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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 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 (i) as we continue to increase our installed base of Coinstar units
internationally and (ii) as Meals.com continues investing heavily in its
operations to achieve market acceptance.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk.
We are subject to the risk of fluctuating interest rates in the normal
course of business, primarily as a result of our senior revolving debt and
investment activities that generally bear interest at variable rates. Because
the investments have maturities of three months or less, and our revolving
debt is renewable annually, we believe that the risk of material loss is low,
and that the carrying amount approximates fair value.
The table below presents principal amounts, at book value, by year of
maturity, and related weighted average interest rates. The fair value of long-
term debt (including current maturities), is calculated using quoted market
prices of the same or similar issues with the same remaining term to maturity.
Expected Maturity Date December 31, 2000
---------------------------------------- -------------------
2001 2002 2003 2004 2005 Thereafter Total Fair Value
In Thousands ---- ---- ---- ---- ---- ---------- ------- ----------
Liabilities
Fixed long-term debt... -- -- -- -- -- $60,980 $60,980 $63,309
Average interest rate.. -- -- -- -- -- 13.0% 13.0%
Senior revolving debt.. $500 $500 $500 $500 $500 $ 500 $ 500 $ 500
Average interest
rate(*)............... 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0%
- ---------------------
* Interest rate represents Imperial Bank's prime rate plus 50 basis points
(10.00% at December 31, 2000).
Item 8. Financial Statements and Supplementary Data.
See Item 14 for an index to the financial statements and supplementary data
required by this item.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
29
PART III
Item 10. Directors and Executive Officers of the Registrant.
Identification of Directors
Jens H. Molbak
Jens H. Molbak, 38, our chairman of the board, founded Coinstar in 1990 and
served as our chief executive officer until February 2000, when he took the
full-time position of president and chief executive officer of Meals.com,
Inc., one of Coinstar's subsidiaries. Prior to founding Coinstar he served two
years as an analyst at Morgan Stanley & Co., Inc., an investment bank.
William D. Ruckelshaus
William D. Ruckelshaus, 68, has been a director of Coinstar since November
1997. Mr. Ruckelshaus has been a principal in Madrona Investment Group,
L.L.C., an investment company since 1996, and is a strategic partner in the
Madrona Venture Fund, formed in 1999. He was chairman of Browning-Ferris
Industries from 1995 to 1999 and chairman and chief executive officer from
1988 to 1995. He was Administrator, Environmental Protection Agency from 1983
to 1985 and a senior vice president of Weyerhaeuser Company, a timber company,
from 1976 to 1983. He is also a director of Weyerhaeuser Company, Cummins
Engine Company, Inc., Pharmacia Company, Nordstrom, Inc., and Solutia, Inc.
Robert O. Aders
Robert O. Aders, 73, has been a director of Coinstar since March 1999. Mr.
Aders is President Emeritus and a member of the board of directors of the Food
Marketing Institute where he served as chief executive officer from its
founding in 1976 until his retirement in 1993. Immediately before joining the
Food Marketing Institute, Mr. Aders was acting Secretary of Labor in the Ford
Administration. Mr. Aders worked at the Kroger Company from 1957 until 1974.
He served in a number of executive positions before being elected chairman of
the board in 1970. He is current chairman of The Advisory Board, Inc., an
international consulting organization. He is also a director of Telepanel
Systems, a manufacturer and distributor of electronic shelf labels for retail
stores; a director of The Source Information Management Company, a
manufacturer and provider of marketing and merchandising services for display
racks in retail stores; and a director of Spar Marketing, Inc., a provider of
in-store marketing and information services.
David E. Stitt
David E. Stitt, 54, has been a director of Coinstar since February 1995. He
has served as managing partner of Banyan Capital Partners, formerly Banyan
Private Equity Management, a private investment firm, since February 1998.
From 1985 to February 1998, he was an employee of Vencap, Inc. (formerly,
Vencap Equities Alberta Ltd.), a venture capital firm, most recently as a vice
president. Previously, for seven years, he was vice president of sales and
marketing for Westmills Carpet Ltd., a regional carpet manufacturer located in
western Canada.
Ronald A. Weinstein
Ronald A. Weinstein, 60, has been a director of Coinstar since March 1992.
Since November 1992, he has served as the managing general partner of the
Weinstein Family Limited Partnership, an investment partnership. Mr. Weinstein
also serves as a director of CelebrateExpress.com, Inc., an on-line party
planning service, and Great Circle Family Foods, LLC, a food processing
company.
David M. Eskenazy
David M. Eskenazy, 38, has been a director of Coinstar since August 2000.
Mr. Eskenazy has been involved in Coinstar as an investor prior to our initial
public offering and, at that time, served in a board observer capacity on
behalf of one of our largest shareholders, Richard C. Hedreen. Mr. Eskenazy
has served as Vice President of R.C. Hedreen Co., a Seattle area hotel
developer, since October 1987 in various capacities relating to finance and
investments.
30
Identification of Executive Officers
The following table sets forth the name, age and position of our executive
officers as of February 28, 2001:
Name Age Position
---- --- --------
Jens H. Molbak.......... 38 Chairman of the Board of Directors
Richard P. Stillman..... 46 Chief Operating Officer
Diane L. Renihan........ 35 Chief Financial Officer
M. Carol Lewis.......... 50 Chief Administrative Officer and Corporate Secretary
Michael W. Parks........ 53 Senior Vice President of Operations
Michael L. Doran........ 50 Senior Vice President of Software Technology
William W. Booth........ 45 Senior Vice President of Retail Development
John P. Reilly.......... 36 Vice President of Coin Services
Jens H. Molbak, our chairman of the board, founded Coinstar in 1990 and
served as our chief executive officer until February 2000, when he took the
full-time position of president and chief executive officer of Meals.com,
Inc., one of Coinstar's subsidiaries. Prior to founding Coinstar he served two
years as an analyst at Morgan Stanley & Co., Inc., an investment bank.
Richard P. Stillman, has served as our chief operating officer since
September 2000. He served as our vice president of marketing from September
1999 through August 2000. From April through August 1999, Mr. Stillman served
as head of marketing at Onvia.com, a business-to-business e-services company.
From August 1996 through January 1999, he co-founded and served as vice
president of sales and marketing for Originet Inc., a start-up technology
company providing digital multi-media interactive systems to large retailers.
From February 1995 through July 1996, he served as senior vice president and
group account director for Cole & Weber, an advertising communications firm.
Diane L. Renihan, has served as our chief financial officer since September
2000. She served as our chief accounting officer from February 2000 through
August 2000 and as our corporate controller from December 1999 through January
2000. From May 1995 to December 1999, Ms. Renihan served in various senior
financial positions at Seattle Lighting Fixture Co., a retail distributor of
lighting and related specialty products, including controller, director of
finance and chief financial officer. Ms. Renihan is a certified public
accountant.
M. Carol Lewis, has served as our chief administrative officer and corporate
secretary since September 2000. She served as our vice president of corporate
organization and development from September 1998 through August 2000 and as
our national director of philanthropic services from September 1996 to
September 1998. Prior to that, Ms. Lewis served as executive director of
Pacific Northwest Ballet, a professional ballet company.
Michael W. Parks, has served as our senior vice president of operations
since September 2000. He served as our vice president of operations from July
1998 through August 2000 and as our director of field operations from April
1994 through June 1998.
Michael L. Doran, has served as our senior vice president of software
technology since September 2000. He served as our vice president of software
technology from September 1998 through August 2000 and as our director of
information systems from August 1996 through September 1998. Prior to that,
Mr. Doran served as senior manager of application services for Snohomish
Public Utility District where he directed automation planning and application
development.
William W. Booth, has served as our senior vice president of retail
development since September 2000. He served as our vice president of retail
development from December 1998 through August 2000 and as our director of
retail development from April 1995 through December 1998. Prior to that, Mr.
Booth served as senior director of retail marketing services for Catalina
Marketing Corporation, a consumer marketing company.
John P. Reilly, has served as our vice president of coin services since
September 2000. He served as our director of coin services from September 1998
through August 2000 and as our manager of coin services from
31
March 1996 through September 1998. Prior to that, Mr. Reilly served as an
account executive for General Electric Capital Corporation.
Section 16(a) Beneficial Ownership Reporting Compliance.
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
our directors and executive officers, and persons who own more than 10% of a
registered class of our equity securities, to report their stock holdings and
transactions to the Securities and Exchange Commission.
Robert O. Aders, a director, failed to report on a timely basis on Form 4 or
Form 5 for the fiscal year ending December 31, 1999 his June 16, 1999 pro rata
stock option grant to purchase up to 1,534 shares of our common stock. Such
transaction was disclosed on a Form 5 for the fiscal year ending December 31,
2000, which was filed on February 14, 2001.
Daniel A. Gerrity, our former president and chief executive officer, failed
to report on a timely basis on Form 4 his October 27, 2000 exercise of a stock
option to purchase 8,625 shares of our common stock. The transaction was
disclosed on a Form 5 for the fiscal year ended December 31, 2000, which was
filed on February 13, 2001.
To our knowledge, based on a review of the copies of such reports furnished
to us and written representations that no other reports were required, during
the fiscal year ended December 31, 2000, all other Section 16(a) filing
requirements applicable to our officers, directors and greater than 10%
beneficial owners were complied with.
Item 11. Executive Compensation.
Summary Compensation Table
The following table shows for the fiscal years ended December 31, 2000, 1999
and 1998, compensation awarded or paid to, or earned by, our chief executive
officer and the other four most highly compensated executive officers at
December 31, 2000 (the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE(1)
Long-Term
Compensation
Awards
Annual ------------
Compensation Securities
---------------- Underlying All Other
Name and Principal Position Year Salary Bonus Options Compensation
- --------------------------- ---- -------- ------- ------------ ------------
Jens H. Molbak(2)........ 2000 $116,667 $ -- -- $ --
Chairman of the Board 1999 180,000 -- 200,000 --
1998 180,000 -- 108,308 --
Daniel A. Gerrity(3)..... 2000 250,833 37,500 25,000 37,500
President and Chief 1999 200,000 -- 150,000 --
Executive Officer 1998 189,135 25,000 122,512 --
Richard P. Stillman(4)... 2000 158,958 19,540 95,000 --
Chief Operating Officer 1999 50,613 -- 60,000 --
William W. Booth(5)...... 2000 125,625 44,939 25,000 --
Senior Vice President of 1999 120,833 19,801 36,000 --
Retail Development 1998 110,000 20,626 22,000 --
Michael W. Parks(6)...... 2000 141,208 7,880 30,000 --
Senior Vice President of 1999 128,000 19,801 37,000 --
Operations 1998 120,000 40,482 40,538 --
Michael L. Doran(7)...... 2000 136,250 10,570 40,000 --
Senior Vice President of 1999 130,000 -- 44,000 --
Software Technology 1998 110,000 6,875 30,308 --
32
- ---------------------
(1) As permitted by rules established by the Securities and Exchange
Commission, no amounts are shown with respect to certain perquisites
where such amounts do not exceed the lesser of 10% of the sum of the
amount in the salary and bonus columns or $50,000.
(2) As of February 10, 2000, Mr. Molbak resigned as chief executive officer
of Coinstar and assumed the role of full-time chief executive officer of
Meals.com, Inc., one of Coinstar's subsidiaries. Mr. Molbak remains as
the chairman of the board of Coinstar. In connection with this change of
position and his compensation package from Meals.com, Mr. Molbak
relinquished 50,000 of his Coinstar stock options.
(3) On February 10, 2000, Mr. Gerrity was promoted to chief executive officer
while maintaining his role as president. As of November 15, 2000, Mr.
Gerrity resigned as president and chief executive officer. Mr. Gerrity's
2000 bonus was paid in February 2001, but was earned in 2000 for
performance in 2000. In addition, Mr. Gerrity's 1998 bonus was paid in
February 1999, but was earned in 1998 for performance in 1998. Other
compensation in 2000 represents $37,500 received pursuant to a separation
agreement in connection with Mr. Gerrity's resignation.
(4) Mr. Stillman was hired as our vice president of marketing in September
1999 and was promoted to chief operating officer in September 2000. Mr.
Stillman's 2000 bonus was paid in February 2001, but was earned in 2000
for performance in 2000.
(5) Mr. Booth's 2000 bonus was paid in February 2001, but was earned in 2000
for performance in 2000. His 1999 bonus was paid in February 2000 but was
earned in 1999 for performance in 1999. His 1998 bonus was paid in
February 1999, but was earned in 1998 for performance in 1998.
(6) Mr. Parks' 2000 bonus was paid in February 2001, but was earned in 2000
for performance in 2000. His 1999 bonus was paid in February 2000 but was
earned in 1999 for performance in 1999. In addition, $36,346 of Mr.
Parks' 1998 bonus was paid in February 1999, but was earned in 1998 for
performance in 1998.
(7) Mr. Doran's 2000 bonus was paid in February 2001, but was earned in 2000
for performance in 2000. In addition, his 1998 bonus was paid in February
1999, but was earned in 1998 for performance in 1998.
Stock Option Grants and Exercises
We grant options to our executive officers under the Coinstar 2000 Equity
Incentive Plan and the Amended and Restated 1997 Equity Incentive Plan. As of
December 31, 2000, options to purchase a total of 3,025,664 shares were
outstanding under the plans and options to purchase 824,219 shares remained
available for grant under the plans.
The following tables show, for the fiscal year ended December 31, 2000,
certain information regarding options granted to, exercised by, and held at
year-end by the Named Executive Officers.
OPTION GRANTS TABLE
Potential
Realizable
Value at Assumed
Percent of Annual Rates of
Number of Total Stock
Securities Options Price Appreciation
Underlying Granted in Exercise for Option Term (3)
Options Fiscal Price -------------------
Name Granted(1) 2000(2) ($/Share) Expiration Date 5%($) 10%($)
---- ---------- ---------- ------------ --------------- -------- ----------
Jens H. Molbak.......... -- -- -- -- $ -- $ --
Daniel A. Gerrity....... 25,000 3.0% $14.13 2/24/10 91,578 200,928
Richard P. Stillman..... 95,000 11.5% $11.69-15.31 9/7/10-12/14/10 743,894 1,885,174
William W. Booth........ 25,000 3.0% $11.69-15.31 9/7/10-12/14/10 217,959 552,351
Michael W. Parks........ 30,000 3.6% $11.69-15.31 9/7/10-12/14/10 266,110 674,376
Michael L. Doran........ 40,000 4.8% $11.69-15.31 9/7/10-12/14/10 362,413 918,426
33
- ---------------------
(1) The per share exercise price is the fair market value of Coinstar common
stock on the date of grant, and the term of the options is ten years,
subject to earlier termination in the event of termination of employment.
Options generally vest over four years with 25% vesting after the first
year and an additional 2.08333% of the shares vesting upon completion of
each full month thereafter. The options may be accelerated in the event
of specified types of corporate reorganizations. The exercise price may
be paid either in cash or at the discretion of the board of directors (i)
by delivery of other Coinstar common stock owned for six months, (ii)
pursuant to a deferred payment arrangement, or (iii) in any other form of
legal consideration acceptable to the board of directors.
(2) Based on an aggregate of 824,000 shares subject to options granted to our
employees in the fiscal year ended December 31, 2000, including the Named
Executive Officers.
(3) The potential realizable value calculated based on the term of the option
at the time of grant (10 years). Stock price appreciation of 5% and 10%
is assumed pursuant to rules promulgated by the Securities and Exchange
Commission and does not represent a prediction of our stock price
performance. Actual gains, if any, are dependent on the actual future
performance of our common stock and no gain to the optionee is possible
unless the stock price increases over the option term, which will benefit
all stockholders.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES
Number of Securities Underlying Value of Unexercised
Unexercised Options at In-the-Money Options at
Shares December 31, 2000 December 31, 2000(2)
Acquired on Value ---------------------------------- -------------------------
Name Exercise Realized(1) Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ----------- --------------- ---------------- ----------- -------------
Jens H. Molbak.......... 5,000 $ 69,315 202,475 120,833 $1,276,921 $601,562
Daniel A. Gerrity....... 13,125 142,690 327,512 -- 1,692,587 --
Richard P. Stillman..... -- -- 17,500 137,500 38,594 371,056
William W. Booth........ 2,700 41,783 49,092 56,208 439,282 200,993
Michael W. Parks........ -- -- 48,354 63,646 285,073 208,797
Michael L. Doran........ 1,875 24,879 42,583 77,875 278,537 249,047
- ---------------------
(1) Based on the difference between the fair market value on the date of
exercise and the exercise price.
(2) Based on the difference between the fair market value on December 31,
2000 ($15.25 per share) and the exercise price.
Directors Compensation
Each non-employee director receives annual cash compensation of $10,000 for
service on the board of directors. Additionally, non-employee directors
receive $250 for attending meetings of committees of which they are official
members. Directors may elect to receive this cash compensation in the form of
Coinstar stock.
Each non-employee director also receives stock option grants under the
Amended and Restated 1997 Non-Employee Directors' Stock Option Plan (the
"Directors' Plan"). The Directors' Plan provides for automatic grants of
options to purchase shares of common stock to eligible non-employee directors
of Coinstar. The maximum number of shares of common stock that may be issued
pursuant to options granted under the Directors' Plan is 200,000.
During 2000, pursuant to the Directors' Plan, we granted the following:
options to purchase 5,000 shares of our common stock to Robert O. Aders at an
exercise price of $9.25, the fair market value of such stock on June 15, 2000,
the date of grant; options to purchase 10,000 shares of our common stock to
David M. Eskenazy at an exercise price of $11.00, the fair market value of
such stock on August 1, 2000, the date of grant; options to purchase 5,000
shares of our common stock to William D. Ruckelshaus at an exercise price of
$9.25, the fair
34
market value of such stock on June 15, 2000, the date of grant; and options to
purchase 15,000 shares of our common stock to Larry A. Hodges at an exercise
price of $9.25, the fair market value of such stock on June 15, 2000, the date
of grant. Of Mr. Hodges' grant, 10,000 shares were subsequently cancelled when
Mr. Hodges resigned from the board of directors.
Employment Contracts, Termination of Employment and Change-in-Control
Arrangements
Employment Agreements. In November 2000, we entered into employment
agreements with Richard P. Stillman, Diane L. Renihan and M. Carol Lewis.
Under the agreements, we agreed to pay each executive a specified annual base
salary. In addition, the agreements provide that such executive is eligible to
receive an annual cash bonus, if such executive meets performance targets
applicable to such bonuses.
The agreements also provide for terms of employment to expire on December
31, 2002 and provide certain benefits if the executive terminates his or her
employment for "good reason" or is terminated without "cause" prior to such
date. These benefits include:
. If terminated without cause, (i) termination payments equal to nine
months' annual base salary, if such termination occurs prior to December
31, 2001 or (ii) termination payments of 6 months' annual base salary, if
such termination occurs prior to December 31, 2002;
. If the executive terminates with good reason, termination payments equal
to the lesser of six months' annual base salary and the annual base salary
such executive would have received if his or her employment had continued
until December 31, 2002;
. Continuation of health insurance benefits, including current dependent
coverage, for 12 months following the date of termination; and
. Acceleration of 75% of such executive's unvested Coinstar options if
terminated without cause prior to December 31, 2001 or acceleration of 50%
of such executive's unvested Coinstar options if such executive terminates
for good reason at any time or is terminated without cause after December
31, 2001, but prior to December 31, 2002.
Our obligations to provide such benefits, however, will be offset by the
amount of salary or pay the executive receives from other employment obtained
during any salary continuation period following such termination.
The agreements require the executives to refrain from working directly or
indirectly for or divulging confidential information to certain competitors
during the shorter of (a) one year following termination of employment without
cause or for good reason or (b) the period of the severance payment.
Separation Agreement. In November 2000, we entered into a separation
agreement with Daniel A. Gerrity. The agreement provides certain benefits
effective November 15, 2000, the date of Mr. Gerrity's resignation as
president and chief executive officer of Coinstar. Such benefits include
twelve months' severance pay (aggregate $300,000) payable over a 12-month
period, one year of continued health insurance benefits, including dependent
care coverage, and vesting of Mr. Gerrity's unvested stock options.
Additional Information with Respect to Compensation Committee Interlocks and
Insider Participation in Compensation Decisions
Our compensation committee consists of William D. Ruckelshaus, David E.
Stitt and Ronald A. Weinstein. No member of our compensation committee serves
as a member of the board of directors or compensation committee of any entity
that has one or more executive officers serving as a member of our board of
directors or compensation committee.
35
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table shows the number of shares of common stock beneficially
owned on December 31, 2000 by: (i) each director; (ii) each of the Named
Executive Officers listed in the Summary Compensation Table on page 32 who
were executive officers during 2000; (iii) the executive officers and
directors of the Company as a group; and (iv) all those known by us to be
beneficial owners of more than 5% of our outstanding common stock.
Number of
Shares Percent of
Beneficially Outstanding
Beneficially Owned Owned(1) Shares
------------------ ------------ -----------
Snyder Capital Management, L.P.(2).................. 2,522,000 12.4%
Snyder Capital Management, Inc.
350 California Street, Suite 1460
San Francisco, CA 94104
Mark A. Riely(3).................................... 2,048,000 10.4%
260 West Broadway, Suite 2-D
New York, NY 10013
Curtis L. Alexander(4).............................. 1,929,590 9.5%
365 Boston Post Road, Suite 210
Sudbury, MA 01716
Media Group Investors, L.P.(5)...................... 1,158,350 5.7%
365 Boston Post Road, Suite 210
Sudbury, MA 01716
FMR, Corp.(6)....................................... 1,842,900 9.0%
82 Devonshire Street
Boston, MA 02109
Hedreen Joint Venture(7)............................ 1,789,846 8.8%
PO Box 9006
Seattle, WA 98109
Jens H. Molbak(8)................................... 774,056 3.8%
Daniel A. Gerrity(9)................................ 277,412 1.3%
Richard P. Stillman(10)............................. 20,200 *
Michael W. Parks(11)................................ 74,678 *
Michael L. Doran(12)................................ 51,449 *
William W. Booth(13)................................ 59,028 *
David M. Eskenazy(14)............................... 30,700 *
David E. Stitt(15).................................. 32,000 *
William D. Ruckelshaus(16).......................... 27,726 *
Ronald A. Weinstein(17)............................. 273,379 1.3%
Robert O. Aders(18)................................. 26,534 *
All directors and executive officers as a group (11
persons)........................................... 1,647,162 7.8.%
- ---------------------
* Represents beneficial ownership of less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage of ownership of that
person, shares of common stock subject to options or warrants held by
that person that are currently exercisable or will become exercisable
within 60 days of December 31, 2000 are deemed outstanding. These option
shares are not deemed outstanding for the purpose of computing the
percentage ownership of any other person (unless otherwise assumed to be
outstanding). Except as indicated by footnote, and subject to marital
community property laws where applicable, we believe that the persons
named in the table above have sole voting and investment power with
respect to all shares of common stock
36
shown as beneficially owned by them. As of December 31, 2000, we had
20,388,705 shares of common stock outstanding.
(2) Beneficial ownership of shares as of December 31, 2000 as reported on
Questionnaire for Directors, Officers and 5% Shareholders signed by
Snyder Capital Management, L.P. on February 27, 2001. Represents
2,522,000 shares over which Snyder Capital Management, L.P. and Snyder
Capital Management, Inc. share dispositive power and 2,285,300 over
which Snyder Capital Management, L.P. and Snyder Capital Management,
Inc. share voting power.
(3) Beneficial ownership of shares as of December 31, 2000 as reported on
Questionnaire for Directors, Officers and 5% Shareholders signed by Mark
A. Riely on February 28, 2001. Includes 155,000 shares of common stock
owned of record by Mr. Riely, 344,710 shares of common stock owned by
Media Group Investments, Ltd., which has as its investment advisor
Vercingetorix Corp., of which Mr. Riely is a 50% stockholder, 1,158,350
shares of common stock owned by Media Group Investors, L.P., which has a
sole general partner, Media Group Management, Inc., of which Mr. Riely
is a 75% stockholder, 276,250 shares of common stock owned by an account
of Goldman Sachs Strategic Tech Fund, which account is managed by
Vercingetorix Corp., of which Mr. Riely is a 50% stockholder, and
113,690 shares of common stock owned by Key Media and Communications,
Inc., which has as its investment adviser Vercingetorix Corp., of which
Mr. Riely is a 50% stockholder.
(4) Beneficial ownership of shares as reported on Questionnaire for
Directors, Officers and 5% Shareholders signed by Mark A. Riely on
February 28, 2001. As of June 9, 2000 Mr. Alexander has the sole power
to vote and dispose of 36,590 shares of common stock owned of record by
Mr. Alexander. Mr. Alexander has the shared power to vote and dispose of
1,158,830 shares of common stock owned by Media Group Investors, L.P.
which has a sole general partner, Media Group Management, Inc., of which
Mr. Alexander is a 25% shareholder, 344,710 shares of common stock owned
by Media Group Investments, Ltd., which has as its investment advisor
Vercingetorix Corp., of which Mr. Alexander is a 50% shareholder,
276,250 shares of common stock owned by an account of Goldman Sachs
Strategic Technology Fund, L.P., which account is managed by
Vercingetorix Corp., of which Mr. Alexander is a 50% shareholder and
113,690 shares of common stock owned by Key Media and Communications,
Inc., which has as its investment advisor Vercingetorix Corp., of which
Mr. Alexander is a 50% shareholder.
(5) Beneficial ownership of shares as reported on Questionnaire for
Directors, Officers and 5% Shareholders signed by Mark A. Riely on
February 28, 2001. Media Group Investors, L.P. has shared power to vote
and dispose of 1,158,350 shares of common stock with Curt L. Alexander
and Mark A. Riely.
(6) Beneficial ownership of shares as of December 31, 2000 as reported on
Form 13G filed with the Securities and Exchange Commission on February
14, 2001. FMR, Corp. has sole dispositive power over all 1,842,900
shares beneficially owned and sole voting power over 383,200 of such
shares. 1,459,700 of these shares are beneficially owned by Fidelity
Management & Research Company ("Fidelity"), a wholly owned subsidiary of
FMR, Corp., as investment advisor to various investment companies
including Fidelity Small Cap Stock Fund, which directly owns 1,444,500
of the shares beneficially owned by Fidelity. The boards of trustees of
the funds advised by Fidelity have sole voting power over shares
directly owned by the funds.
(7) Beneficial ownership as filed on Form 13D with the Securities and
Exchange Commission on January 22, 2001. Includes 1,789,846 shares
beneficially owned by Richard C. Hedreen as sole manager of Hedreen
Joint Venture. Hedreen Joint Venture shares dispositive power over all
1,789,846 shares with Mr. Hedreen. Mr. Hedreen has sole voting power
over 898,542 of such shares.
(8) Includes 214,974 shares issuable upon the exercise of options
exercisable within 60 days of December 31, 2000. Also includes 40,000
shares held by Mt. Shuksan Investments LLC and 73,000 shares held by
Penny Partners L.P. Mr. Molbak shares voting and investment power over
the shares held by Mt. Shuksan Investments LLC and Penny Partners L.P.
and disclaims beneficial ownership of such shares except to the extent
of his ownership interest therein.
37
(9) Includes 205,000 shares issuable upon the exercise of options exercisable
within 60 days of December 31, 2000. Also includes 100 shares held by Mr.
Gerrity's son. Mr. Gerrity shares voting and investment power over the
shares held by his son and disclaims beneficial ownership of such shares
except to the extent of his ownership interest therein.
(10) Includes 20,000 shares issuable upon the exercise of options exercisable
within 60 days of December 31, 2000.
(11) Includes 51,770 shares issuable upon exercise of an option exercisable
within 60 days of December 31, 2000.
(12) Includes 46,208 shares issuable upon exercise of an option exercisable
within 60 days of December 31, 2000.
(13) Includes 51,717 shares issuable upon exercise of an option exercisable
within 60 days of December 31, 2000.
(14) Includes 10,000 shares issuable upon exercise of an option exercisable
within 60 days of December 31, 2000.
(15) Includes 25,000 shares issuable upon exercise of an option exercisable
within 60 days of December 31, 2000.
(16) Includes 22,726 shares issuable upon exercise of an option exercisable
within 60 days of December 31, 2000.
(17) Includes 36,428 shares issuable upon exercise of options exercisable
within 60 days of December 31, 2000. Also includes 90,400 shares
beneficially owned by the Weinstein Family Limited Partnership.
Mr. Weinstein is a general partner of the Weinstein Family Limited
Partnership.
(18) Includes 16,534 shares issuable upon exercise of an option exercisable
within 60 days of December 31, 2000.
Item 13. Certain Relationships and Related Transactions.
On February 10, 2000, Mr. Ronald A. Weinstein, a director of Coinstar,
purchased 500,000 shares of Series A Convertible Preferred Stock of Meals.com,
Inc. for an aggregate purchase price of $500,000. This purchase was made in
connection with the issuance and sale by Meals.com of an aggregate $15.5
million of its convertible preferred stock. Mr. Weinstein also received a
warrant to purchase an additional 500,000 shares of Meals.com for $0.125 per
share.
In November 2000, we entered into employment agreements with Richard P.
Stillman, Diane L. Renihan and M. Carol Lewis. Please see Item 11-Employment
Contracts, Termination of Employment and Change-in-Control Arrangements on
page 35 for a summary of such agreements.
In November 2000, we entered into a separation agreement with Daniel A.
Gerrity. Please see Item 11-Employment Contracts, Termination of Employment
and Change-in-Control Arrangements on page 35 for a summary of such agreement.
We believe that these transactions were on terms no less favorable to
Coinstar or Meals.com than could be obtained from unaffiliated third parties.
There were no other material related party transactions during the year.
38
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
The financial statements required by this item are submitted in a separate
section beginning on page 43 of this Annual Report on Form 10-K.
Page
----
(a)(1) Index to Financial Statements
Independent Auditors' Report.................................... 42
Consolidated Balance Sheets..................................... 43
Consolidated Statements of Operations........................... 44
Consolidated Statements of Changes In Stockholders' Equity
(Deficit)....................................................... 45
Consolidated Statements of Cash Flows........................... 46
Consolidated Notes to Financial Statements...................... 47
(a)(2) Index to Financial Statement Schedules
All schedules have been omitted because they are not applicable
or not required, or the required information is included in the
financial statements or notes thereto.
(a)(3) Index to Exhibits:
Exhibit Number Description of Document
-------------- -----------------------
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 through 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) Senior secured note dated February 10, 2000, executed by
Meals.com, Inc. on behalf of Coinstar, Inc.
4.18(7) Fifth Amendment to Credit Agreement between Coinstar, Inc. and
Imperial Bank, dated September 26, 2000.
39
Exhibit Number Description of Document
-------------- -----------------------
10.1(1) Amended and Restated Registrant's 1997 Equity Incentive Plan.
10.2(1) Registrant's 1997 Employee Stock Purchase Plan.
10.3 Amended and Restated Registrant's 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.
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.
10.11 Registrant's 2000 Equity Incentive Plan.
10.12 Employment Agreement between Richard P. Stillman and the
Registrant dated November 17, 2000.
10.13 Employment Agreement between Diane L. Renihan and the
Registrant dated November 16, 2000.
10.14 Employment Agreement between M. Carol Lewis and the Registrant
dated November 20, 2000.
10.15 Separation Agreement between Daniel A. Gerrity and the
Registrant dated November 15, 2000.
12.1 Ratio of Earnings to Fixed Charges.
21.1(6) Subsidiaries.
23.1 Consent of Deloitte & Touche LLP.
- ---------------------
(1) Incorporated by reference to the Registrant's Registration Statement on
Form S-4 (No. 333-33233).
(2) Incorporated by reference to the Registrant's 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 current Report on Form 8-K
(File Number 000-22555) filed by Coinstar on March 3, 1999.
(5) Incorporated by reference to the Current Report on Form 8-K (File Number
000-22555) filed by Coinstar on February 18, 2000.
(6) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1998.
(7) Incorporated by reference to the Registrant's Quarterly Report on Form 10-
Q for the Quarter Ended September 30, 2000.
(b) Reports on Form 8-K.
The Registrant filed no reports on Form 8-K during the quarter ended
December 31, 2000.
(c) Exhibits.
The exhibits required by this item are listed under Item 14(a)(3).
40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
/s/ Diane L. Renihan
By: _________________________________
Diane L. Renihan
Chief Financial Officer
Date: March 30, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Diane L. Renihan Chief Financial Officer March 30, 2001
______________________________________
Diane L. Renihan
/s/ Richard C. Deck Chief Accounting Officer March 30, 2001
______________________________________
Richard C. Deck
/s/ Jens H. Molbak Chairman of the Board March 30, 2001
______________________________________
Jens H. Molbak
/s/ Robert O. Aders Director March 30, 2001
______________________________________
Robert O. Aders
/s/ David M. Eskenazy Director March 30, 2001
______________________________________
David M. Eskenazy
/s/ David E. Stitt Director March 30, 2001
______________________________________
David E. Stitt
/s/ Ronald A. Weinstein Director March 30, 2001
______________________________________
Ronald A. Weinstein
/s/ William D. Ruckelshaus Director March 30, 2001
______________________________________
William D. Ruckelshaus
41
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Coinstar, Inc.
Bellevue, Washington
We have audited the accompanying consolidated balance sheets of Coinstar,
Inc. and subsidiaries (the "Company") as of December 31, 2000 and 1999, and
the related consolidated statements of operations, changes in stockholders'
equity (deficit), and cash flows for each of the three years in the period
ended December 31, 2000. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Coinstar, Inc. and
subsidiaries at December 31, 2000 and 1999, and the results of their
operations, and their cash flows for each of the three years in the period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States of America.
/s/ Deloitte & Touche LLP
February 9, 2001
Seattle, Washington
42
COINSTAR, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
----------------------------
2000 1999
------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................... $ 78,674,152 $ 78,736,908
Short-term investments available for sale....... -- 9,294,825
Prepaid expenses and other current assets....... 2,885,834 2,337,456
------------- -------------
Total current assets........................... 81,559,986 90,369,189
PROPERTY AND EQUIPMENT:
Coinstar units.................................. 122,765,818 102,669,587
Computers....................................... 7,516,588 4,481,264
Office furniture and equipment.................. 1,560,144 1,241,198
Leased vehicles................................. 3,941,144 2,825,155
Leasehold improvements.......................... 527,017 437,593
Coinstar components............................. 68,924 94,473
------------- -------------
136,379,635 111,749,270
Accumulated depreciation........................ (66,478,763) (43,649,321)
------------- -------------
69,900,872 68,099,949
OTHER ASSETS, net of accumulated amortization of
$4,894,156 and $2,356,150....................... 6,326,760 4,911,337
------------- -------------
TOTAL............................................ $ 157,787,618 $ 163,380,475
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................ $ 4,882,786 $ 4,866,539
Accrued liabilities............................. 51,494,497 41,417,592
Current portion of long-term debt and capital
lease obligations.............................. 920,603 649,640
------------- -------------
Total current liabilities...................... 57,297,886 46,933,771
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS..... 61,815,043 61,181,184
------------- -------------
Total liabilities.............................. 119,112,929 108,114,955
MINORITY INTEREST--CONVERTIBLE PREFERRED STOCK... 3,833,152 --
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS' EQUITY:
Convertible preferred stock, $0.001 par value--
Authorized, 5,000,000 shares; no shares issued
and outstanding at 2000 or 1999................ -- --
Common stock, $0.001 par value--Authorized,
45,000,000 shares; issued and outstanding,
20,388,705 and 20,141,207 shares at 2000 and
1999, respectively............................. 159,517,516 157,737,504
Contributed capital............................. 1,821,647 1,316,128
Accumulated other comprehensive income (loss)... (17,381) (1,304)
Accumulated deficit............................. (126,480,245) (103,786,808)
------------- -------------
Total stockholders' equity..................... 34,841,537 55,265,520
------------- -------------
TOTAL............................................ $ 157,787,618 $ 163,380,475
============= =============
See notes to consolidated financial statements
43
COINSTAR, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
----------------------------------------
2000 1999 1998
------------ ------------ ------------
REVENUE.............................. $103,088,820 $ 77,732,560 $ 47,673,651
EXPENSES:
Direct operating.................... 48,184,214 38,835,647 26,564,505
Regional sales and marketing........ 11,367,751 6,381,182 3,777,995
Product research and development.... 8,335,585 5,571,323 4,744,110
Selling, general and
administrative..................... 26,217,572 15,021,088 14,112,213
Depreciation and amortization....... 27,064,866 20,314,509 13,237,234
------------ ------------ ------------
Loss from operations................ (18,081,168) (8,391,189) (14,762,406)
OTHER INCOME (EXPENSE):
Interest income..................... 1,975,613 2,350,065 1,366,580
Interest expense.................... (8,516,699) (11,314,177) (10,816,858)
Other............................... 261,369 (767,725) 239,812
------------ ------------ ------------
Loss before minority interest and
extraordinary item................. (24,360,885) (18,123,026) (23,972,872)
Minority interest related to
convertible preferred stock........ 1,667,448 -- --
------------ ------------ ------------
Loss before extraordinary item...... (22,693,437) (18,123,026) (23,972,872)
EXTRAORDINARY ITEM
Loss related to early retirement of
debt............................... -- (3,249,744) --
------------ ------------ ------------
NET LOSS............................. $(22,693,437) $(21,372,770) $(23,972,872)
============ ============ ============
LOSS PER SHARE:
Loss per share before extraordinary
item, basic and diluted............ $ (1.12) $ (1.02) $ (1.58)
Extraordinary item per share, basic
and diluted........................ -- (0.18) --
------------ ------------ ------------
Loss per share, basic and diluted... $ (1.12) $ (1.20) $ (1.58)
============ ============ ============
Weighted average shares outstanding,
basic and diluted.................. 20,270,855 17,856,579 15,150,463
============ ============ ============
See notes to consolidated financial statements
44
COINSTAR, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
Accum.
Common Stock Other
----------------------- Contributed Comp. Accumulated
Shares Amount Capital Income Deficit Total
---------- ------------ ----------- -------- ------------- ------------
BALANCE, January 1,
1998................... 15,034,629 $ 61,039,848 $ 513,584 $ (2,962) $ (58,441,166) $ 3,109,304
Issuance of shares under
employee stock purchase
plan................... 98,239 738,968 738,968
Exercise of stock
options................ 80,418 42,713 42,713
Non-cash stock-based
compensation........... 4,218 36,625 36,625
Comprehensive income
Other comprehensive
income
Unrealized loss on
short-term investments
available for sale.... 6,007 6,007
Unrealized gain on
foreign currency
translation........... 126 126
------------
Other comprehensive
income................ 6,133
Net loss................ (23,972,872) (23,972,872)
------------
Comprehensive income.... (23,966,739)
---------- ------------ ---------- -------- ------------- ------------
BALANCE, December 31,
1998................... 15,217,504 61,858,154 513,584 3,171 (82,414,038) (20,039,129)
Issuance of shares under
employee stock purchase
plan................... 77,793 672,510 672,510
Exercise of stock
options................ 224,453 810,033 810,033
Exercise of warrants.... 100,057 89,823 (89,823) --
Issuance of common stock
for acquisition of
assets................. 25,000 386,250 386,250
Issuance of common
stock, net of issuance
costs of $6,286,841.... 4,466,400 93,648,859 93,648,859
Issuance of common stock
for asset purchase
option................. 30,000 271,875 271,875
Contributed capital for
warrants............... 892,367 892,367
Comprehensive income....
Other comprehensive
income (loss)
Unrealized loss on
foreign currency
translation............ (4,475) (4,475)
------------
Other comprehensive
income (loss).......... (4,475)
Net loss................ (21,372,770) (21,372,770)
------------
Comprehensive income.... (21,377,245)
---------- ------------ ---------- -------- ------------- ------------
BALANCE, December 31,
1999................... 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................... 82,484 783,665 783,665
Exercise of stock
options................ 165,014 996,347 996,347
Non-cash stock-based
compensation expense... 505,519 505,519
Other comprehensive
income (loss)
Unrealized loss on
short-term investments
available for sale.... (3,485) (3,485)
Unrealized loss on
foreign currency
translation .......... (12,592) (12,592)
------------
Other comprehensive
income (loss)......... (16,077)
Net loss................ (22,693,437) (22,693,437)
------------
Comprehensive income
(loss)................. (22,709,514)
---------- ------------ ---------- -------- ------------- ------------
BALANCE, December 31,
2000................... 20,388,705 $159,517,516 $1,821,647 $(17,381) $(126,480,245) $ 34,841,537
========== ============ ========== ======== ============= ============
See notes to consolidated financial statements
45
COINSTAR, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31
----------------------------------------
2000 1999 1998
------------ ------------ ------------
OPERATING ACTIVITIES:
Net loss............................ $(22,693,437) $(21,372,770) $(23,972,873)
Adjustments to reconcile net loss to
net cash used by operating
activities:
Depreciation and amortization....... 27,064,866 20,314,509 13,237,234
Minority interest related to
convertible preferred stock........ (1,667,448) -- --
Write off of non-cash portion of
purchase option.................... -- 271,875 --
Debt discount amortization.......... 436,204 8,712,920 10,345,573
Non-cash stock-based compensation... 505,519 -- 36,625
Unrealized loss on short-term
investments available for sale..... (3,485) -- --
Unrealized gain (loss) on foreign
currency........................... (12,592) (4,475) 117
Cash provided (used) by changes in
operating assets and liabilities:
Investment interest receivable...... 131,984 45,862 483,502
Prepaid expenses and other current
assets............................. (407,846) (1,255,585) (21,661)
Other assets........................ 128,316 (646,360) 2,592
Accounts payable.................... 56,382 1,038,080 590,390
Accrued liabilities................. 10,095,782 14,564,068 8,753,736
------------ ------------ ------------
Net cash provided by operating
activities......................... 13,634,245 21,668,124 9,455,235
INVESTING ACTIVITIES:
Purchases of short-term
investments........................ -- (25,681,907) (24,258,982)
Sales and maturities of short-term
investments........................ 9,162,841 20,523,535 56,202,659
Purchases of fixed assets........... (24,876,519) (36,508,249) (22,991,701)
Net proceeds from the sale of
equipment.......................... 17,012 -- --
Refund of tax on Coinstar units..... -- 535,223 --
Purchase of intangible assets....... (4,488,078) -- --
Other............................... -- 54,325 2,622
------------ ------------ ------------
Net cash provided (used) by
investing activities............... (20,184,744) (41,077,073) 8,954,598
FINANCING ACTIVITIES:
Payments on long-term debt.......... (792,869) (35,173,750) (1,703,222)
Borrowings under long-term debt
obligations........................ -- 500,000 --
Proceeds from sale of common stock,
net of issuance costs.............. -- 93,648,859 --
Proceeds from exercise of stock
options and issuance of shares
under employee stock purchase
plan............................... 1,780,012 1,482,543 781,681
Proceeds from sale of subsidiary
convertible preferred stock and
warrants, including minority
interest related to convertible
preferred stock.................... 5,500,600 -- --
------------ ------------ ------------
Net cash provided (used) by
financing activities............... 6,487,743 60,457,652 (921,541)
------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS......................... (62,756) 41,048,703 17,488,292
CASH AND CASH EQUIVALENTS:
Beginning of year................... 78,736,908 37,688,205 20,199,913
------------ ------------ ------------
End of year......................... $ 78,674,152 $ 78,736,908 $ 37,688,205
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for
interest........................... $ 8,082,117 $ 246,574 $ 486,298
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Purchase of vehicles financed by
capital lease obligations.......... $ 1,389,418 $ 1,341,461 $ 504,811
Cashless exercises of warrants...... -- 89,823 --
Purchase of assets with common
stock.............................. -- 386,250 --
Purchase of assets with warrants.... -- 169,156 --
Issuance of warrants under revolving
credit facility.................... -- 723,211 --
Stock issued for purchase option.... -- 271,875 --
See notes to consolidated financial statements
46
COINSTAR, INC. and SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
NOTE 1: ORGANIZATION AND BUSINESS
General: Coinstar, Inc. (the "Company" or "Coinstar") develops, owns and
operates a network of automated, self-service coin-counting and processing
machines that provide consumers with a convenient means to convert loose coins
into cash. The Company has increased its installed base every year since
inception, and as of December 31, 2000, had an installed base of 8,509 units
located in supermarkets and financial institutions in 46 states, the District
of Columbia, the United Kingdom and Canada.
Coinstar International, Inc., ("Coinstar International") a wholly owned
subsidiary, was formed in March 1998 to explore expanding the Company's
operations internationally. Coinstar International is piloting 58 Coinstar
units in Canada to determine the viability of the Canadian market and is
piloting 27 Coinstar units in the United Kingdom.
Meals.com, Inc., ("Meals.com") an 89%-owned subsidiary of the Company, was
formed in January 1999. 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
purchase behavior.
Principles of consolidation: The financial statements include the accounts
of Coinstar Inc., its wholly-owned subsidiary, Coinstar International, and its
89%-owned subsidiary, Meals.com. All intercompany transactions have been
eliminated in consolidation.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and equivalents: The Company considers all highly liquid securities
purchased with a maturity of three months or less to be cash equivalents. Cash
and cash equivalents includes funds in transit, which represent amounts being
processed by armored carriers or residing in Coinstar units which are payable
to our partners, of $42.6 million and $31.4 million at December 31, 2000 and
1999, respectively.
Securities available for sale: At December 31, 1999, the Company had
investments that were classified as available for sale and were stated at fair
value in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 115, Accounting for Certain Investments in Debt and Equity Securities.
This statement specifies that available for sale securities are reported at
fair value with changes in unrealized gains and losses recorded directly to
stockholders' equity. All of the Company's investments had maturities of one
year or less. Realized and unrealized gains or losses at December 31, 1999
were insignificant. Fair value was based upon quoted market prices.
Long-lived assets: The Company periodically reviews long-lived assets,
including identified intangible assets, for impairment to determine whether
any events or circumstances indicate that the carrying amount of the assets
may not be recoverable. Such review includes estimating expected future cash
flows.
Property and equipment: Property and equipment are depreciated using the
following methods and useful lives:
Type Of Asset Method Useful Life
- ------------- ------------- ---------------
Coinstar units.................................... Straight-line 60 months
Installation costs for Coinstar units............. Straight-line 36 months
Furniture and equipment........................... Straight-line 60 months
Computer equipment................................ Straight-line 36 months
Automobiles and light trucks...................... Straight-line 36 months
Leasehold improvements............................ Straight-line 60 to 84 months
47
COINSTAR, INC. and SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
In order to achieve volume discounts, the Company purchases certain
components of the Coinstar units in advance. When a component is placed into
service, the cost is transferred to the appropriate Coinstar equipment account
and depreciated accordingly.
During 1998, the Company reduced the carrying value of certain components of
the Coinstar unit resulting in a provision for additional depreciation of
$170,097. During 1999, the Company wrote off certain obsolete equipment
resulting in a charge of $483,000 and received a refund for overpaid use tax
attributable to Coinstar units, which resulted in the reduction of the basis
of the Coinstar units and a reduction in depreciation expense.
Other assets: Other assets include lease and utility deposits, deferred
financing fees for the Company's long-term debt facilities and amounts
relating to software development costs, in accordance with Statement of
Position 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use. Such assets are amortized on a straight-line basis
over two to ten years.
Revenue recognition: Coin processing fees are recognized at the time the
customers' coins are counted by the Coinstar unit. Units in service with the
top three retail distribution partners in 2000 accounted for approximately
27.6%, 11.4% and 11.3% of the Company's revenues. In 1999, the top two retail
distribution partners accounted for approximately 31.9%, and 11.2% of the
Company's revenues and in 1998, the top two partners accounted for
approximately 18.9% and 18.7% of the Company's revenues.
Start-up activities: All start-up costs incurred by the Company relating to
the development of domestic and international markets and e-services are
expensed as incurred.
Fair value of financial instruments: The following methods and assumptions
were used to estimate the fair value of each class of financial instruments:
The carrying amounts for cash and cash equivalents, short-term investments,
and accounts payable approximate fair value because of the short maturity of
these instruments. The fair value of the Company's senior subordinated
discount notes is based on the quoted market price on the last day of the
year. The fair value of the Company's senior revolving line, included in long
term debt, approximates the carrying amount due to its variable rate of
interest.
At December 31, 2000 and 1999, the carrying amount and estimated fair value
of such financial instruments for which fair value can be determined are as
follows:
2000 1999
---------------- ----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------- -------- -------
(In thousands)
Long-term debt................................ $60,860 $63,309 $60,424 $64,224
Stock-based compensation: The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees. SFAS No. 123, Accounting for Stock-Based Compensation, has been
adopted by the Company for disclosure of certain additional information
related to its stock option plans.
Use of estimates: The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
48
COINSTAR, INC. and SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
Recent accounting pronouncements: In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, which was amended by SFAS No. 138. This pronouncement, as
amended, requires an entity to recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. The Company has adopted the provisions of SFAS 133
and SFAS 138 as of January 1, 2001. The impact of adoption was not material to
the financial statements, taken as a whole.
The SEC recently issued Staff Accounting Bulletin ("SAB") 101, which
outlines the reporting requirements for revenue recognition. The Company's
accounting policies are in accordance with SAB 101; therefore, there was no
material impact upon adoption.
NOTE 3: ACCRUED LIABILITIES
Accrued liabilities consisted of the following at December 31:
2000 1999
----------- -----------
Funds in transit....................................... $42,577,418 $31,398,593
Accrued liabilities for payroll related expenses....... 2,334,929 1,030,686
Accrued liabilities for interest payable............... 1,986,329 2,090,183
Accrued liabilities for taxes.......................... 1,921,851 1,934,922
Accrued liabilities to service contract providers...... 690,065 1,278,058
Accrued liabilities for marketing expenses............. 116,945 2,532,637
Other.................................................. 1,866,960 1,152,513
----------- -----------
$51,494,497 $41,417,592
=========== ===========
NOTE 4: LONG-TERM DEBT
Long-term debt, including current portion, consisted of the following at
December 31:
2000 1999
----------- -----------
Senior subordinated discount notes.................... $60,980,000 $60,980,000
Senior revolving line................................. 500,000 500,000
Less unamortized discounts............................ (619,917) (1,056,118)
----------- -----------
60,860,083 60,423,882
Less current portion.................................. -- --
----------- -----------
Long-term debt........................................ $60,860,083 $60,423,882
=========== ===========
Senior subordinated discount notes: On October 22, 1996, the Company
completed a private placement offering of 95,000 units, each of which
consisted of $1,000 principal amount of 13% senior subordinated discount notes
(the "Notes"), due at maturity in 2006, and warrants to purchase seven shares
of common stock of the Company, at an exercise price of $.01 per warrant
share, subject to adjustment under certain circumstances. Imputed interest on
the Notes, as represented by the original issue discount of $29,413,154,
accrued until October 1999, at which time interest was payable in semi-annual
installments through maturity. Interest paid in 2000 was $7,927,400.
The Notes are not redeemable at the option of the Company prior to October
1, 2001, other than from the proceeds of a public equity offering. The Notes
are redeemable at the option of the Company, in whole or in
49
COINSTAR, INC. and SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
part, at any time on and after October 1, 2001, at specified redemption prices
for the relevant year of redemption, plus accrued and unpaid interest to the
date of redemption.
In the event of a change of control (as defined in the Notes), each holder
of the Notes has the option to require the Company to repurchase such Notes at
101% of the accreted value thereof on the date of repurchase plus liquidated
damages. The Notes are subordinate in rank to all existing and future senior
indebtedness of the Company. The indenture pursuant to which the Notes were
issued contains certain covenants that, among other things, limit the ability
of the Company to make dividend payments, make investments, repurchase
outstanding shares of stock, prepay other debt obligations, incur additional
indebtedness, effect asset dispositions, engage in sale and leaseback
transactions, consolidate, merge or sell all or substantially all of the
Company's assets, engage in transactions with affiliates, or permit its
restricted subsidiaries to effect certain transactions.
Subsequent to the completion of the Company's initial public offering and
pursuant to a related Notes Registration Rights Agreement between the Company
and the initial purchasers of the Notes (the "Registration Rights Agreement"),
the Company completed an exchange offer of the Notes to satisfy its
obligations under the Registration Rights Agreement. The Notes were exchanged
for otherwise substantially identical notes registered under the Securities
Act of 1933, as amended.
The Notes were recorded net of discount of $30,410,654, and the warrants
issued in connection with the Notes were recorded as $997,500 of contributed
capital, each as determined by the relative fair values of the Notes and the
warrants as of the closing date. In addition, the Company has recorded
deferred financing fees related to the Notes of $2,714,354. Additional costs
associated with the exchange offer of $121,063 were added to the deferred
financing cost. The deferred financing costs and discount attributable to the
warrants are being amortized over the term of the Notes.
Early retirement of debt: In 1999, the Company recorded an extraordinary
charge of $3.2 million, which consisted of premiums paid on the pre-payment of
$34.0 million of Notes, and the write-off of their related deferred financing
costs.
Principal payments: Scheduled principal payments on long-term debt are as
follows:
September 2006..................................................... $ 500,000
October 2006....................................................... 60,980,000
-----------
61,480,000
Less unamortized discounts......................................... (619,917)
-----------
$60,860,083
===========
Credit Agreement: On February 19, 1999, the Company entered into a Credit
Agreement with Imperial Bank, for itself and as agent of Bank Austria
Creditanstalt Corporate Finance, Inc. ("Bank Austria" and, together with
Imperial Bank, the "Lenders"). On September 26, 2000, the Company 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 million. The amended Credit Agreement bears interest at Imperial
Bank's prime rate plus 50 basis points (10.0% at December 31, 2000), expires
in September 2006 and also releases the Company from its obligation to
maintain minimum deposits with Imperial Bank. The Credit Agreement requires
the Company to maintain certain financial covenants during the term of the
agreement, which, among other things, prohibits the Company from paying
dividends without Imperial Bank's consent.
50
COINSTAR, INC. and SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
In connection with the Credit Agreement, the Company issued to each of the
Lenders a warrant to purchase 51,326 shares of its common stock. The exercise
price for the warrants, which expire on February 19, 2009, is $12.177 per
share. The values of the warrants issued in connection with the Credit
Agreement were recorded as contributed capital and represent discounts, which
are being amortized ratably over the term of the related debt. The unamortized
value, as of September 26, 2000, of the warrant issued to Bank Austria was
recognized as interest expense upon the release of Bank Austria from the
Credit Agreement.
NOTE 5: COMMITMENTS
Lease commitments: The Company entered into three lease agreements for
office space that commenced April 1, 1997, September 1, 1997 and August 1,
2000 and which expire on March 31, 2002, August 31, 2004 and July 31, 2005,
respectively. The agreements require the Company to pay a portion of operating
costs and minimum monthly payments, which escalate annually, based on a stated
schedule. Each agreement allows the Company to renew each lease for one
consecutive period of five years.
The Company has entered into capital lease agreements to finance the
acquisition of certain automobiles. The Company retains title to such assets.
These capital leases have terms of 36 months at imputed interest rates that
range from 9.6% to 11.7%. Assets under capital lease obligations aggregated
$3,941,144 and $2,825,155, net of $1,382,546 and $903,476 of accumulated
amortization, at December 31, 2000 and 1999, respectively.
A summary of the Company's minimum lease obligations at December 31, 2000
are as follows:
Capital Operating
Leases Leases
---------- ----------
2001.................................................... $1,075,134 $1,603,437
2002.................................................... 766,792 1,441,577
2003.................................................... 266,603 1,396,978
2004.................................................... -- 1,044,840
2005.................................................... -- 170,198
---------- ----------
Total minimum lease commitments......................... 2,108,529 $5,657,030
==========
Less amounts representing interest...................... (232,966)
----------
Present value of lease obligation....................... 1,875,563
Less current portion.................................... (920,603)
----------
Long-term portion....................................... $ 954,960
==========
Rental expense was $1,634,667, $1,362,783 and $1,365,148 for the years ended
December 31, 2000, 1999 and 1998, respectively.
Service providers: As of December 31, 2000, the Company had outstanding
service contracts with several service providers. These contracts generally
cover a one- to two-year period and have cancellation clauses ranging from 30
to 60 days.
Purchase commitments: The Company has entered into certain purchase
agreements with suppliers of Coinstar units, which require aggregate purchases
in the amount of $2,333,478 in 2001.
Concentration of suppliers: The Company currently buys a significant
component of the Coinstar unit from a single supplier. Although there are a
limited number of suppliers for the component, management believes
51
COINSTAR, INC. and SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
that other suppliers could provide similar equipment, which would require
certain modifications. Accordingly, a change in suppliers could cause a delay
in manufacturing and a possible slow-down of growth, which could materially
adversely, affect future operating results.
Letter of credit: At December 31, 2000, the Company had secured irrevocable
letters of credit with two banks totaling $6.8 million. These letters of
credit, which expire at various times through August 2001, are available to
collateralize certain Company obligations to third parties. At December 31,
2000, no amounts were outstanding under these letters of credit agreements.
NOTE 6: FUNDING OF SUBSIDIARY
On February 10, 2000, Meals.com, the Company's 89%-owned subsidiary, 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, Coinstar 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 stockholders. 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, Coinstar provided a $15.6 million
credit facility. At December 31, 2000, Meals.com had drawn the entire amount
of the credit facility from Coinstar. Coinstar does 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.
NOTE 7: STOCKHOLDERS' EQUITY
Common Stock
In April 1999, the Company acquired certain assets consisting of Internet
domain names, fixed assets, contracts, and web site content from Nu World
Marketing Limit Inc. In consideration for the purchase, the Company issued
25,000 shares of common stock.
In June 1999, the Company 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. In July 1999, the
underwriters exercised their option to purchase additional 466,400 shares of
common stock at a purchase price of $22.375 per share for net proceeds of
approximately $9.8 million, net of issuance costs.
In October 1999, the Company issued 30,000 shares of the Company's common
stock in partial consideration for a purchase option to purchase CoinBank
Automated Systems, Inc. Upon the expiration of the option, the Company decided
not to buy CoinBank Automated Systems, Inc.
Warrants
Certain warrants issued between June 28, 1993 and December 15, 1995 had
expiration dates from June 28, 1998 to December 15, 2000, and have been
recorded at amounts, which reflect management's best estimate of fair value on
the date of issuance.
52
COINSTAR, INC. and SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
On February 19, 1999, the Company issued a warrant in connection with its
credit agreement with Imperial Bank to purchase 102,652 shares of common stock
at an exercise price of $12.177 per share. In February 2001, Imperial Bank net
exercised their warrant and purchased 18,963 shares of our common stock.
On March 3, 1999, the Company acquired from Compucook, Inc., assets
consisting of Internet domain names, software, fixed assets, contracts, and
web site content. In consideration of the purchase, the Company issued 25,000
common stock warrants at an exercise price of $15.63 per warrant, which expire
on March 2, 2004.
A summary of the warrants outstanding for the three years in the period
ended December 31, 2000, follows:
Common Stock
--------------------------
Number of
Shares Exercise Price
--------- ---------------
OUTSTANDING, December 31, 1997 and 1998............. 1,042,981 $ 3.25 - $15.61
Issued............................................ 127,652 12.18 - 15.63
Exercised......................................... (100,057) 3.25 - 4.00
Forfeited......................................... (42,924) 3.25 - 4.00
---------
OUTSTANDING, December 31, 1999...................... 1,027,652 11.40 - 15.63
Issued............................................ -- --
Exercised......................................... -- --
Forfeited......................................... (900,000) 11.40 - 15.61
---------
OUTSTANDING, December 31, 2000...................... 127,652 12.18 - 15.63
=========
In November 1998, the Board of Directors approved the adoption of a
Stockholder Rights Plan under which all stockholders receive rights to
purchase shares of a new series of Preferred Stock. The rights are exercisable
only if a person or group acquires 20 percent or more of the Company's common
stock or announces a tender offer for 20 percent or more of the common stock.
If a person acquires 20 percent or more of the Company's common stock, all
rightsholders, except the purchaser, will be entitled to acquire the Company
common stock at a 50 percent discount. The rights trade with the common stock,
unless and until they are separated upon the occurrence of certain future
events. The Board of Directors may terminate the Rights Plan at any time or
redeem the rights prior to the time a person acquires more than 20 percent of
Coinstar's common stock.
NOTE 8: STOCK-BASED COMPENSATION PLANS
Stock Options
In December 2000, the Company adopted the 2000 Equity Incentive Plan (the
"2000 Plan"). During 2000, the Company has granted options to employees under
this plan and the 1997 Equity Incentive Plan (the "1997 Plan") which generally
vest over four years and expire after 10 years. Additionally, the Company has
granted options under the 1997 Plan that have accelerated vesting provisions
that are based on specified performance goals being met. If these goals are
met, the options vest immediately. If the goals are not met, the options vest
after five years. All options with performance-accelerated vesting that were
granted in 1998 vested in 1998. The 1997 Plan is an amendment and restatement
of the Company's 1992 Stock Option Plan, as amended. The Company has reserved
a total of 770,000 shares of common stock for issuance under the 2000 Plan and
3,580,000 shares of common stock for issuance under the 1997 Plan. Stock
options have been granted to officers and employees to purchase common stock
at prices ranging from $0.25 to $25.125 per share, which represented
management's best estimate of fair market value at the dates of grant. The
Company did not recognize any compensation expense related to the options
issued under either the 2000 Plan or the 1997 Plan.
53
COINSTAR, INC. and SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
In March 1997, the Company adopted the Non-Employee Directors' Stock Option
Plan, under which the Board of Directors has provided for the automatic grant
of options to purchase shares of common stock to non-employee directors of the
Company. The Company has reserved a total of 200,000 shares of common stock
for issuance under the Non-Employee Directors' Stock Option Plan. Stock
options have been granted to non-employee directors to purchase common stock
at prices of $9.25 and $11.00 per share, which represented the fair market
value at the date of grant.
In January 1997, the Board of Directors approved an agreement for
acceleration of exercise provisions for certain stock options granted to
certain employees. Under the terms of the agreement, these employees are
allowed to exercise unvested stock options. Any shares purchased by an
employee relating to unvested stock options will be held in escrow until such
options are vested. In addition, the Company has the right to repurchase such
shares prior to the applicable date of vesting should the employees terminate
their employment status. The agreement has not established a new measurement
date for the affected stock options.
In November 2000, the Company entered into a separation agreement with an
employee that provides certain benefits effective November 15, 2000, the date
of the employee's resignation. Such benefits included twelve months' severance
pay (aggregate $300,000) payable over a twelve-month period, 12 months'
continued health insurance benefits, including dependent care coverage, and
vesting of the employee's unvested stock options. In connection with the
accelerated stock option vesting, the Company recorded compensation expense of
$505,000.
The price ranges of all options exercised were $0.25 to $1.50 in 1998, $0.25
to $13.38 in 1999 and $0.40 to $11.75 in 2000. At December 31, 2000, there
were 3,849,983 shares of unissued common stock reserved for issuance of which
824,219 shares were available for future grants. Numbers of common stock
options under the plans are as follows as of December 31:
2000 1999 1998
------------------- ------------------- -------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
--------- -------- --------- -------- --------- --------
Number of common shares
under option:
Outstanding, beginning
of year............... 2,801,869 $10.03 1,678,559 $ 7.08 978,502 $5.76
Granted................ 824,000 13.63 1,567,654 12.14 1,033,944 7.81
Exercised.............. (165,014) 6.04 (224,453) 3.61 (84,636) .51
Canceled or expired.... (435,191) 11.39 (219,891) 9.01 (249,251) 7.19
--------- --------- ---------
Outstanding, end of
year................... 3,025,664 11.03 2,801,869 10.03 1,678,559 7.08
========= ========= =========
Exercisable, end of
year................... 1,444,443 9.66 805,063 8.13 464,811 5.46
========= ========= =========
54
COINSTAR, INC. and SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
The following table summarizes information about common stock options
outstanding at December 31, 2000:
Options Outstanding Options Exercisable
--------------------------------------------------- ----------------------------------
Number of options Weighted average Number of options
outstanding at remaining Weighted average exercisable at Weighted average
Exercise price December 31, 2000 contractual life exercise price December 31, 2000 exercise price
-------------- ----------------- ---------------- ---------------- ----------------- ----------------
$ 0.25 - $ 3.50 95,772 4.92 $ 1.24 95,751 $ 1.24
3.75 - 7.75 98,893 7.78 5.60 55,311 5.79
8.00 442,092 6.65 8.00 339,564 8.00
8.13 - 9.50 134,687 6.03 8.81 110,445 8.76
9.51 - 9.98 26,700 8.98 9.77 5,625 9.76
10.00 - 13.94 1,644,786 7.86 11.06 756,422 10.85
13.95 - 25.13 582,734 9.42 16.33 81,325 19.27
--------- ---------
3,025,664 1,444,443
========= =========
Subsidiary Options
In March 2000, Meals.com adopted the Amended and Restated 2000 Equity
Incentive Plan (the "Meals.com 2000 Plan"), under which options granted to
individuals generally vest according to specific provisions of each option
grant, or as deemed appropriate by the Board and expire after 10 years.
Meals.com has reserved 14,676,400 shares of its common stock under the
Meals.com 2000 Plan for issuance to its officers, directors, employees, and
consultants of Meals.com. In addition, 1,500,000 shares shall be issuable to
executive officers and other senior management of Coinstar, Inc.
Also in March 2000, Meals.com adopted the 2000 Employee Equity incentive
Plan for Coinstar Employees under which options granted to individuals
generally vest according to specific provisions of each option grant, or as
deemed appropriate by the Board and expire after 10 years. Meals.com has
reserved a total of 2,166,933 shares of its common stock for issuance under
this plan to Coinstar employees.
Options for shares of common stock granted under these plans were granted at
prices ranging from $0.10 to $0.20 per share, which represented management's
best estimate of fair market value at the dates of grant. Meals.com has
recorded unearned compensation for the options issued to certain Coinstar
employees and non-employee directors based on the requirements outlined in
SFAS No. 123, Accounting for Stock Based Compensation ("SFAS 123"), 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 of the Company.
During 2000, 15,702,000 shares were granted and 1,333,000 shares were
cancelled with weighted average exercise prices of $0.11 per share and $0.10
per share, respectively. At December 31, 2000, 14,369,000 shares were
outstanding with a weighted average exercise price of $0.11 per share. There
were 18,343,333 shares of unissued common stock reserved for issuance of which
3,974,333 shares were available for future grants at December 31, 2000.
55
COINSTAR, INC. and SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
The following table summarizes information about common stock options
outstanding at December 31, 2000:
Options Outstanding
---------------------------------------------------
Number of options Weighted average
outstanding at remaining Weighted average
Exercise price December 31, 2000 contractual life exercise price
-------------- ----------------- ---------------- ----------------
$0.10 12,860,000 9.30 $ --
0.20 1,509,000 9.84 --
----------
14,369,000
==========
Stock Purchase Plan
In March 1997, the Company adopted the Employee Stock Purchase Plan (the
"ESPP") under Section 423(b) of the Internal Revenue Code. Under the ESPP, the
Board of Directors may authorize participation by eligible employees,
including officers, in periodic offerings. The Company has reserved a total of
400,000 shares of common stock for issuance under the Employee Stock Purchase
Plan. Eligible employees may participate through payroll deductions in amounts
related to their basic compensation. At the end of each offering period,
shares are purchased by the participants at 85% of the lower of the fair
market value at the beginning or the end of the offering period. As of
December 31, 2000, payroll deductions totaling $783,664 were made for the
purchase of shares. Actual shares purchased by participating employees as of
December 31, 2000 totaled 82,484 at an average price of $9.50.
Pro forma Net Loss
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its plans. Accordingly, no compensation cost has been
recognized for its stock option grants. The weighted average fair value of
options granted during 2000, 1999 and 1998 were $13.63, $8.04 and $3.46,
respectively. The fair value of each option granted during 2000, 1999 and 1998
is estimated on the date of grant using the Black-Scholes option-pricing model
with the following assumptions: four to five year expected life from date of
grant; annualized stock volatility of 83%, 84% and 49% for 2000, 1999, and
1998, respectively; risk-free interest rates from 4.6% to 6.8%; and no
dividends during the expected term. Had compensation costs for the Company's
stock-based compensation plans been determined based on the fair value at the
grant dates for awards under those plans consistent with the method prescribed
in SFAS No. 123, the Company's net loss and net loss per share would have
increased to the pro forma amounts indicated below:
December 31,
----------------------------------------
2000 1999 1998
------------ ------------ ------------
Net loss:
As reported........................ $(22,693,437) $(21,372,770) $(23,972,872)
Pro forma.......................... (26,676,626) (24,640,875) (25,512,452)
Net loss per share, basic and
diluted:
As reported........................ (1.12) (1.20) (1.58)
Pro forma.......................... (1.32) (1.38) (1.68)
56
COINSTAR, INC. and SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
NOTE 9: INCOME TAXES
The provision for income taxes differs from the amount computed by applying
the statutory federal income tax rate to loss before minority interest related
to convertible preferred stock. The sources and tax effects of the differences
are as follows:
December 31,
-----------------------
2000 1999 1998
------- ------- -------
Income tax at the federal statutory................... (34.0)% (34.0)% (34.0)%
Other................................................. (1.0)% (0.1)% 0.2 %
Valuation allowance changes affection the provision
for income taxes..................................... 35.0 % 34.1 % 33.8%
------- ------- -------
0.0 % 0.0 % 0.0%
======= ======= =======
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets and liabilities at December 31, 2000 and
1999 are as follows:
December 31,
--------------------------
2000 1999
------------ ------------
Depreciation and amortization...................... $ (5,195,000) $ (5,410,000)
------------ ------------
Total deferred tax liabilities..................... (5,195,000) (5,410,000)
------------ ------------
Tax loss and credit carry forwards................. 41,486,000 32,854,000
Subordinated debt discount amortization............ 7,140,000 7,312,000
Other.............................................. 794,000 493,000
------------ ------------
Total deferred tax assets.......................... 49,420,000 40,659,000
------------ ------------
Net deferred tax asset............................. 44,225,000 35,249,000
Valuation allowance................................ (44,225,000) (35,249,000)
------------ ------------
$ -- $ --
============ ============
A valuation allowance in the full amount of the net deferred tax asset
balance has been established as it is uncertain that the Company will be able
to realize such tax assets in the future. At December 31, 2000, the Company
had net operating loss and credit carry forwards in the amount of
$122,016,000, which expire through 2020.
The Company recorded deferred tax benefits of $8,976,000, $7,287,000, and
$8,113,000 for each of the years ended December 31, 2000, 1999 and 1998. A
valuation allowance in the amount of the deferred tax benefit was recorded
each year.
NOTE 10: LOSS PER SHARE
The weighted average number of shares outstanding used to compute basic and
diluted loss per share was 20,270,855, 17,856,579 and 15,150,463 for the years
ended December 31, 2000, 1999 and 1998, respectively. Because the results from
operations reflect a net loss for all years presented, basic and diluted loss
per share is calculated based on the same weighted average number of shares
outstanding.
57
COINSTAR, INC. and SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
The following warrants and options were not included in the computation of
diluted loss per share, as of December 31, because the effect was
antidilutive:
2000 1999 1998
------------------------- ------------------------- ------------------------
Exercise Exercise Exercise
Number Price Number Price Number Price
--------- --------------- --------- --------------- --------- --------------
Stock warrants.......... 127,652 $12.18 - $15.63 1,027,652 $11.40 - $15.63 1,042,981 $3.25 - $15.61
Common stock options.... 3,025,664 0.25 - 25.13 2,801,869 0.25 - 25.13 1,678,559 0.25 - 13.94
NOTE 11: RETIREMENT PLAN
In July 1995, the Company adopted a tax-qualified employee savings and
retirement plan under Section 401(k) of the Internal Revenue Code of 1986 (the
"Plan") for all employees who satisfy the age and service requirements under
the Plan. The Plan is funded by voluntary employee salary deferral of up to
15% of annual compensation and 50% employer matching contributions of up to 6%
of annual compensation. Effective October 1, 1998, the Company adopted an
amendment to the Plan, whereby participating employees are 100% vested for the
Company matched contributions. The Company contributed $442,824, $139,560 and
$170,243 to the plan for the years ended December 31, 2000, 1999 and 1998.
NOTE 12: 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.
58
COINSTAR, INC. and SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
NOTE 13: SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Following is a presentation of selected consolidated financial data for each
of the four quarters of 2000 and 1999:
Three Months 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
-------- --------- -------- -------- -------- --------- -------- --------
(In thousands, except per share data)
Statements of Operations
Data:
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):
Interest income........ 400 542 476 558 918 1,151 118 163
Interest expense....... (2,362) (2,094) (2,081) (1,980) (2,381) (3,089) (2,993) (2,851)
Other income
(expense)............. 60 70 68 63 (831) -- 19 44
------- ------- ------- ------- ------- ------- ------- -------
Net loss before minority
interest and
extraordinary item..... (8,079) (6,347) (5,744) (4,191) (5,538) (3,902) (4,149) (4,534)
Minority interest
related to convertible
preferred stock........ 669 461 286 252 -- -- -- --
Extraordinary loss
related to early
retirement of debt..... -- -- -- -- (2,506) (744) -- --
------- ------- ------- ------- ------- ------- ------- -------
Net loss................ $(7,410) $(5,886) $(5,458) $(3,939) $(8,044) $(4,646) $(4,149) $(4,534)
======= ======= ======= ======= ======= ======= ======= =======
Loss per share, basic
and diluted............ $ (0.36) $ (0.29) $ (0.27) $ (0.20) $ (0.40) $ (0.23) $ (0.26) $ (0.30)
======= ======= ======= ======= ======= ======= ======= =======
Weighted average shares
outstanding, basic and
diluted................ 20,350 20,299 20,239 20,193 20,123 20,016 15,852 15,358
======= ======= ======= ======= ======= ======= ======= =======
59
COINSTAR, INC. and SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
NOTE 14: BUSINESS SEGMENT INFORMATION
Operating segments as defined in SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information", are components of an enterprise for
which separate financial information is available and regularly reviewed by
the chief operating decision-maker.
The Company is organized into three reportable business segments: the United
States core business, the Coinstar International business and the Meals.com
business. Information about these three segments has been disclosed in the
table below.
Year Ended December 31,
----------------------------
2000 1999 1998
-------- -------- --------
Revenue:
United States core business.................. $101,928 $ 77,467 $ 47,654
International business....................... 681 222 20
Meals.com business........................... 480 44 --
-------- -------- --------
Total revenues.............................. $103,089 $ 77,733 $ 47,674
======== ======== ========
Net loss:
United States core business.................. $ (8,022) $(16,663) $(23,219)
International business....................... (1,060) (1,297) (754)
Meals.com business........................... (15,312) (3,416) --
Minority interest and eliminations........... 1,701 3 --
-------- -------- --------
Total net loss.............................. $(22,693) $(21,373) $(23,973)
======== ======== ========
Total assets:
United States core business.................. $171,002 $166,165 $ 98,833
International business....................... 1,130 453 --
Meals.com business........................... 15,287 3,630 --
Intercompany eliminations.................... (29,631) (6,868) --
-------- -------- --------
Total assets.................................. $157,788 $163,380 $ 98,833
======== ======== ========
60
EXHIBIT INDEX
Exhibit Number Description of Document
-------------- -----------------------
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 through 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) Senior secured note dated February 10, 2000, executed by
Meals.com, Inc. on behalf of Coinstar, Inc.
4.18(7) Fifth Amendment to Credit Agreement between Coinstar, Inc. and
Imperial Bank, dated September 26, 2000.
10.1(1) Amended and Restated Registrant's 1997 Equity Incentive Plan.
10.2(1) Registrant's 1997 Employee Stock Purchase Plan.
10.3 Amended and Restated Registrant's 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.
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.
10.11 Registrant's 2000 Equity Incentive Plan.
10.12 Employment Agreement between Richard P. Stillman and the
Registrant dated November 17, 2000.
10.13 Employment Agreement between Diane L. Renihan and the
Registrant dated November 16, 2000.
61
Exhibit Number Description of Document
- -------------- -----------------------
10.14 Employment Agreement between M. Carol Lewis and the Registrant dated November 20, 2000.
10.15 Separation Agreement between Daniel A. Gerrity and the Registrant dated November 15, 2000.
12.1 Ratio of Earnings to Fixed Charges.
21.1(6) Subsidiaries.
23.1 Consent of Deloitte & Touche LLP.
- ---------------------
(1) Incorporated by reference to the Registrant's Registration Statement on
Form S-4 (No. 333-33233).
(2) Incorporated by reference to the Registrant's 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 current Report on Form 8-K
(File Number 000-22555) filed by Coinstar on March 3, 1999.
(5) Incorporated by reference to the Current Report on Form 8-K (File Number
000-22555) filed by Coinstar on February 18, 2000.
(6) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1998.
(7) Incorporated by reference to the Registrant's Quarterly Report on Form 10-
Q for the Quarter Ended September 30, 2000.
62