<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
For Quarterly Period Ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-22555
COINSTAR, INC
(Exact name of registrant as specified in its charter)
DELAWARE 94-3156448
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
13231 SE 36TH STREET, SUITE 200, BELLEVUE, WASHINGTON 98006
(Address of principal executive offices) (Zip Code)
(206) 644-6789
(Registrant's telephone number, including area code)
(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 NO X
------ -------
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date.
Class Outstanding at July 9, 1997
----- ----------------------------
Common Stock, $0.001 par value 14,361,598
1.
<PAGE>
COINSTAR, INC.
FORM 10-Q
INDEX
Page No.
--------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Balance Sheets as of June 30, 1997
and December 31, 1996. . . . . . . . . . . . . . . . . . . 3
Statements of Operations for the three
and six months ended June 30, 1997 and 1996. . . . . . . . 3
Statements of Stockholders' Equity (Deficit) for
the six months ended June 30, 1997 . . . . . . . . . . . . 3
Statements of Cash Flows for the
six months ended June 30, 1997 and 1996. . . . . . . . . . 3
Notes to Financial Statements for the three
and six months ended June 30, 1997 and 1996 . . . . . . . . . . 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . 3
PART II - OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . 3
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . 3
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . 4
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
The information required by this item is incorporated by reference from
the information in pages F-2 to F-7 of the Registration Statement on Form
S-4 (333-33233) filed by Coinstar, Inc. (the "Company"), which information is
filed hereto a Exhibit 99.1.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by this item is incorporated by reference from
the information under the captions "Management's Discussion and Analysis of
Financial Condition and Results of Operations" from pages 29-40 and "Risk
Factors" from pages 15 to 25 of the Company's Registration Statement on Form
S-4 (333-33233), which information is filed hereto as Exhibit 99.2.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on June 9, 1997. The
stockholders voted as follows:
The stockholders elected each of the five nominees for director. The
elected directors and the votes cast in favor and withheld for each are as
follows:
VOTES IN FAVOR VOTES WITHHELD
-------------- --------------
Jens H. Molbak 8,369,881 203,080
George H. Clute 8,369,881 203,080
David E. Stitt 8,369,881 203,080
Larry A. Hodges 8,369,881 203,080
Ronald A. Weinstein 8,369,881 203,080
The stockholders approved the Amended and Restated Certificate of
Incorporation, which became effective following the closing of the Company's
initial public offering with 8,359,881 votes in favor, 203,080 against and
10,000 abstentions.
The stockholders approved the Amended and Restated Bylaws, which became
effective following the closing of the Company's initial public offering with
8,369,881 votes in favor, 0 against and 0 abstentions.
The stockholders approved the Company's 1997 Equity Incentive Plan with
8,397,888 votes in favor, 6,742 against and 55,251 abstentions.
3.
<PAGE>
The stockholders approved the Company's 1997 Non-Employee Directors'
Stock Option Plan with 8,104,808 votes in favor, 209,822 against and 55,251
abstentions.
The stockholders approved the Company's Employee Stock Purchase Plan with
8,322,173 votes in favor, 6,742 against and 40,966 abstentions.
The stockholders' approved a form of Indemnity Agreement to be entered
into by the Company with each of its directors and executive officers with
8,161,801 votes in favor, 203,080 against and 5,000 abstentions.
The stockholders ratified the selection of Deloitte & Touche LLP as
independent auditors for the Company with 7,505,801 votes in favor, 205,526
against and 658,527 abstentions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
3.1(1) Amended and Restated Certificate of Incorporation of the Registrant
in effect after the closing of the Initial Public Offering.
3.2(1) Amended and Restated Bylaws of the Registrant.
4.1 Reference is made to Exhibits 3.1 through 3.2.
4.2(1) Specimen Stock Certificate.
4.3(1) Second Amended and Restated Investor Rights Agreement, dated
August 27, 1996, between the Registrant and certain investors, as
amended October 22, 1996.
4.4(1) Indenture between Registrant and The Bank of New York dated
October 1, 1996.
4.5(1) Warrant Agreement between Registrant and The Bank of New York dated
October 22, 1996.
4.6(1) Notes Registration Rights Agreement between Registrant and Smith
Barney Inc. dated October 22, 1996.
4.7(1) Warrant Registration Rights Agreement between Registrant and Smith
Barney Inc. dated October 22, 1996.
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.
4.
<PAGE>
27.1 Financial Data Schedule.
99.1 Pages F-2 to F-7 of the Company's Registration Statement on
Form S-4 (333-33233) incorporated by reference.
99.2 "Management's Discussion and Analysis of Financial Condition and
Results of Operations" from pages 29-40 and "Risk Factors" from
pages 15 to 25 of the Company's Registration Statement on
Form S-4 (333-33233) incorporated by reference.
___________
(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
June 30, 1997
ITEMS 2, 3, AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
5.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COINSTAR, INC.
(Registrant)
Date: August 14, 1997 /S/ KIRK A. COLLAMER
-----------------------------------------
Kirk A. Collamer
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
<PAGE>
EXHIBIT 11.1
COINSTAR, INC.
COMPUTATION OF EARNINGS PER SHARE
Calculations of pro forma net loss per share are based on the following:
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
1996 1997 1996 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Weighted average common shares outstanding............... 984,012 984,012 984,012 984,012
Effect of convertible preferred shares................... 8,988,964 8,988,964 8,988,964 8,988,964
Effect of stock warrants outstanding..................... 397,162 397,162 397,162 397,162
Effect of stock options outstanding...................... 89,745 89,745 89,745 89,745
------------ ------------ ------------ ------------
Pro forma weighted average common and equivalent shares
outstanding............................................ 10,459,883 10,459,883 10,459,883 10,459,883
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997 DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997 JAN-01-1996 JAN-01-1997
<PERIOD-END> JUN-30-1996 JUN-30-1997 JUN-30-1996 JUN-30-1997
<CASH> 7,283,086 16,271,057 7,283,086 16,271,057
<SECURITIES> 0 23,080,853 0 23,080,853
<RECEIVABLES> 0 0 0 0
<ALLOWANCES> 0 0 0 0
<INVENTORY> 0 0 0 0
<CURRENT-ASSETS> 7,644,554 41,188,942 7,644,554 41,188,942
<PP&E> 16,523,597 43,486,857 16,523,597 43,486,857
<DEPRECIATION> (2,874,393) (8,918,193) (2,874,393) (8,918,193)
<TOTAL-ASSETS> 21,363,134 79,102,985 21,363,134 79,102,985
<CURRENT-LIABILITIES> 6,200,930 18,522,153 6,200,930 18,522,153
<BONDS> 0 0 0 0
23,675,912 24,972,084 23,675,912 24,972,084
4,231,809 4,231,809 4,231,809 4,231,809
<COMMON> 14,346 93,727 14,346 93,727
<OTHER-SE> (17,000,477) (41,799,362) (17,000,477) (41,799,362)
<TOTAL-LIABILITY-AND-EQUITY> 21,363,134 79,102,985 21,363,134 79,102,985
<SALES> 2,133,643 9,288,582 1,387,982 5,293,558
<TOTAL-REVENUES> 2,133,643 9,288,582 1,387,982 5,293,558
<CGS> 0 0 0 0
<TOTAL-COSTS> 7,480,104 21,097,599 4,352,734 11,364,914
<OTHER-EXPENSES> 0 0 0 0
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 254,936 4,758,676 167,573 2,414,608
<INCOME-PRETAX> (5,346,844) (15,547,986) (3,037,733) (8,046,295)
<INCOME-TAX> 0 0 0 0
<INCOME-CONTINUING> (5,346,844) (15,547,986) (3,037,733) (8,046,295)
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (5,346,844) (15,547,986) (3,037,733) (8,046,295)
<EPS-PRIMARY> (0.51) (1.49) (0.29) (0.77)
<EPS-DILUTED> (0.51) (1.49) (0.29) (0.77)
</TABLE>
<PAGE>
Exhibit 99.1
COINSTAR, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
DECEMBER 31, -------------------------
1996 1997
------------ ----------- 1997
------------
(PRO FORMA)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................................ 23,867,763 16,271,057 16,271,057
Short-term investments available for sale................................ 32,441,912 23,080,853 23,080,853
Prepaid expenses and other current assets................................ 865,000 1,837,032 1,837,032
------------ ----------- ------------
Total current assets................................................... 57,174,675 41,188,942 41,188,942
PROPERTY AND EQUIPMENT, net................................................ 22,459,254 34,568,664 34,568,664
------------ ----------- ------------
OTHER ASSETS............................................................... 2,897,177 3,345,379 3,345,379
------------ ----------- ------------
TOTAL.................................................................. 82,531,106 79,102,985 79,102,985
------------ ----------- ------------
------------ ----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable......................................................... 1,779,702 2,843,092 2,843,092
Accrued liabilities...................................................... 7,690,288 14,132,412 14,132,412
Current portion of long-term debt and capital lease obligations.......... 910,535 1,546,649 1,546,649
------------ ----------- ------------
Total current liabilities.............................................. 10,380,525 18,522,153 18,522,153
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS............................... 69,154,936 73,082,574 73,082,574
------------ ----------- ------------
MANDATORILY REDEEMABLE PREFERRED STOCK..................................... 24,972,084 24,972,084 --
COMMITMENTS AND CONTINGENCIES (Notes 5, 6 and 11):
TOTAL STOCKHOLDERS' EQUITY (DEFICIT)....................................... (21,976,439) (37,473,826) (12,501,742)
------------ ----------- ------------
TOTAL................................................................ 82,531,106 79,102,985 79,102,985
------------ ----------- ------------
------------ ----------- ------------
</TABLE>
See notes to financial statements
F-2
<PAGE>
COINSTAR, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, THREE MONTHS ENDED JUNE 30,
----------------------------- ----------------------------
1996 1997 1996 1997
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUE............................................. $ 2,133,643 $ 9,288,582 $ 1,387,982 $ 5,293,558
EXPENSES:
Direct operating.................................. 2,208,420 7,415,653 1,320,530 3,965,509
Regional sales and marketing...................... 614,756 1,601,824 406,602 971,916
Product research and development.................. 1,422,337 3,080,297 761,797 1,639,655
Selling, general, and administrative.............. 1,939,614 5,157,287 1,068,012 2,629,624
Depreciation and amortization..................... 1,294,977 3,842,538 795,793 2,158,210
------------- -------------- ------------- -------------
Loss from operations.............................. (5,346,461) (11,809,017) (2,964,752) (6,071,356)
OTHER INCOME (EXPENSE):
Interest income................................... 254,553 1,019,707 94,592 439,669
Interest expense.................................. (254,936) (4,758,676) (167,573) (2,414,608)
------------- -------------- ------------- -------------
NET LOSS............................................ $ (5,346,844) $ (15,547,986) $ (3,037,733) $ (8,046,295)
------------- -------------- ------------- -------------
------------- -------------- ------------- -------------
UNAUDITED PRO FORMA INFORMATION (Note 1):
Pro forma net loss per share........................ $ (0.51) $ (1.49) $ (0.29) $ (0.77)
------------- -------------- ------------- -------------
Pro forma weighted average shares outstanding..... 10,459,883 10,459,883 10,459,883 10,459,883
------------- -------------- ------------- -------------
------------- -------------- ------------- -------------
</TABLE>
See notes to financial statements.
F-3
<PAGE>
COINSTAR, INC.
STATEMENTS 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
--------- --------- --------- --------- --------- ---------- ----------- ------------
<S> <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)
Exercise of stock
options................. 190,953 75,331 -- -- -- -- -- --
Unrealized loss on short-
term investments
available for sale...... -- -- -- -- -- -- -- (24,732)
Net loss.................. -- -- -- -- -- -- -- (15,547,986)
BALANCE, June 30, 1997.... 984,012 $ 93,727 649,775 $ 649,775 895,506 $3,582,034 $2,621,160 $(44,420,522)
--------- --------- --------- --------- --------- ---------- ----------- ------------
--------- --------- --------- --------- --------- ---------- ----------- ------------
<CAPTION>
TOTAL
------------
<S> <C>
BALANCE, December 31,
1996.................... $(21,976,439)
Exercise of stock
options................. 75,331
Unrealized loss on short-
term investments
available for sale...... (24,732)
Net loss.................. (15,547,986)
BALANCE, June 30, 1997.... $(37,473,826)
------------
------------
</TABLE>
See notes to financial statements.
F-4
<PAGE>
COINSTAR, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
------------------------------
JUNE 30, 1996 JUNE 30, 1997
-------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss........................................................................ $ (5,346,844) $ (15,547,986)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization................................................. 1,294,185 3,842,538
Debt discount amortization.................................................... 7,558 4,445,130
Accrued investment income..................................................... 21,195 60,091
Cash provided (used) by changes in operating assets and liabilities:
Prepaid expenses and other current assets................................... $ (131,146) $ (972,033)
Other assets................................................................ 9,034 (586,555)
Accounts payable............................................................ 966,662 1,063,389
Accrued liabilities......................................................... 2,781,247 6,442,123
-------------- --------------
Net cash provided (used) by operating activities................................ $ (398,109) $ (1,253,303)
INVESTING ACTIVITIES:
Purchase of short-term investments.............................................. -- $ (11,916,020)
Sale of short-term investments.................................................. -- 21,192,254
Purchase of fixed assets........................................................ $ (9,651,190) (15,392,219)
Payment of security deposit..................................................... (134,072) --
-------------- --------------
Net cash used by investing activities........................................... $ (9,785,262) $ (6,115,985)
FINANCING ACTIVITIES:
Repayment of equipment loans.................................................... $ (392,566) $ (302,749)
Proceeds from long-term debt.................................................... 3,547,823 --
Proceeds from Series D Warrants exercised....................................... 128,148 --
Proceeds from exercise of stock options......................................... 63,520 75,331
-------------- --------------
Net cash provided (used) by financing activities................................ $ 3,346,925 $ (227,418)
-------------- --------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................................. $ (6,836,446) $ (7,596,706)
CASH AND CASH EQUIVALENTS:
Beginning of period............................................................. $ 14,119,532 $ 23,867,763
-------------- --------------
End of period................................................................... $ 7,283,086 $ 16,271,057
-------------- --------------
-------------- --------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest........................................ $ 252,131 $ 344,395
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
Purchase of equipment financed by capital lease obligation...................... $ 140,792 $ 421,376
</TABLE>
See notes to financial statements.
F-5
<PAGE>
COINSTAR, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS
ENDED JUNE 30, 1996 AND 1997
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FINANCIAL STATEMENT PREPARATION: The financial statements as of and for the
three and six months ended June 30, 1997 and 1996 are unaudited, but in the
opinion of management include all adjustments (consisting of normal recurring
adjustments) necessary to present fairly the financial position and results of
operations and cash flows for the periods presented.
These statements have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission (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 rules and regulations. These financial statements should be
read in conjunction with management's discussion and analysis and with the
Company's audited financial statements and the accompanying notes for the years
ended December 31, 1996, 1995 and 1994. The results of operations for the three
and six months ended June 30, 1997, are not necessarily indicative of the
results to be expected for the entire year.
UNAUDITED PRO FORMA BALANCE SHEET: The accompanying pro forma balance sheet
as of June 30, 1997, which is unaudited, is presented as if the conversion of
preferred stock into common stock occurred on such date, and excludes warrants
to purchase 2,693,420 shares of common stock at a weighted average exercise
price of $2.96 per share which expire upon the July 9, 1997 closing of the
Company's initial public offering or 90 days thereafter. Such warrants may be
exercised for cash or on a cashless basis at the option of the warrant holder.
UNAUDITED PRO FORMA NET LOSS PER SHARE: Pro forma net loss per share is
based on the weighted average number of shares outstanding during the period
after consideration of the dilutive effect, if any, of options and warrants
issued and outstanding, and after giving pro forma effect to the conversion of
the Company's outstanding preferred stock, as described above, as if such
conversion had occurred at the beginning of the periods presented. Pursuant to
rules of the Securities Exchange Commission, all common stock warrants, and
options issued by the Company at a price less than the initial public offering
price during the 12 months preceding the closing date (using the treasury stock
method until shares are issued) have been included in the calculation of common
and common equivalent shares outstanding for the periods presented, regardless
of their dilutive effect.
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.
F-6
<PAGE>
COINSTAR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 $28.5 million (including approximately $1.0 million of
estimated 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 offering, the preferred stock
outstanding at June 30, 1997 was converted into common stock and certain common
and preferred stock warrants are expected to be exercised.
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, 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 Registration Rights Agreement between the Company and
the initial purchaser of the notes, the Company was required to agree to offer
to exchange the notes (not registered under the Securities Act) for otherwise
substantially identical notes registered under the Securities Act (the "Exchange
Act"). The Registration Rights Agreement also identified certain events,
including the Company's initial public offering, that require the Company to
consummate such Exchange Offer.
F-7
<PAGE>
Exhibit 99.2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
FINANCIAL STATEMENTS AND RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS
PROSPECTUS. EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE
DISCUSSION IN THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES, SUCH AS THE COMPANY'S PLANS, OBJECTIVES,
EXPECTATIONS AND INTENTIONS. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS
THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED
TO, THOSE DISCUSSED BELOW, IN "RISK FACTORS," "BUSINESS" AND ELSEWHERE IN THIS
PROSPECTUS.
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
June 30, 1997 had an installed base of 2,335 units located in supermarkets and
financial institutions in 33 regional markets across the United States. In 1996,
the Company significantly accelerated its plans for installation of the Coinstar
units in various geographic regions.
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 $44.4
million as of June 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 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 24 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 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 significant increase in the Company's installed base in 1996
and the first quarter of 1997 resulted in a reduction in average age of all
units in operation and consequently contributed to a lower average revenue
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per unit. The average age of all units in operation increased slightly during
the second 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 and 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. See "Risk
Factors--History of Sustained Operating Losses and Continuation of Such Losses,"
"Risk Factors--Limited Operating History," "Risk Factors--Uncertainty of Future
Operating Results," "Risk Factors--Fluctuations in Quarterly Operating Results,"
"Risk Factors-- Dependence on Continued Market Acceptance By Consumers and
Retail Distribution Partners," "Risk Factors--Possible Termination of Retail
Distribution Partner Agreements," and "Business--Sales and Marketing."
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997 AND 1996
REVENUE
Revenue increased to $5.3 million in the three months ending June 30, 1997
from $1.4 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
units in service during this period. The installed base of Coinstar units
increased to 2,335 as of June 30, 1997 from
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796 units as of June 30, 1996. During the second quarter of 1997, 406 units were
installed compared to 364 for the same period in 1996. The dollar value of coins
processed in the second quarter of 1997 increased to $70,626 million compared to
$20,692 million in the comparable 1996 period.
DIRECT OPERATING EXPENSES
Direct operating expenses increased to $4.0 million in the three months
ending June 30, 1997 from $1.3 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 accelerated growth and its expansion into 15 new regions
as of June 30, 1996. Direct operating expense as a percentage of revenue
decreased to 74.9% for the three months ending June 30, 1996 from 95.2% 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 engineering 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 $1.0 million in the three
months ending June 30, 1997 from $400,000 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 in the new regions installed in the second
quarter of 1997 and the initial incurrence of ongoing marketing expenses in the
existing markets. 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 ending June 30, 1997 from $800,000 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 expenses
may be capitalized in the future.
SELLING, GENERAL, AND ADMINISTRATIVE
Selling, general, and administrative expense increased to $2.6 million in
the three months ending June 30, 1997 from $1.1 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 $2.2 million in the three
months ending June 30, 1997 from $800,000 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
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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 $400,000 in the three months ending June 30,
1997 from $100,000 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.
Interest expense increased to $2.4 million in the three months ending June
30, 1997 from $200,000 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 $8.0 million in the three months ending June 30, 1997
from $3.0 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 that 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. See "Risk Factors--Dependence on Continued Market
Acceptance By Consumers and Retail Distribution Partners."
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
REVENUE
Revenue increased to $9.3 million in the first six months of 1997 from $2.1
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 2,335 as of June 30,
1997 from 796 units as of June 30, 1996. The dollar value of coins processed
increased to $123.4 million during the 1997 period from $33.0 million in the
comparable 1996 period.
DIRECT OPERATING EXPENSES
Direct operating expenses increased to $7.4 million in the first six months
of 1997 from $2.2 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 15 new regional markets as of June 30,
1996. Direct operating expenses as a percentage of revenue decreased to 79.9% in
the 1997 period from 103.5% 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 engineering expenses
decrease as a percentage of revenue as the Company increases its density in its
existing markets.
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REGIONAL SALES AND MARKETING
Regional sales and marketing expenses increased to $1.6 million in the first
six months of 1997 from $600,000 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 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 $3.1 million in the
first six months of 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 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 $5.2 million in the
first six months of 1997 from $1.9 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 second half of 1996 and first six 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 $3.8 million in the first
six months of 1997 from $1.3 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. 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 $1.0 million in the first six months of 1997
from $300,000 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.
Interest expense increased to $4.8 million in first six months of 1997 from
$300,000 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.
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NET LOSS
Net loss increased to $15.5 million in the first six months of 1997 from
$5.3 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. See "Risk Factors--Dependence on Continued Market
Acceptance By Consumers and Retail Distribution Partners."
YEARS ENDED DECEMBER 31, 1996 AND 1995
REVENUE
Revenue increased to $8.3 million in 1996 from $1.1 million in 1995. The
increase was due principally to the increase in the number of Coinstar units
placed in service during 1996 and the increase in the volume of coins processed
by the units in service during that year. The installed base of Coinstar units
increased to 1,501 at the end of 1996 from 263 at the end of 1995. The dollar
value of coins processed increased to $115.5 million during 1996 from $17.7
million in 1995.
DIRECT OPERATING EXPENSES
Direct operating expenses increased to $7.3 million in 1996 from $1.3
million in 1995. 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 12 new regional markets in 1996. Direct operating expenses as a percentage
of revenue decreased to 87% in 1996 from 126% in 1995.
REGIONAL SALES AND MARKETING
Regional sales and marketing expenses increased to $1.5 million in 1996 from
$349,000 in 1995. 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 1996. Substantially all of the Company's sales and marketing
expenses in 1996 were attributable to startup marketing activities as the
Company increased its installed base to 23 regions at the end of 1996 from 11
regions in 1995.
PRODUCT RESEARCH AND DEVELOPMENT
Product research and development expenses increased to $4.0 million in 1996
from $1.8 million in 1995 due largely to increased 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 in 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.
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SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased to $5.4 million in
1996 from $2.8 million in 1995. The increase primarily reflects an investment in
higher staffing levels during the second half of 1996 to support the Company's
rapid growth and expansion.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased to $4.1 million in 1996 from
$1.1 million in 1995. The increase was primarily due to the increase in the
installed base of Coinstar units during these years.
INTEREST INCOME AND EXPENSE
Interest income increased to $848,000 in 1996 from $398,000 in 1995. 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.
Interest expense increased to $2.7 million in 1996 from $208,000 in 1995 as
a result of the sale of the Notes in October 1996 and the accretion of such
Notes since the original issue date to year end.
NET LOSS
Net loss increased to $16.0 million in 1996 from $6.2 million in 1995. The
increase in net loss primarily was due to disproportionately higher increases in
operating expenses and interest expense as compared to increases in the
Company's direct contribution margin. This was the result of the Company adding
infrastructure during the year to support an expected increase in the number of
installed units.
YEARS ENDED DECEMBER 31, 1995 AND 1994
REVENUE
Revenue increased to $1.1 million in 1995 from $325,000 in 1994. The
increase was due principally to the increase in the number of Coinstar units
placed in service during 1995 and the increase in the volume of coins processed
by the units in service during that year. The installed base of Coinstar units
increased to 263 at the end of 1995 from 48 at the end of 1994. The dollar value
of coins processed increased to $17.7 million during 1995 from $5.2 million in
1994.
DIRECT OPERATING EXPENSES
Direct operating expenses increased to $1.3 million in 1995 from $488,000 in
1994. 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 overall growth of the number of units
in service. The increase was also attributable to higher 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 seven new
regional markets in 1995. Operating expenses as a percentage of revenue
decreased to 126% in 1995 from 150% in 1994.
REGIONAL SALES AND MARKETING
Regional sales and marketing expenses increased to $349,000 in 1995 from
$86,000 in 1994. 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 startup
regions installed during 1995. Substantially all of the Company's sales and
marketing expenses in 1995 were attributable to startup marketing activities as
the Company increased its installed base to 11 regions at the end of 1995 from
four regions in 1994.
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PRODUCT RESEARCH AND DEVELOPMENT
Product research and development expenses increased to $1.8 million in 1995
from $1.6 million in 1994 due largely to the costs related to the improvement of
existing and development of new Coinstar unit software, hardware, network
applications and development costs related to new service offerings.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased to $2.8 million in
1995 from $1.7 million in 1994. The increase primarily reflects an investment in
higher staffing levels to support the Company's rapid growth and expansion.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased to $1.1 million in 1995 from
$439,000 in 1994. The increase was primarily due to the increase in the
installed base of Coinstar units during these years.
INTEREST INCOME AND EXPENSE
Interest income increased to $398,000 in 1995 from $34,000 in 1994. The
increase in interest income is attributable to higher invested cash balances
resulting from the proceeds received from private debt and equity financings.
Interest expense decreased to $208,000 in 1995 from $297,000 in 1994
primarily as a result of a lower average level of borrowings during 1995.
NET LOSS
Net loss increased to $6.2 million in 1995 from $4.3 million in 1994. The
increase in net loss was the result of operating expenses increasing at a higher
amount than the Company's increase in revenue during the period.
INCOME TAXES
At December 31, 1996 and 1995, the Company had net deferred tax assets of
approximately $9.9 million and $4.4 million, respectively, resulting primarily
from net operating loss and credit carryforwards available to offset future
income and tax obligations, respectively. The extent to which the loss
carryforwards can be used to offset future taxable income will be limited
because of the ownership changes within any three-year period as provided in the
Tax Reform Act of 1986. The Initial Public Offering may trigger such a
limitation as a result of which the annual usage will be limited by the market
value of the Company at the closing of the offering multiplied by the then
current long-term tax exempt interest rate. Such federal carryforwards expire
through 2011. Based upon the Company's history of operating losses and
expiration dates of the loss carryforwards, the Company has recorded a valuation
allowance to the full extent of its net deferred tax assets.
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 June 30, 1997, the Company had cash and cash equivalents of $16.3
million, short-term investments of $23.1 million and working capital of $22.7
million. Cash and cash equivalents include $11.1 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 $1.3 million for the
six months ended June 30, 1997 and net cash used by operating activities was
$400,000 for the six months ended June 30, 1996. Net cash used by operating
activities was $3.4 million, $4.5 million, $2.6 million for
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1996, 1995 and 1994, respectively. The principal use of cash for all periods was
to fund net operating losses incurred, partially offset by depreciation and
other non-cash charges, and in 1996 and the six months ended June 30, 1997 by an
increase in accrued liabilities.
Net cash used by investing activities during the six month period ended June
30, 1997 was $6.1 million and $9.8 million for the comparable 1996 period.
Capital expenditures for such periods were $15.4 million and $9.7 million,
respectively. Net cash used by investing activities was $53.2 million, $3.9
million and $2.2 million in 1996, 1995 and 1994, respectively. Capital
expenditures for such years were $20.8 million, $3.8 million and $2.2 million,
respectively. The majority of capital expenditures consist of the purchase of
Coinstar units. The installed cost of the Coinstar unit decreased over time to
approximately $13,500 in 1996 from approximately $22,200 in 1993. The Company
expects the cost of the unit to continue to decrease in 1997. In 1996, $32.2
million of the Company's investing activities were for the purchase of
short-term investments. At the end of 1996, the Company's purchase commitments
for 1997 totaled $8.7 million.
Net cash used by financing activities for the six month period ended June
30, 1997 was $200,000 and net cash provided by financing activities for the six
month period ended June 30, 1996 was $3.3 million. Net cash provided by
financing activities was $66.3 million, $21.2 million and $4.7 million in 1996,
1995 and 1994, respectively. For 1996, financing activities consisted primarily
of the sale of the Notes. For 1995, financing activities consisted primarily of
proceeds from the sale of Preferred Stock. For 1994, financing activities
consisted primarily of borrowings under short-term debt obligations which were
subsequently converted into Preferred Stock.
During 1995, the Company entered into a loan agreement which allowed for
maximum borrowings of $2.0 million to be drawn under specific notes and secured
by certain equipment of the Company. The Company drew down approximately $2.0
million under five separate notes between November 1995 and February 1996. The
effective annual interest rate on this loan was 17.5%, and the loan was due in
monthly installments. The Company repaid this note in December 1996. In
connection with this loan, the Company issued 49,231 detachable warrants to
purchase shares of Series C Preferred Stock at an exercise price of $3.25. 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 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 August 1996, the Company entered into a $7.0 million term loan facility
and a $250,000 line of credit. The facility was secured by certain Coinstar
units and all remaining corporate assets, excluding specific equipment currently
under lease or purchase money security interest. The Company drew approximately
$4.5 million on this loan during 1996. The term loan bore interest at the rate
of prime plus 3.5% and was payable on December 31, 2000. The line of credit bore
interest at the rate of prime plus 3.0% and expired on August 12, 1997. The
Company paid off this loan in December 1996. In connection with this loan, the
Company issued detachable warrants to purchase 51,176 shares of its Series D
Preferred Stock at an exercise price of $4.25. 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
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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 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.
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 $28.5 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.
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 may
seek additional external financing to fund its cash needs. 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 five 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>
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1996 1996 1996 1997 1997
--------- ------------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue........................................... $ 1,388 $ 2,830 $ 3,349 $ 3,995 $ 5,294
Expenses:
Direct operating................................ 1,321 2,110 2,940 3,450 3,966
Regional sales and marketing.................... 407 396 494 630 972
Product research and development................ 762 1,014 1,533 1,441 1,640
Selling, general and administrative............. 1,067 1,425 1,987 2,528 2,630
Depreciation and amortization................... 796 1,098 1,741 1,684 2,158
Loss from operations.............................. $ (2,965) $ (3,213) $ (5,346) $ (5,738) (6,072)
OTHER DATA:
Number of New Coinstar units installed during the
period.......................................... 364 413 292 428 406
Installed base of Coinstar units at end of
period.......................................... 796 1,209 1,501 1,929 2,335
Number of regional markets........................ 18 22 23 27 33
Dollar value of coins processed................... $ 20,692 $ 37,637 $ 44,841 $ 52,724 $ 70,626
Direct contribution (loss)(1)..................... 67 720 409 545 1,328
Direct operating expense per average installed
unit(2)......................................... 2,205 2,055 2,112 2,037 1,858
</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 and June 30, 1997 and continues to take measures
to optimize such efficiencies.
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
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<PAGE>
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 Standard ("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.
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<PAGE>
RISK FACTORS
AN INVESTMENT IN THE NEW NOTES BEING OFFERED HEREBY INVOLVES A HIGH DEGREE
OF RISK. PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY THE FOLLOWING RISK
FACTORS, IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS,
BEFORE EXCHANGING THE OLD NOTES FOR THE NEW NOTES OFFERED HEREBY. THIS
PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED
IN "RISK FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS" AND "BUSINESS" AS WELL AS THOSE DISCUSSED ELSEWHERE
IN THIS PROSPECTUS.
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 six months and
three months ended June 30, 1997 was $6.2 million, $16.0 million, $15.5 million
and $8.0 million, respectively. As of June 30, 1997, the Company had an
accumulated deficit of $44.4 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. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
LIMITED OPERATING HISTORY
After several years of development, the Company commenced commercial
deployment of Coinstar units in 1994 and placed approximately 89% of the
installed base as of June 30, 1997 in service during 1996 and the six months
ended June 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 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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business."
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
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<PAGE>
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. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business--Sales and Marketing."
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. See "Risk Factors--Possible Termination of Retail
Distribution Partner Agreements," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business--Sales and
Marketing."
SUBSTANTIAL LEVERAGE AND ABILITY TO SERVICE DEBT
The Company had outstanding indebtedness as of June 30, 1997 of $74.6
million, which included $70.6 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 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,
14
<PAGE>
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. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
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. See
"Business--Competition."
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. See "Business--Sales and Marketing."
15
<PAGE>
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 banks, convenience
stores and mass merchants 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. See "Risk Factors--Possible Termination of Retail Distribution
Partner Agreements" and "Business."
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 six months ended June 30,
1997, Coinstar units in service in three supermarket chains accounted for
approximately 32.3% 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 11.0% and 13.0%, respectively, of the Company's
revenue in the six months ended June 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. See "Business--Sales and Marketing."
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
16
<PAGE>
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. See "Business."
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. See "Risk Factors--Dependence on Continued Market
Acceptance By Consumers and Retail Distribution Partners" and "Business--Sales
and Marketing."
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 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. See "Business--Manufacturing and Supply."
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
17
<PAGE>
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. See "Business--Manufacturing and Supply."
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. See "Business--The
Coinstar System."
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
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
18
<PAGE>
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. See "Business--The Coinstar System."
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. See "Management."
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 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
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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 Company's trade secrets will not otherwise
become known or be discovered independently by its competitors. See
"Business--Proprietary Rights."
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
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business, financial condition and results of operations and on its ability to
achieve sufficient cash flow to service its indebtedness. See "Business--Product
Research and Development."
ABSENCE OF PUBLIC MARKET FOR THE NOTES
The New Notes are being offered to the Holders of the Old Notes. Prior to
this Exchange Offer, there has been no public market for the Old Notes. Prior to
Exchange Offer there are no New Notes. The Company does not intend to apply for
listing of the New Notes on any securities exchange or for quotation through the
Nasdaq National Market. The Initial Purchaser has informed the Company that it
currently intends to make a market for the New Notes. However, the Initial
Purchaser is not obligated to do so and any such market making may be
discontinued at any time without notice. Therefore, no assurance can be given as
to whether an active trading market will develop or be maintained for the New
Notes. If the New Notes are traded after their initial issuance they may trade
at a discount from their initial offering price, depending on prevailing
interest rates, the market for similar securities and other factors, including
the financial condition, performance and prospects of the Company.
CONSEQUENCES TO NON-TENDERING HOLDERS OF OLD NOTES
Upon consummation of the Exchange Offer, the Company will have no further
obligation to register the Old Notes. Thereafter, any Holder of Old Notes who
does not tender its Old Notes in the Exchange Offer, including any Holder which
is an "affiliate" (as that term is defined in Rule 405 of the Securities Act) of
the Company which cannot tender its Old Notes in the Exchange Offer, will
continue to hold restricted securities which may not be offered, sold or
otherwise transferred, pledged or hypothecated except pursuant to Rule 144 and
Rule 144A under the Securities Act or pursuant to any other exemption from
registration under the Securities Act relating to the disposition of securities,
provided that an opinion of counsel is furnished to the Company that such an
exemption is available.
RANKING OF NOTES
The Notes will be unsecured obligations of the Company, will be subordinated
to all other Senior Debt of the Company and will be effectively subordinated to
all indebtedness (including senior indebtedness and trade credit) of
subsidiaries of the Company. As of June 30, 1997 the aggregate amount of Senior
Debt of the Company was $4.0 million. See "Capitalization." The Indenture
permits the Company and its subsidiaries to incur substantial additional
indebtedness, including senior indebtedness and secured indebtedness. The
Company currently does not have any subsidiaries.
The Company and its subsidiaries may incur substantial additional
indebtedness, including senior indebtedness and secured indebtedness. Any
holders of secured indebtedness of the Company would be entitled to payment of
their indebtedness out of the proceeds of their collateral prior to the holders
of any general unsecured obligations of the Company, including the Notes, and
any holders of senior indebtedness of the Company or of subsidiaries of the
Company would generally be entitled to repayment of such indebtedness from the
assets of the Company or of the affected subsidiaries before such assets were
made available for distribution to holders of subordinated obligations of the
Company or to the Company, respectively. In addition, holders of any future
indebtedness of the Company ranking pari passu in right of payment with the
Notes would generally share pro rata in the remaining assets of the Company with
the holders of the Notes. Similarly, in the event of any distribution or payment
of the assets of the Company in any foreclosure, dissolution, winding-up,
liquidation or reorganization, holders of any secured indebtedness will have a
secured prior claim to the assets of the Company that constitute their
collateral and holders of senior or subsidiary indebtedness would be entitled to
prior repayment of their claims from the assets of the Company or of the
relevant subsidiary. In the event of bankruptcy, liquidation or reorganization
of the Company, holders of the Notes will participate ratably with all holders
of unsecured indebtedness of the Company which is deemed to be of the same class
as the Notes, and potentially with all other general creditors of the Company,
based upon the respective amounts owed to each holder or creditor, in
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the remaining assets of the Company. In any of the foregoing events, there can
be no assurance that there would be sufficient assets to pay amounts due on the
Notes. See "Description of Old Notes-- Subordination."
In the event that the Company is unable to generate sufficient cash flow and
the Company is otherwise unable to obtain funds necessary to meet required
payments of principal, premium, if any, and interest on its indebtedness,
including the Notes, the Company could be in default under the terms of the
agreements governing such indebtedness, including the Indenture. In the event of
such default, the holders of such indebtedness could elect to declare all of the
funds borrowed thereunder to be due and payable together with accrued and unpaid
interest. If such an acceleration were effected and the Company did not have
sufficient funds to pay the accelerated indebtedness, the holders of such
indebtedness could initiate foreclosure or other enforcement action against the
Company. Any such circumstances would materially adversely affect the Company's
ability to pay principal, premium, if any, and interest on the Notes and the
market value of the Notes.
FRAUDULENT TRANSFER AND PREFERENCE CONSIDERATIONS
Under applicable provisions of the federal bankruptcy law or comparable
provisions of state fraudulent transfer law, if the Company, at the time of
issuance of, or making any payment in respect of, the Notes, (a)(i) was or was
rendered insolvent thereby, was engaged or about to engage in a business or
transaction for which its assets constituted unreasonably small capital, or
intended to incur, or believed that it would incur, debts beyond its ability to
pay such debts as they matured, and (ii) the Company received less than
reasonably equivalent value or fair consideration for such issuance, or (b) the
Company issued the Notes or made any payment thereunder with intent to hinder,
defraud or delay any of its creditors, the obligations of the Company under some
or all of the Notes could be avoided or held to be unenforceable by a court, the
obligations of the Company under the Notes could be subordinated to claims of
other creditors or the holders could be required to return payments already
received. In any of the foregoing cases, there could be no assurance that the
holders would ultimately recover the amounts owing under the Notes. In addition,
under the preference law of the State of New York, if the Company were to issue
the Notes or make any payment in respect thereof in contemplation of insolvency,
the Notes could be avoided or amounts paid to the holders could be required to
be returned.
The measure of insolvency for purposes of the foregoing will vary depending
upon the law applied in any such case. Generally, however, the Company would be
considered insolvent if the sum of its debts, including contingent liabilities,
was greater than all of its assets at a fair valuation or if the present fair
saleable value of its assets was less than the amount that would be required to
pay the probable liability on its existing debts, including contingent
liabilities, as they become absolute and matured.
The Company believes that it will not be insolvent at the time of or as a
result of any of the offerings made hereby, that it will not engage in a
business or transaction for which its assets constitute unreasonably small
capital, and that it did not and does not intend to incur or believe that it
will incur debts beyond its ability to pay such debts as they mature. These
beliefs are based on internal cash flow projections and estimated value of
assets and liabilities. There can be no assurance, however, that a court passing
on such questions would agree with the Company's analysis.
ORIGINAL ISSUE DISCOUNT
The Notes will be issued at a substantial discount from their principal
amount at maturity. Although cash interest will not be payable in respect of the
Notes prior to April 1, 2000, Original Issue Discount (the difference between
the stated redemption price at maturity of the Notes and the issue price of the
Notes) will accrue from the issue date of the Notes and generally will be
includable as interest income in the Note holder's gross income for United
States federal income tax purposes in advance of the cash payments to which the
income is attributable.
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Furthermore, the Notes will be subject to the high yield discount obligation
rules which will defer and may in part eliminate the Company's ability to deduct
the Original Issue Discount attributable to the Notes. Accordingly, the
Company's after tax cash flow might be less than if the Original Issue Discount
on the Notes was deductible when it accrued. See "Certain Federal Income Tax
Considerations--Notes-- Applicable High Yield Discount Obligations." Similar
results may apply under state tax laws.
If a bankruptcy case were commenced by or against the Company under the
Federal Bankruptcy Code of 1978, as amended (the "Bankruptcy Code"), after the
issuance of the Notes, the claim of a holder is the sum of: (i) the initial
offering price and (ii) that portion of the Original Issue Discount that is not
deemed to constitute "unmatured interest" for purposes of the Bankruptcy Code.
Any Original Issue Discount that was not accrued as of the date of any such
bankruptcy filing would constitute "unmatured interest."
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