Redbox 2006 Annual Report Download

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COIN
E-PAYMENT
ENTERTAINMENT
BULK VENDING
MONEY TRANSFER
DVD RENTAL
2006 ANNUAL REPORT

Table of contents

  • Page 1
    2 0 0 6 ANNUAL REPORT COIN E-PAYMENT ENTERTAINMENT BULK VENDING MONEY TRANSFER DVD RENTAL

  • Page 2
    ... card offerings. During the past year, we also acquired Travelex Money Transfer Limited, now known as Coinstar Money Transfer or CMT. We believe this is an exciting category with attractive economics and growth potential. Consistent with our strategy, we made investments within our existing lines...

  • Page 3
    ... whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes ' No È The aggregate market value of the common stock held by non-affiliates of the registrant, based upon the closing price of our common stock on June 30, 2006 as reported on the NASDAQ Global Select...

  • Page 4
    ... 19 Page 19 Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities ...Page 20 Item 6. Selected Consolidated Financial Data ...Page 21 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ...Page 22...

  • Page 5
    ...cards, prepaid debit cards and money transfer services. In addition, through our strategic investments in Redbox Automated Retail, LLC ("Redbox") and Video Vending New York, Inc. (d.b.a. "DVDXpress"), we offer self-service DVD kiosks where consumers can rent or purchase movies. We also offer a range...

  • Page 6
    ... services We offer e-payment services, including activating and reloading value on prepaid wireless accounts, selling stored value cards, loading and reloading prepaid debit cards and prepaid phone cards, prepaid phones and providing payroll card services such as balance inquiry and wage statement...

  • Page 7
    ... lives within five miles of one of our coin-counting machines. In addition, we are the leading owner and operator of skill-crane and bulk vending machines in the United States, with more than 300,000 pieces of equipment installed in more than 35,000 retail locations. Profitable, turn-key solutions...

  • Page 8
    ...new services, while increasing store profits for the retailer. We believe the front end of retail stores has long been under-utilized and believe our 4th Wall strategy is a competitive advantage that will drive our growth in the retail environment for years to come. International growth. During 2006...

  • Page 9
    ... Get Information We File with the SEC We file with, and furnish to, the Securities and Exchange Commission ("SEC"), reports including annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, as well as amendments thereto. We maintain a website, www.coinstar.com...

  • Page 10
    ...including our money transfer business, we will need to enhance the capabilities of our coin-counting machines and e-payment machines and equipment, as well as our related network and systems through appropriate technological solutions, and establish market acceptance of such products or services. We...

  • Page 11
    ...accounts, stored value cards, debit cards, payroll services and money transfer services, faces competition from a variety of types of providers, including, among others, national distributors of similar cards, other retailers who provide these services themselves, as well as money transfer companies...

  • Page 12
    ... business, financial condition and results of operations. We have substantial indebtedness. On July 7, 2004, we entered into a senior secured credit facility to finance our acquisition of ACMI. The credit facility consists of a $60.0 million revolving credit facility and a $250.0 million term loan...

  • Page 13
    ... to provide new products and services, including additional e-payment services, we are increasing the amount of consumer data that we collect, transfer and retain as part of our business. These activities are subject to laws and regulations, as well as industry standards, in the United States and...

  • Page 14
    ... timing of, and our ability to develop and successfully commercialize, new or enhanced products and services, the level of product and price competition, our success in maintaining and expanding our network and managing our growth, the successful operation of our coin-counting and e-payment network...

  • Page 15
    ... e-payment services, including stored value card and money transfer transactions. There can be no assurance that we will be granted all necessary licenses in the future or that current licenses will be renewed. Given the unique nature of our business and new products and services we may develop or...

  • Page 16
    e-payment machines and entertainment services equipment internationally. In addition, our money transfer services are offered in over 142 countries, and we expect to continue expanding that area of our business over time. Accordingly, political uncertainties, civil unrest, exchange rate fluctuations...

  • Page 17
    ...transfer services revenue is generated through an agent network spanning 142 countries. Agents include banks and other financial institutions, regional micro-finance companies, chain stores and local convenience stores. Transaction volumes at existing agent locations often increase over time and new...

  • Page 18
    ... performance is a direct reflection of customer use of and the ability to operate and service the coin-counting, entertainment and e-payment services machines and equipment used in our business. Severe weather, natural disasters and other events beyond our control can, for extended periods of time...

  • Page 19
    ... operations, products, technology, information systems or personnel of an acquired company, managing relationships with other investors and the companies in which we have made investments, impairment of relationships with employees, retailers and affiliates of our business and the acquired business...

  • Page 20
    ... or new products or services by us or our competitors, ineffective internal controls, industry developments, and economic or other external factors. In addition, the securities markets have experienced significant price and volume fluctuations that are unrelated to the operating performance of...

  • Page 21
    ...most of our 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...

  • Page 22
    ... Issuer Purchases of Equity Securities. Market Information Our common stock is traded on the NASDAQ Global Select Market under the symbol "CSTR." The following table sets forth the high and low bid prices per share as reported by the NASDAQ Global Select Market for our common stock for each quarter...

  • Page 23
    ... Financial Statements of Coinstar, Inc. and related Notes thereto included elsewhere in this Annual Report on Form 10-K. 2006 Year Ended December 31, 2005 2004 2003 (in thousands, except per share data) 2002 Consolidated Statements of Operations: REVENUE ...EXPENSES: Direct operating ...Marketing...

  • Page 24
    ... prepaid wireless products, stored value cards, payroll cards, prepaid debit cards and money transfer services. In addition, through our strategic investments in Redbox and DVDXpress, we offer self-service DVD kiosks where consumers can rent or purchase movies. We also offer a range of point-of-sale...

  • Page 25
    ... evaluating new marketing and promotional programs to increase consumer utilization of our services as well as further expand our product research and development efforts. Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations is...

  • Page 26
    ... revenue per machine, multiplied by the 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. Money transfer revenue is recognized at the time the customer completes...

  • Page 27
    ... on a straight-line basis over their expected useful lives. Fees paid to retailers: Fees paid to retailers relate to the amount we pay our retailers for the benefit of placing our machines in their stores and their agreement to provide certain services on our behalf to our customers. The fee is...

  • Page 28
    ... 13,500, 12,800 and 12,100, respectively. The increase in the number of machines, as well as the increased usage of our existing machines, accounted for the majority of these increases in revenue. Our e-payment prepaid telephony and stored value card sales have increased year over year and...

  • Page 29
    ...channels such as our stored value card offerings. This directed marketing and advertising approach, which we expect to continue in 2007, continues driving increased trial and repeat usage of both our coin services offering and e-payment products. Marketing as a percentage of revenue was 2.7% in 2006...

  • Page 30
    ... support development and design of complementary new product ideas and continue our ongoing efforts to enhance our existing products and services, primarily our coin-counting system. It is our intent to continue to invest in research and development in the coming years. Since revenues have increased...

  • Page 31
    ... being processed represents coin residing in our coin-counting or entertainment services machines or being processed by carriers which we are mainly obligated to use to settle our accrued liabilities payable to our retailer partners. Working capital was $73.1 million at December 31, 2006, compared...

  • Page 32
    ...machines. Net cash used by financing activities for the year ended December 31, 2006, was $25.8 million compared to net cash provided by financing activities of $1.8 million in the prior year period. In 2006, net cash provided by financing activities represented the proceeds of employee stock option...

  • Page 33
    ... October 7, 2004, 2005 and 2006. The LIBOR floor rates were set at 1.85%, 2.25% and 2.75% for each of the respective one-year periods. Under this interest rate hedge, we will continue to pay interest at prevailing rates plus any spread, as defined by our credit facility, but will be reimbursed for...

  • Page 34
    ... the timing and number of machine installations, the number of available installable machines, the type and scope of service enhancements and the cost of developing potential new product and service offerings and enhancements. Off-Balance Sheet Arrangements As of December 31, 2006, off-balance sheet...

  • Page 35
    ...the periods. On July 7, 2004, we entered into a senior secured credit facility. As of December 31, 2006, our credit agreement provides for advances totaling up to $247.0 million, consisting of a $60.0 million revolving credit facility and a $187.0 million term loan facility. Included in the terms of...

  • Page 36
    ... balances to conform with the current year presentation. Dec. 31, 2006 Sept. 30, 2006 Three Month Periods Ended June 30, March 31, Dec. 31, Sept. 30, 2006 (1) 2006 2005 (2) 2005 (in thousands, except per share data) (unaudited) June 30, 2005 March 31, 2005 Consolidated Statements of Operations...

  • Page 37
    ...our consolidated financial statements as of and for the year ended December 31, 2006. Our management's assessment of the effectiveness of our internal control over financial reporting as of December 31, 2006 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in...

  • Page 38
    ... herein by reference to the Proxy Statement relating to our 2007 Annual Meeting of Stockholders. Item 14. Principal Accountant Fees and Services. The information required by this item is incorporated herein by reference to the Proxy Statement relating to our 2007 Annual Meeting of Stockholders. 36

  • Page 39
    ... this Annual Report on Form 10-K. Page (a)(1) (a)(2) (a)(3) Index to Financial Statements Reports of Independent Registered Public Accounting Firm-KPMG LLP ...Consolidated Balance Sheets ...Consolidated Statements of Operations ...Consolidated Statements of Stockholders' Equity and Comprehensive...

  • Page 40
    ... and Restated Equity Incentive Plan Stock Option Grant Notice. (10) Form of Indemnity Agreement between Registrant and its Executive Officers and Directors. (4) Form of Release Agreement. (11) Summary of 2007 Base Salaries for 2006 Named Executive Officers. Form of Restricted Stock Award under...

  • Page 41
    ...) Transitional Services Agreement dated May 31, 2006 between Travelex Limited, Travelex Money Transfer Limited and Registrant. (23) Form of Restricted Stock Award under the 1997 Amended And Restated Equity Incentive Plan for Awards Made to Nonemployee Directors. (24) Form of Stock Option Grant under...

  • Page 42
    ...2006 (File Number 000-22555). (20) Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2005 (File Number 000-22555). (21) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2006 (File Number...

  • Page 43
    ... the undersigned, thereunto duly authorized. Coinstar, Inc. By: /s/ BRIAN V. TURNER Brian V. Turner Chief Financial Officer Date: March 9, 2007 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 44
    ... of the internal control over financial reporting of CMT. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Company as of December 31, 2006 and 2005, and the related consolidated statements of...

  • Page 45
    ... (revised 2004), Share-Based Payment, effective January 1, 2006. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Coinstar, Inc.'s internal control over financial reporting as of December 31, 2006, based on...

  • Page 46
    COINSTAR, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share data) December 31, 2006 2005 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 $1,050 and $469 in ...

  • Page 47
    COINSTAR, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) Year Ended December 31, 2006 2005 2004 REVENUE ...EXPENSES: Direct operating ...Marketing ...Research and development ...General and administrative ...Depreciation and other ...Amortization of intangible ...

  • Page 48
    ...25,227,487 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 share-based compensation ...Equity purchase of assets, net of issuance cost of $66 ...2,057,272...

  • Page 49
    ... of stock options and issuance of shares under employee stock purchase plan ...Financing costs associated with long-term credit facility ...Net cash (used) provided by financing activities ...Effect of exchange rate changes on cash ...NET INCREASE IN CASH AND CASH EQUIVALENTS, CASH IN MACHINE OR...

  • Page 50
    ..., Coinstar is a multi-national company offering a range of 4th Wallâ„¢ solutions for retailers' storefronts consisting of self-service coin counting, electronic payment ("e-payment") services such as money transfer services, stored value cards, payroll cards, prepaid debit cards and prepaid wireless...

  • Page 51
    ... 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 lease term shorter of lease term or useful life of improvement Equity investments...

  • Page 52
    ...the allocation period, which is within one year of the purchase date. Goodwill and intangible assets: Goodwill represents the excess of cost over the estimated fair value of net assets acquired, which is not being amortized. We test goodwill for impairment at the reporting unit level on an annual or...

  • Page 53
    ... daily revenue per machine, multiplied by the 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. Money transfer revenue is recognized at the time the customer completes...

  • Page 54
    ... stock option awards. Disclosures for the year ended December 31, 2006, are not presented because the amounts are recognized in the consolidated financial statements. Year Ended December 31, 2005 2004 (in thousands, except per share data) Net income as reported: ...Add: Total stock-based employee...

  • Page 55
    ...term (in years) ...Expected stock price volatility ...Risk-free interest rate ...Expected dividend yield ...Estimated fair value per option granted ... 3.6 4.6 47% 52% 4.6% 4.0% 0.0% 0.0% $9.87 $11.07 4.5 69% 3.4% 0.0% $10.98 The expected term of the options represents the estimated period of time...

  • Page 56
    COINSTAR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) YEARS ENDED DECEMBER 31, 2006, 2005, AND 2004 Prior to the adoption of SFAS 123R we presented all tax benefits resulting from the exercise of stock options as operating cash inflows in the consolidated statements of cash flows, in...

  • Page 57
    ... post offices, and other retail locations to supply its service. CMT was established in mid-2003 and uses leading edge Internet-based technology to provide consumers with an easy-to-use, reliable and cost-effective way to send money around the world. We acquired CMT in order to enhance our e-payment...

  • Page 58
    ... FINANCIAL STATEMENTS-(Continued) YEARS ENDED DECEMBER 31, 2006, 2005, AND 2004 The total purchase consideration has been allocated to the assets acquired and liabilities assumed, including identifiable intangible assets, based on their respective fair values at the acquisition date. The accounting...

  • Page 59
    ...United States with a complete line of amusement vending services for retailers including skill-crane machines, bulk vending, kiddie rides and video games. In addition to the purchase price, we incurred approximately $0.5 million in transaction costs including amounts relating to legal and accounting...

  • Page 60
    ...TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) YEARS ENDED DECEMBER 31, 2006, 2005, AND 2004 facility. Additionally, on December 7, 2005 we signed an asset purchase option agreement that allows Coinstar to purchase substantially all of DVDXpress' business assets and liabilities in exchange for any...

  • Page 61
    ... the life of the revolving line of credit and the term loan which are 5 years and 7 years, respectively. We amortize deferred finance fees on a straight-line basis which approximates the effective interest method. Loans made pursuant to the credit agreement are secured by a first security interest...

  • Page 62
    ... the critical terms of the interest rate cap and floor and the underlying obligation are the same, there was no ineffectiveness recorded in the consolidated statements. NOTE 7: COMMITMENTS Lease commitments: Our corporate administrative, marketing and product development facility is located in a 46...

  • Page 63
    ... TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) YEARS ENDED DECEMBER 31, 2006, 2005, AND 2004 In addition, we have entered into capital lease agreements to finance the acquisition of certain automobiles. These capital leases have terms of 36 to 60 months at imputed interest rates that range from...

  • Page 64
    ...-Employee Directors' Stock Option Plan. Stock options have been granted to non-employee directors to purchase our common stock at prices of $7.38 to $32.64 per share, which represented the fair market value at the date of grant. The price ranges of all options exercised were $0.70 to $31.49 in 2006...

  • Page 65
    ... year, respectively. During 2006 and 2005, we granted 7,500 and 85,050, respectively, restricted stock awards with a weighted average fair value of $22.77 and $24.49, respectively, per share, the respective market price of the stock at grant date. The restricted share units require no payment from...

  • Page 66
    ... CONSOLIDATED FINANCIAL STATEMENTS-(Continued) YEARS ENDED DECEMBER 31, 2006, 2005, AND 2004 under this plan was 600,000. Eligible employees participated through payroll deductions in amounts related to their basic compensation. At the end of each six-month offering period, shares were purchased by...

  • Page 67
    ... for financial reporting purposes and the carrying amounts used for income tax purposes. Future tax benefits for net operating loss and tax credit carryforwards are also recognized to the extent that realization of such benefits is more likely than not. In determining our fiscal 2006, 2005...

  • Page 68
    ... $34.1 million of the net operating loss carry forward is subject to limitation under the provisions of Section 382 of the Internal Revenue Code. In May of 2006 we acquired Travelex Money Transfer Limited and recorded a deferred tax liability of $2.7 million for acquired intangibles that had no tax...

  • Page 69
    ... STATEMENTS-(Continued) YEARS ENDED DECEMBER 31, 2006, 2005, AND 2004 During 2006, we performed a study of our state net operating losses and a study of our qualifying research and development credits. As a result of these studies, we adjusted the carrying amount of the related deferred tax balances...

  • Page 70
    COINSTAR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) YEARS ENDED DECEMBER 31, 2006, 2005, AND 2004 We also maintain a 401(k) profit sharing plan, which covers substantially all of the employees of our entertainment services subsidiaries. Employees are permitted to contribute up to ...

  • Page 71
    ...100 We have coin-counting, entertainment and e-payment machines that are placed with retailers that accounted for the following percentages of our consolidated revenue: Year ended December 31, 2006 2005 2004 Wal-Mart, Inc...The Kroger Company ...NOTE 15: CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES...

  • Page 72
    ... services subsidiary, is a member of a limited liability company which has agreed to lease to Coinstar a 31,000 square foot building located in Louisville, Colorado. The terms of the agreement provide for a ten year lease term, commencing March 1, 2003, at monthly rental payments ranging...

  • Page 73
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  • Page 74
    ... return of an investment of $100 on December 31, 2001 for (i) Coinstar common stock; (ii) the NASDAQ Composite Index; and (iii) the Russell 2000 Index. All values assume reinvestment of dividends and are plotted below as of December 31 of each fiscal year shown. The stock price performance...

  • Page 75
    ....'s control. For more information on factors that may affect future performance, please review "Risk Factors" described in Item 1A of Part I of our Annual Report on Form 10-K enclosed herein and filed with the Securities and Exchange Commission. These forward-looking statements reflect Coinstar, Inc...

  • Page 76
    ©2007 Coinstar, Inc. 3103.0407