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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15() OF THE SECURITIES
AND EXCHANGE ACT OF 1934
FOR THREE MONTH PERIOD ENDED JUNE 30, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15() 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 Identification No.)
incorporation or organization)
1800 114TH AVENUE SE, BELLEVUE, WASHINGTON 98004
(Address of principal executive offices) (Zip Code)
(425) 943-8000
(Registrant's telephone number, including area code)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /.
------------------------
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
CLASS OUTSTANDING AT JULY 31, 1998
<S> <C>
Common Stock, $0.001 par value 15,170,188
</TABLE>
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COINSTAR, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE NO.
---------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of June 30, 1998 (unaudited) and December 31, 1997............ 1
Consolidated Statements of Operations for the six and three month periods ended
June 30, 1998 and 1997 (unaudited)......................................................... 2
Consolidated Statement of Stockholders' Equity (Deficit) for the six month period ended June
30, 1998 (unaudited)....................................................................... 3
Consolidated Statements of Cash Flows for the six month periods ended
June 30, 1998 and 1997 (unaudited)......................................................... 4
Notes to Consolidated Financial Statements for the six month periods ended
June 30, 1998 and 1997..................................................................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........ 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................................ 23
Item 2. Changes in Securities and Use of Proceeds.................................................... 23
Item 4. Submission of Matters to a Vote of Security Holders.......................................... 23
Item 5. Other Information............................................................................ 24
Item 6. Exhibits and Reports on Form 8-K............................................................. 24
SIGNATURES.............................................................................................. 26
EXHIBIT INDEX........................................................................................... 27
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COINSTAR, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................... $ 26,345,723 $ 20,199,914
Short-term investments available for sale....... 21,804,006 36,603,474
Prepaid expenses and other current assets....... 1,187,058 1,021,349
------------ ------------
Total current assets.......................... 49,336,787 57,824,737
PROPERTY AND EQUIPMENT............................
Coinstar units.................................. 62,123,977 51,002,230
Computers....................................... 2,946,398 2,792,326
Office furniture and equipment.................. 1,170,236 1,153,974
Leased vehicles................................. 1,473,441 1,014,873
Leasehold improvements.......................... 435,427 366,090
Coinstar components............................. 77,180 110,024
------------ ------------
68,226,659 56,439,517
Accumulated depreciation........................ (19,302,966) (13,511,235)
------------ ------------
48,923,693 42,928,282
OTHER ASSETS...................................... 2,606,408 2,792,875
------------ ------------
TOTAL............................................. $100,866,888 $103,545,894
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable................................ $ 5,316,017 $ 3,238,069
Accrued liabilities............................. 22,920,120 18,253,065
Current portion of long-term debt and capital
lease obligations............................. 1,698,295 1,612,451
------------ ------------
Total current liabilities..................... 29,934,432 23,103,585
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS...... 81,702,968 77,333,005
COMMITMENTS AND CONTINGENCIES (Notes 3 & 4)
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock.................................... 61,515,387 61,039,848
Contributed capital for warrants................ 513,584 513,584
Accumulated deficit............................. (72,799,483) (58,444,128)
------------ ------------
Total stockholders equity (deficit)........... (10,770,512) 3,109,304
------------ ------------
TOTAL............................................. $100,866,888 $103,545,984
------------ ------------
------------ ------------
</TABLE>
See notes to consolidated financial statements
1
<PAGE>
COINSTAR, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTH PERIODS THREE MONTH PERIODS
ENDED JUNE 30, ENDED JUNE 30,
------------------------------ ----------------------------
1998 1997 1998 1997
-------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUE............................................ $ 19,294,739 $ 9,288,582 $ 10,471,904 $ 5,293,558
EXPENSES:
Direct operating................................. 11,965,843 7,415,653 6,142,132 3,965,509
Regional sales and marketing..................... 1,770,696 1,601,824 853,800 971,916
Product research and development................. 2,738,850 3,080,297 1,329,033 1,639,655
Selling, general, and administrative............. 7,002,175 5,157,287 3,726,547 2,629,624
Depreciation and amortization.................... 5,933,123 3,842,538 3,119,846 2,158,210
-------------- -------------- ------------- -------------
Loss from operations............................... (10,115,948) (11,809,017) (4,699,454) (6,071,356)
OTHER INCOME (EXPENSE):
Interest income.................................. 887,469 1,019,707 386,062 439,669
Interest expense................................. (5,231,691) (4,758,676) (2,660,634) (2,414,608)
Other Income..................................... 102,884 63,776
-------------- -------------- ------------- -------------
NET LOSS........................................... $ (14,357,286) $ (15,547,986) $ (6,910,250) $ (8,046,295)
-------------- -------------- ------------- -------------
-------------- -------------- ------------- -------------
Net loss per share, basic and diluted............ $ (.95) $ (16.47) $ (.46) $ (8.18)
-------------- -------------- ------------- -------------
-------------- -------------- ------------- -------------
Weighted average shares outstanding, basic and
diluted........................................ 15,098,294 943,977 15,116,403 984,012
-------------- -------------- ------------- -------------
-------------- -------------- ------------- -------------
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
COINSTAR, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK CONTRIBUTED
--------------------------- FOR CAPITAL ACCUMULATED
SHARES AMOUNT WARRANTS DEFICIT TOTAL
------------ ------------- ----------- -------------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE, January 1, 1998.............. 15,034,629 $ 61,039,848 $ 513,584 $ (58,444,128) $ 3,109,304
Issuance of shares under employee
stock purchase plan................. 58,020 425,271 -- -- 425,271
Exercise of stock options............. 30,410 50,268 -- -- 50,268
Unrealized gain on short-term
investments available for sale...... -- -- -- 1,931 1,931
Net loss.............................. (14,357,286) (14,357,286)
------------ ------------- ----------- -------------- --------------
BALANCE, June 30, 1998................ 15,123,059 $ 61,515,387 $ 513,584 $ (72,799,483) $ (10,770,512)
------------ ------------- ----------- -------------- --------------
------------ ------------- ----------- -------------- --------------
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
COINSTAR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTH PERIODS
ENDED JUNE 30,
------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss........................................................................ $ (14,357,286) $ (15,547,986)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization................................................. 5,933,122 3,842,538
Debt discount amortization.................................................... 4,970,055 4,445,130
Accrued investment income..................................................... 108,103 60,091
Non-cash stock-based compensation............................................. 36,625
Cash provided (used) by changes in operating assets and liabilities:
Prepaid expenses and other current assets................................... (165,709) (972,033)
Other assets................................................................ 2,592 (586,555)
Accounts payable............................................................ 2,077,948 1,063,389
Accrued liabilities......................................................... 4,684,026 6,442,123
-------------- --------------
Net cash provided/(used) by operating activities................................ $ 3,289,476 $ (1,253,303)
INVESTING ACTIVITIES:
Purchase of short-term investments.............................................. $ (20,607,391) $ (11,916,020)
Sale of short-term investments.................................................. 35,300,692 21,192,254
Purchase of fixed assets........................................................ (11,422,424) (15,392,219)
Proceeds from sale of equipment................................................. 2,247 0
-------------- --------------
Net cash provided/(used) by investing activities................................ $ 3,273,124 $ (6,115,985)
FINANCING ACTIVITIES:
Payments on long-term debt...................................................... $ (855,705) $ (302,749)
Net proceeds from issuance of common stock
Net proceeds from exercise of stock options..................................... 438,914 75,331
-------------- --------------
Net cash provided/(used) by financing activities................................ $ (416,791) $ (227,418)
-------------- --------------
DECREASE IN CASH AND CASH EQUIVALENTS............................................. $ $ (7,596,706)
CASH AND CASH EQUIVALENTS:
Beginning of period............................................................. $ 20,199,914 $ 23,867,763
-------------- --------------
End of period................................................................... $ 26,345,723 $ 16,271,057
-------------- --------------
-------------- --------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest........................................ $ 268,583 $ 344,395
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
Purchase of vehicles financed by capital lease obligation....................... $ 267,387 $ 421,376
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
COINSTAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTH PERIODS ENDED JUNE 30, 1998 AND 1997
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The unaudited consolidated financial statements of
Coinstar, Inc. and its newly formed subsidiary Coinstar International, Inc.
(collectively, the "Company") included herein reflect all adjustments,
consisting only of normal recurring adjustments which, in the opinion of
management, are necessary to present fairly the Company's financial position,
results of operations and cash flows for the periods presented.
These financial statements have been prepared by the Company pursuant to the
rules and regulations of the Securities and Exchange Commission (the "SEC").
Certain information and footnote disclosures, normally included in financial
statements prepared in accordance with generally accepted accounting principles,
have been omitted pursuant to such SEC rules and regulations. These financial
statements should be read in conjunction with the Company's audited financial
statements and the accompanying notes included in the Company's Form 10-K for
the year ended December 31, 1997 filed with the SEC. The results of operations
for the three month and six month periods ended June 30, 1998 are not
necessarily indicative of the results to be expected for any subsequent quarter
or for the entire fiscal year.
PRINCIPLES OF CONSOLIDATION: The financial statements include the accounts
of Coinstar, Inc. and its wholly owned subsidiary Coinstar International, Inc.,
which was formed for the purpose of exploring the expansion of the Coinstar
network internationally.
NEW ACCOUNTING PRONOUNCEMENTS: The Accounting Standards Executive Committee
of the American Institute of Certified Public Accountants issued Statement of
Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use," on March 4, 1998. This SOP is effective for the
Company's year ending December 31, 1999 and requires certain of the Company's
product research and development expenses related to development of software for
internal use to be capitalized. The Company is currently evaluating the effects
of this Statement, and management is uncertain as to the impact of its adoption
on the financial statements, taken as a whole.
Statement of Financial Accounting Standards (SFAS) No. 130, "REPORTING
COMPREHENSIVE INCOME" and SFAS No. 131, "DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION," were also recently issued and are effective
for the Company's year ending December 31, 1998. The Company is currently
evaluating the effects of these Standards, however, management believes the
impact of adoption will not be material to the financial statements, taken as a
whole.
NOTE 2: LETTERS OF CREDIT
As of June 30, 1998 the Company had outstanding secured irrevocable letters
of credit with a bank which totaled $3.2 million. These letters of credit, which
expire through June, 1999, collateralize the Company's obligations to third
parties. As of June 30, 1998, no amounts were outstanding under these letters of
credit.
NOTE 3: 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"). On June 27,
1997, CoinBank answered the Patent Infringement Claim and counterclaimed for
declaration of non-infringement, invalidity and unenforcability of the subject
patent, and filed a claim for breach of
5
<PAGE>
COINSTAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTH PERIODS ENDED JUNE 30, 1998 AND 1997
NOTE 3: LEGAL PROCEEDINGS (CONTINUED)
warranty against Scan Coin AB ("Scan Coin"). The claim against Scan Coin has
been dismissed by agreement of the parties. On January 26, 1998, the court, in
response to cross motions for summary judgment filed by both parties, held that
certain of CoinBank's devices did not infringe on the subject patent, and that
there remained a question of fact as to the infringement of other devices. There
can be no assurance that the Company will prevail in such Patent Infringement
Claim or on any claim that may 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.
NOTE 4: NEW COIN COUNTING TECHNOLOGY
The Company has invented and is in the process of introducing new
proprietary coin counting technology that is capable of being used in the
Coinstar units. The Company previously purchased the coin counter components of
the Coinstar unit solely from Scan Coin, pursuant to an agreement that may be
terminated by either party with six months notice at any time on or after June
30, 1999. In March 1997, the Company entered into a non-binding letter of intent
with Scan Coin for a new agreement. Subsequently Scan Coin indicated that the
use of any coin counter in the Coinstar units other than the coin counting
device supplied by Scan Coin prior to June 30, 1999 would violate the prior
supply agreement between Scan Coin and the Company. Scan Coin also reserved the
right to assert ownership of any of the Company's intellectual property that can
be deemed an improvement or development of Scan Coin's intellectual property.
The Company believes that the pertinent sections of the agreements with Scan
Coin have been superseded through course of dealing. Moreover, the Company
believes that Scan Coin has no claim on any of the Company's intellectual
property. The Company has evaluated Scan Coin's claims and believes they are
without merit. However, the Company believes that even if it is determined that
the prior supply agreements are effective and the Company's use of the new coin
counting technology violates these agreements, an amount that may compensate
Scan Coin's claims under the agreements, would not be material to the Company's
business. Accordingly, the Company responded to Scan Coin, declaring that it
does not agree with Scan Coin's claims related to the agreements, and that Scan
Coin has no valid claim on any Company owned or licensed intellectual property.
The Company will continue to attempt to settle this dispute amicably with Scan
Coin.
NOTE 5: SUBSEQUENT EVENTS
In July 1998, the Company accepted a nonbinding revolving credit proposal
(the "Revolving Credit Proposal") with a third-party lender to provide financing
to the Company for general corporate working capital and the manufacturing of
additional Coinstar units. If consummated, the proposal would provide up to
$30.0 million in revolving credit for a three year period at a floating rate of
interest and be secured by certain Company assets.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE DISCUSSION IN THIS FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS
REGARDING THE COMPANY, ITS BUSINESS, PROSPECTS AND RESULTS OF OPERATIONS THAT
INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL BUSINESS, PROSPECTS AND
RESULTS OF OPERATIONS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED HEREIN AS WELL AS THOSE DISCUSSED UNDER THE CAPTION
"RISK FACTORS" IN THE COMPANY'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997
AND QUARTERLY REPORT ON FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 1998.
READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING
STATEMENTS, WHICH REFLECT MANAGEMENT'S ANALYSIS ONLY AS OF THE DATE HEREOF. THE
COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY RELEASE THE RESULTS OF ANY REVISION
TO THESE FORWARD-LOOKING STATEMENTS WHICH MAY BE MADE TO REFLECT EVENTS OR
CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF
UNANTICIPATED EVENTS. READERS ARE URGED TO CAREFULLY REVIEW AND CONSIDER THE
VARIOUS DISCLOSURES MADE BY THE COMPANY IN THIS REPORT AND IN THE COMPANY'S
OTHER REPORTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION THAT ATTEMPT TO
ADVISE INTERESTED PARTIES OF THE RISKS AND FACTORS AND MAY AFFECT THE COMPANY'S
BUSINESS, PROSPECTS AND RESULTS OF OPERATIONS.
OVERVIEW
The Company develops, owns and operates a network of automated, self-service
coin counting and processing machines that provides consumers with a convenient
means to convert loose coins into cash. The Company began field testing of a
prototype unit in 1992 and commercial installation of units in supermarkets in
1994. The Company has increased its store installation base every year and as of
June 30, 1998 had an installed base of 4,032 units located in supermarkets,
financial institutions and mass merchants in 49 regional markets across the
United States.
Beginning in 1995, the Company has devoted significant resources to building
a sales and marketing organization, adding administrative personnel and
developing the network systems and infrastructure to support the rapid growth of
its installed base of units. The cost of this expansion and the significant
depreciation expense of its installed network have resulted in significant
operating losses to date and an accumulated stockholders' deficit of $72.8
million as of June 30,1998. 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
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 Company's 13% Senior Subordinated Discount
Notes due at maturity in 2006 (the "Notes") for net proceeds of $62.9 million,
and the Company's initial public offering of 3.0 million shares of Common Stock
for net proceeds of $28.4 million.
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 31 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. 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 as awareness levels
of the service increases, driving initial trial and repeat usage for the
service. 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 Company expects that as it continues to aggressively expand
installations relative to the
7
<PAGE>
size of its installed base, the average revenue per unit may decrease even as
the per unit dollar volume of mature units increases.
The Company established a wholly-owned subsidiary, Coinstar International,
Inc. ("Coinstar International"), in March 1998 to explore expanding the
Company's operations internationally. At the present time, Coinstar
International is piloting a three store test in Canada to determine the
viability of the Canadian market for the Coinstar service and investigating the
viability of the Coinstar service in certain European countries.
Direct operating expenses are comprised of the regional expenses associated
with Coinstar unit operations and support and consist primarily of coin pickup
and processing, field operations support and related expenses, and retail
operations support. Coin pickup and processing costs, which represent a major
portion of direct operating expenses, vary based on the level of total coin
processing volume and the density of the units within a region. The Company
believes that while coin pickup and processing costs are variable based on units
in service and coin volume generated, economies related to these direct expense
components can be achieved through increasing the density of units in operation
in regional markets. Field service operations and related expenses vary
depending on the number of geographic regions in which Coinstar units are
located and the density of the units within a region. Regional sales and
marketing expenses are comprised of ongoing marketing, advertising and public
relations efforts in existing market regions and startup marketing expenses
incurred to launch the Coinstar service in new regional markets. Product
research and development expense consists of the development costs of the
Coinstar unit software, network applications, Coinstar unit sustaining
engineering and new product development. Selling, general and administrative
expenses are comprised of management compensation, administrative support for
field operations, the customer service center, sales and marketing support,
systems and engineering support, corporate services, and accounting, human
resources and occupancy expenses. Depreciation and amortization consists
primarily of depreciation charges on Coinstar units and, to a lesser extent,
depreciation on furniture and fixtures, automobiles, computer equipment and
amortization of intangibles. Other income consists of rental income from a
sublease of unused office space.
The Company expects to continue to evaluate new marketing and promotional
programs to increase the breadth and rate of customer utilization of its service
and to engage in systems and product research and development. The Company
intends to continue to invest in sales and marketing and product research and
development, which is expected to negatively impact its operating results. The
Company believes that its future revenue growth, operating margin gains and
profitability will be dependent upon the penetration of its installed base with
retail distribution partners in existing markets, expansion and penetration of
installations in new market regions and successful ongoing marketing and
promotional activities to sustain the growth in unit coin volume over time.
Given the Company's limited operating history, unpredictability of the timing of
installations with retail distribution partners and the resulting revenues, and
the continued market acceptance of the Company's service by consumers and retail
distribution partners, the Company's operating results for any quarter are
subject to significant variation, and the Company believes that period-to-period
comparisons of its results of operations are not necessarily meaningful and
should not be relied upon as indications of future performance.
RESULTS OF OPERATIONS
THREE MONTH PERIODS ENDED JUNE 30, 1998 AND 1997
REVENUE
Revenue increased to $10.5 million in the three month period ended June 30,
1998 from $5.3 million in the comparable 1997 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 4,032 as of June 30, 1998 from 2,335 units as of June 30, 1997.
During the second quarter of 1998, 501 units were installed
8
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compared to 406 for the same period in 1997. The dollar value of coins processed
in the second quarter of 1998 increased to $143.3 million compared to $70.6
million in the comparable 1997 period.
DIRECT OPERATING EXPENSES
Direct operating expenses increased to $6.1 million in the three month
period ended June 30, 1998 from $4.0 million in the comparable 1997 period. The
increase in direct operating expenses was primarily attributable to increased
coin pickup and processing costs as a result of the increased dollar volumes
processed by the network and the increase in field service personnel expenses
associated with the hiring and training of new field service personnel to
support the Company's growth and its expansion into 7 new regions as of June 30,
1998. Direct operating expense as a percentage of revenue decreased to 58.6% for
the three month period ended June 30, 1998 from 74.9% in the comparable 1997
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 expected to decrease as (i) coin pickup
and processing cost economies from regional densities are realized, (ii) field
service expenses decrease as a percentage of revenue as the Company increases
its density in its existing markets, and (iii) the Company integrates its new
coin counting technology into the network, which is expected to
increase the productivity of the Company's field service organization.
REGIONAL SALES AND MARKETING
Regional sales and marketing expense decreased to $854,000 in the three
month period ended June 30, 1998 from $972,000 in the comparable 1997 period.
The decrease in regional marketing expense was the result of a decreased level
of new market launches and promotional activity, offset partially by an increase
in television advertising. The Company expects its sales and marketing
expenditures to remain at approximately the present level for the remainder of
1998. In addition, as a percentage of revenue, the Company expects regional
sales and marketing costs to decrease over the year ending 1998 compared with
the year ending 1997.
PRODUCT RESEARCH AND DEVELOPMENT
Product research and development expenses decreased to $1.3 million in the
three month period ended June 30, 1998 compared to $1.6 million in the
comparable 1997 period. The decrease in product research and development costs
reflects the decrease in expenditures associated the completion of the
development of the new coin counting technology. The Company expects to maintain
its product research and development expenditures at the present levels for
1998. While the Company currently expenses all product research and development
costs, a portion may be capitalized in the future.
SELLING, GENERAL, AND ADMINISTRATIVE
Selling, general, and administrative expense increased to $3.7 million in
the three month period ended June 30, 1998 from $2.6 million in the comparable
1997 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 but at a
much slower rate in 1998 as the Company has substantially completed the
development of the infrastructure to support the growth of the Company.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased to $3.1 million in the three
month period ended June 30, 1998 from $2.2 million in the comparable 1997
period. The increase was primarily due to the increase in the installed base of
Coinstar units. The Company expects depreciation and amortization
9
<PAGE>
expense to increase significantly over the next several years as a result of
expected increases in the installation of Coinstar units.
OTHER INCOME AND EXPENSE
The Company generated income of $64,000 in the three month period ended June
30, 1998 due to the subleasing of excess office space. The Company expects to
maintain this income source until the year 2000, as this sublease agreement has
a two year term.
Interest income decreased to $386,000 in the three month period ended June
30, 1998 from $440,000 in the comparable 1997 period. The decrease in interest
income is attributed to a reduction in invested cash balances resulting from the
sale of certain short-term investments to finance the installation of Coinstar
units during the period.
Interest expense increased to $2.7 million in the three month period ended
June 30, 1998 from $2.4 million in the comparable 1997 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 decreased to $6.9 million in the three month period ended June 30,
1998 from $8.0 million in the comparable 1997 period. The decrease in the net
loss primarily was due to an increase in the Company's contribution margin
combined with a reduction in the rate of growth of expenses. As a result, the
improvement in net income reflects improved operating leverage of the Coinstar
network. In the longer term, the Company expects that it will not be required to
add as much infrastructure as it has in the past 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 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.
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
REVENUE
Revenue increased to $19.3 million in the first six months of 1998 from $9.3
million in the comparable 1997 period. The increase was due principally to the
increase in the number of Coinstar units in service during the 1998 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 4,032 as of June
30, 1998 from 2,335 units as of June 30, 1997. The dollar value of coins
processed increased to $260.6 million during the 1998 period from $123.4 million
in the comparable 1997 period.
DIRECT OPERATING EXPENSES
Direct operating expenses increased to $12.0 million in the first six months
of 1998 from $7.4 million in the comparable 1997 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 9 new regional markets as of June 30,
1998. Direct operating expenses as a percentage of revenue decreased to 62% in
the 1998 period from 79.8% in the comparable 1997 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, (ii) field
service expenses decrease as a percentage of revenue as the Company increases
its density in its existing markets, and (iii) the Company integrates its
10
<PAGE>
new coin counting technology into the network, which is expected to increase the
productivity of the Company's field service organization.
REGIONAL SALES AND MARKETING
Regional sales and marketing expenses increased to $1.8 million in the first
six months of 1998 from $1.6 million in the comparable 1997 period. The increase
in regional marketing expense was the result of an increased level of television
advertising, offset partially by a decrease in new market launches and
promotional activity. The Company expects its sales and marketing expenditures
to remain at approximately the present level for the remainder of 1998. In
addition, as a percentage of revenue, the Company expects regional sales and
marketing costs to decrease over the year ending December 31, 1998 compared with
the year ended December 31, 1997.
PRODUCT RESEARCH AND DEVELOPMENT
Product research and development expenses decreased to $2.7 million in the
first six months of 1998 from $3.1 million in the comparable 1997 period. The
decrease in product research and development costs reflects the decrease in
expenditures associated with the completion of the development of the new coin
counting technology. The Company expects to maintain its product research and
development expenditures at the present levels for 1998. While the Company
currently expenses all product research and development costs, a portion may be
capitalized in the future.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expense increased to $7.0 million in the
first six months of 1998 from $5.2 million in the comparable 1997 period. The
principal component of such expenses was personnel compensation and the
period-to-period increase primarily 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 but at a
much slower rate in 1998 as the Company has substantially completed the
development of the infrastructure to support the growth of the Company.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased to $5.9 million in the first
six months of 1998 from $3.8 million in the comparable 1997 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.
OTHER INCOME AND EXPENSE
The Company generated income of $103,000 in the six month period ended June
30, 1998 due to the subleasing of excess office space. The Company expects to
maintain this income source until the year 2000, as this sublease agreement has
a two year term.
Interest income decreased to $887,000 in the six month period ended June 30,
1998 from $1.02 million in the comparable 1997 period. The decrease in interest
income is attributed to a reduction in invested cash balances resulting from the
sale of certain short-term investments to finance the installation of Coinstar
units during the period.
Interest expense increased to $5.2 million in the six month period ended
June 30, 1998 from $4.8 million in the comparable 1997 period. The increase was
due to the accretion of the Notes. No cash interest payments are due on the
Notes until April 2000.
11
<PAGE>
NET LOSS
Net loss decreased to $14.4 million in the first six months of 1998 from
$15.5 million in the comparable 1997 period. The decrease in the net loss
primarily was due to an increase in the Company's contribution margin combined
with a reduction in the rate of growth of expenses. As a result, the improvement
in net income reflects improved operating leverage of the Coinstar network. In
the longer term, the Company expects that it will not be required to add as much
infrastructure as it has in the past 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
expenses. There can be no assurance, however, that the Company will install a
sufficient number of units or obtain sufficient market acceptance to allow the
Company to achieve or sustain profitability.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1998, the Company had cash and cash equivalents of $26.3
million, short-term investments of $21.8 million and working capital of $19.4
million. Cash and cash equivalents include $18.7 million of funds in transit,
which represent amounts being processed by armored car carriers or residing in
Coinstar units. Net cash provided by operating activities was $3.3 million for
the six month period ended June 30, 1998 and net cash used was $1.3 million for
the comparable period in 1997. The principal use of cash was to fund net
operating losses incurred, offset by depreciation, other non-cash items, and an
increase in accounts payable and accrued liabilities.
Net cash provided by investing activities was $3.3 million for the six month
period ended June 30, 1998 and net cash used was $6.1 million for the comparable
period in 1997. Capital expenditures during the six month period ended June 30,
1998 and the comparable period in 1997 were $11.4 million and $15.4 million,
respectively. The majority of capital expenditures consist of the manufacturing
of Coinstar units.
Net cash used by financing activities was $416,787 for the six month period
ended June 30, 1998 and net cash used by financing activities for the comparable
period in 1997 was $227,418.
As of June 30, 1998 the Company had outstanding secured irrevocable letters
of credit with a bank in the amount of $3.2 million. These letters of credit,
which expires between December 1998 and June 1999, collateralize the Company's
obligations to third parties. As of June 30, 1998, no amounts were outstanding
under the letters of credit.
In July 1998, the Company accepted a nonbinding revolving credit proposal
(the "Revolving Credit Proposal") with a third-party lender to provide financing
to the Company for general corporate working capital and the manufacturing of
additional Coinstar units. If consummated, the proposal would provide up to
$30.0 million in revolving credit for a three year period at a floating rate of
interest and be secured by certain Company assets.
The Company believes existing cash equivalents, short-term investments, and
the Revolving Credit Proposal, if consummated, will be sufficient to fund its
cash requirements and capital expenditure needs for the continued expansion of
the domestic Coinstar network at the recent installation rate for at least the
next twelve months. The extent of additional financing needed will depend on the
success of the Company's business. If the Company significantly increases
installations beyond planned levels or if unit coin processing volumes generated
are lower than historical levels, the Company's cash needs will be increased.
The Company's future capital requirements will depend on a number of factors,
including the timing and number of unit installations, the type and scope of
service enhancements, the level of market acceptance of the Company's service
and the feasibility of international expansion. 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. See "Risk
Factors Uncertainty of Future Operating Results; Fluctuations in Quarterly
Operating Results; and Substantial Leverage and Ability to Service Debt."
12
<PAGE>
QUARTERLY FINANCIAL RESULTS
The following table sets forth selected unaudited quarterly financial
information and operating data for the last eight quarters. This information has
been prepared on the same basis as the Company's unaudited consolidated
financial statements and includes, in the opinion of management, all normal and
recurring adjustments that management considers necessary for a fair statement
of the quarterly results for the periods. The operating results and data for any
quarter are not necessarily indicative of the results for future periods.
<TABLE>
<CAPTION>
THREE MONTH PERIODS ENDED
-----------------------------------------------------------------------------------------
JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31,
1998 1998 1997 1997 1997 1997 1996
---------- ---------- ------------ ------------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT UNIT AND PER UNIT DATA)
Statements of Operations Data:
Revenue....................... $ 10,472 $ 8,823 $ 7,957 $ 7,762 $ 5,294 $ 3,995 $ 3,349
Expenses:
Direct operating............ 6,142 5,823 5,208 5,276 3,966 3,450 2,940
Regional sales and
marketing................. 854 917 689 798 972 630 494
Product research and
development............... 1,329 1,410 1,644 1,637 1,640 1,441 1,533
Selling, general and
administrative............ 3,726 3,276 3,252 2,669 2,630 2,528 1,987
Depreciation and
amortization.............. 3,120 2,813 2,539 2,297 2,158 1,684 1,741
Loss from operations.......... $ (4,699) $ (5,416) $ (5,375) $ (4,915) $ (6,072) $ (5,738) $ (5,346)
Other Data:
Number of new Coinstar units
installed during the
period...................... 501 327 469 400 406 428 292
Installed base of Coinstar
units at end of period...... 4,032 3,531 3,204 2,735 2,335 1,929 1,501
Average age of network for the
period (months)............. 14.8 13.4 11.7 10.6 9.3 8.3 7.0
Number of regional markets.... 49 42 40 35 33 27 23
Dollar value of coins
processed................... $ 139,227 $ 117,298 $ 105,692 $ 103,442 $ 70,626 $ 52,724 $ 44,841
Direct contribution(1)........ $ 4,330 $ 3,000 $ 2,749 $ 2,486 $ 1,328 $ 545 $ 409
Annualized revenue per average
installed unit(2)........... $ 11,195 $ 10,597 $ 10,907 $ 12,284 $ 9,939 $ 9,433 $ 9,623
Annualized direct contribution
per average installed
unit(1)(2).................. $ 4,568 $ 3,601 $ 3,768 $ 3,935 $ 2,494 $ 1,287 $ 1,175
International development
costs (3)................... $ 241 $ 28
<CAPTION>
SEPTEMBER 30,
1996
-------------
<S> <C>
Statements of Operations Data:
Revenue....................... $ 2,830
Expenses:
Direct operating............ 2,110
Regional sales and
marketing................. 396
Product research and
development............... 1,014
Selling, general and
administrative............ 1,425
Depreciation and
amortization.............. 1,098
Loss from operations.......... $ (3,213)
Other Data:
Number of new Coinstar units
installed during the
period...................... 413
Installed base of Coinstar
units at end of period...... 1,209
Average age of network for the
period (months)............. 6.1
Number of regional markets.... 22
Dollar value of coins
processed................... $ 37,637
Direct contribution(1)........ $ 720
Annualized revenue per average
installed unit(2)........... $ 11,021
Annualized direct contribution
per average installed
unit(1)(2).................. $ 2,804
International development
costs (3)...................
</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.
(3) International development costs represent the costs incurred by Coinstar
International related to the exploration of the international expansion. All
costs related to international development (such as market research and
travel) are expensed as incurred in accordance with the American Institute
of Certified Public Accountants Statement of Position ("SOP") 98-5,
"Reporting on the Costs of Start-Up Activities," issued on April 3, 1998.
13
<PAGE>
Based on its limited operating history, the Company believes that coin
processing volumes have been affected by seasonality; in particular 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.
In addition to fluctuations in revenue resulting from factors affecting
customer usage, timing of unit installations will result in significant
fluctuations in quarterly results. The rate of installations does not follow a
regular pattern, as it depends principally on installation schedules determined
by agreements between the Company and its retail distribution partners, variable
length of partner trial periods and the planned coordination of multiple partner
installations in a given geographic region.
Increasing quarterly losses from operations during the periods presented
were the result of higher direct operating expenses associated with the
significant increase in the Company's installed base, higher depreciation and
amortization expense from the expansion of the installed base and the
significantly higher level of systems infrastructure and management personnel to
support the Company's accelerated growth. The Company expects to continue to
incur substantial and increasing quarterly operating losses from operations as
it plans to significantly increase its installed base of Coinstar units.
NEW ACCOUNTING PRONOUNCEMENTS
The Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants issued Statement of Position ("SOP") 98-5,
"Reporting on the Costs of Start-up Activities," on April 3, 1998. The Company
has adopted this SOP effective for the fiscal year ending December 31, 1998.
Management believes the impact of the adoption of this SOP will not be material
to the financial statements, taken as a whole.
The Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants issued Statement of Position ("SOP") 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," on March 4, 1998. This SOP is effective for the Company's year
ending December 31, 1999 and requires certain of the Company's product research
and development expenses related to development of software for internal use to
be capitalized. The Company is currently evaluating the effects of this SOP, and
management is uncertain as to the impact of its adoption on the financial
statements, taken as a whole.
Statement of Financial Accounting Standards (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.
RISK FACTORS
IN EVALUATING THE COMPANY'S BUSINESS, PROSPECTS AND RESULTS OF OPERATIONS,
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS IN
ADDITION TO THE OTHER INFORMATION PRESENTED IN THIS REPORT AND IN THE COMPANY'S
OTHER REPORTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION THAT ATTEMPT TO
ADVISE INTERESTED PARTIES OF THE RISKS AND FACTORS THAT MAY AFFECT THE COMPANY'S
BUSINESS, PROSPECTS AND RESULTS OF OPERATIONS.
HISTORY OF SUSTAINED OPERATING LOSSES AND CONTINUATION OF SUCH LOSSES. The
Company has incurred substantial and increasing operating losses since inception
in 1991. The Company's net loss for 1996, 1997 and the six month period ended
June 30, 1998 was $16.0 million, $29.6 million and $14.4 million, respectively.
As of June 30, 1998, the Company had an accumulated deficit of $72.8 million.
Operating losses to date have resulted primarily from expenses incurred in the
development, marketing and operation of the Coinstar units, expansion and
maintenance of the network, administrative and occupancy expenses
14
<PAGE>
at the Company's headquarters, and depreciation and amortization. The Company
expects to continue to incur operating losses and negative cash flow from
operating and investing activities as it continues to increase its installed
base of Coinstar units.
LIMITED OPERATING HISTORY. After several years of development, the Company
commenced commercial deployment of Coinstar units in 1994 and placed
approximately 93% of the installed base in 1996, 1997, and the six month period
ended June 30, 1998. 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.
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 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 network and managing the growth of such network, the ability of the Company
to develop and market product enhancements, the timing of product enhancements,
activities of and acquisitions by competitors, the ability to hire additional
employees and the timing of such hiring and the ability to control costs.
Fluctuations in the volume and value of coins processed and the rate of unit
installations have caused and may continue to cause material fluctuations in the
Company's operating results, particularly on a quarterly basis. Quarterly
revenue and operating results, therefore, depend on the volume and mix of coins
processed and the rate of unit installations during the quarter, all of which
are difficult to forecast.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. The customer utilization of
the Company's coin processing service varies substantially from unit to unit,
making the Company's revenues difficult to forecast. Customer utilization is
affected by the timing and success of promotions by the Company and its retail
distribution partners, age of the installed unit, adverse weather conditions and
other factors, many of which are not in the Company's control. Based on its
limited operating history, the Company believes that coin processing volumes are
affected by seasonality; in particular the Company believes that on a relative
basis coin processing volumes have been lower in the months of January,
February, September and October. There can be no assurance, however, that such
seasonal trends will continue. Any projections of future seasonality are
inherently uncertain due to the Company's limited operating history, and due to
the lack of comparable companies engaged in the coin processing business. As a
result of these and other factors, revenue for any quarter is subject to
significant variation, and the Company believes that period-to-period
comparisons of its results of operations are not necessarily meaningful and
should not be relied upon as indications of future performance. Because the
Company's operating expenses are based on anticipated revenue trends and because
a large percentage of the Company's expenses are relatively fixed, revenue
variability could cause significant variations in operating results from quarter
to quarter and could result in significant losses. To the extent such expenses
precede, or are not subsequently followed by, increased revenue, the Company's
operating results would be materially adversely affected. Due to all of the
foregoing factors, it is likely that in some future quarter the Company's
operating results will be below the expectations of public market analysts and
investors. In such event, the price of the Company's Common
15
<PAGE>
Stock would likely be materially adversely affected. Fluctuations in operating
results may also result in volatility in the price of the Company's Common
Stock.
SUBSTANTIAL LEVERAGE AND ABILITY TO SERVICE DEBT. The Company had
outstanding indebtedness as of June 30, 1998 of $83.4 million, which included
$80.3 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, acquisitions, and other general corporate
purposes may be materially limited or impaired, (ii) a substantial portion of
the Company's cash flow from operations may need to be dedicated to the payment
of principal and interest on its indebtedness and therefore not available to
finance the Company's business and (iii) the Company's high degree of leverage
may make it more vulnerable to economic downturns, may limit its ability to
withstand competitive pressures and may reduce its flexibility in responding to
changing business and economic conditions.
COMPETITION. The Company believes that it is the first company to provide a
widespread network of self-service coin processing machines that provide a
convenient, reliable means for consumers to convert loose coins into cash. The
Company has become aware of two direct competitors that operate self-service
coin processing machines, both of which the Company believes operate an
installed base of less than 150 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. Moreover, the Company may face direct
competition from Scan Coin, or other third parties to whom Scan Coin may sell
its coin counting device, as a result of the Company's intention to discontinue
its supply arrangement with Scan Coin. See "Risk Factors--Introduction of New
Coin Counting Technology." There can be no assurance that the Company
16
<PAGE>
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.
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 primarily supermarket chains. The self-
service coin processing market is relatively new and evolving; accordingly, it
is difficult to predict the future growth rate and size of this market. There
can be no assurance that the Company will be successful in achieving the
large-scale adoption of its coin processing service. While the Company's
existing installed base of Coinstar units has been well received by both retail
distribution partners and customers to date, there can be no assurance that the
operating results of the installed units will continue to be favorable or past
results will be indicative of future market acceptance of the Company's service.
The Company believes that market acceptance of the Coinstar unit is dependent on
the consumer's perception that the units are convenient, easy to use and
reliable. Even if the Company is successful in promoting awareness of the
Coinstar unit among consumers, there can be no assurance that such consumers
will utilize the Coinstar units in sufficient volume to make the Company
profitable. In addition, market acceptance and ongoing use of the Coinstar
service may be adversely affected by the increasing use of alternatives to coin
and currency transactions such as credit and debit cards, checks, wire
transfers, smart cards and other forms of electronic payment.
Market acceptance of the Coinstar units is also dependent on the willingness
of potential retail distribution partners to have the units installed in their
stores. The Company believes that market acceptance by potential retail
distribution partners will be dependent on its ability to demonstrate the
utility of the Coinstar unit as a customer service and as a means to provide
other tangible benefits, including increased customer traffic and the promotion
of store sales or service. There can be no assurance, however, that potential
retail distribution partners will be willing to place Coinstar units in their
locations 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 increase its deployment of
Coinstar units in the international market. However, the Company has not entered
certain international markets or fully penetrated other such markets and there
can be no assurance that initial or further deployment in such markets would be
successful.
POSSIBLE TERMINATION OF RETAIL DISTRIBUTION PARTNER AGREEMENTS. The Company
is substantially dependent upon its ability to enter into agreements with retail
distribution partners for the installation of its Coinstar units. In addition,
the Company generally has separate agreements with each of its retail
distribution partners, providing for the Company's exclusive right to provide
coin processing services in their retail locations. These contracts generally
have terms ranging from two to three years and are generally terminable by
either party with advance notice of at least 90 days. In addition, Coinstar
units in service in several supermarket chains account for a significant portion
of the Company's revenue. In the quarter ended June 30, 1998, Coinstar units in
service in two supermarket chains accounted for approximately 35.6% of the
Company's revenue. The units in service in these two chains, Fred Meyer and
Kroger, accounted for approximately 16.7% and 18.9%, respectively, of the
Company's revenue in 1998. 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.
17
<PAGE>
MANAGEMENT OF GROWTH. The Company has experienced rapid growth and intends
to continue to aggressively expand its operations. The growth in the size and
scale of the Company's business has placed and is expected to continue to place
significant demands on its operational, administrative and financial personnel
and operating systems. Additional planned expansion by the Company may further
strain management and other resources. The Company's ability to manage growth
effectively will depend on its ability to improve its operating systems, to
expand, train and manage its employee base and to develop additional
manufacturing and service capacity. In particular, the Company will be required
to rapidly expand its operating systems and processes in order to support the
projected installations of Coinstar units and the potential addition of
value-added services. In addition, the Company will be required to establish
relationships with additional third-party service providers. 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 installations currently projected. If the Company
is unable to manage growth effectively, the Company's business, financial
condition and results of operations and its ability to achieve sufficient cash
flow to service its indebtedness will be materially adversely affected.
DEPENDENCE ON A SINGLE SERVICE. The Company has and expects for the
foreseeable future to derive substantially all of its revenues from the
operation of Coinstar units. Accordingly, market acceptance of the Company's
coin processing service is critical to the Company's future success. Since there
is only a limited existing market for the Company's coin processing service,
there can be no assurance that an acceptable level of demand will be achieved or
sustained. If sufficient demand for the Company's coin processing service does
not develop due to lack of market acceptance, technological change, competition
or other factors, the Company's business, financial condition and results of
operations and its ability to achieve sufficient cash flow to service its
indebtedness will be materially adversely affected.
INTRODUCTION OF NEW COIN COUNTING TECHNOLOGY. The Company has invented and
is in the process of introducing new proprietary coin counting technology that
is capable of being used in the Coinstar units. The new coin counting component
is manufactured by SeaMed Corporation ("SeaMed"). The Company previously
purchased the coin counter components of the Coinstar unit solely from Scan
Coin, pursuant to an agreement that may be terminated by either party with six
months notice at any time on or after June 30, 1999. In March 1997, the Company
entered into a non-binding letter of intent with Scan Coin for a new agreement.
Subsequently, Scan Coin indicated that the use of any coin counter in the
Coinstar units other than the coin counting device supplied by Scan Coin prior
to June 30, 1999 would violate the prior supply agreement between Scan Coin and
the Company. Scan Coin also reserved the right to assert ownership of any of the
Company's intellectual property that can be deemed an improvement or development
of Scan Coin's intellectual property. The Company believes that the pertinent
sections of the agreements with Scan Coin have been superseded through course of
dealing. Moreover, the Company believes that Scan Coin has no claim on any of
the Company's intellectual property. The Company has evaluated Scan Coin's
claims and believes they are without merit. However, the Company believes that
even if it is determined that the prior supply agreements are still effective
and the Company's use of the new coin counting technology violates these
agreements, an amount that may compensate Scan Coin's claims under the
agreements would not be material to the Company's business. Accordingly, the
Company responded to Scan Coin, declaring that it does not agree with Scan
Coin's claims related to the agreements, and that Scan Coin has no valid claim
on any Company owned or licensed intellectual property. The Company will
continue to attempt to settle this dispute amicably with Scan Coin. There can be
no assurance that the Company will be able to resolve the dispute with Scan
Coin, nor can there be any assurance that if litigation commences, the Company
will prevail. Failure to prevail in litigation may result in a payment of
monetary damages, the forfeiture of certain intellectual property rights, or
both, each of which, individually, in the event of its occurrence, 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.
18
<PAGE>
The Company still requires spare parts for the Scan Coin supplied coin
counters. The Company believes, if all pending parts orders from Scan Coin are
received, that it currently has enough parts to meet demand through the end of
1998. However, there can be no assurance the dispute with Scan Coin will not
effect Scan Coin's decision to fill such orders or others in the future. The
Company believes it can purchase many of these parts from third party suppliers.
However, there can be no assurance that the Company will be able to source all
necessary parts from outside suppliers for the Scan Coin coin counters on a
timely basis, if at all. Failure to secure necessary parts on a timely basis may
result in a slowdown of installations, or in machine downtime.
There can be no assurance that the transition to the Company's proprietary
coin counting technology will proceed on schedule, or that there will be no
conversion problems. The coin counter is a complex mechanical and electronic
device that is difficult to manufacture. In addition, implementation of the new
device will require the distribution of parts, the retraining of Company
personnel, and the retraining of third party personnel that help service the
Coinstar units. There can be no assurance that these tasks can be completed
without delay, nor can there be any assurance that SeaMed will be able to
produce the device in the required quantities or in a timely manner. Any such
delay or problems may result in machine downtime, or a delay, or cessation of
installations for an indeterminate period, each of which, individually, in the
event of its occurrence, 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. See "Risk Factors
Reliance on Third Party Manufacturers and Service Providers".
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 will be able to produce sufficient units
to meet projected demand, there can be no assurance that SeaMed or other
manufacturers will be able to meet the Company's manufacturing needs in a
satisfactory and timely manner. In the event of an unanticipated increase in
demand for Coinstar unit installations by retail distribution partners, the
Company may be unable to meet such demand due to manufacturing constraints.
Although the Company has a contract with SeaMed, it does not have a long-term
obligation to continue the manufacture of the Coinstar unit or its components.
Further, SeaMed is principally engaged in the manufacture of electronic medical
instruments for medical technology companies. The Company believes that it is
SeaMed's only material non-medical customer. As such, the Company faces an
increased risk that SeaMed may choose to focus exclusively on manufacturing its
medical products and cease making the Company's products. Should SeaMed cease
providing services, the Company would be required to locate and qualify
additional suppliers. There can be no assurance that the Company would be able
to locate alternate manufacturers on a timely basis. The Company's reliance on
third-party manufacturers involves a number of additional risks, including the
absence of guaranteed capacity and reduced control over delivery schedules,
quality assurance, production yields and costs. There can be no assurance that
the manufacturing capability of such third-party manufacturers will successfully
address the Company's needs. In the event the Company is unable to retain such
manufacturing on commercially reasonable terms, its business, financial
condition and results of operation and its ability to achieve sufficient cash
flow to service its indebtedness will be materially adversely affected.
The Company relies on third-party service providers for substantial support
and service efforts that the Company currently does not provide directly. In
particular, the Company contracts with armored carriers to arrange for the
pick-up, processing and deposit of coins. The Company generally contracts with
one armored carrier to service a particular region. Many of these carriers do
not have long-standing relationships with the Company and these contracts
generally can be terminated by either party with advance notice ranging from 30
to 90 days. In the past, the Company has experienced a sudden disruption in
service from an armored carrier company. The Company does not currently have nor
does it expect to
19
<PAGE>
have in the foreseeable future the internal capability to provide back up
service in the event of sudden disruption in service from an armored carrier
company. Any failure by the Company to maintain its existing relationships or to
establish new relationships on a timely basis or on acceptable terms would have
a material adverse effect on the Company's business, financial condition and
results of operations and on its ability to achieve sufficient cash flow to
service its indebtedness. Moreover, as with any business that handles large
volumes of cash, the Company is susceptible to theft, counterfeit and other
forms of fraud, including security breaches of the Company's computing system
that performs important accounting functions. There can be no assurance that the
Company will be successful in developing product enhancements and new services
to thwart such attempts.
RISK OF DEFECTS IN OPERATING SYSTEMS. The Company collects financial and
operating data and monitors unit performance through a wide-area communications
network connecting each of the Coinstar units with a central computing system
located at the Company's headquarters. This information is used to track the
flow of coins, verify coin 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 retail distribution
partners for vouchers already redeemed. Further, there can be no assurance that
the design of the operating systems to prevent the loss of data will operate as
intended and any loss of or delay in collecting coin processing data would
materially and adversely effect the Company's operations. In addition, the
Company has in the past experienced limited delays and disruptions resulting
from upgrading or improving its operating systems. Although such disruptions
have not had a material effect on the Company's operations, there can be no
assurance that future upgrades or improvements will not result in delays or
disruptions that would have a material adverse impact on the Company's
operations. In particular, the Company is currently planning some significant
improvements in its operating platform in order to support its projected
expansion of the installed base of Coinstar units and the potential addition of
value-added services. While the Company is taking steps to ensure that the
potential adverse impact of such improvements on the Company's operations is
minimized, there can be no assurance that the platform will be able to handle
the increased volume of services expected from the continued expansion of the
Company's network and the potential addition of value-added services or that the
improvements will occur on a timely basis so as not to disrupt such continued
expansion and potential addition of value-added services. In addition, the
communications network on which the Company relies is not owned by the Company
and is subject to service interruptions. Further, while the Company has taken
significant steps to protect the security of its network, any breach of such
security whether intentional or from a computer virus could have a material
adverse impact on the Company. Any service disruptions, either due to errors or
delays in the Company's software or computing systems or interruptions or
breaches in the communications network, or security breaches of the system,
could have a material adverse affect on the Company's business, financial
condition and results of operations and on its ability to achieve sufficient
cash flow to service its indebtedness.
DEPENDENCE ON KEY PERSONNEL AND NEED TO HIRE ADDITIONAL PERSONNEL. The
Company's performance is substantially dependent on the performance of its
executive officers and key employees and its long term success will depend on
its ability to recruit, retain and motivate highly skilled personnel. 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.
20
<PAGE>
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,
April 1997 and May 1998, 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, April 2014 and May 2015, 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 distribution 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 suit 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"). On June 27,
1997, CoinBank answered the Patent Infringement Claim and counterclaimed for
declaration of non-infringement, invalidity and unenforcability of the subject
patent, and filed a claim for breach of warranty against Scan Coin. The claim
against Scan Coin has been dismissed by agreement of the parties. On January 26,
1998, the court, in response to cross motions for summary judgment filed by both
parties, held that certain of CoinBank's devices did not infringe on the subject
patent, and that there remained a question of fact as to the infringement of
other devices. There can be no assurance that the Company will prevail in such
Patent Infringement Claim or on any claim that may 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
21
<PAGE>
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.
RAPID TECHNOLOGICAL CHANGE. The self-service coin processing market is
relatively new and evolving. As such, the Company anticipates that, as the
market matures, it will be subject to technological change, new services and
product enhancements, particularly as the Company expands its service offerings.
Accordingly, the Company's success may depend in part upon its ability to
develop product enhancements and new services that keep pace with continuing
changes in technology and consumer preferences while remaining price
competitive. There can be no assurance, however, that the Company would be
successful in developing such product enhancements or new services, that it will
be able to introduce such products or services on a timely basis or that any
such product enhancements or new services will be successful in the marketplace.
The Company's failure to develop technological improvements or to adapt its
products and services to technological change on a timely basis could, over
time, have a material adverse effect on the Company's business, financial
condition and results of operations and on its ability to achieve sufficient
cash flow to service its indebtedness.
POTENTIAL VOLATILITY OF STOCK PRICE. The Company's Common Stock price has
fluctuated substantially since its initial public offering in July 1997. There
can be no assurance that the market price of the Company's Common Stock will not
decline further or continue to fluctuate. Announcements of technological
innovations or new products or services by the Company or its competitors, the
termination of one or more retail distribution contracts, release of reports,
changes in or failure of the Company to meet financial estimates by securities
analysts, industry developments, market acceptance of the Coinstar service by
retail distribution partners and consumers, economic and other external factors,
as well as period-to-period fluctuations in the Company's financial results, may
have a significant and adverse impact on the market price of the Common Stock.
In addition, the securities markets have from time to time experienced
significant price and volume fluctuations that are unrelated to the operating
performance of particular companies. These market fluctuations may also
materially and adversely affect the market price of the Company's Common Stock.
UNCERTAINTY OF EFFECTS OF YEAR 2000 ON COMPUTER PROGRAMS AND SYSTEMS. Many
currently installed computer systems and software programs were designed to use
only a two-digit date field. These date code fields will need to accept four
digit entries to distinguish 21st century dates from 20th century dates. Until
the date fields are updated, the systems and programs could fail or give
erroneous results when referencing dates following December 31, 1999. Such
failure or errors could occur prior to the actual change in century. The Company
relies on computer applications for its coin processing machines and to manage
and monitor its accounting and administrative functions. In addition, the
Company's retail distribution partners, suppliers and service providers
(including financial institutions) are reliant upon computer applications, some
of which may contain software that may fail as a result of the upcoming change
in century, with respect to functions that materially affect their interactions
with the Company. While the Company does not believe its computer systems or
applications currently in use will be adversely affected by the upcoming change
in century, the Company has not made an assessment as to whether any of its
retail distribution partners, suppliers or service providers will be so
affected. Failure of the Company's software or that of its retail distribution
partners, suppliers or service providers could have a material adverse impact on
the Company's business, financial condition and results of operations and on its
ability to achieve sufficient cash flow service to its indebtedness.
22
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 18, 1997, the Company filed in the United States District Court,
Northern District of California against CoinBank Automated Systems, Inc.
("CoinBank"), one of its competitors, a complaint for infringement of one of the
Company's United States patents (the "Patent Infringement Claim"). On June 27,
1997, CoinBank answered the Patent Infringement Claim and counterclaimed for
declaration of non-infringement, invalidity and unenforcability of the subject
patent, and filed a claim for breach of warranty against Scan Coin AB. The claim
against Scan Coin AB has been dismissed by agreement of the parties. On January
26, 1998, the court, in response to cross motions for summary judgment filed by
both parties, held that certain of CoinBank's devices did not infringe on the
subject patent, and that there remained a question of fact as to the
infringement of other devices. There can be no assurance that the Company will
prevail in such Patent Infringement Claim or on any claim that may 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 of found to be invalid.
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
The effective date of the Company's first registration statement, filed on
Form S-1 under the Securities Act of 1993, as amended (Registration No.
333-26843), was July 2, 1997 (the "Registration Statement"). The class of
securities registered was Common Stock. The offering commenced on July 2, 1997
and all securities were sold in the offering. The managing underwriters were
Smith Barney Inc. and Hambrecht & Quist.
Pursuant to the Registration Statement, the Company sold 3,000,000 shares of
its Common Stock for its own account, for an aggregate offering price of
$31,500,000. The Company incurred expenses of approximately $2,837,544, of which
$1,957,125 represented underwriting discounts and commissions and $880,419
represented estimated other expenses, of which expenses $50,149 represented
direct or indirect payments to an affiliate of the Company. The net offering
proceeds to the issuer after total expenses was $28,662,456.
During the second quarter of 1998, the Company began to disburse proceeds
for the initial public offering. Offering proceeds were used as follows: (i)
approximately $5.9 million for capital expenditures and working capital in
connection with the continued expansion of the Coinstar network, (ii)
approximately $300,000 for product research and development to enhance the
Coinstar unit and the coin processing network; and (iii) approximately $300,000
for general corporate purposes.
The remaining net proceeds have been invested in short term securities. The
use of the proceeds from the offering does not represent a material change in
the use of proceeds described in the prospectus included as part of the
Registration Statement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on June 4, 1998. The
stockholders voted as follows:
The stockholders elected each of the two nominees for director to hold
office until the 2001 Annual Meeting of Stockholders. The elected directors and
the votes cast in favor and withheld for each are as follows:
<TABLE>
<CAPTION>
VOTES IN
FAVOR VOTES WITHHELD
------------- ---------------
<S> <C> <C>
Jens H. Molbak................................................. 12,509,858 16,853
William D. Ruckelshaus......................................... 12,510,180 16,531
</TABLE>
23
<PAGE>
Directors continuing in office are as follows:
<TABLE>
<CAPTION>
UNTIL ANNUAL
MEETING OF
SHAREHOLDERS
---------------
<S> <C>
David E. Stitt.................................................................. 1999
Ronald A. Weinstein............................................................. 1999
George H. Clute................................................................. 2000
Larry A. Hodges................................................................. 2000
</TABLE>
The stockholders ratified the selection of Deloitte & Touche LLP as
independent auditors for the Company with 11,959,407 votes in favor, 564,485
votes against and 2,819 abstentions.
ITEM 5. OTHER INFORMATION
Pursuant to the Company's bylaws, stockholders who wish to bring matters or
propose nominees for director at the Company's 1999 Annual Meeting of
Stockholders must provide specified information to the Company between 60 and 90
days prior to the first anniversary of the 1998 Annual Meeting of Stockholders,
which was held on June 4, 1998 (unless such matters are included in the
Company's proxy statement pursuant to Rule 14a-8 under the Securities Exchange
Act of 1934, as amended).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- -------- ----------------------------------------------------------------------
<C> <S>
3.1(1) Amended and Restated Certificate of Incorporation of the Registrant in
effect after the closing of the Initial Public Offering.
3.2(1) Amended and Restated Bylaws of the Registrant.
4.1 Reference is made to Exhibits 3.1 through 3.2.
4.2(1) Specimen Stock Certificate.
4.3(1) Second Amended and Restated Investor Rights Agreement, dated August
27, 1996, between the Registrant and certain investors, as amended
October 22, 1996.
4.4(1) Indenture between Registrant and The Bank of New York dated October 1,
1996.
4.5(1) Warrant Agreement between Registrant and The Bank of New York dated
October 22, 1996.
4.6(1) Notes Registration Rights Agreement between Registrant and Smith
Barney Inc. dated October 22, 1996.
4.7(1) Warrant Registration Rights Agreement between Registrant and Smith
Barney Inc. dated October 22, 1996.
4.8(1) Specimen 13% Senior Discount Note Due 2006
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.
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- -------- ----------------------------------------------------------------------
<C> <S>
10.4(1) Form of Indemnity Agreement between the Registrant and its executive
officers and directors.
10.5(1) Series E Preferred Stock and Warrant Purchase Agreement between
Registrant and Acorn Ventures, Inc., dated August 27, 1996.
10.6(1) Office Building Lease between Registrant and Factoria Heights dated
June 1, 1994, as amended on January 24, 1997.
10.7(1) Sublease between Registrant and Maruyama U.S., Inc. dated January 15,
1997.
10.8(1) Lease agreement between Registrant and Spieker Properties, L.P. dated
January 29, 1997.
10.9(1) Lease agreement between Registrant and Spieker Properties, L.P. dated
January 29, 1997.
10.10 Manufacturing Agreement between Registrant and SeaMed Corporation
dated May 14, 1998.
10.11+(1) Letter of Intent between Registrant and Scan Coin AB dated March 5,
1997.
10.12+(1) Agreement between Registrant and Scan Coin AB dated April 30, 1993, as
amended.
10.13(1) Purchase Agreement between Registrant and Smith Barney Inc. dated
October 22, 1996.
11.1 Computation of Earnings Per Share.
27.1 Financial Data Schedule.
</TABLE>
- ------------------------
(1) Filed as an Exhibit to the Registrant's Registration Statement on Form S-4
(No. 333-33233)
+ Certain confidential portions deleted pursuant to Order Granting Application
Under the Securities Act of 1933, as amended, and Rule 406 thereunder
respecting Confidential Treatment.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended March 31,
1998.
Items 3, 4 and 5 are not applicable and have been omitted.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COINSTAR, INC.
(Registrant)
/s/ KIRK A. COLLAMER
---------------------------------------------
Kirk A. Collamer
Date: August 13, 1998 VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
26
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ ----------------------------------------------------------------------
<C> <S>
3.1 (1) Amended and Restated Certificate of Incorporation of the Registrant in
effect after the closing of the Initial Public Offering.
3.2 (1) Amended and Restated Bylaws of the Registrant.
4.1 Reference is made to Exhibits 3.1 through 3.2.
4.2 (1) Specimen Stock Certificate.
4.3 (1) Second Amended and Restated Investor Rights Agreement, dated August
27, 1996, between the Registrant and certain investors, as amended
October 22, 1996.
4.4 (1) Indenture between Registrant and The Bank of New York dated October 1,
1996.
4.5 (1) Warrant Agreement between Registrant and The Bank of New York dated
October 22, 1996.
4.6 (1) Notes Registration Rights Agreement between Registrant and Smith
Barney Inc. dated October 22, 1996.
4.7 (1) Warrant Registration Rights Agreement between Registrant and Smith
Barney Inc. dated October 22, 1996.
4.8 (1) Specimen 13% Senior Discount Note Due 2006
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 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 Manufacturing Agreement between Registrant and SeaMed Corporation
dated May 14, 1998.
10.11+(1) Letter of Intent between Registrant and Scan Coin AB dated March 5,
1997.
10.12+(1) Agreement between Registrant and Scan Coin AB dated April 30, 1993, as
amended.
10.13(1) Purchase Agreement between Registrant and Smith Barney Inc. dated
October 22, 1996.
11.1 Computation of Earnings Per Share.
27.1 Financial Data Schedule.
</TABLE>
- ------------------------
(1) Filed as an Exhibit to the Registrant's Registration Statement on Form S-4
(No. 333-33233)
+ Certain confidential portions deleted pursuant to Order Granting Application
Under the Securities Act of 1933, as amended, and Rule 406 thereunder
respecting Confidential Treatment.
27
<PAGE>
MANUFACTURING SUPPLY AGREEMENT
BETWEEN
SEAMED CORPORATION
AND
COINSTAR INC.
MAY 14, 1998
<PAGE>
MANUFACTURING SUPPLY AGREEMENT
LIST OF EXHIBITS
Exhibit A Products
Exhibit A-1 C6005 Pricing
Exhibit B Tooling
Exhibit C Spare Parts Warranty List
Exhibit D Document Change Control
Agreement
Exhibit E Rates
2
<PAGE>
SUPPLY AGREEMENT
This Supply Agreement and all attachments (collectively the "Agreement") is
made by Coinstar, Inc. ("Buyer") its principal place of business at
1800-114th Avenue S.E., Bellevue, Washington 98004, and SeaMED Corporation
("Seller") its principal place of business at 14500 N.E. 87th Street,
Redmond, Washington 98052. This Agreement sets forth the terms and conditions
pursuant to which Buyer and Seller will conduct business for the life of this
Agreement.
Seller and Buyer agree as follows:
SECTION 1. DEFINITIONS
Whenever used in this Agreement, the following terms shall have the following
specified meanings:
1.1 "BUYERS' PLANT" means Buyer's plant located in Bellevue, Washington
or such other location in the United States as Buyer may specify for delivery
of any Product.
1.2 "CUSTOMER" means any customer of Buyer, any subsequent owner,
operator or user of any Product and any other Person that has or acquires an
interest in any Product.
1.3 "ORDER" means Buyer's purchase order for Products.
1.4 "DOCUMENTATION" means Specifications and/or Inspection Procedures.
1.5 "INSPECTION PROCEDURES" means detailed inspection procedures for
Product quality assurance and to assure compliance with Specifications in the
form delivered to Seller.
1.6 "LOT" means the number of Products to be delivered for acceptance
testing at the end of each week pursuant to firm delivery dates under an
Order.
1.7 "PERSON" means any individual, corporation, partnership, trust,
association or other entity.
1.8 "PURCHASED PRODUCT" means Product purchased by Buyer in accordance
with the acceptance procedures under Section 4.1.
1.9 "PRODUCT" means the Coinstar, Inc. Jefferson-1000 Self Service Coin
Machine and Ansel System Coin Counting Mechanism (and any spare parts or
components of the same), with the exception of the Ansel Retrofit Kits,
manufactured or to be manufactured by Seller, as more particularly described
in the Specifications. Buyer and Seller may mutually agree to amend Exhibit A
to include other electronic assemblies as specified in the future.
1.10 "SPECIFICATIONS" means the specifications for each Product in the
form delivered to Seller, as may be changed from time to time pursuant to
paragraph 2.1.
1.11 "TERM" means the period commencing with the date of this Agreement
and ending on the third anniversary date of this Agreement. Thereafter, the
Agreement shall continue automatically for subsequent one (1) year terms.
Either party can terminate this Agreement by giving written notice to
the other more than thirty (30) days prior to the end of any one (1) year term
upon completion of the initial three (3) year term.
1.12 "TOOLING" means Buyer purchased tooling set forth in Exhibit B, as
the same may be amended from time to time.
1.13 "WARRANTY PERIOD" means, with respect to each Purchased Product
listed in Exhibit A, the period ending upon the expiration of eighteen (18)
months after the date of shipment and invoice of such Product from Seller's
Plant.
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1.14 "SPARE PARTS WARRANTY PERIOD" means the period ending upon the
expiration of ninety (90) days after the date of installation of such Spare
Part (but not to exceed six (6) months from the date of delivery of such
spare part to Buyer). However, with respect to the Spare Parts listed in
Exhibit C, Seller shall pass on the benefits of any extended warranty to
Buyer. Upon Buyer's request and under normal circumstances, Seller will use
best efforts to ship a reasonable quantity of the Spare Parts listed in
Exhibit C to Buyer within 30 days.
SECTION 2. PRODUCT CHANGES; TOOLING
2.1 CHANGES TO DOCUMENTATION. Seller shall revise the Documentation only
in accordance with the Document Change Control Agreement set forth in Exhibit
D. Buyer shall be the owner of all Documentation and all associated patent,
copyright, trade secret and other proprietary rights with the exception of
Seller's proprietary manufacturing processes and Seller's proprietary STEMS
software.
2.2 TOOLING. Seller shall hold the Tooling for use in the manufacture,
assembly and testing of Products. Buyer shall bear the cost of manufacturing,
preventative maintenance and normal wear repairing of all Tooling. Buyer
shall be the owner of all Tooling (and Seller shall place a permanent marking
on all Tooling showing Buyer's ownership and shall execute and deliver any
and all documents as Buyer may reasonably request to vest, evidence or give
public notice of Buyer's ownership). Seller shall deliver any and all
Tooling to Buyer promptly on written request and in any event at the end of
the Term in good operating condition and state of repair, ordinary wear and
tear excepted, together with any and all related specifications, drawings,
manuals, documentation and records (e.g., pertaining to the operation,
maintenance and repair of the Tooling).
2.3 BUYER SUPPLIED COMPONENTS. Any parts inventory of Buyer supplied
components shall remain the sole and exclusive property of Buyer.
SECTION 3. PURCHASE AND SALE OF PRODUCTS
3.1 PURCHASE AGREEMENT. This Agreement is a supply agreement whereby the
Buyer agrees to purchase Product for the term shown from the Seller. At a
minimum, Buyer agrees to purchase all of its requirements for Product in the
United States up to and including 1800 units per year during the initial
three (3) year term of this Agreement. Buyer may choose to build Product
itself or through a third party so long as the yearly commitment to Seller of
1800 units is not affected. Should the annual volume of units ordered by
Buyer be greater than or less than 1800 units per year, Seller will
re-calculate the unit price accordingly based on the pricing methodology in
Exhibit A-1 and Exhibit F. Any volume price adjustments will be implemented
as go forward pricing not retroactively. Buyer will provide Seller with an
opportunity to bid on any Products for sale outside of the United States
provided no exclusion of U.S. suppliers exists. Notwithstanding Seller's
right to bid on any Products for sale outside of the United States, Buyer
shall have the right to select any seller at its sole discretion.
3.2 EXCLUSION OF ANSEL RETROFIT KITS. Buyer and Seller agree to exclude
the Product known as "Ansel Retrofit Kits" from this Agreement. Buyer and
Seller agree to review Ansel System Retrofit Kit pricing within two (2)
months of executing this Agreement. Buyer and Seller will work together to
reduce the cost of the retrofit kits and upon mutual acceptance of terms will
amend this Agreement to add the Ansel Retrofit Kits to the Product definition.
3.3 PRODUCTION PRODUCTS. Seller shall manufacture, sell and deliver to
Buyer such Products as Buyer may order from Seller during the Term.
3.4 RIGHT TO BID ON NEW PRODUCT. Seller shall have the right to bid on
the manufacture of any new Product that Buyer may decide to introduce during
the term of this Agreement. For the purposes of this Agreement, new Product
is defined as a Product which differs from the specifications in Exhibit A
by more than 50% of component content, provided that such component content
changes are not resultant from on-going cost reduction efforts or added
product features to the Products listed in Exhibit A. Notwithstanding
Seller's right to bid on new Product, Buyer shall have the right to select
any seller at its sole discretion.
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3.5 SEGREGATION OF ENGINEERS AND EARLY NOTIFICATION OF COMPETING
PRODUCTS. During the term of this agreement, Seller agrees that the
employee's of Seller that are engaged or have been engaged in the design and
development of Buyer's product will not be used to develop or manufacture
competing products. Seller further agrees to use it's best efforts to inform
Buyer of the manufacture of competing products prior to any public
announcement. If such disclosure is made, Buyer agrees to treat such
information in confidence.
3.6 ORDERS; DELIVERY SCHEDULE. Each of Buyer's Orders for Products shall
be submitted to Seller substantially in the form of a purchase order or such
other form as may be utilized by Buyer for ordering Products under this
Agreement. Each Order shall contain a description of the Products ordered,
specify the shipping destination (if any at that time), specify the quantity
of Products ordered and specify the dates on which each ordered Product is to
be made available to Buyer for acceptance testing with respect to the first
three month period covered by the Order schedule, along with a forecast of
when additional Product will be acceptance tested for the remaining quarters
covered by the Order. No less than ninety (90) days prior to such forecasted
quarter, Buyer will supply Seller with a definitive schedule for Product
acceptance testing timing and quantities for such quarter. The definitive
quantity may vary from the forecasted quantity by plus or minus thirty
percent (30%). Time is of the essence in this Agreement. If one or more Lots
is not made available for delivery and acceptance testing in accordance with
the definitive schedule provided by Buyer ("Short Lots(s)"), and the
reason(s) for such delay are within the reasonable control of Seller, and
Seller fails to ensure that, within eight (8) weeks from the date of the
first Short Lot, the cumulative number of Products in Lots actually made
available for acceptance testing and delivery is again equal to the number
required through that date under the definitive schedule, Seller shall be in
material breach of this Agreement and Buyer may terminate this Agreement and
all or part of any outstanding Orders at any time thereafter. Upon such
termination, Buyer shall pay Seller an amount equal to Seller's Burdened
Costs (as defined in Section 3.9.2 below) for raw materials which are
purchased by Seller (or which Seller has then placed non-cancelable purchase
orders) specifically for the manufacture of such Products and which are
returned to Seller's suppliers where possible, sold or otherwise disposed of
as directed by Buyer.
3.7 PURCHASED PRICE. As full compensation for the Products and the
performance of Seller's obligations under this Agreement, Buyer shall pay
Seller the price for each Product as established in each order. Buyer
requested changes to (a) the Documentation or (b) to ordering components for
subassemblies resulting in a quantity less than the total purchase quantity
for such Products under such Order, may cause an increase or decrease in
underlying material costs, and therefore in the price of Products. All
increases or decreases in material cost due to such changes will be passed on
to Buyer as direct material cost increases or savings (as the case may be).
Seller will provide Buyer detailed baseline cost and actual costs for any
such changes to support any price adjustments made hereunder. The parties
will work together to ensure that the mechanics and documentation of
implementing price changes occur in an efficient manner for both Buyer and
Seller. Burden rates as stated in Exhibit E will be fixed for the initial
three (3) year term of this Agreement. Buyer and Seller agree to meet every
three (3) months during the term of the Agreement to discuss the methodology
(i.e., tooling, NRE, economic order buys, etc.) towards price reduction and
reduction of actual costs to manufacture Products. Seller and Buyer agree to
work together to continue to reduce the manufacturing cost of the Products
where possible.
3.8 PAYMENT. Seller shall issue its invoice for the price of a Product
upon Buyer's approval of the Product pursuant to paragraph 4.1. Buyer shall
pay Seller the amount due under each of Seller's invoices within thirty (30)
days after Buyer's receipt of the invoice. Seller shall promptly furnish
Buyer with such documentation and information as Buyer may reasonably request
to verify the amount due under any of Seller's invoices. Payments otherwise
due or payable under this Agreement may be withheld by Buyer on account of
any Product that does not comply with the warranty set forth in paragraph 7.1
or the failure of Seller to comply with any of its other obligations under
this Agreement. Applicable taxes will appear as additional amounts owing on
invoices.
3.9 CANCELLATION OF ORDERS.
3.9.1. Buyer may not cancel any Order as it applies to Products
scheduled for delivery within ninety (90) days after Buyer
gives Seller such notice of the cancellation.
3.9.2 Buyer may cancel any Order as it applies to Products
scheduled for delivery more than ninety (90) days after
Buyer gives Seller such notice of the cancellation; provided
that, with respect to canceled Products scheduled for delivery
more than ninety (90) days but less than three hundred sixty
five (365) days after
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Buyer gives Seller notice of the cancellation, Buyer shall
agree to pay Seller an amount equal to Seller's Burdened
Costs (as defined below) for raw materials which are
purchased by Seller (or for which Seller has then placed
non-cancelable purchase orders) specifically for the
manufacture of such Products and which are returned to
Seller's suppliers where possible, sold or otherwise disposed
of as directed by Buyer. Seller's "Burdened Costs" shall
equal the difference between the amount paid by Seller for
such materials plus a handling charge of ten percent (10%)
plus any bill back by Seller's suppliers for taking less than
amounts ordered with respect to Product Orders and the amount
of any refund, credit, allowance or compensation received
by or on behalf of Seller for such return, sale or other
disposition. Seller shall furnish Buyer such receipts,
documents and other information as Buyer may reasonably
request to verify Seller's net Burdened Costs under this
Agreement.
3.9.3 No cancellation shall relieve Buyer or Seller or any of their
respective obligations under this Agreement as to any
Products not canceled. If Buyer purports to cancel all or any
part of any Order for Seller's breach or default and it is
determined that Seller was not in breach or default that
would permit such cancellation, then such cancellation shall
be deemed to have been a cancellation pursuant to this
paragraph and the rights and obligations of the parties shall
be determined accordingly.
3.10 SPARE PARTS. Seller will produce and sell and provide Buyer with
spare parts for the Products, which are configured and tested to the current
Product Specifications pursuant to Orders for such spare parts. During the
first term year of this Agreement, Buyer shall provide Seller with a 1 year
forecast of spare parts requirements and shall provide firm orders for spare
parts quarterly. Seller shall invoice Buyer for Seller's actual spare part
direct material and assembly labor cost plus 10 percent (10%). For the
subsequent term years of the Agreement, Seller shall invoice Buyer for
Seller's actual spare part direct material and assembly labor cost plus 10
percent (10%) when spare parts are ordered with annual Product Orders. For
spare parts orders not made in connection with annual Product Orders, Seller
shall invoice Buyer for Seller's actual spare part direct material and
assembly labor cost plus seventeen percent (17%). On Orders for spares that
provide for future delivery to Buyer, Seller will reasonably accommodate
Buyer's requests, as necessary, to delay delivery or utilize some portion of
such spare parts in future Product manufacturing.
SECTION 4. ACCEPTANCE, DELIVERY AND SHIPMENT
4.1 ACCEPTANCE. Delivery of Products to Buyer shall be deemed to have
occurred upon acceptance of each lot of Products under any Order in
accordance with the following acceptance procedure. Seller shall notify Buyer
when a particular Product Lot is ready for acceptance testing. Buyer will
promptly inspect all or a portion of such Product Lot at Seller's Plant.
Buyer may conduct a statistical sampling of each such Lots of Products. If
five percent (5%) or more of the lot fails to comply with the warranties set
forth in paragraph 7.1, then Seller shall repair the non-conforming Products
at Seller's plant using Seller's labor, tools, and materials, all at Seller's
expense. However, if Seller will not be able to make, or does not make, such
required repairs within a reasonable time, Buyer may, at its option, repair
the non-complying Products and charge Seller the reasonable cost of the
repair. Even if a Product Lot is accepted, Seller shall remain responsible to
correct non-conformities in any Product in such Lot under paragraph 7.2.
4.2 STORAGE OF COMPLETED PRODUCTS. Accepted product lots shall be stored
in clean and safe condition by Seller at Seller's Plant or any other mutually
acceptable location until Buyer requests shipment of individual Products to
Buyer's Plant. Seller shall retain all risk of loss with respect to such
stored Products until shipment. Once accepted pursuant to Section 4.1, Buyer
shall retain all right, title and interest in and to such Products. Seller
shall execute any and all documents reasonably required in order to protect
Buyer's ownership interest in all accepted and delivered Products. Seller
shall maintain general liability and any other insurance reasonably required
to insure against loss or damage of any nature to the Products and Tooling in
amounts equal to the full insurable value thereof. At Buyer's request, Seller
shall provide a certificate evidencing the above required insurance coverage.
4.3 SHIPMENT. Upon Buyer's request, Seller shall properly mark and
otherwise identify each accepted Product for shipment to Buyer's Plant. Buyer
shall arrange and pay for all transportation, handling, transit insurance,
duties, governmental inspections and other requirements for delivery of the
Products in accordance with this Agreement. Shipments shall be F.O.B.
Seller's Plant.
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4.4 PACKAGING. Seller shall properly package the Purchased Product
according to Buyer's instructions for protection against damage or
deterioration that may result from shipment, handling, storage or other cause.
4.5 SCHEDULE. Seller shall make the Products available for Buyer's
acceptance testing in accordance with the schedule set forth in the
applicable Order, as revised and updated as described in Section 3.6.
However, Seller shall not be liable for delays in delivery due to causes
which are not reasonably foreseeable, which are beyond Seller's control and
which cannot be overcome by the exercise of reasonable diligence; provided
that Seller gives Buyer prompt written notice of the circumstances giving
rise to the delay, the anticipated duration of the delay and the action being
taken by Seller of overcome or mitigate the delay. The specified delivery date
shall be extended by the period of any such delay and the shipment schedule
shall be recovered in accordance with section 3.6. unless otherwise agreed to
by the parties. Shipment delays requested by the Buyer or due to Buyer
supplied materials, design changes, software or other factors under the
primary control of the Buyer may result in an inventory deposit from the
Buyer to the Seller.
4.6. EXCESS AND OBSOLETE MATERIAL. During the performance of this
Agreement, Seller will purchase materials to support the requirements of the
Buyers program. Certain materials which Seller will acquire will be subject
to minimum-buy requirements and quantity price breaks which may result in
excess material accumulation which will be the responsibility of the Buyer.
Additionally, design changes may cause materials to become obsolete. Obsolete
materials due to a design change will be returned to suppliers when possible.
Non-returnable inventory will be charged to the buyer. During the performance
of this Supply Agreement, Seller will provide the Buyer with periodic updates
of the status and amount of excess or obsolete material. Seller will use its
best efforts to minimize the impact of excess material and/or obsolete
materials on Buyer's program. Seller will return materials to suppliers for
credit, less restocking fees, when appropriate. However, final costs
associated with the accumulation of excess and obsolete materials are
chargeable and payable by the Buyer. Any excess or obsolete inventories will
be charged to the Buyer at Seller's cost plus material burden, but without
profit. Disposition of excess or obsolete materials will be coordinated with
the Buyer to minimize the impact of cost to the Buyer where possible.
SECTION 5. INSPECTION
5.1 SELLER'S PLANT. Seller's Plant and all Tooling shall be subject to
inspection by Buyer at any time during normal business hours upon twenty-four
(24) hours prior notice. Seller shall provide Buyer with safe and sufficient
access for such inspection.
5.2 BY SELLER. Seller shall perform such detailed inspections and tests
of each Purchased Product as are necessary to ensure that such Product
complies with the requirements of this Agreement. Without limiting the
generality of the foregoing, Seller shall:
(a) comply with the Inspection Procedures applicable to each
Purchased Product;
(b) inspect and test all materials and components to be incorporated
in any Purchased Product on receipt in order to assure material
and component quality; and
(c) keep and maintain complete and adequate records of all
inspections and test performed on Purchased Products, and make
such records available to Buyer for examination, copying and
audit.
5.3 BY BUYER. All Products shall at all times be subject to inspection
and testing by Buyer upon 24 hours prior notice to Seller. Seller shall
provide Buyer with safe and sufficient access, equipment and facilities for
any such inspection or test prior to delivery. No acceptance of any Products
shall be construed to result from any inspection, test or delay or failure to
inspect or test by Buyer prior to final inspection and test of such Products
by Buyer. Buyer shall be afforded a reasonable opportunity to inspect each
Product for damage at its specified destination. No inspection, test, delay
or failure to inspect or test, or failure to discover any defect or
noncompliance by Buyer shall relieve Seller of any of its obligations under
this Agreement or impair Buyer's right to reject defective or non-complying
Products or any other right or remedy afforded to Buyer.
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SECTION 6. COMPLIANCE WITH LAWS AND STANDARDS
6.1 GENERAL. Seller shall comply (and shall ensure that all Products and
Seller's subcontractors and suppliers of every tier comply) with all
applicable laws, ordinances, rules, regulations, orders, licenses, permits
and other requirements, now or hereafter in effect, of any governmental
authority. Seller shall furnish such documents as may be required to effect
or evidence such compliance. All laws, ordinances, rules, regulations and
order required to be incorporated in agreements of this character are
incorporated in this Agreement by reference.
6.2 INDUSTRY STANDARDS. Seller shall produce all Products in accordance
with, and shall ensure that each Product complies with, the following
requirements as now or hereafter in effect:
(a) Federal Communications Commission ("FCC") Class "A" Standard
agency approvals and;
(b) Underwriters Laboratory ("UL") Standard 751 agency approvals.
Seller shall provide buyer with such specifications, testimony and other
assistance as Buyer may reasonably request in connection with the listing,
approval, registration or satisfaction of similar requirements of any trade
association or other organization, as the same may apply to the Product.
SECTION 7. WARRANTY
7.1 WARRANTY. Seller warrants to Buyer that:
(a) each Product shall be free from defects in material and
workmanship;
(b) each Product shall be free from all defects in design, except
to the extent manufactured to a detailed design furnished by
Buyer;
(c) all materials, parts components and other items incorporated in
any Product shall be new and suitable for its intended purposes;
(d) all Products shall strictly comply with the Documentation; and
(e) each Product shall comply with the requirements of this
Agreement and the Order pursuant to which it is purchased by
Buyer.
7.2 CORRECTION OF NONCOMPLIANCE If at any time during the Warranty
Period Buyer notifies Seller of any failure to comply with the warranty set
forth in paragraph 7.1, Seller shall promptly correct such noncompliance
(e.g., repair or replacement of the noncomplying Product) and remedy any
damage to the Product resulting from such failure. Buyer will pay the costs
of transportation to Seller's Plant for warranty service. Seller will pay all
other transportation and other costs incidental to such correction and
remedying. If Buyer rejects any Products that do not comply with the warranty
set forth in paragraph 7.1, Seller shall have a reasonable time to correct
the noncompliance. If Seller fails to correct the noncompliance within a
reasonable time, Buyer may cancel the Order as it applies to the noncomplying
Products only without any cost, obligation or liability to Buyer with respect
to such noncomplying Products and without prejudice to any other rights or
remedies of Buyer with respect to such noncompliance (e.g., as to damages or
cover).
7.3 SELLER'S FAILURE TO CORRECT NONCOMPLIANCE. If during the Warranty
Period Buyer requests Seller to correct any Product that does not comply with
the warranty set forth in paragraph 7.1 and Seller thereafter fails to
correct the noncompliance or otherwise comply with the requirements of
paragraph 7.2, or indicates its inability or unwillingness to comply, then
Buyer may perform (or cause performance of) the correction or otherwise
achieve compliance by the most expeditious means available to it (by contract
or otherwise) and charge to or otherwise recover (for example, by offset
against the compensation otherwise payable to Seller under this Agreement)
from Seller all reasonable costs thereof that are associated with the direct
repair of the Product. Buyer's right to perform corrections, achieve
compliance and recover the costs thereof from Seller shall not be interpreted
or
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construed as obligating Buyer to make any correction or otherwise achieve
compliance. Further, Seller's obligations (including warranty) shall not be
limited or reduced in any way because of any corrections performed or caused
to be performed by Buyer or Buyer's rights to perform the same. However,
Seller will have no obligation for damage to a Product where such damage is
caused by the efforts of Buyer or Buyer's representative in correcting the
noncompliance.
7.4 RESPONSE TIME. Seller shall use its best efforts to perform such
warranty service by a qualified service technician within (10) business days
from the time that Seller receives the defective Product part, assuming
material availability. If the claim is not within Seller's warranty
obligations under this paragraph 7, Seller shall immediately notify Buyer
and, at Buyer's option, shall either return such Product part to Buyer or
shall perform the required service under paragraph 7.5 as directed by Buyer.
7.5 SERVICE NOT COVERED BY WARRANTY. In the event that any Product
requires repair or other service that is not covered by Seller's warranty
obligations under this paragraph 7 (e.g., after expiration of the Warranty
Period), Seller shall provide such service at a rate as may be agreed upon by
the parties. Seller shall use its best efforts to complete such repairs
within four (4) business days in the case of a priority repair and within ten
(10) business days in the case of a normal repair.
7.6 SPARE PARTS. Seller warrants that spare parts shall be free from
defects in material and workmanship. If at any time during the Spare Parts
Warranty Period any spare part provided pursuant to this Section does not
conform with the above, the Buyer or, at the Buyer's option, the Buyer's
designee shall return such spare part to the Seller. The Seller shall, within
seven (7) days following receipt of the part, promptly repair or replace such
spare part (dependent on material availability) without charge and refund to
the Buyer or the Buyer's designee freight paid by the Buyer or the Buyer's
designee for the original and return shipment. Such freight cost shall not
exceed the then current surface rate, freight charge charged by United Parcel
Service ("UPS") or, if such UPS freight charge is not readily available, the
rate charged by a shipping company similar to UPS.
7.7 SPARE PARTS WARRANTY. The Buyer and Seller will jointly create and
periodically review a list of spare components (not to exceed 15 parts) which
require extended (one (1) year) warranty per 1.14. Should the Seller's
suppliers provide an extended warranty to the Seller at no cost that same
warranty will be passed on to the Buyer at no cost. Should the Seller's
supplier not provide such warranty, the Buyer and Seller will negotiate in
good faith on the additional cost associated with supplying an extended
warranty.
7.8 ONGOING ENGINEERING SERVICE. Seller shall provide such technical
support services to Buyer as the parties may agree upon during the Term and
thereafter until the expiration of the Warranty Period for all Products
delivered under this Agreement. Such services may include, without
limitation, engineering consulting services to modify, correct or enhance any
Product to perform according to its specifications or to its intended
function. Seller's engineering hourly rates for the Term are set forth on
Exhibit E.
SECTION 8. ADDITIONAL OBLIGATIONS OF SELLER
8.1 PROPRIETARY NATURE OF PRODUCTS. The Documentation, Tooling and
Products involve valuable patent, copyright, trade secret and other
proprietary rights of Buyer. Accordingly, Seller shall not, without Buyer's
prior written consent;
(a) sell any Product to any person other than the Buyer;
(b) manufacture any product except for sale to Buyer under this
Agreement;
(c) deliver or disclose any Documentation, Tooling, or any
confidential or proprietary information of or relating to Buyer
(e.g., whether of a technical, financial, business, trade secret
or other nature) to any Person other than Buyer; or
(d) use any Documentation or Tooling for any purpose other than the
manufacture of Products for sale to Buyer under this Agreement.
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Seller and Buyer shall each maintain as confidential any specifications,
drawings, blueprints, data, business information, trade secrets,
manufacturing processes, or other confidential information which Seller or
Buyer learns or acquires by virtue of this Agreement.
8.2 COMPONENT SPECIFICATIONS. Seller shall provide upon request from
Buyer a complete list of all parts and components used in the Product and the
manufacturers of such parts and components, specifically noting which parts
or components are available only from the manufacturer listed. Seller shall
ensure that all Products and pertinent parts and components of all Products
are serialized and otherwise identified in accordance with any reasonable
requirements by Buyer.
8.3 PRODUCT DEFECT NOTIFICATION. Seller shall immediately notify Buyer
by fax or telephone of any material or recurring defect, deficiency or
nonconformity discovered with respect to the Product.
8.4 MODIFICATION. Seller shall not modify or authorize any modification
affecting form, fit or function of any Product, or which would be significant
with respect to requirements of any governmental authority, without the prior
written consent of Buyer. Seller shall promptly disclose in writing to Buyer
all potential modifications (includin, but not necessarily limited to,
alterations, improvements and enhancements), methods, applications,
inventions, ideas and know-how relating to the Product made by Seller during
the Term.
8.5 IMPROVEMENTS. Seller hereby acknowledges that improvements to the
Product funded by the Buyer, which are unique to Buyer's program, shall be
the sole property of Buyer, and Seller shall provide Buyer, at Buyer's
request and at a reasonable charge, reasonable assistance in securing patents
for such improvements. Seller agrees to promptly disclose improvements to
Buyer and to execute documents reasonably requested by Buyer to evidence
Buyer's ownership of such improvements. Manufacturing process improvements
developed by the Seller shall be the property of the Seller.
SECTION 9. NOTICES
9.1 NOTICES. Any notice, request, authorization, direction or other
communications under this Agreement shall be given in writing and be
delivered in person or by first-class U.S. mail, properly addressed and
stamped with the required postage, to the intended recipient as follows:
If to Seller: If to Buyer:
Steven F. Bahr Scott Dean
Contracts Manager Director of Manufacturing and Quality
SeaMED Corporation Coinstar, Inc.
14500 NE 87th Street 1800-114th Avenue SE
Redmond, WA 98052 Bellevue, WA 98004
with copies to: with copies to:
Vice President, Operations Vice President, Program Management
and Development
Either party may change its address specified above by giving the other party
notice of such change in accordance with this paragraph.
9.2 INDEPENDENT CONTRACTOR. Seller is an independent contractor, not an
agent or representative of Buyer. Seller shall not have any right, power or
authority to enter into any agreement for or on behalf of, or incur any
obligation or liability of or to otherwise bind Buyer. This Agreement shall
not be interpreted or construed to create an association, joint venture or
partnership between the parties or to impose any partnership obligation or
liability upon either party.
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9.3 NONWAIVER. The failure of either party to insist upon or enforce
strict performance by the other party of any provision of this Agreement or
to exercise any right under this Agreement shall not be construed as a waiver
or relinquishment to any extent of such party's right to assert or rely upon
any such provision or right in that or any other instance; rather, the same
shall be and remain in full force and effect.
9.4 SURVIVAL. Paragraphs 6, 7 and 8.1 (and all provisions of this
Agreement which may reasonably be interpreted or construed as surviving the
completion, expiration, termination or cancellation of this Agreement) shall
survive the completion, expiration, termination or cancellation of this
Agreement.
9.5 ENTIRE AGREEMENT. This Agreement and all outstanding purchase orders
from Buyer to Seller for Product set forth the entire agreement, and
supersede any and all prior agreements, of the parties with respect to the
Products. No additional or different provisions proposed by Buyer or Seller
shall apply and are herby rejected, unless provisions are specifically agreed
to in writing by both parties. If any term of this Agreement conflicts with
any term of an issued Purchase Order, this Agreement shall take precedence.
Any terms or conditions in the Purchase Order not covered under this
Agreement must be specified on the front of purchase orders and must be
mutually and explicitly agreed to by both the Buyer and Seller.
9.6 AMENDMENT. No change, amendment or modification of any provision of
this Agreement shall be valid unless set forth in a written instrument signed
by the party to be bound thereby.
9.7 SUCCESSORS AND ASSIGNS. Neither party shall assign (voluntarily, by
operation of law or otherwise) this Agreement or any right, interest or
benefit under this Agreement without the prior written consent of the other
party; provided, however, that either party may assign this Agreement or any
of its rights, interests or benefits in this Agreement without such consent
to any entity which is wholly owned or controlled by, which owns or controls
or which is under common control with the assigning party. No assignment with
or without such consent shall relieve or release either party of any of its
obligations under this Agreement. Subject to the foregoing restriction on
assignments, this Agreement shall be fully binding upon, inure to the benefit
of and be enforceable by the parties and their respective successors, assigns
and legal representatives.
9.8 APPLICABLE LAW. This Agreement shall be interpreted, construed and
enforced in accordance with the laws of the State of Washington, except to
the extent such laws may be preempted by the laws of the United States of
America. Seller shall not commence or prosecute any suit, proceeding or claim
to enforce the provisions of this Agreement, to recover damages for breach of
or default under this Agreement, or otherwise arising under or by reason of
this Agreement, other than in the courts of the State of Washington or the
District Court of the United States, Western Division, State of Washington.
Seller irrevocably consents to the jurisdiction of the courts of the State of
Washington with venue laid in King County and of the District Court of the
United States, Western Division, State of Washington.
9.9 FORCE MAJEURE. Neither party shall be liable for any failure to
perform or delay in performing any of its obligations hereunder when such
failure or delay is due to one or more of the following circumstances: any
natural catatrosphe, fire, war, riot or civil unrest, or any act, regulation,
restriction, order or intervention of any governmental authority. Upon the
occurrence of such circumstance(s), the affected party shall immediately
notify the other party, keep the other party informed of any further
developments and use all commercially reasonable efforts to overcome the
force majeure event. Immediately after such condition is removed, the
affected party shall perform such obligation with all due speed.
11
<PAGE>
IN WITNESS WHEREOF, the authorized representatives of the parties have
executed this Agreement under seal as of the date(s) set forth below.
SEAMED CORPORATION
SELLER BUYER
/s/ Donald Rich /s/ Daniel A. Gerrity
------------------------------- ---------------------------
(Signature) (Signature)
Donald Rich Daniel A. Gerrity
------------------------------- ---------------------------
(Printed Name) (Printed Name)
President and
Sr. V.P., Operations Chief Operating Officer
------------------------------- ---------------------------
(Title) (Title)
May 14, 1998 May 15, 1998
------------------------------- ---------------------------
(Date) (Date)
12
<PAGE>
EXHIBIT A
PRODUCTS, PRICING & LEAD TIME
<TABLE>
<CAPTION>
Products Pricing
-------- -------
<S> <C>
Jefferson-1000 Self Service Coin Exhibit A-1
Machine including the Ansel
System Coin Counting Mechanism
(Project Clatskanie including
Project Cascade)
</TABLE>
13
<PAGE>
EXHIBIT A-1
SEAMED CORPORATION
COINSTAR
UNIT PRICING FOR THE COINSTAR C6005
(assumes annual volume of 2000/year and a 3 year agreement)
<TABLE>
<CAPTION>
Initial Estimated Price after 6 months Estimated Price after 1 Year
Production Price w/Tooling and Labor Efficiency w/Tooling and Labor Efficiency
---------------- ------------------------------ ------------------------------
<S> <C> <C> <C> <C> <C> <C>
Manufacturing Material $ 6,255 $ 6,032 $ 6,032
Outplant Costs 171 171 171
Assembly Labor 19.00 266 18.00 252 17.00 238
------- -------- -------
Direct cost 6,692 6,455 6,441
------- -------- -------
------- -------- -------
Service Fee 2,872 2,776 2,742
------- -------- -------
UNIT PRICE BEFORE SALES TAX 9,564 9,231 9,183
------- -------- -------
------- -------- -------
Sales Tax @8.6% 823 794 790
------- -------- -------
UNIT PRICE INCLUDING SALES TAX $10,387 $10,025 $ 9,973
------- -------- -------
------- -------- -------
</TABLE>
*Includes savings from Long-term agreements, learning curve, and design
refinements
**Includes above savings, reduced material costs from tooling and reduced
direct labor
***Includes above savings and reduced direct labor
Page 1 of 1
<PAGE>
EXHIBIT B
TOOLING
<TABLE>
<CAPTION>
Number Part Location
- -------- ---- --------
<S> <C> <C>
2 I/O Board Tester SeaMED - Redmond, WA
1 PC (used for disk replication) SeaMED - Redmond, WA
1 RIM Tool Left Door Design Octaves - Santa Cruz, CA
1 RIM Tool Right Door Design Octaves - Santa Cruz, CA
1 RIM Tool Monitor Bezel Design Octaves - Santa Cruz, CA
1 RIM Tool ISP Module (Jan 97) Design Octaves - Santa Cruz, CA
1 Frame Set Fixture (3 pieces) 3D - Bothell, WA
1 Keypad Tool CRT - Bothell, WA
1 Keypad Tool (Jan 97) Design Mark - MA
1 Pressure Form Tool Left Pyramid Accel Plastics - Auburn, WA
1 Injection Mold Coin Chute Accel Plastics - Auburn, WA
Multiple Silk Screens Applied Finishing - Mukilteo, WA
200 Frame Set Shipping Pallets 3D/SeaMED
1 Extrusion Die Technical Dynamics Aluminum -
Portland, OR
1 Injection Mold P/N 60761 & 60917 Vaupell Industrial Plastics - Seattle, WA
1 Injection Mold P/N 60755 Vaupell Industrial Plastics - Seattle, WA
1 Injection Mold P/N 60915 Vaupell Industrial Plastics - Seattle, WA
1 Injection Mold P/N 60754 Vaupell Industrial Plastics - Seattle, WA
1 Injection Mold P/N 60756 Vaupell Industrial Plastics - Seattle, WA
</TABLE>
14
<PAGE>
EXHIBIT C
EXTENDED WARRANTY SPARE PARTS LIST
<TABLE>
<CAPTION>
Part Number/Vendor Description Warranty*
- ------------------ ------------ ---------
<S> <C> <C>
61104/Celestica SDRAM 32 MB 168 PIN DIMM Lifetime
61100/DFI Motherboard Assembled 233 MHZ 3 years
61040/US Robotics Modem International 5 years
60957/Cardex Video Card 3D VGA 2MB EDQ DRA 1 year
36518/Seagate Hard Drive 1.7 Gig Enhanced 3 years
60843/Micron RAM 16MB 72 PIN SIMM Lifetime
60839/BTC Sound Card 16 BIT Stereo ISA 1 year
</TABLE>
When SEAMED's PC Board Assembly supplier becomes a "turn key" supplier, SeaMED
will add applicable PC Board assemblies to this Exhibit C. The warranty on
these PC Board assemblies is expected to be 1 year.
*The Extended Warranty offered is supplier dependent. A change of supplier
may result in a decreased or incresed warranty. SeaMED will review and update
this list periodically.
15
<PAGE>
EXHIBIT D
DOCUMENT CHANGE CONTROL AGREEMENT
between SeaMED Corporation and Coinstar
for Project Cascade and Project Clatskanie
February 12, 1998
1. Purpose and scope of this agreement.
1.1. The objective of this agreement is to define the document
change control process for documents involved in SeaMED's
manufacture of devices for Coinstar.
1.2. It is a goal of this agreement that there be only one
document and one point of change control for each item and/or
document.
1.3. Since SeaMED is the manufacturer and purchaser of the
device's component parts (but is not the originator of a
large portion of the documentation of components used in the
previous Coinstar product now referred to as Project Celilo),
engineering change control for all related documentation will
reside at SeaMED. To ensure uniform document content,
Coinstar should release only the SeaMED-supplied version of
any document, in those cases where both companies release a
document. Changes should be made by the terms of this
agreement.
1.4. Engineering change control for the unique mechanical design
and manufacturing/test documentation of Project Clatskanie will
reside at SeaMED.
1.5. Coinstar retains ownership of all previous documentation as
well as all Coinstar-related SeaMED generated documentation.
1.6. To ensure uniform drawing content, Coinstar will provide only
released documentation to SeaMED.
1.7. SeaMED will administer change control in accordance with
SeaMED Document Change Procedure (Document # 900319) and
Manufacturing Adjustments Procedure (Document # 1000915),
including determination of change classes as described below.
1.8. Coinstar will control and administer change in accordance
with their standard practices, (Lotus Notes, for example)
including determination of change classes, effectivity, etc.
1.9. This agreement affects all documents at Production-level
release in the Device Master Record Index of products that
SeaMED manufactures for Coinstar.
2. Document Change Procedure. This procedure first defines the classes of
changes; then describes the mechanics of the change process based on
those classifications per SeaMED's Internal Quality Assurance
requirements.
2.1. Document classifications; Documents may be described as
either generic or product-specific. The generic category
includes Source and Specification Control Drawings (SCD) used
for buying and inspecting commercially available "off-the-shelf"
parts. Product-specific documents include all documents that are
unique to the design of the product.
2.2. Document Change Classifications. (SeaMED originated drawings,
i.e. Clatskanie or Cascade Project)
2.2.1. Class 0: Changes to generic documents. Class 0
changes do not fit within the definition of Class 1, 2
or 3 changes. Class 0 changes do not require customer
approval or notification.
2.2.2. Class 1: Changes to product-specific or generic
documents where there is no impact on component or
assembly specifications/limits/dimensions, regulatory
compliance, appearance, cosmetic criteria,
manufacturing or test processes,
Page 1 of 4
<PAGE>
qualification status, increase in manufacturing costs,
and scheduled shipping dates. Class 1 changes do not
require customer approval, but do require customer
notification within one (1) working day after approval
by SeaMED.
2.2.3. Class 2: Changes to product-specific or generic
documents where there is no impact on end-item
specifications/limits/dimensions, intended use or
operation, labeling, regulatory compliance, appearance,
cosmetic criteria, special processes, qualification
status, increase in manufacturing or service costs, and
scheduled shipping dates. Class 2 changes do not
require customer approval, but do require customer
notification within one (1) working day after approval
by SeaMED.
2.2.4. Class 3: this is a Class 2 change where there is
impact on end-item specifications/limits/dimensions,
intended use or operation, labeling, regulatory
compliance, appearance, cosmetic criteria, special
processes, design verification status, increase in
manufacturing or service costs, and scheduled shipping
dates. Class 3 changes require customer approval.
3. Mechanics of the change process.
3.1 It is a goal of this agreement that all correspondence
regarding document changes be handled promptly and efficiently.
Delays can seriously upset scheduled buys, work orders, and
shipments.
3.2 SeaMED Documentation Control will handle all correspondence
for SeaMED regarding document changes.
3.3 Coinstar will notify SeaMED by telefax, Lotus Notes Engineering
Change Orders database of change requests to Coinstar-related
drawings.
3.4 SeaMED will notify Coinstar by telefax of Class 1 and 2 changes
as they are signed and implemented.
3.5. SeaMED will submit Class 3 changes to Coinstar by telefax for
approval after SeaMED's Change Control Board has approved the
proposed change.
3.6. Coinstar will designate one representative and one alternate with
authority to approve/disapprove proposed changes as they are
presented by SeaMED. Proposed changes should be addressed within
one week.
3.7. Coinstar may request a change to any document, generic or
product-specific, by submitting a written change request
(or Lotus Notes Engineering Change Orders database). Change
requests are to be signed by the designated Coinstar
representative, or their alternate, with the authority to
approve/disapprove the request. SeaMED should address
requested changes in one week or less.
3.8. As previously agreed to between Coinstar and SeaMED, Coinstar
authorizes Gordon Overbye the ability to sign for Coinstar to
approve changes in certain instances. SeaMED does not need an
approval signature from Coinstar when Coinstar has generated
an ECO. Gordon is authorized to sign for Coinstar when Coinstar
has already written an ECO or clearly defined and outlined
Coinstar's objectives and intent. The purpose of this
authorization is to allow SeaMED the ability to make changes
expeditiously.
3.9. SeaMED will periodically provide copies of all incorporated
changes to product specific documents.
4. Costs associated with document changes.
4.1. A certain number of changes is normal during the life of a
product. Also, once production is underway, SeaMED or Coinstar
may suggest changes to ease manufacture or inspection. SeaMED
may elect to waive the administrative costs associated with
these changes.
Page 2 of 4
<PAGE>
4.2. Changes which occur at Coinstar request, regarding the
established design of the product or affecting parts already
ordered or in SeaMED's inventory, will be considered
individually. In some cases, an administrative charge may be
assessed by SeaMED for the cost of processing and
incorporating a change above and beyond normal processing and
aside from any material costs involved.
Agreed to, for Coinstar, Inc. by /s/ Russell Borgmann on 26 March 1998
----------------------- ----------------
Agreed to, for SeaMED Corp., by /s/ Kimberly A. Marfield on 3/27/98
------------------------ ----------------
Documentation Control
Project Director [ILLEGIBLE] on 3/26/98
------------------------ ----------------
Page 3 of 4
<PAGE>
Coinstar designated representatives with authority to approve/disapprove
proposed changes. Coinstar is responsible for providing SeaMED with updated
names of designated representatives.
Name (printed) Signature Initial
Representative Russell Borgmann /s/ Russell Borgmann RAB
----------------- ---------------------- -----
Alternate Cheryl D. Germany /s/ Cheryl D. Germany CDG
----------------- ---------------------- -----
Alternate Scott A. Dean /s/ Scott A. Dean SAD
----------------- ---------------------- -----
Page 4 of 4
<PAGE>
EXHIBIT E - RATES
HOURLY RATES FOR ENGINEERING SERVICES
<TABLE>
<CAPTION>
TITLE SUSTAINING ENGINEERING DEVELOPMENT ENGINEERING
HOURLY RATE HOURLY RATE
<S> <S> <S>
Project Director $85 $100
Engineer $75 $90
Designer $55 $60
Engineering Tech $40 $50
</TABLE>
The level of engineering work required is dependent upon the scope of the
proposed Project. Sustaining Engineering does not require a full Project Team
or a unique Project Plan (i.e. continuous improvements, component
obsolescence). Development Engineering typically requires a full Project
Team and a specific Project Plan.
Engineering Rates will be fixed for the initial three (3) year term of this
Agreement. The rates shall be subject to adjustment as forth on page 2 of
this Exhibit E.
PRODUCTION PRICING RATES*
<TABLE>
<CAPTION>
BURDEN RATE
<S> <C>
Material Burden 7.0% of Total Material Costs
Outplant Burden 7.0% of Total Outplant Costs
Assembly Overhead 199.3% of Direct Labor Costs
Warranty 0.5% of Sell Price
Freight 1.0% of Material Costs
SGA 7.8% of Sell Price
Profit Margin 12.0% of Sell Price
</TABLE>
*These rates are based on annual volumes of 1800-2200
units.
16
<PAGE>
EXHIBIT E-PAGE 2
ABNORMAL INFLATION CLAUSE FOR ENGINEERING RATES
RATE ADJUSTMENT:
_ _
| S |
| 1 |
RateN = RateN |(----)|
1| S |
|_ 0 _|
Where:
Rate = Fixed rate of services in calendar year N.
N
RateN = Fixed rate of services in calendar year N-1.
1
S = Average of the months October of the year N-1 through November
1 of the year N-1 of the Producer Price Index for SIC Code 8711 as
published by the US. Department of Labor.
S = Average of the months October of the year N-2 through November
0 of the year N-2 of the Producer Price Index for SIC Code 8711 as
published by the US. Department of Labor. Inflation to be
adjusted prior to December 31, of year N-1 for services in year
N.
The hourly rates for engineering services for the base year (1998)
will remain in effect through the term of the agreement and shall
only be subject to adjustment for "abnormal" inflation. Abnormal
inflation shall be defined as any increase in excess of 7% in the
Producer Price index for Engineering Design, analysis and consulting
services (Standard Industrial Classification 8711). The inflation
percentage shall be calculated annually and rates, if necessary, will
adjust at the beginning of the calendar year. The first review period
will be January 1999. In the event that the inflation is in excess of
7% the hourly rates will adjust by one-half of the calculated
inflation rate. The newly calculated rate would then be used as the
base year for future adjustments.
In the event the US. Department of Labor - Bureau of Labor Statistics
discontinues or alters its method of determining the index listed
herein, the parties shall agree upon appropriate substitute or
adjustment of basis for use in this Article.
17
<PAGE>
EXHIBIT 11.1
COINSTAR, INC.
COMPUTATION OF EARNINGS PER SHARE
Calculations of net loss per share are based on the following:
<TABLE>
<CAPTION>
SIX MONTH PERIODS ENDED THREE MONTH PERIODS
JUNE 30, ENDED JUNE 30,
----------------------- -----------------------
1998 1997 1998 1997
------------ --------- ------------ ---------
<S> <C> <C> <C> <C>
Weighted average common and equivalent shares outstanding....... 15,098,294 943,977 15,116,403 984,012
------------ --------- ------------ ---------
------------ --------- ------------ ---------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> APR-01-1998 JAN-01-1998
<PERIOD-END> JUN-30-1998 JUN-30-1998
<CASH> 26,345,723 26,345,723
<SECURITIES> 21,804,006 21,804,006
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 49,336,787 49,336,787
<PP&E> 68,226,659 68,226,659
<DEPRECIATION> 19,302,966 19,302,966
<TOTAL-ASSETS> 100,866,888 100,866,888
<CURRENT-LIABILITIES> 29,934,432 29,934,432
<BONDS> 0 0
0 0
0 0
<COMMON> 61,515,387 61,515,387
<OTHER-SE> (72,285,899) (72,285,899)
<TOTAL-LIABILITY-AND-EQUITY> 100,866,888 100,866,888
<SALES> 0 0
<TOTAL-REVENUES> 10,471,904 19,294,739
<CGS> 0 0
<TOTAL-COSTS> 15,171,358 29,410,687
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 2,660,634 5,231,691
<INCOME-PRETAX> (6,910,250) (14,357,286)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (6,910,250) (14,357,286)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (6,910,250) (14,357,286)
<EPS-PRIMARY> (.46) (.95)
<EPS-DILUTED> (.46) (.95)
</TABLE>
