<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q/A
AMENDMENT NO. 1
(MARK ONE)
<TABLE>
<S> <C>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE
ACT OF 1934
FOR QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
</TABLE>
COMMISSION FILE NUMBER: 0-22555
------------------------
COINSTAR, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 94-3156448
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1800 114TH AVENUE SE, BELLEVUE, 98004
WASHINGTON (Zip Code)
(Address of principal executive
offices)
</TABLE>
(425) 943-8000
(Registrant's telephone number, including area code)
13231 SE 36TH STREET
SUITE 200
BELLEVUE, WASHINGTON 98006
(206) 644-6789
(Former name, former address and former fiscal year, if changed since last
report)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
------------------------
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
<TABLE>
<S> <C>
CLASS OUTSTANDING AT SEPTEMBER 30, 1997
Common Stock, $0.001 par value 14,948,847
</TABLE>
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<PAGE>
Amendment No. 1 to the Quarterly Report on Form 10-Q, for the quarter ended
September 30, 1997, is filed for the purpose of amending Exhibit 27.1.
COINSTAR, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
NO.
------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Balance Sheets as of September 30, 1997 and December 31, 1996........................ 1
Statements of Operations for the three and nine months ended September 30, 1997 and
1996............................................................................... 2
Statement of Stockholders' Equity (Deficit) for the nine months ended September 30,
1997............................................................................... 3
Statements of Cash Flows for the nine months ended September 30, 1997 and 1996....... 4
Notes to Financial Statements for the three and nine months ended September 30, 1997
and 1996........................................................................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations......................................................................... 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................................... 24
Item 2. Changes in Securities and Use of Proceeds............................................ 24
Item 6. Exhibits and Reports on Form 8-K..................................................... 24
SIGNATURES.................................................................................... 26
EXHIBIT INDEX................................................................................. 27
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COINSTAR, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................... $ 23,867,763 $ 32,646,230
Short-term investments available for sale....... 32,441,912 29,036,249
Prepaid expenses and other current assets....... 865,000 1,385,124
------------ -------------
Total current assets.......................... 57,174,675 63,067,603
PROPERTY AND EQUIPMENT, net....................... 22,459,254 40,606,010
OTHER ASSETS...................................... 2,897,177 3,470,494
------------ -------------
TOTAL......................................... $ 82,531,106 $ 107,144,107
------------ -------------
------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable................................ $ 1,779,702 $ 3,966,720
Accrued liabilities............................. 7,690,288 16,224,333
Current portion of long-term debt and capital
lease obligations............................. 910,535 1,619,144
------------ -------------
Total current liabilities..................... 10,380,525 21,810,197
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS...... 69,154,936 75,205,623
MANDATORILY REDEEMABLE PREFERRED STOCK............ 24,972,084
COMMITMENTS AND CONTINGENCIES (Note 5):
TOTAL STOCKHOLDERS' EQUITY (DEFICIT)............ (21,976,439) 10,128,287
------------ -------------
TOTAL......................................... $ 82,531,106 $ 107,144,107
------------ -------------
------------ -------------
</TABLE>
See notes to financial statements
1
<PAGE>
COINSTAR, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ----------------------
1996 1997 1996 1997
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUE.................................. $4,963,344 $17,050,337 $2,829,701 $7,761,755
EXPENSES:
Direct operating....................... 4,318,486 12,691,275 2,110,065 5,275,623
Regional sales and marketing........... 1,010,435 2,399,701 395,679 797,875
Product research and development....... 2,436,194 4,717,497 1,013,857 1,637,201
Selling, general, and administrative... 3,364,665 7,826,712 1,425,051 2,669,422
Depreciation and amortization.......... 2,392,717 6,139,623 1,097,740 2,297,085
---------- ----------- ---------- ----------
Loss from operations..................... (8,559,153) (16,724,471) (3,212,691) (4,915,451)
OTHER INCOME (EXPENSE):
Interest income........................ 276,874 1,730,488 22,321 710,206
Interest expense....................... (590,424) (7,258,108) (335,488) (2,499,432)
---------- ----------- ---------- ----------
NET LOSS................................. $(8,872,703) $(22,252,091) $(3,525,858) $(6,704,103)
---------- ----------- ---------- ----------
---------- ----------- ---------- ----------
Net loss per share..................... $ (0.85) $ (1.96) $ (0.34) $ (0.47)
---------- ----------- ---------- ----------
---------- ----------- ---------- ----------
Weighted average shares outstanding.... 10,459,883 11,370,787 10,459,883 14,199,582
---------- ----------- ---------- ----------
---------- ----------- ---------- ----------
</TABLE>
See notes to financial statements.
2
<PAGE>
COINSTAR, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
SERIES A SERIES B
COMMON STOCK PREFERRED STOCK PREFERRED STOCK CONTRIBUTED
--------------------- -------------------- --------------------- CAPITAL FOR ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT WARRANTS DEFICIT TOTAL
--------- ---------- --------- --------- --------- ---------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December
31, 1996......... 793,059 $ 18,396 649,775 $ 649,775 895,506 $3,582,034 $2,621,160 ($28,847,804) $(21,976,439)
Exercise of stock
options.......... 196,411 77,479 -- -- -- -- -- -- 77,479
Conversion of
Series A
Preferred........ 649,775 649,775 (649,775) (649,775) -- -- -- -- 0
Conversion of
Series B
Preferred........ 1,023,399 3,582,034 -- -- (895,506) (3,582,034) -- -- 0
Conversion of
Mandatorily
Redeemable
Preferred
Stock............ 7,315,795 24,972,084 -- -- -- -- -- -- 24,972,084
Exercise of common
stock warrants... 1,970,408 3,245,165 -- -- -- -- (1,982,889) -- 1,262,276
Issuance of Common
Stock............ 3,000,000 28,042,873 -- -- -- -- -- -- 28,042,873
Unrealized loss on
short-term
investments
available for
sale............. -- -- -- -- -- -- -- 2,105 2,105
Net loss........... -- -- -- -- -- -- -- (22,252,091) (22,252,091)
--------- ---------- --------- --------- --------- ---------- ------------ ------------ -----------
BALANCE, September
30, 1997......... 14,948,847 $60,587,806 0 $ 0 0 $ 0 $ 638,271 ($51,097,790) $10,128,287
--------- ---------- --------- --------- --------- ---------- ------------ ------------ -----------
--------- ---------- --------- --------- --------- ---------- ------------ ------------ -----------
</TABLE>
See notes to financial statements.
3
<PAGE>
COINSTAR, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED
SEPTEMBER 30,
------------------------
1996 1997
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss....................................................... $(8,872,703) $(22,252,091)
Adjustments to reconcile net loss to net cash used by operating
activities:
Depreciation and amortization................................ 2,392,717 6,139,623
Debt discount amortization................................... 14,145 6,781,166
Accrued investment income.................................... 24,601 (338,627)
Cash provided (used) by changes in operating assets and
liabilities:
Prepaid expenses and other current assets.................. $ (453,589) $ (520,125)
Other assets............................................... 3,444 (477,784)
Accounts payable........................................... 669,774 2,187,017
Accrued liabilities........................................ 5,515,568 8,224,676
----------- -----------
Net cash used by operating activities.......................... $ (706,043) $ (256,145)
INVESTING ACTIVITIES:
Purchase of short-term investments............................. -- $(28,260,720)
Sale of short-term investments................................. -- 32,007,105
Purchase of fixed assets....................................... $(14,822,661) (23,432,182)
Payment of security deposit.................................... (134,072) --
----------- -----------
Net cash used by investing activities.......................... (14,956,733) $(19,685,797)
FINANCING ACTIVITIES:
Repayment of equipment loans................................... (582,160) $ (662,220)
Proceeds from issuance of long-term debt....................... 7,321,129 --
Net proceeds from issuance of common stock..................... -- 28,042,873
Net proceeds from sales of Series D Preferred stock............ 127,503 --
Net proceeds from sales of Series E Preferred stock............ 600,000 --
Net proceeds from exercise of stock options.................... 4,050 77,481
Contributed capital for warrants............................... 487,270 1,262,275
----------- -----------
Net cash provided (used) by financing activities............... $ 7,957,792 $28,720,409
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................. $(7,704,984) $ 8,778,467
CASH AND CASH EQUIVALENTS:
Beginning of period............................................ $14,119,532 $23,867,763
----------- -----------
End of period.................................................. $ 6,414,548 $32,646,230
----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest....................... $ 529,836 $ 511,674
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
Purchase of equipment financed by capital lease obligation..... $ 552,311 $ 640,357
</TABLE>
See notes to financial statements
4
<PAGE>
COINSTAR, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The unaudited financial statements of Coinstar, Inc.
(the "Company") included herein reflect all adjustments, consisting only of
normal recurring adjustments which, in the opinion of management, are necessary
to present fairly the Company's financial position, results of operations and
cash flows for the periods presented.
These financial statements have been prepared by the Company pursuant to the
rules and regulations of the Securities and Exchange Commission (the "SEC").
Certain information and footnote disclosures, normally included in financial
statements prepared in accordance with generally accepted accounting principles,
have been omitted pursuant to such SEC rules and regulations. These financial
statements should be read in conjunction with the Company's audited financial
statements and the accompanying notes for the years ended December 31, 1996,
1995 and 1994, as included in the Company's Registration Statement on Form S-4
(Registration No. 333-33233) filed with the SEC. The results of operations for
the periods ended September 30, 1997 are not necessarily indicative of the
results to be expected for any subsequent quarter or for the entire fiscal year.
RECLASSIFICATIONS: Certain reclassifications have been made to the 1996
financial statements to conform to the presentation used in 1997.
NEW ACCOUNTING PRONOUNCEMENTS: Statement of Financial Accounting Standards
(SFAS) No. 128, "EARNINGS PER SHARE," was recently issued and is effective for
the Company's fiscal year ending December 31, 1997. This Statement requires a
change in the presentation of earnings per share. Early adoption of this
statement is not permitted. Management believes that the impact of the adoption
of this Statement on the financial statements, taken as a whole, will not be
material.
SFAS No. 130, "REPORTING COMPREHENSIVE INCOME" and SFAS No. 131,
"DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION," were also
recently issued and are effective for the Company's year ending December 31,
1998. The Company is currently evaluating the effects of these Standards,
however, management believes the impact of adoption will not be material to the
financial statements, taken as a whole.
NOTE 2: INITIAL PUBLIC OFFERING
In July 1997, the Company completed its initial public offering of 3,000,000
shares of Common Stock at a purchase price of $10.50 per share for net proceeds
of approximately $28.0 million (after deducting applicable issuance costs and
expenses.) The net proceeds received by the Company will be used (i)
predominantly to fund capital expenditures and working capital in connection
with the continued expansion of the Coinstar network, (ii) for product research
and development, and deployment of enhancements to the Coinstar unit and the
coin processing network and (iii) for general corporate purposes.
Upon the July 9, 1997 closing of the initial public offering, the preferred
stock then outstanding was converted into common stock. In addition, certain
warrants were exercised on a cash basis to purchase 352,907 shares of common
stock at an aggregate exercise price of approximately $1.26 million and certain
warrants were net exercised resulting in the issuance of 1,035,715 shares of
common stock, all of which warrants expired on the closing of the initial public
offering. Within 90 days of the closing of the Company's initial public
offering, the warrants issued in connection with the sale of the Notes (as
defined
5
<PAGE>
COINSTAR, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
NOTE 2: INITIAL PUBLIC OFFERING (CONTINUED)
below) were exercised on a cash or cashless basis, resulting in the issuance of
an aggregate of 664,937 shares of Common Stock.
NOTE 3: EXCHANGE OFFER
On October 22, 1996, the Company completed a private placement offering of
95,000 units, each of which consisted of a $1,000 principal amount of 13% senior
subordinated discount notes, due at maturity in 2006 (the "Notes"), 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.
Pursuant to a related Notes Registration Rights Agreement between the
Company and the initial purchaser of the Notes (the "Registration Rights
Agreement"), the Company filed its Registration Statement on Form S-4
(Registration No. 333-33233) to satisfy its obligations under the Registration
Rights Agreement to exchange the Notes for otherwise substantially identical
notes registered under the Securities Act of 1993, as amended.
NOTE 4: LETTER OF CREDIT
As of September 30, 1997 the Company had outstanding a secured irrevocable
letter of credit with a bank in the amount of $4.0 million. This letter of
credit, which expires in March 1998, collateralizes the Company's obligations to
a third party. As of September 30, 1997, no amounts were outstanding under the
letter of credit.
NOTE 5: LEGAL PROCEEDINGS
On June 18, 1997, the Company filed in the United States District Court,
Northern District of California against CoinBank Automated Systems, Inc.
("CoinBank"), one of its competitors, a complaint for infringement of one of the
Company's United States patents (the "Patent Infringement Claim"). CoinBank
responded to the Company by letter dated June 23, 1997, alleging that the
Company failed to conduct a reasonable investigation before filing the Patent
Infringement Claim, the Patent Infringement Claim is unreasonable and without
factual foundation and the Patent Infringement Claim was filed for an improper
purpose. CoinBank has demanded the Company dismiss such action, and indicated
that if such action is not dismissed, CoinBank would answer the Patent
Infringement Claim on June 26, 1997 and counterclaim for declaration of
noninfringement, invalidity and unenforceability of the subject patent and file
a claim for $12 million of damages based on the tort of intentional interference
with prospective economic advantage. CoinBank further stated that it may file a
cross-complaint against Scan Coin AB for indemnity and breach of warranty of
title. On June 27, 1997, CoinBank answered the Patent Infringement Claim and
counterclaimed for declaration of noninfringement, invalidity and
unenforceability of the subject patent, and filed a claim for breach of warranty
against Scan Coin AB. There can be no assurance that the Company will prevail in
such Patent Infringement Claim or on any claim that might be filed by CoinBank
against the Company, or that as a result of such Patent Infringement Claim, the
Company's patent will not be limited in scope or found to be invalid.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE DISCUSSION IN THIS FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS
REGARDING THE COMPANY, ITS BUSINESS, PROSPECTS AND RESULTS OF OPERATIONS THAT
INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL BUSINESS, PROSPECTS AND
RESULTS OF OPERATIONS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED HEREIN AS WELL AS THOSE DISCUSSED UNDER THE CAPTION
"RISK FACTORS" IN THE COMPANY'S FORM S-4 REGISTRATION STATEMENT (REGISTRATION
NO. 333-33233), FORM S-1 REGISTRATION STATEMENT (REGISTRATION NO. 333-26843) AND
QUARTERLY REPORT ON FORM 10-Q FOR THE THREE MONTHS ENDED JUNE 30, 1997. READERS
ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS,
WHICH REFLECT MANAGEMENT'S ANALYSIS ONLY AS OF THE DATE HEREOF. THE COMPANY
UNDERTAKES NO OBLIGATION TO PUBLICLY RELEASE THE RESULTS OF ANY REVISION TO
THESE FORWARD-LOOKING STATEMENTS WHICH MAY BE MADE TO REFLECT EVENTS OR
CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF
UNANTICIPATED EVENTS. READERS ARE URGED TO CAREFULLY REVIEW AND CONSIDER THE
VARIOUS DISCLOSURES MADE BY THE COMPANY IN THIS REPORT AND IN THE COMPANY'S
OTHER REPORTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION THAT ATTEMPT TO
ADVISE INTERESTED PARTIES OF THE RISKS AND FACTORS AND MAY AFFECT THE COMPANY'S
BUSINESS, PROSPECTS AND RESULTS OF OPERATIONS.
OVERVIEW
The Company develops, owns and operates a network of automated, self-service
coin counting and processing machines that provides consumers with a convenient
means to convert loose coins into cash. The Company began field testing of a
prototype unit in 1992 and commercial installation of units in supermarkets in
1994. The Company has increased its store installation base every year and as of
September 30, 1997 had an installed base of 2,735 units located in supermarkets,
financial institutions and mass merchants in 35 regional markets across the
United States.
Beginning in 1995, the Company has devoted significant resources to building
a sales and marketing organization, adding administrative personnel and
developing the network systems and infrastructure to support the rapid growth of
its installed base of units. The cost of this expansion and the significant
depreciation expense of its installed network have resulted in significant
operating losses to date and an accumulated stockholders' deficit of $51.1
million as of September 30, 1997. The continued rapid expansion of its installed
base is expected to result in continued increases in the number of employees,
marketing and field service personnel expenses in new regions and general and
administrative expenses related to the ongoing development of information
systems to support future growth. Consequently, the Company expects to incur
increasing operating losses in the future. To date, the Company has funded its
operating losses and capital expenditure requirements through the private sale
of equity and in October 1996, the sale of 13% senior subordinated discount
notes due at maturity in 2006 (the "Notes") for net proceeds of $62.9 million.
In connection with the debt financing in October 1996, the Company began to
prepare for accelerated future growth of its installed base by increasing
expenditures on its field service organization, upgrading its systems
engineering capabilities and developing and testing new marketing and promotion
programs designed to increase coin processing volumes.
The Company currently derives substantially all its revenues from coin
processing services generated by its installed base of Coinstar units located in
supermarket chains in 26 states across the country. The Company generates
revenues based on a processing fee, currently 7.5%, charged on the total dollar
amount of coins processed in a transaction. Prior to 1996 the Company's
processing fee was 10% on pennies and 5% on all other coins. Beginning in the
first quarter of 1996 the Company began charging a flat 7.5% fee on selected
units and converted all units to this new fee structure by the end of the second
quarter of 1996. 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 its installed base. The Company's experience to date is
that coin processing volumes per unit have generally increased with the length
of time the unit is in operation. The Company believes that coin processing
volumes per unit may also be affected by other factors such as
7
<PAGE>
public relations, advertising and other activities that promote awareness of the
units, as well as the amount of consumer traffic in the stores in which the
units are located and seasonality. Given the Company's limited operating
history, there can be no assurance, however, that unit volumes will continue to
increase as a function of the time the unit is in operation, or that unit
volumes will be affected by such other factors. The average age of all units in
operation increased slightly during the third quarter of 1997 and contributed to
a nominal increase in the average revenue per unit. The Company expects that as
it continues to aggressively expand installations relative to the size of its
installed base, the average revenue per unit may decrease even as the per unit
dollar volume of mature units increases.
Direct operating expenses are comprised of the regional expenses associated
with Coinstar unit operations and support and consist primarily of coin pickup
and processing, field operations support and related expenses, and retail
operations support. Coin pickup and processing costs, which represent a major
portion of direct operating expenses, vary based on the level of total coin
processing volume and the density of the units within a region. The Company
believes that while coin pickup 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 the Coinstar service in new regional markets. Product
research and development expense consists of the development costs of the
Coinstar unit software, network applications, Coinstar unit sustaining
engineering 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, corporate services, and accounting, human
resources and occupancy expenses. Depreciation and amortization consists
primarily of depreciation charges on Coinstar units and, to a lesser extent,
depreciation on furniture and fixtures, automobiles, computer equipment and
amortization of intangibles.
The Company expects to continue to evaluate new marketing and promotional
programs to increase the breadth and rate of customer utilization of its service
and to engage in systems and product research and development. The Company
intends to continue to invest in sales and marketing and product research and
development, which is expected to negatively impact its operating results. The
Company believes that its future revenue growth, operating margin gains and
profitability will be dependent upon the penetration of its installed base with
retail distribution 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 the Company's limited operating history, unpredictability of the timing of
installations with retail distribution partners and the resulting revenues, and
the continued market acceptance of the Company's service by consumers and retail
distribution partners, the Company's operating results for any quarter are
subject to significant variation, and the Company believes that period-to-period
comparisons of its results of operations are not necessarily meaningful and
should not be relied upon as indications of future performance.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
REVENUE
Revenue increased to $7.8 million in the three months ended September 30,
1997 from $2.8 million in the comparable 1996 period. The increase was due
principally to the increase in the number of Coinstar units in service during
the three month period and the increase in the volume of coins processed by the
8
<PAGE>
units in service during this period. The installed base of Coinstar units
increased to 2,735 as of September 30, 1997 from 1,209 units as of September 30,
1996. During the third quarter of 1997, 400 units were installed compared to 413
for the same period in 1996. The dollar value of coins processed in the third
quarter of 1997 increased to $103.4 million compared to $37.6 million in the
comparable 1996 period.
DIRECT OPERATING EXPENSES
Direct operating expenses increased to $5.3 million in the three months
ended September 30, 1997 from $2.1 million in the comparable 1996 period. The
increase in direct operating expenses was primarily attributable to increased
coin pickup and processing costs as a result of the increased dollar volumes
processed by the network and the increase in field service personnel expenses
associated with the hiring and training of new field service personnel to
support the Company's growth and its expansion into 2 new regions as of
September 30, 1997. Direct operating expense as a percentage of revenue
decreased to 68.0% for the three months ended September 30, 1997 from 74.6% in
the comparable 1996 period. The Company anticipates that direct operating
expense will continue to increase as the number of installed units increases.
However, direct operating expenses as a percentage of revenue are anticipated to
decrease as (i) coin pickup and processing cost economies from regional
densities are realized and (ii) field services expenses decrease as a percentage
of revenue as the Company increases its density in its existing markets.
REGIONAL SALES AND MARKETING
Regional sales and marketing expense increased to $798,000 in the three
months ended September 30, 1997 from $396,000 in the comparable 1996 period. The
increase in regional marketing expense was the result of an increased level of
advertising, cooperative promotion with its retail distribution partners and
public relation efforts focused on increasing the awareness of the Coinstar
service in the third quarter of 1997. The Company expects sales and marketing
expenses to continue to increase as the Company expands the installed base of
units and enters new regional markets.
PRODUCT RESEARCH AND DEVELOPMENT
Product research and development expenses increased to $1.6 million in the
three months ended September 30, 1997 from $1.0 million in the comparable 1996
period. The principal component of such expenses was personnel compensation and
the period-to-period increase was due largely to higher staffing levels required
for the improvement of existing and development of new Coinstar unit software,
hardware, network applications and development costs related to new service
offerings. The Company expects to continue to increase its product research and
development expenditures during 1997 as it continues to add personnel in
connection with operating systems improvements and the potential addition of
value-added services. A portion of the product research and development costs
may be capitalized in the future.
SELLING, GENERAL, AND ADMINISTRATIVE
Selling, general, and administrative expense increased to $2.7 million in
the three months ended September 30, 1997 from $1.4 million in the comparable
1996 period. The principal component of such expenses was personnel compensation
and the period-to-period increase reflects an investment in higher staffing
levels to support the Company's rapid growth and expansion. The Company expects
selling, general and administrative expenses to continue to increase in 1997 as
the Company continues to add staff.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased to $2.3 million in the three
months ended September 30, 1997 from $1.1 million in the comparable 1996 period.
The increase was primarily due to the increase in the installed base of Coinstar
units during these periods. The Company expects depreciation
9
<PAGE>
and amortization expense to increase significantly over the next several years
as a result of expected increases in the installation of Coinstar units.
INTEREST INCOME AND EXPENSE
Interest income increased to $710,000 in the three months ended September
30, 1997 from $22,000 in the comparable 1996 period. The increase in interest
income is attributed to higher invested cash balances resulting from net
proceeds received from the sale of Notes in October 1996 and the completion of
the Company's initial public offering in July 1997.
Interest expense increased to $2.5 million in the three months ended
September 30, 1997 from $335,000 in the comparable 1996 period. The increase was
due to the accretion of the Notes. No cash interest payments are due on the
Notes until April 2000.
NET LOSS
Net Loss increased to $6.7 million in the three months ended September 30,
1997 from $3.5 million in the comparable 1996 period. The increase in the net
loss primarily was due to the fact that selling, general, and administrative
expenses, product research and development expenses, and depreciation and
amortization increased during the same period at a disproportionately higher
rate than the Company's direct contribution margin. This was the result of the
Company's decision to build infrastructure necessary to support the rapid growth
of its installed base of units. In the near term, the Company expects to
continue to add infrastructure to support expected increases in its installed
base, and as a result expects to incur increasing net losses. In the longer
term, the Company expects that it will not be required to add as much
infrastructure to support its installed base and as a result expects to achieve
profitability as its direct contribution margin from its larger base of
installed units grows proportionately faster than its operating expenses. There
can be no assurance, however, that the Company will install a sufficient number
of units or obtain sufficient market acceptance to allow the Company to achieve
or sustain profitability.
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
REVENUE
Revenue increased to $17.1 million in the first nine months of 1997 from
$5.0 in the comparable 1996 period. The increase was due principally to the
increase in the number of Coinstar units in service during the 1997 period and
the increase in the volume of coins processed by the units in service during
this period. The installed base of Coinstar units increased to 2,735 as of
September 30, 1997 from 1,209 units as of September 30, 1996. The dollar value
of coins processed increased to $226.8 million during the 1997 period from $70.6
million in the comparable 1996 period.
DIRECT OPERATING EXPENSES
Direct operating expenses increased to $12.7 million in the first nine
months of 1997 from $4.3 in the comparable 1996 period. The increase in direct
operating expenses was primarily attributable to increased coin pickup and
processing costs as a result of the increased dollar volumes processed by the
network and the increase in field service personnel expenses associated with the
hiring and training of new field service personnel to support the Company's
accelerated growth and its expansion into 13 new regional markets since
September 30, 1996. Direct operating expenses as a percentage of revenue
decreased to 74.4% in the 1997 period from 87.0% in the 1996 period. The Company
anticipates that direct operating expenses will continue to increase as the
number of installed units increases. However, direct operating expenses as a
percentage of revenue are anticipated to decrease as (i) coin pickup and
processing cost economies from regional densities are realized and (ii) field
service expenses decrease as a percentage of revenue as the Company increases
its density in its existing markets.
10
<PAGE>
REGIONAL SALES AND MARKETING
Regional sales and marketing expenses increased to $2.4 million in the first
nine months of 1997 from $1.0 million in the comparable 1996 period. The
increase in regional marketing expense was the result of an increased level of
advertising, cooperative promotion with its retail distribution partners and
public relations efforts focused in the new regions installed during the 1997
period and the initial incurrence of ongoing marketing expenses in existing
markets. The Company expects that the components of sales and marketing expenses
in the future will include ongoing marketing expenses in existing markets and
startup marketing expenses in new regions entered. The Company expects sales and
marketing expenses to continue to increase as the Company expands the installed
base of units and enters new regional markets.
PRODUCT RESEARCH AND DEVELOPMENT
Product research and development expenses increased to $4.7 million in the
first nine months of 1997 from $2.4 million in the comparable 1996 period. The
principal component of such expenses was personnel compensation and the
period-to-period increase was due largely to higher staffing levels required for
the improvement of existing and development of new Coinstar unit software,
hardware, network applications and development costs related to new service
offerings. The Company expects to increase its product research and development
expenditures during 1997 as it continues to add personnel in connection with
operating systems improvements and the potential addition of value-added
services. A portion of the product research and development expenses may be
capitalized in the future.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expense increased to $7.8 million in the
first nine months of 1997 from $3.4 million in the comparable 1996 period. The
principal component of such expenses was personnel compensation and the
period-to-period increase primarily reflects an investment in higher staffing
levels during the third half of 1996 and first nine months of 1997 to support
the Company's rapid growth and expansion. The Company expects selling, general
and administrative expenses to continue to increase in 1997 as the Company
continues to add staff.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased to $6.1 million in the first
nine months of 1997 from $2.4 million in the comparable 1996 period. The
increase was primarily due to the increase in the installed base of Coinstar
units during these periods. The Company expects depreciation and amortization
expense to increase significantly over the next several years as a result of
expected increases in the installation of Coinstar units.
INTEREST INCOME AND EXPENSE
Prior to October 1996, the Company funded its liquidity needs primarily from
the issuance of equity securities and equipment lease financing. In October
1996, the Company issued a total of $95 million aggregate principal amount at
maturity of the Notes and certain related warrants. Accordingly, the Company has
incurred significant non-cash interest expense from the amortization of the
original issue discount and deferred financing fees on such debt.
Interest income increased to $1.7 million in the first nine months of 1997
from $277,000 in the comparable 1996 period. The increase in interest income is
attributable to higher invested cash balances resulting from net proceeds of
$62.9 million received from the sale of the Notes in October 1996 and net
proceeds of $28.0 million from the completion of the Company's initial public
offering in July 1997.
11
<PAGE>
Interest expense increased to $7.3 million in first nine months of 1997 from
$590,000 in the comparable 1996 period as a result of the sale of the Notes. The
increase was due to the accretion of the Notes. No cash interest payments are
due on the Notes until April 2000.
NET LOSS
Net loss increased to $22.3 million in the first nine months of 1997 from
$8.9 million in the comparable 1996 period. The increase in net loss primarily
was due to the fact that selling, general and administrative expenses, product,
research and development expenses, and depreciation and amortization increased
during the same period at a disproportionately higher rate than the Company's
direct contribution margin. This was the result of the Company's decision to
build the infrastructure necessary to support the rapid growth of its installed
base of units. In the near term, the Company expects to continue to add
infrastructure to support expected increases in its installed base, and as a
result expects to incur increasing net losses. In the longer term, the Company
expects that it will not be required to add as much infrastructure to support
its installed base and as a result expects to achieve profitability as its
direct contribution margin from its significantly larger base of installed units
grows proportionately faster than its operating expenses. There can be no
assurance, however, that the Company will install a sufficient number of units
or obtain sufficient market acceptance to allow the Company to achieve or
sustain profitability.
LIQUIDITY AND CAPITAL RESOURCES
Since inception and prior to its initial public offering in July 1997, the
Company has funded its operations primarily through the private sale of equity
securities, equipment lease financing, bank borrowings and the sale of the
Notes. As of September 30, 1997, the Company had cash and cash equivalents of
$32.6 million, short-term investments of $29.0 million and working capital of
$41.3 million. Cash and cash equivalents include $11.9 million of funds in
transit, which represent amounts being processed by armored car carriers or
residing in Coinstar units. Net cash used by operating activities was $256,145
for the nine months ended September 30, 1997 and was $706,000 for the nine
months ended September 30, 1996. The principal use of cash was to fund net
operating losses incurred, partially offset by depreciation, other non-cash
charges, and an increase in accounts payable and accrued liabilities.
Net cash used by investing activities during the nine month period ended
September 30, 1997 was $19.7 million and $15.0 million for the comparable 1996
period. Capital expenditures for such periods were $23.4 million and $14.8
million, respectively. The majority of capital expenditures consist of the
purchase of Coinstar units.
Net cash provided by financing activities for the nine month period ended
September 30, 1997 was $28.7 and net cash provided by financing activities for
the nine month period ended September 30, 1996 was $8.0 million.
In January 1996, the Company entered into a loan agreement which allows for
maximum borrowings of $3.0 million to be drawn under specific notes secured by
certain equipment of the Company. During 1996, the Company drew the entire $3.0
million. The effective annual interest rate on this loan is 16.6% and the loan
is due in monthly installments that will be paid through October 1999. In
connection with this loan, the Company issued detachable warrants to purchase
93,750 shares of its Series D Preferred Stock at an exercise price of $4.00.
Upon the closing of the initial public offering, such warrants automatically
converted into warrants to purchase an equivalent number of shares of Common
Stock.
In October 1996, the Company issued and sold a total of $95.0 million in
aggregate principal amount at maturity of the Notes due 2006, and warrants to
purchase an aggregate of 665,000 shares of Common Stock at a nominal exercise
price for proceeds, net of issuance costs, of $62.9 million. Although interest
is not payable prior to April 1, 2000, the carrying amount of such indebtedness
accretes as the original issue discount is amortized through maturity in October
2006 and the Company's interest expense includes such accretion. Cash interest
on the Notes will accrue and be payable semi-annually in arrears at the rate of
12
<PAGE>
13.0% per annum, on October 1 and April 1. No principal payments on the Notes
are due prior to maturity in 2006. The Notes are redeemable at the option of the
Company in whole or in part within 60 days of the consummation of a public
equity offering for an amount equal to 118% of the accreted value as of the date
of redemption, plus accrued and unpaid interest and liquidated damages, if any.
Otherwise the Notes are redeemable after October 1, 2001 at declining redemption
prices to maturity. The Indenture governing the Notes contains certain covenants
that, among other restrictions, limit the Company's 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 its assets. Pursuant to its obligations under a registration
rights agreement related to the Notes, the Company filed a Form S-4 Registration
Statement (Registration No.333-33233) to exchange the Notes for otherwise
substantially identical notes registered under the Securities Act of 1933, as
amended.
In July 1997, the Company completed its initial public offering of 3,000,000
shares of Common Stock at a purchase price of $10.50 per share for net proceeds
of approximately $28.0 million. The net proceeds received by the Company will be
used (i) predominantly to fund capital expenditures and working capital in
connection with the continued expansion of the Coinstar network, (ii) for
product research and development, and deployment of enhancements to the Coinstar
unit and the coin processing network and (iii) for general corporate purposes.
As of September 30, 1997 the Company had outstanding a secured irrevocable
letter of credit with a bank in the amount of $4.0 million. This letter of
credit, which expires in March 1998, collateralizes the Company's obligations to
a third party. As of September 30, 1997, no amounts were outstanding under the
letter of credit.
The Company believes existing cash equivalents and short-term investments
will be sufficient to fund its cash requirements and capital expenditure needs
for the continued expansion of the Coinstar network at the recent installation
rate for at least the next twelve months. The extent of additional financing
needed will depend on the success of the Company's business. If the Company
significantly increases installations beyond planned levels or if unit coin
processing volumes generated are lower than historical levels, the Company's
cash needs will be increased. The Company's future capital requirements will
depend on a number of factors, including the timing and number of unit
installations, the type and scope of service enhancements, and the level of
market acceptance of the Company's service. In addition, beginning in April
2000, the Company will have debt service obligations under the Notes that were
issued in October 1996 of over $12 million per year until October 2006, at which
time the principal amount of the Notes ($95.0 million) will be due.
QUARTERLY FINANCIAL RESULTS
The following table sets forth selected unaudited quarterly financial
information and operating data for the last seven quarters. This information has
been prepared on the same basis as the Company's Financial Statements and
includes, in the opinion of management, all normal and recurring adjustments
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<PAGE>
that management considers necessary for a fair statement of the quarterly
results for the periods. The operating results and data for any quarter are not
necessarily indicative of the results for future periods.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1996 1996 1996 1996 1997 1997
----------- ----------- ------------- ------------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT UNIT AND PER UNIT DATA)
<S> <C> <C> <C> <C> <C> <C>
Statements of Operations Data:
Revenue............................... $ 746 $ 1,388 $ 2,830 $ 3,349 $ 3,995 $ 5,294
Expenses:
Direct operating.................... 888 1,321 2,110 2,940 3,450 3,966
Regional sales and marketing........ 208 407 396 494 630 972
Product research and development.... 661 762 1,014 1,533 1,441 1,640
Selling, general and
administrative.................... 872 1,067 1,425 1,987 2,528 2,630
Depreciation and amortization....... 499 796 1,098 1,741 1,684 2,158
Loss from operations.................. $ (2,382) $ (2,965) $ (3,213) $ (5,346) $ (5,738) $ (6,072)
Other Data:
Number of new Coinstar units installed
during the period................... 169 364 413 292 428 406
Installed base of Coinstar units at
end of period....................... 432 796 1,209 1,501 1,929 2,335
Average age of network for the period
(months)............................ 6.6 6.4 6.1 7.0 8.3 9.3
Number of regional markets............ 13 18 22 23 27 33
Dollar value of coins processed....... $ 12,306 $ 20,692 $ 37,637 $ 44,841 $ 52,724 $ 70,626
Direct contribution (loss)(1)......... $ (142) $ 67 $ 720 $ 409 $ 545 $ 1,328
Annualized revenue per average
installed unit(2)................... $ 8,449 $ 9,269 $ 11,021 $ 9,623 $ 9,433 $ 9,939
Annualized direct contribution per
average installed unit(2)........... $ (1,612) $ 449 $ 2,804 $ 1,175 $ 1,287 $ 2,494
<CAPTION>
SEPTEMBER 30,
1997
-------------
<S> <C>
Statements of Operations Data:
Revenue............................... $ 7,762
Expenses:
Direct operating.................... 5,276
Regional sales and marketing........ 798
Product research and development.... 1,637
Selling, general and
administrative.................... 2,669
Depreciation and amortization....... 2,297
Loss from operations.................. $ (4,915)
Other Data:
Number of new Coinstar units installed
during the period................... 400
Installed base of Coinstar units at
end of period....................... 2,735
Average age of network for the period
(months)............................ 10.6
Number of regional markets............ 35
Dollar value of coins processed....... $ 103,442
Direct contribution (loss)(1)......... $ 2,486
Annualized revenue per average
installed unit(2)................... $ 12,284
Annualized direct contribution per
average installed unit(2)........... $ 3,935
</TABLE>
- ------------------------
(1) Direct contribution (loss) is defined as revenue less direct operating
expenses. The Company uses direct contribution (loss) as a measure of
operating performance to assist in understanding its operating results.
Direct contribution (loss) is not a measure of financial performance under
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.
(2) Based on monthly averages of units in operation over the applicable period.
Based on its limited operating history, the Company believes that coin
processing volumes have been affected by seasonality; in particular the Company
believes that on a relative basis coin processing volumes are 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 the Company's limited operating
history, and due to the lack of comparable companies engaged in the coin
processing business. The Company's revenue growth in the third and fourth
quarters of 1996 reflect the acceleration of Coinstar unit installations
beginning in the second quarter of that year and higher coin volumes generated
by its older units in service, offset in part by the seasonally lower coin
processing volume of its installed base. In addition to the seasonal impact of
such fourth quarter revenues, direct contribution in that fourth quarter
reflects higher direct operating expenses as a percentage of revenue and higher
field service expenses from the anticipated entry into new regional markets.
Higher coin pickup and processing costs were attributable principally to
seasonally lower volumes and a semi-fixed pickup schedule largely in effect
during the period. The Company experienced improved pickup efficiencies in the
quarters ended March 31, 1997, June 30, 1997 and September 30, 1997 and
continues to take measures to optimize such efficiencies.
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<PAGE>
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 the Company and its retail distribution partners, variable
length of partner trial periods and the planned coordination of multiple partner
installations in a given geographic region.
Increasing quarterly losses from operations during the periods presented
were the result of higher direct operating expenses associated with the
significant increase in the Company's 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 the Company's accelerated growth. The Company expects to continue to
incur substantial and increasing quarterly operating losses from operations as
it plans to significantly increase its installed base of Coinstar units.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 128, EARNINGS PER
SHARE, was recently issued and is effective for the Company's fiscal year ending
December 31, 1997. This statement requires a change in the presentation of
earnings per share. Early adoption of this statement is not permitted.
Management believes that the impact of the adoption of this statement on the
financial statements, taken as a whole, will not be material.
SFAS No. 130, REPORTING COMPREHENSIVE INCOME, and SFAS No. 131, DISCLOSURE
ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, were also issued and
are effective for the Company's year ending December 31, 1998. The Company is
currently evaluating the effects of these standards, however, management
believes the impact of adoption will not be material to the financial
statements, taken as a whole.
RISK FACTORS
IN EVALUATING THE COMPANY'S BUSINESS, PROSPECTS AND RESULTS OF OPERATIONS,
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS IN
ADDITION TO THE OTHER INFORMATION PRESENTED IN THIS REPORT AND IN THE COMPANY'S
OTHER REPORTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION THAT ATTEMPT TO
ADVISE INTERESTED PARTIES OF THE RISKS AND FACTORS THAT MAY AFFECT THE COMPANY'S
BUSINESS, PROSPECTS AND RESULTS OF OPERATIONS.
HISTORY OF SUSTAINED OPERATING LOSSES AND CONTINUATION OF SUCH LOSSES
The Company has incurred substantial and increasing operating losses since
inception in 1991. The Company's net loss for 1995, 1996 and the nine months and
three months ended September 30, 1997 was $6.2 million, $16.0 million, $22.3
million and $6.7 million, respectively. As of September 30, 1997, the Company
had an accumulated deficit of $51.1 million. Operating losses to date have
resulted primarily from expenses incurred in the development, marketing and
operation of the Coinstar units, development and maintenance of the network,
administrative and occupancy expenses at the Company's headquarters, and
depreciation and amortization. The Company expects to continue to incur
substantial and increasing operating losses and negative cash flow from
operating and investing activities as it plans to significantly increase its
installed base of Coinstar units.
LIMITED OPERATING HISTORY
After several years of development, the Company commenced commercial
deployment of Coinstar units in 1994 and placed approximately 90% of the
installed base as of September 30, 1997 in service during 1996 and the nine
months ended September 30, 1997. Prospective investors, therefore, have limited
historical financial information on which to base an evaluation of the Company's
performance. The Company's prospects must be considered in light of the risks,
expenses and difficulties frequently encountered by companies in an early stage
of development, particularly companies in new or rapidly
15
<PAGE>
evolving markets. There can be no assurance that the Company will install a
sufficient number of its Coinstar units or obtain sufficient market acceptance
to allow the Company to achieve or sustain profitability, or generate sufficient
cash flow to meet the Company's capital and operating expenses and debt service
obligations.
UNCERTAINTY OF FUTURE OPERATING RESULTS
Substantially all of the Company's revenue has been, and the Company
believes will continue to be, derived from the processing fees charged for the
Company's coin processing service. Prior growth rates in the Company's revenue
should not be considered indicative of future operating results. The timing and
amount of future revenues will depend almost entirely on the Company's ability
to obtain new agreements with supermarket chains and other potential retail
distribution partners for the installation of Coinstar units, the successful
deployment and operation of the Company's coin processing network, and customer
utilization of the service. Future operating results will depend upon many
factors, including the Company's success in deploying a substantial number of
additional units, the consumer demand for the Company's coin processing service,
the level of product and price competition, the Company's success in expanding
its national network and managing the growth of such network, the ability of the
Company to develop and market product enhancements, the timing of product
enhancements, activities of and acquisitions by competitors, the ability to hire
additional employees and the timing of such hiring and the ability to control
costs. Fluctuations in the volume and value of coins processed and the rate of
unit installations have caused and may continue to cause material fluctuations
in the Company's operating results, particularly on a quarterly basis. Quarterly
revenue and operating results, therefore, depend on the volume and mix of coins
processed and the rate of unit installations during the quarter, all of which
are difficult to forecast.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The customer utilization of the Company's coin processing service varies
substantially from unit to unit, making the Company's revenues difficult to
forecast. Customer utilization is affected by the timing and success of
promotions by the Company and its retail distribution partners, age of the
installed unit, adverse weather conditions and other factors, many of which are
not in the Company's control. Based on its limited operating history, the
Company believes that coin processing volumes are affected by seasonality; in
particular the Company believes that on a relative basis 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 the Company's
limited operating history, and due to the lack of comparable companies engaged
in the coin processing business. As a result of these and other factors, revenue
for any quarter is subject to significant variation, and the Company believes
that period-to-period comparisons of its results of operations are not
necessarily meaningful and should not be relied upon as indications of future
performance. Because the Company's operating expenses are based on anticipated
revenue trends and because a large percentage of the Company's expenses are
relatively fixed, revenue variability could cause significant variations in
operating results from quarter to quarter and could result in significant
losses. To the extent such expenses precede, or are not subsequently followed
by, increased revenue, the Company's operating results would be materially
adversely affected. Due to all of the foregoing factors, it is likely that in
some future quarter the Company's operating results will be below the
expectations of public market analysts and investors. In such event, the price
of the Company's Common Stock would likely be materially adversely affected.
Fluctuations in operating results may also result in volatility in the price of
the Company's Common Stock.
SUBSTANTIAL LEVERAGE AND ABILITY TO SERVICE DEBT
The Company had outstanding indebtedness as of September 30, 1997 of $76.8
million, which included $72.9 million of the Notes. The Notes will accrete to
$95.0 million by October 1999. The Company must begin paying cash interest on
the Notes in April 2000. Beginning at that time, the Company
16
<PAGE>
will have debt service obligations of over $12.0 million per year until October
2006 when the principal amount of $95.0 million will be due. The Company's
capital expenditures will increase significantly upon the continued expansion of
the Coinstar network, and the Company expects that its operating cash flow will
be insufficient to finance capital expenditures over the next several years. The
ability of the Company to meet its debt service requirements will depend upon
achieving significant and sustained growth in the Company's cash flow, which
will be affected by its success in implementing its business strategy,
prevailing economic conditions and financial, business and other factors,
certain of which are beyond the Company's control. Accordingly, there can be no
assurance as to whether or when the Company's operations will generate positive
cash flow or become profitable or whether the Company will at any time have
sufficient resources to meet its debt service obligations. If the Company is
unable to generate sufficient cash flow to service its indebtedness, it will
have to reduce or delay planned capital expenditures, sell assets, restructure
or refinance its indebtedness or seek additional equity capital. There can be no
assurance that any of these strategies could be effected on satisfactory terms,
if at all, particularly in light of the Company's high levels of indebtedness.
In addition, the degree to which the Company is leveraged could have significant
consequences, including, but not limited to, the following: (i) the Company's
ability to obtain additional financing in the future for working capital,
capital expenditures, product research and development, acquisitions, and other
general corporate purposes may be materially limited or impaired, (ii) a
substantial portion of the Company's cash flow from operations may need to be
dedicated to the payment of principal and interest on its indebtedness and
therefore not available to finance the Company's business and (iii) the
Company's high degree of leverage may make it more vulnerable to economic
downturns, may limit its ability to withstand competitive pressures and may
reduce its flexibility in responding to changing business and economic
conditions.
COMPETITION
The Company believes that it is the first company to provide a widespread
network of self-service coin processing machines that provide a convenient,
reliable means for consumers to convert loose coins into cash. The Company has
become aware of two direct competitors that operate self-service coin processing
machines, both of which the Company believes operate an installed base of less
than 50 units in certain regions of the United States. There can be no
assurance, however, that such competitors have not or will not increase their
installed base of units or expand their service nationwide. The Company also
competes indirectly with manufacturers of machines and devices that enable
consumers to count or sort coins themselves. The Company also competes or may
compete directly or indirectly with banks and similar depository institutions
for coin conversion customers. Currently, 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 the Company. Many of these potential competitors have
longer operating histories, greater name recognition, larger customer bases and
significantly greater financial, technical, marketing and public relations
resources than the Company. Such competitors may be able to undertake more
extensive marketing campaigns, adopt more aggressive pricing policies and make
more attractive offers to consumers and businesses. There can be no assurance,
however, that the Company's competitors, or others will not 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
the Company or that would render the Company's technologies or products obsolete
or noncompetitive. There can be no assurance that the Company will be able to
compete effectively with current or future competitors or that the competitive
pressures faced by the Company will not have a material adverse effect on the
Company's business, financial condition and results of operations and on its
ability to achieve sufficient cash flow to service its indebtedness.
17
<PAGE>
DEPENDENCE ON CONTINUED MARKET ACCEPTANCE BY CONSUMERS AND RETAIL DISTRIBUTION
PARTNERS
The Company is substantially dependent on continued market acceptance of its
coin processing service by consumers and its retail distribution partners, which
have been almost exclusively supermarket chains. The self-service coin
processing market is relatively new and evolving; accordingly, it is difficult
to predict the future growth rate and size of this market. There can be no
assurance that the Company will be successful in achieving the large-scale
adoption of its coin processing service. While the Company's existing installed
base of Coinstar units has been well received by both retail distribution
partners and customers to date, there can be no assurance that the operating
results of the installed units will continue to be favorable or past results
will be indicative of future market acceptance of the Company's service. The
Company believes that market acceptance of the Coinstar unit is dependent on the
consumer's perception that the units are convenient, easy to use and reliable.
Even if the Company is successful in promoting awareness of the Coinstar unit
among consumers, there can be no assurance that such consumers will utilize the
Coinstar units in sufficient volume to make the Company profitable. In addition,
market acceptance and ongoing use of the Coinstar service may be adversely
affected by the increasing use of alternatives to coin and currency transactions
such as credit and debit cards, checks, wire transfers, smart cards and other
forms of electronic payment
Market acceptance of the Coinstar units is also dependent on the willingness
of potential retail distribution partners to have the units installed in their
stores. The Company believes that market acceptance by potential retail
distribution partners will be dependent on its ability to demonstrate the
utility of the Coinstar unit as a customer service and as a means to provide
other tangible benefits, including increased customer traffic and the promotion
of store sales. There can be no assurance, however, that potential retail
distribution partners will be willing to place Coinstar units in their stores or
that, once installed, Coinstar units will obtain market acceptance from
consumers. Market acceptance and the Company's revenues may also be affected by
the availability and success of coin processing services offered by competitors.
In the event the Company's service does not achieve market acceptance or does so
less rapidly than expected or the Company's contracts with one or more of its
retail distribution partners is terminated, the Company and its results of
operations, including its ability to achieve sufficient cash flow to service its
indebtedness and achieve profitability, will be materially adversely affected.
Moreover, the Company intends to deploy the Coinstar units in convenience stores
and is exploring opportunities for deployment in the international market.
However, the Company has not yet entered such markets and there can be no
assurance that, if entered, deployment in such markets would be successful.
POSSIBLE TERMINATION OF RETAIL DISTRIBUTION PARTNER AGREEMENTS
The Company is substantially dependent upon its ability to enter into
agreements with retail distribution partners for the installation of its
Coinstar units. In addition, the Company generally has separate agreements with
each of its retail distribution partners, providing for the Company's exclusive
right to provide coin processing services in their retail locations. These
contracts generally have terms ranging from two to three years and are generally
terminable by either party with advance notice of at least 90 days. In addition,
Coinstar units in service in several supermarket chains account for a
significant portion of the Company's revenue. In the nine months ended September
30, 1997, Coinstar units in service in three supermarket chains accounted for
approximately 34.6% of the Company's revenue. The units in service in two of
these chains, Ralphs Grocery Co. ("Ralphs") and The Kroger Co. ("Kroger"),
accounted for approximately 10.6% and 16.7%, respectively, of the Company's
revenue in the nine months ended September 30, 1997. The termination of any one
or more of the Company's contracts with its retail distribution partners could
have a material adverse effect on the Company's business, financial condition,
results of operations and on its ability to achieve sufficient cash flow to
service its indebtedness.
18
<PAGE>
MANAGEMENT OF GROWTH
The Company has experienced rapid growth and intends to continue to
aggressively expand its operations. The growth in the size and scale of the
Company's business has placed and is expected to continue to place significant
demands on its operational, administrative and financial personnel and operating
systems. Additional planned expansion by the Company may further strain
management and other resources. The Company's ability to manage growth
effectively will depend on its ability to improve its operating systems, to
expand, train and manage its employee base and to develop additional
manufacturing and service capacity. In particular, the Company will be required
to rapidly expand its operating systems and processes in order to support the
projected installations of Coinstar units and the potential addition of
value-added services. Such expansion will require improvements to both hardware
and software and the hiring and training of additional software engineers. In
addition, the Company will be required to establish relationships with
additional third-party service providers. These demands, and others, will
require the addition of new management personnel and the development of
additional expertise by existing management personnel. There can be no assurance
that the Company will be able to effectively manage the expansion of its
operations, or that the Company's systems, procedures or controls will be
adequate to support the Company's operations or that Company management will be
able to achieve and manage the rapid roll-out currently projected. If the
Company is unable to manage growth effectively, the Company's business,
financial condition and results of operations and its ability to achieve
sufficient cash flow to service its indebtedness will be materially adversely
affected.
DEPENDENCE ON A SINGLE SERVICE
The Company has and expects for the foreseeable future to derive
substantially all of its revenues from the operation of Coinstar units.
Accordingly, market acceptance of the Company's coin processing service is
critical to the Company's future success. Since there is only a limited existing
market for the Company's coin processing service, there can be no assurance that
an acceptable level of demand will be achieved or sustained. If sufficient
demand for the Company's coin processing service does not develop due to lack of
market acceptance, technological change, competition or other factors, the
Company's business, financial condition and results of operations and its
ability to achieve sufficient cash flow to service its indebtedness will be
materially adversely affected.
EXPOSURE TO COMPONENT SHORTAGES FROM SINGLE SOURCE SUPPLIER
The Company currently purchases the coin counter component of the Coinstar
unit from a single manufacturer, Scan Coin AB, pursuant to an agreement that may
be terminated by either party with six months notice at any time on or after
June 30, 1998. The Company has entered into a non-binding letter of intent with
Scan Coin AB for a new agreement, although no assurance can be given that the
parties will enter into a new agreement. Currently, no other manufacturer
produces a coin counter capable of being used in the Coinstar units without
extensive enhancements and modifications. No assurance can be given that Scan
Coin AB will be able or willing to supply coin counter components to the Company
in the future. The Company believes it would require up to 12 months to source
and make necessary modifications to an alternative coin counter component.
Moreover, it could take several additional months for any such alternative
supplier to meet the Company's required volume levels. Accordingly, any
cessation, slow-down or disruption in the Company's current supply of coin
counter components would have a material adverse effect on the Company's
business, financial condition and results of operations and on its ability to
achieve sufficient cash flow to service its indebtedness. Although the Company
believes alternative suppliers are available, there can be no assurance that the
Company would be able to locate an alternate supplier on a timely or
cost-efficient basis, if at all, and make the necessary modifications and
enhancements to the design of the Coinstar unit to utilize such replacement,
both of which, in the event of their nonoccurrence, would materially impair its
ability to have Coinstar units manufactured. A prolonged inability to obtain
certain components could have a material adverse effect on the Company's
business, financial condition
19
<PAGE>
and results of operations and on its ability to achieve sufficient cash flow to
service its indebtedness, particularly as the Company increases its
manufacturing requirements to support its nationwide deployment.
RELIANCE ON THIRD-PARTY MANUFACTURER AND SERVICE PROVIDERS
The Company does not conduct manufacturing operations and is dependent and
will continue to be dependent on outside parties for the manufacture of the
Coinstar unit and its key components. While Coinstar intends to significantly
expand its installed base, such expansion may be constrained by the
manufacturing capacity of its third-party manufacturers and suppliers. Although
the Company expects that its current contract manufacturer, SeaMed Corporation
("SeaMed") will be able to produce sufficient units to meet projected demand,
there can be no assurance that SeaMed or other manufacturers will be able to
meet the Company's manufacturing needs in a satisfactory and timely manner. In
the event of an unanticipated increase in demand for Coinstar unit installations
by retail distribution partners, the Company may be unable to meet such demand
due to manufacturing constraints. Although the Company has a contract with
SeaMed, it does not have a long-term obligation to continue the manufacture of
the Coinstar unit or its components. Further, SeaMed is principally engaged in
the manufacture of electronic medical instruments for medical technology
companies. The Company believes that it is SeaMed's only material non-medical
customer. As such, the Company faces an increased risk that SeaMed may choose to
focus exclusively on manufacturing its medical products and cease making the
Company's products. Should SeaMed cease providing services, the Company would be
required to locate and qualify additional suppliers. There can be no assurance
that the Company would be able to locate alternate manufacturers on a timely
basis. The Company's reliance on third-party manufacturers involves a number of
additional risks, including the absence of guaranteed capacity and reduced
control over delivery schedules, quality assurance, production yields and costs.
There can be no assurance that the manufacturing capability of such third-party
manufacturers will successfully address the Company's needs. In the event the
Company is unable to retain such manufacturing on commercially reasonable terms,
its business, financial condition and results of operation and its ability to
achieve sufficient cash flow to service its indebtedness will be materially
adversely affected.
The Company relies on third-party service providers for substantial support
and service efforts that the Company currently does not provide directly. In
particular, the Company contracts with armored carriers to arrange for the
pick-up, processing and deposit of coins. The Company generally contracts with
one armored carrier to service a particular region. Many of these carriers do
not have long-standing relationships with the Company and these contracts
generally can be terminated by either party with advance notice ranging from 30
to 90 days. In the past, the Company has experienced a sudden disruption in
service from an armored carrier company. The Company does not currently have nor
does it expect to have in the foreseeable future the internal capability to
provide back up service in the event of sudden disruption in service from an
armored carrier company. Any failure by the Company to maintain its existing
relationships or to establish new relationships on a timely basis or on
acceptable terms would have a material adverse effect on the Company's business,
financial condition and results of operations and on its ability to achieve
sufficient cash flow to service its indebtedness. Moreover, as with any business
that handles large volumes of cash, the Company is susceptible to theft,
counterfeit and other forms of fraud, including security breaches of the
Company's computing system that performs important accounting functions. There
can be no assurance that the Company will be successful in developing product
enhancements and new services to thwart such attempts.
RISK OF DEFECTS IN OPERATING SYSTEMS
The Company collects financial and operating data and monitors unit
performance through a wide-area communications network connecting each of the
Coinstar units with a central computing system located at the Company's
headquarters. This information is used to track the flow of coins, verify coin
20
<PAGE>
counts and schedule and dispatch unit service. The operation of the Coinstar
units depends on sophisticated software, computing systems and communications
services that may contain undetected errors or are subject to failures. These
errors and failures may arise particularly when new services or service
enhancements are added or when the volume of services provided increases.
Although each unit is designed to store all data collected, helping to ensure
critical data is not lost due to an operating systems failure, the inability of
the Company to collect the data from its units could lead to a delay in
processing coins and crediting the accounts of its distribution partners for
vouchers already redeemed. Further, there can be no assurance that the design of
the operating systems to prevent the loss of data will operate as intended and
any loss of or delay in collecting coin processing data would materially and
adversely effect the Company's operations. In addition, the Company has in the
past experienced limited delays and disruptions resulting from upgrading or
improving its operating systems. Although such disruptions have not had a
material effect on the Company's operations, there can be no assurance that
future upgrades or improvements will not result in delays or disruptions that
would have a material adverse impact on the Company's operations. In particular,
the Company is currently planning some significant improvements in its operating
platform in order to support its projected expansion of the installed base of
Coinstar units and the potential addition of value-added services. While the
Company is taking steps to ensure that the potential adverse impact of such
improvements on the Company's operations is minimized, there can be no assurance
that the platform will be able to handle the increased volume of services
expected from the continued expansion of the Company's network and the potential
addition of value-added services or that the improvements will occur on a timely
basis so as not to disrupt such continued expansion and potential addition of
value-added services. In addition, the communications network on which the
Company relies is not owned by the Company and is subject to service
interruptions. Further, while the Company has taken significant steps to protect
the security of its network, any breach of such security whether intentional or
from a computer virus could have a material adverse impact on the Company. Any
service disruptions, either due to errors or delays in the Company's software or
computing systems or interruptions or breaches in the communications network, or
security breaches of the system, could have a material adverse affect on the
Company's business, financial condition and results of operations and on its
ability to achieve sufficient cash flow to service its indebtedness.
DEPENDENCE ON KEY PERSONNEL AND NEED TO HIRE ADDITIONAL PERSONNEL
The Company's performance is substantially dependent on the performance of
its executive officers and key employees and its long term success will depend
on its ability to recruit, retain and motivate highly skilled personnel. Jens H.
Molbak, President and Chief Executive Officer, Rod W. Brooks, Vice President of
Sales and Marketing, Aaron R. Finch, Vice President of Operations, and Daniel A.
Gerrity, Vice President and Chief Technical Officer, have been primarily
responsible for the development and expansion of the Company's business. The
Company recently hired Kirk A. Collamer as Vice President and Chief Financial
Officer. All of the Company's executive officers and employees are employed on
an at-will basis. The loss of the services of any of these executive officers or
other key employees or the inability to attract and retain necessary technical
and managerial personnel could have a material adverse effect upon the Company's
business, financial condition and results of operation and on its ability to
achieve sufficient cash flow to service its indebtedness. Presently, the Company
maintains a "key man" life insurance policy on Mr. Molbak in the amount of $2.0
million.
UNCERTAINTY OF PROTECTION OF PATENTS AND PROPRIETARY RIGHTS
The Company's future success depends, in part, on its ability to protect its
intellectual property and maintain the proprietary nature of its technology
through a combination of patents, licenses and other intellectual property
arrangements, without infringing the proprietary rights of third parties. In
October 1996 and April 1997, the Company was issued United States patents
relating to removing debris from coins processed in a self-service environment
and other aspects of self-service coin processing. These patents will expire in
October 2013 and April 2014, respectively. Sufficient debris removal is
important to
21
<PAGE>
reducing clogging and malfunctioning. Reducing these problems and the associated
downtime improves unit availability for customer use and reduces the amount of
time that Company or retail partner personnel must spend attending to the unit,
both of which are important features of operating in a self-service environment.
No assurance can be given that any patents from any pending patent applications
or from any future patent applications will be issued, that any of the Company's
patents will be held valid if subsequently challenged or that others will not
claim rights in or ownership of the patents and other proprietary rights held by
the Company. Moreover, there can be no assurance that any patents issued to the
Company will not be challenged, invalidated or circumvented, or that the rights
granted thereunder will provide proprietary protection to the Company. Despite
the Company's efforts to safeguard and maintain its proprietary rights, there
can be no assurance that the Company will be successful in doing so or that the
Company's competitors will not independently develop or patent technologies that
are substantially equivalent or superior to the Company's technologies. On June
18, 1997, the Company filed in the United States District Court, Northern
District of California against CoinBank Automated Systems, Inc. ("CoinBank"),
one of its competitors, a complaint for infringement of one of the Company's
United States patents (the "Patent Infringement Claim"). CoinBank responded to
the Company by letter dated June 23, 1997, alleging that the Company failed to
conduct a reasonable investigation before filing the Patent Infringement Claim,
the Patent Infringement Claim is unreasonable and without factual foundation and
the Patent Infringement Claim was filed for an improper purpose. CoinBank has
demanded the Company dismiss such action, and has indicated that if such action
is not dismissed, CoinBank will answer the Patent Infringement Claim on June 26,
1997 and counterclaim for declaration of noninfringement, invalidity and
unenforceability of the subject patent and file a claim for $12 million of
damages based on the tort of intentional interference with prospective economic
advantage. CoinBank further stated that it may file a cross-complaint against
Scan Coin AB for indemnity and breach of warranty of title. On June 27, 1997,
CoinBank answered the Patent Infringement Claim and counterclaimed for
declaration of noninfringement, invalidity and unenforceability of the subject
patent, and filed a claim for breach of warranty against Scan Coin AB. There can
be no assurance that the Company will prevail in such Patent Infringement Claim
or on any claim that might be filed by CoinBank against the Company, or that as
a result of such Patent Infringement Claim, the Company's patent will not be
limited in scope or found to be invalid.
Since patent applications in the United States are not publicly disclosed
until the patent is issued, applications may have been filed by others which, if
issued as patents, could cover the Company's products. The Company is subject to
the risk of claims and litigation alleging infringement of the intellectual
property rights of others. There can be no assurance that others will not assert
infringement or misappropriation claims against the Company in the future based
on patents, copyrights or trade secrets or that such claims will not be
successful. The Company could incur substantial costs in defending itself and
its retail distribution partners against any such claims, regardless of the
merits of such claims. Parties making such claims may be able to obtain
injunctive or other equitable relief which could effectively block the Company's
ability to provide its coin processing service and use the 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, the Company may
need or be required to obtain one or more licenses from, and/or grant one or
more licenses to, others. There can be no assurance that the Company could
obtain necessary licenses from others at a reasonable cost or at all. The
defense of any lawsuit could result in time-consuming and expensive litigation,
damages, license fees, royalty payments, diversion of the attention of key
personnel and restrictions on or the termination of the Company's ability to
provide its coin processing service and use the processing equipment, any of
which could have a material adverse effect on the Company's business, financial
condition and results of operations and on its ability to achieve sufficient
cash flow to service its indebtedness. The Company also relies on trade secrets
to develop and maintain its competitive position. Although the Company protects
its proprietary technology in part by confidentiality agreements with its
employees, consultants and corporate partners, there can be no assurance that
these agreements will not be breached, that the Company will have adequate
remedies for any breach or that the
22
<PAGE>
Company's trade secrets will not otherwise become known or be discovered
independently by its competitors.
RAPID TECHNOLOGICAL CHANGE
The self-service coin processing market is relatively new and evolving. As
such, the Company anticipates that, as the market matures, it will be subject to
technological change, new services and product enhancements, particularly as the
Company expands its service offerings. Accordingly, the Company's success may
depend in part upon its ability to develop product enhancements and new services
that keep pace with continuing changes in technology and consumer preferences
while remaining price competitive. There can be no assurance, however, that the
Company would be successful in developing such product enhancements or new
services, that it will be able to introduce such products or services on a
timely basis or that any such product enhancements or new services will be
successful in the marketplace. The Company's failure to develop technological
improvements or to adapt its products and services to technological change on a
timely basis could, over time, have a material adverse effect on the Company's
business, financial condition and results of operations and on its ability to
achieve sufficient cash flow to service its indebtedness.
POTENTIAL VOLATILITY OF STOCK PRICE
The securities markets have from time to time experienced significant price
and volume fluctuations that are unrelated to the operating performance of
particular companies. Announcements of technological innovations or new products
or services by the Company or its competitors, the termination of one or more
retail distribution contracts, release of reports, changes in or failure of the
Company to meet financial estimates by securities analysts, industry
developments, market acceptance of the Coinstar service by retail distribution
partners and consumers, economic and other external factors, as well as
period-to-period fluctuations in the Company's financial results, may have a
significant and adverse impact on the market price of the Common Stock.
23
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 18, 1997, the Company filed in the United States District Court,
Northern District of California against CoinBank Automated Systems, Inc.
("CoinBank"), one of its competitors, a complaint for infringement of one of the
Company's United States patents (the "Patent Infringement Claim"). CoinBank
responded to the Company by letter dated June 23, 1997, alleging that the
Company failed to conduct a reasonable investigation before filing the Patent
Infringement Claim, the Patent Infringement Claim is unreasonable and without
factual foundation and the Patent Infringement Claim was filed for an improper
purpose. CoinBank has demanded the Company dismiss such action, and has
indicated that if such action is not dismissed, CoinBank will answer the Patent
Infringement Claim on June 26, 1997 and counterclaim for declaration of
noninfringement, invalidity and unenforceability of the subject patent and file
a claim for $12 million of damages based on the tort of intentional interference
with prospective economic advantage. CoinBank further stated that it may file a
cross-complaint against Scan Coin AB for indemnity and breach of warranty of
title. On June 27, 1997, CoinBank answered the Patent Infringement Claim and
counterclaimed for declaration of noninfringement, invalidity and
unenforceability of the subject patent, and filed a claim for breach of warranty
against Scan Coin AB. There can be no assurance that the Company will prevail in
such Patent Infringement Claim or on any claim that might be filed by CoinBank
against the Company, or that as a result of such Patent Infringement Claim, the
Company's patent will not be limited in scope or found to be invalid.
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
The effective date of the Company's first registration statement, filed on
Form S-1 under the Securities Act of 1993, as amended (Registration No.
333-26843), was July 2, 1997 (the "Registration Statement"). The class of
securities registered was Common Stock. The offering commenced on July 2, 1997
and all securities were sold in the offering. The managing underwriters were
Smith Barney Inc. and Hambrecht & Quist.
Pursuant to the Registration Statement, the Company sold 3,000,000 shares of
its Common Stock for its own account, for an aggregate offering price of
$31,500,000. The Company incurred expenses of approximately $2,837,544, of which
$1,957,125 represented underwriting discounts and commissions and $880,419
represented estimated other expenses, of which expenses $50,149 represented
direct or indirect payments to an affiliate of the Company. The net offering
proceeds to the issuer after total expenses was $28,662,456.
The Company has not used any of the net proceeds from the offering. All net
proceeds have been invested in short term securities. The use of the proceeds
from the offering does not represent a material change in the use of proceeds
described in the prospectus included as part of the Registration Statement.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ---------- --------------------------------------------------------------------
<S> <C>
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.
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ---------- --------------------------------------------------------------------
<S> <C>
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.
10.1(1) Registrant's 1997 Equity Incentive Plan.
10.2(1) Registrant's 1997 Employee Stock Purchase Plan.
10.3(1) Registrant's 1997 Non-Employee Directors' Stock Option Plan.
10.4(1) Form of Indemnity Agreement to be entered into 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(1) Lease agreement between Registrant and Spieker Properties, L.P.
dated January 29, 1997.
10.10(1) Manufacturing Agreement between Registrant and SeaMed Corporation
dated September 1, 1996.
10.11+(1) Letter of Intent between Registrant and Scan Coin AB dated March 5,
1997.
10.12+(1) Agreement between Registrant and Scan Coin AB dated April 30, 1993,
as amended.
10.13(1) Purchase Agreement between Registrant and Smith Barney Inc. dated
October 22, 1996.
11.1 Computation of Earnings Per Share.
27.1 Financial Data Schedule.
</TABLE>
- ------------------------
(1) Filed as an Exhibit to the Registrant's Registration Statement on Form S-4
(No. 333-33233)
+ Certain confidential portions deleted pursuant to Order Granting Application
Under the Securities Act of 1933, as amended, and Rule 406 thereunder
respecting Confidential Treatment.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended September 30,
1997.
Items 3, 4 and 5 are not applicable and have been omitted.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C>
COINSTAR, INC.
(Registrant)
Date: November 18, 1997 /s/ KIRK A. COLLAMER
--------------------------------------
Kirk A. Collamer
VICE PRESIDENT AND CHIEF FINANCIAL
OFFICER
</TABLE>
26
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ---------- ------------------------------------------------------------
<S> <C>
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.
10.1(1) Registrant's 1997 Equity Incentive Plan.
10.2(1) Registrant's 1997 Employee Stock Purchase Plan.
10.3(1) Registrant's 1997 Non-Employee Directors' Stock Option Plan.
10.4(1) Form of Indemnity Agreement to be entered into 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(1) Lease agreement between Registrant and Spieker Properties,
L.P. dated January 29, 1997.
10.10(1) Manufacturing Agreement between Registrant and SeaMed
Corporation dated September 1, 1996.
10.11+(1) Letter of Intent between Registrant and Scan Coin AB dated
March 5, 1997.
10.12+(1) Agreement between Registrant and Scan Coin AB dated April
30, 1993, as amended.
10.13(1) Purchase Agreement between Registrant and Smith Barney Inc.
dated October 22, 1996.
11.1 Computation of Earnings Per Share.
27.1 Financial Data Schedule.
</TABLE>
- ------------------------
(1) Filed as an Exhibit to the Registrant's Registration Statement on Form S-4
(No. 333-33233)
+ Certain confidential portions deleted pursuant to Order Granting Application
Under the Securities Act of 1933, as amended, and Rule 406 thereunder
respecting Confidential Treatment.
<PAGE>
EXHIBIT 11.1
COINSTAR, INC.
COMPUTATION OF EARNINGS PER SHARE
Calculations of net loss per share are based on the following:
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1996 1997 1996 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Weighted average common shares outstanding............... 984,012 5,312,287 984,012 13,906,463
Effect of convertible preferred shares................... 8,988,964 6,058,499 8,988,964 293,119
Effect of stock warrants outstanding..................... 397,162 0 397,162 0
Effect of stock options outstanding...................... 89,745 0 89,745 0
------------ ------------ ------------ ------------
Weighted average common and equivalent shares
outstanding............................................ 10,459,883 11,370,787 10,459,883 14,199,582
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 9-MOS 3-MOS 9-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1997 JUL-01-1997 JAN-01-1996 JUL-01-1996
<PERIOD-END> SEP-30-1997 SEP-30-1997 SEP-30-1996 SEP-30-1996
<CASH> 32,646,230 32,646,230 6,414,548 6,414,548
<SECURITIES> 29,036,249 29,036,249 0 0
<RECEIVABLES> 0 0 0 0
<ALLOWANCES> 0 0 0 0
<INVENTORY> 0 0 0 0
<CURRENT-ASSETS> 63,067,603 63,067,603 7,095,052 7,095,052
<PP&E> 51,683,670 51,683,670 22,016,362 22,016,362
<DEPRECIATION> (11,077,660) (11,077,660) (3,968,383) (3,968,383)
<TOTAL-ASSETS> 107,144,107 107,144,107 25,483,817 25,483,817
<CURRENT-LIABILITIES> 21,810,197 21,810,197 9,124,345 9,124,345
<BONDS> 0 0 0 0
0 0 24,275,267 24,275,267
0 0 4,231,809 4,231,809
<COMMON> 60,587,806 60,587,806 18,396 18,396
<OTHER-SE> (50,459,519) (50,459,519) (20,102,587) (20,102,587)
<TOTAL-LIABILITY-AND-EQUITY> 107,144,107 107,144,107 25,483,817 25,483,817
<SALES> 0 0 0 0
<TOTAL-REVENUES> 17,050,337 7,761,755 4,963,344 2,829,701
<CGS> 0 0 0 0
<TOTAL-COSTS> 33,774,808 12,677,206 13,522,497 6,042,392
<OTHER-EXPENSES> 0 0 0 0
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 7,258,108 2,499,432 590,424 335,488
<INCOME-PRETAX> (22,252,091) (6,704,103) (8,872,703) (3,525,858)
<INCOME-TAX> 0 0 0 0
<INCOME-CONTINUING> (22,252,091) (6,704,103) (8,872,703) (3,525,858)
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (22,252,091) (6,704,103) (8,872,703) (3,524,858)
<EPS-PRIMARY> (1.96) (.47) (.85) (.34)
<EPS-DILUTED> (1.96) (.47) (.85) (.34)
</TABLE>
