the
currently projected installations. If we are unable to manage growth
effectively, our business, financial condition and results of operations and
our ability to achieve sufficient cash flow to service our indebtedness could
be seriously harmed.
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 significantly 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 the manufacture of 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 our contracts with them 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 service
in the event of sudden disruption in service from an armored carrier company.
Any failure by us to maintain our existing 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
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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 nine United States patents and one International patent
relevant to aspects of self-service coin processing.
We cannot assure you that any of our patents will be held valid if
challenged, that any pending patent applications will issue, or that other
parties will not claim rights in or ownership of our patents and other
proprietary rights. Moreover, patents issued to us may be circumvented or fail
to provide adequate protection. Our competitors might independently develop or
patent technologies that are substantially equivalent or superior to our
technologies.
Since patent applications in the United States are not publicly disclosed
until the patent is issued, others may have filed applications, which, if
issued as patents, could cover our products. We cannot be certain that others
will not assert patent infringement claims or claims of misappropriation
against us based on current or pending United States and/or foreign patents,
copyrights or trade secrets or that such claims will not be successful. In
addition, defending our company and our retail partners against these types of
claims, regardless of their merits, could require us to incur substantial
costs and divert the attention of key personnel. Parties making these types of
claims may be able to obtain injunctive or other equitable relief which could
effectively block our ability to provide our coin processing service and use
our processing equipment in the United States and abroad, and could result in
an award of substantial damages. In the event of a successful claim of
infringement, we may need or be required to obtain one or more licenses from,
as well as grant one or more licenses to, others. We cannot assure you that we
could obtain necessary licenses from others at a reasonable cost or at all.
We 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 Canada 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.
Our expansion into Europe will present challenges different from those faced
in the United States. We expect to face greater competition than currently is
the case in the United States because banks in Europe typically offer coin-
counting services to their customers and most of the world's self-service
coin-counting machine manufacturers are located in Europe. Some of these
manufacturers have been involved in attempts to set up networks similar to
ours. In addition, local laws and market conditions may require us to change
our fee
20
<PAGE>
structure. We also will face a number of technical challenges as we attempt to
expand into Europe. In several areas, close national borders may require that
our units be able to handle as many as six different national coin sets, as
well as the new Euro coin. Supermarkets in Europe tend to be smaller than
those in the United States. Because of this, floor space is more of an issue
than in the typical supermarket in the United States. As a result, it may be
necessary for us to reduce the size of our unit to succeed in Europe. Reducing
our unit size could present technical challenges and the smaller capacity that
might result from a smaller unit could increase operating costs in servicing
the units. Many local laws do not permit stores to be operated on a 24-hour,
seven-day per week basis. This could reduce volumes and present challenges in
our servicing of the units. We also expect to face higher telecommunications
costs in Europe than in the United States, and a European network may need to
make extensive use of cellular communications.
We depend upon key personnel and need to hire additional personnel. Our
performance is substantially dependent on the continued services of our
executive officers and key employees, all of whom we employ on an at-will
basis. Our long-term success will depend on our ability to recruit, retain and
motivate highly skilled personnel. Competition for such personnel is intense.
We have at times experienced difficulties in recruiting qualified personnel,
and we may experience difficulties in the future. On November 30, 1999 we
announced that Kirk Collamer, our chief financial officer, was resigning and
his resignation was effective on February 29, 2000. The inability to attract
and retain 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. Currently, we
maintain a "key man" life insurance policy on our chairman Jens Molbak, in the
amount of $2.0 million.
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.
The communications network on which we rely is not owned by us and is
subject to service disruptions. Further, while we have taken significant steps
to protect the security of our network, any breach of security whether
intentional or from a computer virus could seriously harm us. Any service
disruptions, either due to errors or delays in our software or computing
systems or interruptions or breaches in the communications network, or
security breaches of the system, could seriously harm our business, financial
condition and results of operations and ability to achieve sufficient cash
flow to service our indebtedness.
We must keep pace with rapid technological changes to remain
competitive. The self-service coin processing market is relatively new and
evolving. We anticipate that, as the market matures, it will be subject to
technological change, new services and product enhancements, particularly as
we expand our service offerings. Accordingly, our success may depend in part
upon our ability to keep pace with continuing changes in technology and
consumer preferences while remaining price competitive. Our failure to develop
technological improvements or to adapt our products and services to
technological change on a timely basis could, over time,
21
<PAGE>
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. Provisions of our certificate of incorporation, bylaws and rights plan
and of Delaware law could make it more difficult for a third party to acquire
us, even if doing so would be beneficial to our stockholders.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are subject to the risk of fluctuating interest rates in the normal
course of business. Our major market risk relates to short-term investments,
which have a floating rate of interest. These investments are financed through
fixed rate debt. The relationship between fixed and floating rates debt varies
depending on market conditions. We do not enter into speculative derivative
transactions or leveraged swap agreements.
The table below presents principal (or notional) amounts and related
weighted average interest rates outstanding at each of the respective balance
sheet dates. All items described in the table are non-trading and are stated
in U.S. dollars.
<TABLE>
<CAPTION>
Period Ended Year Ended December 31,
In Thousands March 31, ----------------------------------------------
Interest Rate Risk 2000 2000 2001 2002 2003 Thereafter
- ------------------ ------------ ------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Assets
Short-term
investments.......... $ 986 -- -- -- -- --
Average interest
rate................. 5.56% -- -- -- -- --
Liabilities
Capital lease
obligations.......... $ 1,489 $ 961 $ 353 $ 7 -- --
Average interest
rate................. 10.13% 10.10% 10.02% 10.41% -- --
Fixed long-term debt.. $60,980 $60,980 $60,980 $60,980 $60,980 $60,980
Average interest
rate................. 13.0% 13.0% 13.0% 13.0% 13.0% 13.0%
Variable senior
revolving debt....... $ 500 $ 500 $ 500 $ 500 $ 500 $ 500
Average interest
rate(*).............. 11.0% 11.0% 11.0% 11.0% 11.0% 11.0%
</TABLE>
- --------
* Interest rate represents Imperial Bank's prime rate plus 200 basis points
(11.0% at March 31,2000).
22
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
3.1(1) Amended and Restated Certificate of Incorporation of the Registrant in
effect after the closing of the initial public offering.
3.2(1) Amended and Restated Bylaws of the Registrant.
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2(1) Specimen Stock Certificate.
4.3(1) Second Amended and Restated Investor Rights Agreement, dated August
27, 1996, between the Registrant and certain investors, as amended
October 22, 1996.
4.4(1) Indenture between Registrant and The Bank of New York dated October 1,
1996.
4.5(1) Warrant Agreement between Registrant and The Bank of New York dated
October 22, 1996.
4.6(1) Notes Registration Rights Agreement between Registrant and Smith
Barney Inc. dated October 22, 1996.
4.7(1) Warrant Registration Rights Agreement between Registrant and Smith
Barney Inc. dated October 22, 1996.
4.8(1) Specimen 13% Senior Discount Note Due 2006.
4.9(3) Rights Agreement dated as of November 12, 1998 between Registrant and
American Securities Transfer and Trust, Inc.
4.10(3) Registrant's Certificate of Designation of Series A Preferred Stock.
Reference is made to Exhibit A of Exhibit 4.9.
4.11(3) Form of Rights Certificate. Reference is made to Exhibit B of Exhibit
4.9.
4.12(4) Credit Agreement, dated February 19, 1999, between Coinstar, Inc. and
Imperial Bank, for itself and as agent for Bank Austria Creditanstalt
Corporate Finance, Inc.
4.13(4) Form of Warrant, dated February 19, 1999, issued to Imperial Bank.
4.14(4) Form of Warrant, dated February 19, 1999, issued to Bank Austria
Creditanstalt Corporate Finance, Inc.
4.15(4) Registration Rights Agreement dated February 19, 1999, between
Coinstar, Inc. and Imperial Bank.
4.16(4) Registration Rights Agreement dated February 19, 1999, between
Coinstar, Inc. and Bank Austria Creditanstalt Corporate Finance, Inc.
4.17(5) June 7, 1999 amendment to Credit Agreement, dated February 19, 1999.
4.18(5) June 14, 1999 limited waiver to Credit Agreement dated February 19,
1999.
4.19(6) Second Amendment to Credit Agreement, Consent and Limited Waiver dated
September 21, 1999.
4.20(8) Senior Secured Note dated February 10, 2000, executed by Meals.com,
Inc. on behalf of Coinstar, Inc.
10.1(7) Registrant's Amended and Restated 1997 Equity Incentive Plan.
10.2(7) Registrant's Amended and Restated 1997 Employee Stock Purchase Plan.
10.3(7) Registrant's Amended and Restated 1997 Non-Employee Directors' Stock
Option Plan.
10.4(1) Form of Indemnity Agreement between the Registrant and its executive
officers and directors.
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
10.5(1) Series E Preferred Stock and Warrant Purchase Agreement between
Registrant and Acorn Ventures, Inc., dated August 27, 1996.
10.6(1) Office Building Lease between Registrant and Factoria Heights dated
June 1, 1994, as amended on January 24, 1997.
10.7(1) Sublease between Registrant and Maruyama U.S., Inc. dated January 15,
1997.
10.8(1) Lease agreement between Registrant and Spieker Properties, L.P. dated
January 29, 1997.
10.9(2) Manufacturing Agreement between Registrant and SeaMed Corporation
dated May 14, 1998.
10.10(1) Purchase Agreement between Registrant and Smith Barney Inc. dated
October 22, 1996.
27.1 Financial Data Schedule.
</TABLE>
- --------
(1) Incorporated by reference to the Registrant's Registration Statement on
Form S-2 (No. 333-33233).
(2) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the Quarter Ended June 30, 1998.
(3) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the Quarter Ended September 30, 1998.
(4) Incorporated by reference to the Registrant's Report on Form 8-K filed by
the Registrant on March 3, 1999.
(5) Incorporated by reference to the Registrant's Quarterly Report on Form
10Q for the Quarter Ended June 30, 1999.
(6) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the Quarter Ended September 30, 1999.
(7) Incorporated by reference to the Registrant's Form S-8 Registration
Statement (registration no. 333-89975).
(8) Incorporated by reference to the Registrant's Current Report on Form 8-K
(file number 000-22555) filed by Coinstar, Inc. on February 18, 2000.
(b) Reports on Form 8-K:
The Company filed a current report on Form 8-K on February 18, 2000.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Coinstar, Inc.
(registrant)
/s/ Diane L. Renihan
By: _________________________________
Diane L. Renihan
Controller and Chief Accounting
Officer
May 11, 2000
25
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
3.1(1) Amended and Restated Certificate of Incorporation of the Registrant in
effect after the closing of the initial public offering.
3.2(1) Amended and Restated Bylaws of the Registrant.
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2(1) Specimen Stock Certificate.
4.3(1) Second Amended and Restated Investor Rights Agreement, dated August
27, 1996, between the Registrant and certain investors, as amended
October 22, 1996.
4.4(1) Indenture between Registrant and The Bank of New York dated October 1,
1996.
4.5(1) Warrant Agreement between Registrant and The Bank of New York dated
October 22, 1996.
4.6(1) Notes Registration Rights Agreement between Registrant and Smith
Barney Inc. dated October 22, 1996.
4.7(1) Warrant Registration Rights Agreement between Registrant and Smith
Barney Inc. dated October 22, 1996.
4.8(1) Specimen 13% Senior Discount Note Due 2006.
4.9(3) Rights Agreement dated as of November 12, 1998 between Registrant and
American Securities Transfer and Trust, Inc.
4.10(3) Registrant's Certificate of Designation of Series A Preferred Stock.
Reference is made to Exhibit A of Exhibit 4.9.
4.11(3) Form of Rights Certificate. Reference is made to Exhibit B of Exhibit
4.9.
4.12(4) Credit Agreement, dated February 19, 1999, between Coinstar, Inc. and
Imperial Bank, for itself and as agent for Bank Austria Creditanstalt
Corporate Finance, Inc.
4.13(4) Form of Warrant, dated February 19, 1999, issued to Imperial Bank.
4.14(4) Form of Warrant, dated February 19, 1999, issued to Bank Austria
Creditanstalt Corporate Finance, Inc.
4.15(4) Registration Rights Agreement dated February 19, 1999, between
Coinstar, Inc. and Imperial Bank.
4.16(4) Registration Rights Agreement dated February 19, 1999, between
Coinstar, Inc. and Bank Austria Creditanstalt Corporate Finance, Inc.
4.17(5) June 7, 1999 amendment to Credit Agreement, dated February 19, 1999.
4.18(5) June 14, 1999 limited waiver to Credit Agreement dated February 19,
1999.
4.19(6) Second Amendment to Credit Agreement, Consent and Limited Waiver dated
September 21, 1999.
4.20(8) Senior Secured Note dated February 10, 2000, executed by Meals.com,
Inc. on behalf of Coinstar, Inc.
10.1(7) Registrant's Amended and Restated 1997 Equity Incentive Plan.
10.2(7) Registrant's Amended and Restated 1997 Employee Stock Purchase Plan.
10.3(7) Registrant's Amended and Restated 1997 Non-Employee Directors' Stock
Option Plan.
10.4(1) Form of Indemnity Agreement between the Registrant and its executive
officers and directors.
10.5(1) Series E Preferred Stock and Warrant Purchase Agreement between
Registrant and Acorn Ventures, Inc., dated August 27, 1996.
10.6(1) Office Building Lease between Registrant and Factoria Heights dated
June 1, 1994, as amended on January 24, 1997.
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
10.7(1) Sublease between Registrant and Maruyama U.S., Inc. dated January 15,
1997.
10.8(1) Lease agreement between Registrant and Spieker Properties, L.P. dated
January 29, 1997.
10.9(2) Manufacturing Agreement between Registrant and SeaMed Corporation
dated May 14, 1998.
10.10(1) Purchase Agreement between Registrant and Smith Barney Inc. dated
October 22, 1996.
27.1 Financial Data Schedule.
</TABLE>
- --------
(1) Incorporated by reference to the Registrant's Registration Statement on
Form S-2 (No. 333-33233).
(2) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the Quarter Ended June 30, 1998.
(3) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the Quarter Ended September 30, 1998.
(4) Incorporated by reference to the Registrant's Report on Form 8-K filed by
the Registrant on March 3, 1999.
(5) Incorporated by reference to the Registrant's Quarterly Report on Form
10Q for the Quarter Ended June 30, 1999.
(6) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the Quarter Ended September 30, 1999.
(7) Incorporated by reference to the Registrant's Form S-8 Registration
Statement (registration no. 333-89975).
(8) Incorporated by reference to the Registrant's Current Report on Form 8-K
(file number 000-22555) filed by Coinstar, Inc. on February 18, 2000.
27
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 81,884,555
<SECURITIES> 1,034,495
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 86,599,842
<PP&E> 117,156,027
<DEPRECIATION> (49,225,646)
<TOTAL-ASSETS> 159,045,753
<CURRENT-LIABILITIES> 40,570,845
<BONDS> 0
0
3,898,301
<COMMON> 158,369,919
<OTHER-SE> (106,226,190)
<TOTAL-LIABILITY-AND-EQUITY> 159,045,753
<SALES> 0
<TOTAL-REVENUES> 21,037,493
<CGS> 0
<TOTAL-COSTS> 23,869,267
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,979,831
<INCOME-PRETAX> (3,937,942)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,937,942)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,937,942)
<EPS-BASIC> (0.20)
<EPS-DILUTED> (0.20)
</TABLE>
