Redbox 2005 Annual Report Download

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05Annual Report

Table of contents

  • Page 1
    05 Annual Report

  • Page 2
    ... product line to our 4th Wall portfolio. Through an investment in Redbox Automated Retail, LLC with McDonald's Ventures, and a stake in Video Vending New York, Inc. (d/b/a DVDXpress), Coinstar now offers DVD rental kiosks to its customers. Redboxâ„¢ is the leading self-service DVD rental kiosk...

  • Page 3
    ... One) È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2005 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...

  • Page 4
    ...Risk Factors ...Properties ...Legal Proceedings ...Submission of Matters to a Vote of Security Holders ...Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities ...Selected Consolidated Financial Data ...Management's Discussion and Analysis...

  • Page 5
    ..., shopping malls, supermarkets and convenience stores in the United States and the United Kingdom. Due to our recent strategic investments with Video Vending New York, Inc. (d.b.a. "DVDXpress") and Redbox Automated Retail, LLC ("Redbox"), we are now able to offer self-service DVD kiosks where...

  • Page 6
    ... sales, marketing, research and development, quality control, customer service operations and administration. In addition, our main entertainment services office is located in Louisville, Colorado. As of December 31, 2005, we had approximately 2,000 employees. We believe our employee relations are...

  • Page 7
    ...and prepaid phone cards and providing payroll card services. We believe these and other e-payment services represent a significant growth opportunity for us. We offer various e-payment services through point-of-sale terminals, stand-alone e-payment kiosks and e-payment-enabled coin-counting machines...

  • Page 8
    ... kiosk businesses through our acquisitions, strategic alliances and product line extensions, as well as explore other services designed to drive traffic to the front end of retail locations, the 4th Wall. Place more units. We expect continued growth through new distribution; both new channels...

  • Page 9
    ... We File with the SEC We file annual, quarterly and current reports (including amendments), as well as registration and proxy statements and other information, with the SEC. These documents are available free of charge on our website at www.coinstar.com under: About Us-Investor Relations-SEC Filings...

  • Page 10
    ... services machines at historical levels of profitability. We have faced and continue to face ongoing pricing pressure from our current retail partners to increase the service fee we pay to them on coin and entertainment services or to make other financial concessions to win or retain business...

  • Page 11
    ...example, as compared to our coincounting business, our entertainment services business incurs higher operating expenses, due in part to such factors as maintaining inventory of consumer products to support our skill-crane and bulk vending machine businesses. Our experience in evaluating inventory of...

  • Page 12
    ... and the assets of our subsidiaries, as well as a pledge of our subsidiaries' capital stock. The credit facility matures on July 7, 2011. This debt financing may limit our ability to effect future financings or may negatively impact our business, financial condition, results of operations and growth...

  • Page 13
    ... trademarks, copyrights, trade secrets and other proprietary intellectual property to develop and maintain our competitive position. Although we protect our intellectual property in part by confidentiality agreements with our employees, consultants, vendors and corporate partners, these parties may...

  • Page 14
    .... As part of our business strategy, we have in the past sought and may in the future seek to acquire or invest in businesses, products or technologies that we feel could complement or expand our business. We may be unable to adequately address the financial, legal and operational risks raised...

  • Page 15
    ... our entertainment services machines, internationally resulting in significant transportation-related costs. Petroleumbased resins are used in the manufacture of these products. In addition, we operate a large number of vehicles used by our field service personnel for the purpose of servicing and...

  • Page 16
    ... performance is a direct reflection of customer use of and our ability to operate and service our coin-counting and entertainment services machines installed in retail and similar locations. Severe weather, natural disasters and other events beyond our control can, for extended periods of time...

  • Page 17
    ... one or more retail partner relationships, operating results below market expectations and changes in, or our failure to meet, financial estimates of securities analysts or our own guidance, trends and fluctuations in the use of our coin-counting and entertainment services machines, period-to-period...

  • Page 18
    ... sales, marketing, research and development, quality control, customer service operations and administration. In addition, our main entertainment services office is located in Louisville, Colorado. Our corporate administrative, marketing and product development facility is located in a 46,070 square...

  • Page 19
    ... Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. 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...

  • Page 20
    ...number of shares used in computing net income per share information, basic and diluted. (2) Excludes balances related to Meals.com, as the operations were discontinued during 2001. (3) Cash in machines or in transit is unavailable for immediate cash requirements as it represents cash being processed...

  • Page 21
    ...annual report. Overview We are a multi-national company offering a range of 4th Wall solutions for retailers' storefront consisting of self-service coin counting; e-payment services such as stored value cards, payroll cards, prepaid MasterCard® cards and prepaid wireless products; and entertainment...

  • Page 22
    ...and prepaid phone cards and providing payroll card services. We believe these and other e-payment services represent a significant growth opportunity for us. We offer various e-payment services through point-of-sale terminals, stand-alone e-payment kiosks and e-payment-enabled coin-counting machines...

  • Page 23
    ... Financial Statements. We are depreciating the cost of our coin-counting and entertainment services machines over periods that range from 3 to 10 years and have determined that these lives are appropriate based on our analysis which included a review of historical data and trends, as well...

  • Page 24
    ...used expectations of future cash flows to estimate the fair value of the acquired retailer relationships. We amortize our intangible assets over their expected useful lives, which range from 3 to 10 years. Fees paid to retailers: Fees paid to retailers relate to the amount we pay our retail partners...

  • Page 25
    ..., accounted for the majority of this increase in revenue. We expect to continue installing additional coin and e-payment machines and therefore, expect this trend to continue in the foreseeable future. Direct Operating Expenses Direct operating expenses for our 4th Wall product and service offerings...

  • Page 26
    ... product channels like our gift card mall offerings. Our regional introduction of e-payment products enables us to use cost effective regional marketing strategies rather than more expensive national marketing campaigns. This directed marketing and advertising approach continues driving increased...

  • Page 27
    ... of entertainment subsidiary companies over the last two years and the related costs of providing administrative support to our subsidiary businesses. Our increased general and administrative expenditures represent the incremental cost of supporting subsidiary companies with regional offices...

  • Page 28
    ... million in the prior year period. During 2005 net cash provided by financing activities represented cash received from the proceeds of employee stock option exercises net of cash used to make principal payments on debt. During 2004 we refinanced an existing credit facility by retiring $7.8 million...

  • Page 29
    ... unpaid balance of the loan will bear interest at an annual rate equal to LIBOR plus three percent. As of December 31, 2005, DVDXpress has drawn down $3.5 million on this credit facility. Additionally, on December 7, 2005 we signed an asset purchase option agreement that allows Coinstar to purchase...

  • Page 30
    ... minimum taxes. Off-Balance Sheet Arrangements As of December 31, 2005, off-balance sheet arrangements are comprised of our conditional consideration agreement related to our equity investment disclosed in Note 2 to our Consolidated Financial Statements, obligations under our interest rate hedge...

  • Page 31
    ... number of factors, including cash required by future acquisitions, our consumer usage, the timing and number of machine installations, the number of available installable machines held, the type and scope of service enhancements and the cost of developing potential new product and service offerings...

  • Page 32
    ...Because our investments have maturities of three months or less, and our credit facility interest rates are based upon either the LIBOR or base rate plus an applicable margin, we believe that the risk of material loss is low and that the carrying amount of these balances approximates fair value. For...

  • Page 33
    ...the current rate in effect at the end of 2005. The rate is based on LIBOR plus a margin of 2.0%. The table below presents principal amounts, at book value, by year of maturity and related weighted average interest rates. Liabilities Expected Maturity Date December 31, 2005 Average interest rate (in...

  • Page 34
    ... Factory, and total revenues of $18.7 million, including $9.0 million related to Amusement Factory, included in our consolidated financial statements as of and for the year ended December 31, 2005. Our management's assessment of internal control over financial reporting also excluded an evaluation...

  • Page 35
    ... herein by reference to the Proxy Statement. Item 13. Certain Relationships and Related Transactions. The information required by this item is incorporated herein by reference to the Proxy Statement. Item 14. Principal Accountant Fees and Services. The information required by this item is...

  • Page 36
    ... Coin Merchandising, Inc. and Wellspring Capital Management LLC, as Stockholder Representative. LLC Interest Purchase Agreement dated November 17, 2005 by and among Redbox Automated Retail, LLC, McDonald's Ventures, LLC and Coinstar, Inc. Asset Purchase Agreement by and among The Amusement Factory...

  • Page 37
    ...Inc., as Syndication Agent, and JPMorgan Chase Bank, as Administrative Agent. Lease Agreement, dated January 1, 2004, by and between Registrant and EOP Operating Limited Partnership. Industrial Building Lease, dated October 24, 2002, by and between FCF Properties, LLC and American Coin Merchandising...

  • Page 38
    ... 2005 (File Number 000-22555). (20) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the Quarter ended June 30, 2004 (File Number 000-22555). (21) Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2001 (File Number...

  • Page 39
    ... undersigned, thereunto duly authorized. Coinstar, Inc. By: /s/ BRIAN V. TURNER Brian V. Turner Chief Financial Officer Date: February 24, 2006 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...

  • Page 40
    ...the consolidated balance sheets of the Company as of December 31, 2005 and 2004, and the related consolidated statements of operations, stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2005, and our report, dated February...

  • Page 41
    ...of the Public Company Accounting Oversight Board (United States), the effectiveness of Coinstar, Inc.'s internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the...

  • Page 42
    COINSTAR, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share data) December 31, 2005 2004 ASSETS CURRENT ASSETS: Cash and cash equivalents ...Cash in machine or in transit ...Cash being processed ...Trade accounts receivable, net of allowance for doubtful accounts of $469 and $481 in 2005...

  • Page 43
    ...STATEMENTS OF OPERATIONS (in thousands, except per share data) Year Ended December 31, 2005 2004 2003 REVENUE ...EXPENSES: Direct operating ...Marketing ...Research and development ...General and administrative ...Depreciation and other ...Amortization of intangible assets ...Income from operations...

  • Page 44
    ... Proceeds from issuance of shares under employee stock purchase plan ...82,454 Proceeds from exercise of stock options, net ...323,633 Stock-based compensation expense ...84,782 Tax benefit on options and employee stock purchase plan ...Equity purchase of assets, net of issuance cost of $66 ...2,057...

  • Page 45
    ... on early retirement of debt ...Non-cash stock-based compensation ...Deferred income taxes ...Return on equity investments ...Other ...Cash provided (used) by changes in operating assets and liabilities, net of effects of business acquisitions: Accounts receivable ...Inventory ...Prepaid expenses...

  • Page 46
    ...STATEMENTS YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003 NOTE 1: ORGANIZATION AND BUSINESS Description of company: Incorporated as a Delaware company in 1993, Coinstar is a multi-national company offering a range of 4th Wall â„¢ solutions for the retailers' front of store consisting of self-service...

  • Page 47
    ... lives. Useful Life Coin-counting and e-payment machines ...Entertainment services machines ...Vending machines ...Computers ...Office furniture and equipment ...Leased vehicles ...Leasehold improvements ... 5 years 10 years 3 to 5 years 3 years 5 years 3 years 5 to 7 years Equity investments...

  • Page 48
    ...2005. A third-party consultant used expectations of future cash flows to estimate the fair value of the acquired retailer relationships. We amortize our intangible assets on a straight-line basis over their expected useful lives, which range from 3 to 10 years. The gross carrying amounts and related...

  • Page 49
    ... number of days since the coin in the machine has been collected; E-payment services revenue is recognized at the point of sale based on our commissions earned, net of retailer fees. • Fees paid to retailers: Fees paid to retailers relate to the amount we pay our retail partners for the benefit...

  • Page 50
    ... the years in which those temporary differences and operating loss and tax credit carryforwards are expected to be recovered or settled. Research and development: Costs incurred for research and development activities are expensed as incurred. Software costs developed for internal use are accounted...

  • Page 51
    ...cost relating to sharebased payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. In April 2005, the SEC delayed the effective date of SFAS 123(R) until January 1, 2006 for calendar year companies...

  • Page 52
    ...other distribution channels. These entertainment services include skill-crane machines, bulk vending, kiddie rides and video games. We acquired ACMI in order to add new classes of trade, broaden our retailer base, diversify services, expand the reach of field service and create a platform for growth...

  • Page 53
    ... FINANCIAL STATEMENTS-(Continued) YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003 The following condensed balance sheet data presents the final determination of fair value of the assets acquired and liabilities assumed. (in thousands) Assets acquired: Cash and cash equivalents ...Trade accounts...

  • Page 54
    ... are 5 years and 7 years, respectively. Loans made pursuant to the credit agreement are secured by a first security interest in substantially all of our assets and the assets of our subsidiaries, as well as a pledge of our subsidiaries' capital stock. The credit facility matures on July 7, 2011. As...

  • Page 55
    ... FINANCIAL STATEMENTS-(Continued) YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003 the LIBOR or base rate plus an applicable margin dependent upon a consolidated leverage ratio of outstanding indebtedness to EBITDA (to be calculated in accordance with the terms specified in the credit agreement...

  • Page 56
    ... expense on our income statement to terminate this interest rate swap. NOTE 8: COMMITMENTS Lease commitments: Our corporate administrative, marketing and product development facility is located in a 46,070 square foot facility in Bellevue, Washington, under a lease that expires December 1, 2009...

  • Page 57
    ... Plan. Stock options have been granted to officers and employees to purchase common stock at prices ranging from $0.70 to $32.48 per share, which represented fair market value at the date of grants and our best estimate of fair market value for grants issued prior to our initial public offering. We...

  • Page 58
    ...-Employee Directors' Stock Option Plan. Stock options have been granted to non-employee directors to purchase our common stock at prices of $7.75 to $30.00 per share, which represented the fair market value at the date of grant. The price ranges of all options exercised were $0.70 to $23.30 in 2005...

  • Page 59
    ... CONSOLIDATED FINANCIAL STATEMENTS-(Continued) YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003 under this plan is 600,000. Eligible employees may participate through payroll deductions in amounts related to their basic compensation. At the end of each six-month offering period, shares are purchased by...

  • Page 60
    ... the Internal Revenue Code. In determining our fiscal 2005, 2004 and 2003 tax provisions under SFAS No. 109, Accounting for Income Taxes, management determined the deferred tax assets and liabilities for each separate tax entity. Management then considered a number of factors including the positive...

  • Page 61
    ... shares from employee stock options ...Weighted average shares for diluted calculation ... $22,272 25,767 - 266 26,033 $20,368 21,626 - 333 21,959 $19,555 21,489 2 297 21,788 For the years ended December 31, 2005, 2004 and 2003, options to acquire 1.2 million, 1.3 million and 2.0 million shares...

  • Page 62
    ... profit or loss, certain specific revenue and expense items and segment assets. The method for determining what information is reported is based on the way that management organizes the operating segments for making operational decisions and assessments of financial performance. Our chief operating...

  • Page 63
    ... STATEMENTS-(Continued) YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003 Currently, management does not use product line financial performance as a basis for business operating decisions. However, our CEO does analyze our revenue based on revenue generated from our coin-counting and e-payment service...

  • Page 64
    ... FINANCIAL STATEMENTS-(Continued) YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003 payments ranging from $25,353 for the first year to $33,076 for the tenth year, together with additional payments in respect of the tenant's proportionate share of the maintenance and insurance costs and property tax...

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  • Page 67
    ... 2005 we combined and increased our sales teams from our various subsidiaries. In addition, we began to integrate our field service staff this past year and saw early successes - this integration effort will continue in 2006. Coinstar is committed to our 4th Wall program to help drive future growth...

  • Page 68
    ... Exchange Listing Coinstar common stock is traded on the NASDAQ National Market under the symbol CSTR. Note Regarding Forward-Looking Statements Contained in this Annual Report. This annual report contains forward-looking statements covered by the safe harbor provisions under the Private Securities...