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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
FROM THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-22555
COINSTAR, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 94-3156448
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1800 114TH AVENUE SE, BELLEVUE, WASHINGTON 98004
(Address of principal executive offices) (Zip Code)
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(425) 943-8000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.001 PAR VALUE
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing price of Common Stock on February 27, 1998 as
reported on the Nasdaq National Market, was approximately $79,086,353. Shares of
Common Stock held by each executive officer and director and by each shareholder
whose beneficial ownership exceeds 5% of the outstanding Common Stock at
February 27, 1998 have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
The number of outstanding shares of the registrant's Common Stock, par value
$.001 per share, was 15,098,701 on February 27, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for Registrant's 1998 Annual
Meeting of Stockholders to be held June 4, 1998 are incorporated by reference in
Part III of this Form 10-K.
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FORM 10-K
INDEX
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PART I
Item 1. Business.............................................................. Page 3
Item 2. Properties............................................................ Page 23
Item 3. Legal Proceedings..................................................... Page 23
Item 4. Submission of Matters to a Vote of Security Holders................... Page 23
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Page 24
Matters...............................................................
Item 6. Selected Financial Data............................................... Page 25
Item 7. Management's Discussion and Analysis of Financial Condition and Page 26
Results of Operations.................................................
Item 8. Financial Statements and Supplementary Data........................... Page 33
Item 9. Changes in and Disagreements with Accountants on Accounting and Page 34
Financial Disclosure..................................................
PART III
Item 10. Directors and Executive Officers of the Registrant.................... Page 34
Item 11. Executive Compensation................................................ Page 34
Item 12. Security Ownership of Certain Beneficial Owners and Management........ Page 34
Item 13. Certain Relationships and Related Transactions........................ Page 34
PART IV
Item 14. Exhibits, Financial Statements, Financial Statement Schedules, and Page 35
Reports on Form 8-K...................................................
SIGNATURES......................................................................... Page 37
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PART I
ITEM 1. BUSINESS
THE FOLLOWING DISCUSSION IN THIS ANNUAL REPORT ON FORM 10-K CONTAINS
FORWARD-LOOKING STATEMENTS REGARDING THE COMPANY, ITS BUSINESS, PROSPECTS AND
RESULTS OF OPERATIONS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS THAT MAY BE ANTICIPATED BY SUCH
FORWARD-LOOKING STATEMENTS AND DISCUSSED ELSEWHERE 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 CAPTIONS "RISK FACTORS"
AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" AS WELL AS THOSE DISCUSSED ELSEWHERE THROUGHOUT THIS ANNUAL REPORT
ON FORM 10-K. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE
FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE OF THIS REPORT. THE
COMPANY UNDERTAKES NO OBLIGATION TO REVISE ANY FORWARD-LOOKING STATEMENTS IN
ORDER TO REFLECT EVENTS OR CIRCUMSTANCES THAT MAY SUBSEQUENTLY ARISE. 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 THAT MAY AFFECT THE COMPANY'S BUSINESS, PROSPECTS AND
RESULTS OF OPERATIONS.
SUMMARY
Coinstar, Inc. (the "Company") develops, owns and operates a network of
automated, self-service coin counting and processing machines that provide
consumers with a convenient means to convert loose coins into cash. The Coinstar
units, located in supermarkets, financial institutions and mass merchants in 30
states across the country as of December 31, 1997, accept and count accumulated
loose coins deposited by consumers and issue vouchers listing the total number,
denominations and dollar value of coins processed less a processing fee charged
by the Company, currently 7.5% (prior to 1996 the Company charged a 10%
processing fee on pennies and a 5% processing fee on all other coins.) The
vouchers are redeemable by customers at store cashiers for either credit towards
retail purchases or cash, regardless of whether a purchase is made. The Company
believes its service addresses a significant consumer need for a convenient and
reliable coin processing method. The Coinstar service provides consumers with a
means of redeeming accumulated loose coins and an alternative to manually
presorting, counting and wrapping coins typically required for cash redemption
at a bank. As of December 31, 1997 the network has processed coins worth over
$470 million. The Company began commercial deployment of the Coinstar network in
1994 and, in 1996, significantly accelerated its plans for installation of the
Coinstar units in various geographic regions. As of December 31, 1997, the
Company had an installed base of 3,204 in 40 regional markets across the United
States.
The Company believes a key competitive advantage is its significant
expertise accumulated over the past five years in designing and manufacturing
the Coinstar units, in developing and supporting a wide-area communications
network capable of receiving and transmitting data to all Coinstar units, and in
building a dedicated field service organization with the ability to rapidly
deploy and service the Coinstar units. The Coinstar unit is a modularly
designed, free-standing machine controlled by an internal computer connected to
the Company's wide-area communications network. The network is critical to
providing high availability of the Coinstar units, maintaining a high level of
customer service and managing direct operating costs. The reliability of the
Coinstar unit and the utilization of the communications network, in conjunction
with the support of the Company's regional field service organization, have
resulted in median availability of units in operation of over 98%. In addition,
the network is used to distribute store-specific promotional programs such as
electronic offers, coupons and advertising.
THE RECURRING FLOW OF COINS IN THE ECONOMY
The New York Times has reported that an estimated 288 billion cash
transactions have occurred on an annual basis in the United States. Assuming
that the change generated by each such cash transaction
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averaged fifty cents, the annual coin flow resulting from such transactions
would have been approximately $144 billion. Based on the current population in
the United States, the average person handles approximately $600 in coins each
year. To support this flow of coins in the economy, the U.S. Mint has produced
$15 billion in new coins over the past 25 years. According to the U.S. Mint, the
circulating stock of coins used in cash transactions is approximately $8
billion, which the Company estimates would have to turn over approximately 18
times a year to support a coin flow of $144 billion. The prevalence of coins in
cash transactions and the lack of a convenient alternative for converting coins
into cash has resulted in the accumulation of coins. Based on the U.S. Mint data
above, only $8 billion of the $15 billion in coins produced over the last 25
years (the useful life of a coin) are regarded as circulating, and the Company
believes there is an estimated $7 billion of non-circulating coins. New coins
are made to replace those that fall out of circulation and to support the
increasing size of the economy. In 1997 alone, the U.S. Mint produced over 13
billion new coins worth approximately $655 million. The Company believes a
significant market opportunity exists for providing a convenient method of
redeeming non-circulating coins and recycling the recurring coin flow in the
United States economy. The actual size of the market of recyclable coins
potentially available to the Company, however, is limited by the number of
geographic locations in which it is economically feasible for the Company to
locate units. In addition, many consumers regularly use their loose change in
commercial transactions rather than accumulating it, or may elect other
alternatives for recycling their accumulated coins. In 1997, the Company
processed approximately $333 million of coins. See "Risk Factors."
The Company believes there is no widely available technology to quickly,
accurately and reliably sort and count odd volumes of coins in a self-service
environment. Traditionally, banks and other depository institutions have been
the primary means by which consumers could convert coins into cash, but they
typically have provided the service only to their depositors and generally only
after the coins have been pre-sorted, counted and wrapped in paper rolls by the
consumer, an inefficient and labor-intensive process. The lack of an efficient,
hassle-free alternative for consumers to convert coins into cash presents the
Company with a significant opportunity to capitalize on redeeming
non-circulating coins as well as recycling coins on a regular basis.
THE COINSTAR SYSTEM
The Company has designed, developed and is commercially deploying, in scale,
what the Company believes to be the first and only widespread network of
automated, self-service coin counting and processing machines. The Company
believes its service addresses a significant consumer need for a convenient and
reliable coin processing method. The Coinstar service provides consumers with a
means of redeeming accumulated loose coins and an alternative to manually
presorting, counting and wrapping coins typically required for cash redemption
at a bank or other depository institution. The Company believes a key
competitive advantage is its significant expertise accumulated over the past
five years in designing and manufacturing the Coinstar units, in developing and
supporting a wide-area communications network capable of receiving and
transmitting data to all Coinstar units, and in building a dedicated field
service organization with the ability to rapidly deploy and service the Coinstar
units.
COINSTAR UNIT
The Coinstar unit is comprised of a coin input and cleaning process, a coin
counter that is designed to be jam-resistant, coin collection bins, a computer,
a thermal printer, an input keypad, an internal phone and a color monitor. The
Coinstar unit is highly accurate, durable, easy to use and service, and capable
of processing up to 600 coins per minute. The counter detects foreign coins,
slugs, debris and damaged coins and directs the coins processed to collection
trolleys located inside the Coinstar unit. The Company's proprietary advances
relating to certain aspects of coin processing enable the Coinstar unit to
handle moisture, dirt, lint, and other debris with infrequent clogging or
malfunctioning, important features for operating in a self-service environment.
In October 1996 and April 1997, the Company was issued United
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States patents relating to removing debris from coins processed in a
self-service environment and other aspects of self-service coin processing.
These patents will expire in October 2013 and April 2014, respectively.
Sufficient debris removal is important to reducing clogging and malfunctioning.
Reducing these problems and the associated downtime improves unit availability
for customer use and reduces the amount of time that Company or retail
distribution partner personnel must spend attending to the unit, both of which
are important features of operating in a self-service environment.
The Coinstar unit is controlled by an internal computer that runs a
multi-tasking operating system. In addition to controlling and coordinating
Coinstar unit functions, the computer electronically records nearly all aspects
of the unit's operation. The unit electronically logs extensive transaction
information such as a unique transaction number, the dollar amount, time and
duration of each transaction, the numbers of each type of coin processed and the
number of rejected coins. Aggregate log information is transmitted daily over
the Company's wide-area communications network to the Company's headquarters for
analysis and backup.
The Coinstar unit is also equipped with a telephone handset that enables
supermarket personnel to connect directly to the Coinstar Customer Service
Center via a toll free number, providing store personnel direct support in the
event assistance is required.
NETWORK SYSTEM AND TECHNOLOGY
The Company believes that the availability of current performance,
configuration, and financial data through the wide-area communications network
is critical to providing high availability of the Coinstar units, maintaining a
high level of customer service, and managing direct operating costs. The Company
also believes the establishment and development of the network functions are a
significant barrier to entry for competitors. The Company believes that the
following benefits resulting from the network and associated features enable the
Company to provide a higher level of service at a lower cost than a traditional
reactive, dispatch-oriented service organization:
- DOWNLOADABLE SOFTWARE PROGRAMS AND SYSTEMS ENHANCEMENTS. The two-way
network permits headquarters to send information to each Coinstar unit,
customized to the unit's location, including new graphics, animations,
sounds and voucher designs. This capability permits the Company to promote
the use of the service through store-specific advertising, on-screen
promotions, special offers, sweepstakes and coupons. In addition, the
network is used to download new versions of application and operating
system software from headquarters to the units in the field, and effect
other configuration changes electronically, avoiding on-site visits by
Company personnel.
- UNIT OPERATING PERFORMANCE REPORTING. Each Coinstar unit generates daily
performance and operating reports that are transmitted over the network to
headquarters for consolidation and then electronically distributed via the
network to the responsible field service employee. In addition, the
Coinstar unit provides specific service information to the responsible
field employee by directly paging the employee with current operating
information based on a series of predetermined performance criteria. The
Company's personnel use this unit performance information to make
proactive decisions to service each Coinstar unit in advance, such as
determining when a preventative maintenance is required or identifying the
specific maintenance or repairs needed.
- ENHANCEMENT OF FIELD SERVICE PRODUCTIVITY. Performance and operating
reports generated by the network are also used to better utilize field
service and armored carrier personnel. As part of the daily performance
and operating reports sent over the network, each Coinstar unit reports
its fill status and predicts, based on a number of factors, when it will
become full. This information is used by the Company to manage the
efficiency of armored carrier pickups and reduce downtime resulting from
full Coinstar units.
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- FINANCIAL REPORTING AND RECONCILIATION. The network allows Coinstar units
to transmit key financial data and operating statistics to headquarters on
a daily basis. The financial and accounting information generated by the
Coinstar units is cross-checked at the Company's headquarters with bank
records and armored carrier processing data logged into the network to
ensure the accuracy, speed and control of each deposit. The Company also
balances the coin counts verified by armored carriers against the coin
counts declared by the Coinstar unit on a bin-by-bin basis, all of which
information is available from the network. In addition, retail
distribution partners receive weekly automated facsimile reports generated
by the network detailing information such as transaction volumes and
deposits made for each store.
- AUTOMATED TRACKING OF COIN COLLECTION, PROCESSING AND DEPOSITS. The
Company is expanding the Company's wide-area communications network to
provide information to, and gather information from, each of the Company's
armored carrier partners by deploying a proprietary automatic receipt
tracking system ("ARTS"). The addition of ARTS to the Coinstar network
enables the Company to track each deposit to the respective bank accounts
of the retail distribution partners and the Company.
The wide-area and local area networks at the Company's headquarters are
coupled securely using sophisticated modern networking equipment. These
scaleable networks are integrated using standard tcp/ ip networking protocols
over a 100 Mbps backbone which features automatic segmentation and secure
subnets via firewall and intelligent ethernet switch technology. Headquarters
components of the network operate on widely available personal computers with
advanced reliability features including RAID-5 storage, multi-processor
configurations and clustering. The Company has built an extensive and secure
intranet on top of this physical infrastructure using standard client/server
tools provided by leading industry vendors. The client/server applications
leverage both traditional high performance relational database management
systems technology as well as novel, more flexible, discussion-oriented database
technology. Certain data processing activities occur at the Coinstar unit during
off-peak hours, distributing the processing load from headquarters and allowing
the network of Coinstar units to grow faster than the corresponding headquarters
system capacities. In the event of a network failure, however, availability of
the Coinstar units and related field service would be negatively impacted until
such failure was repaired, and a continued failure for a sustained period could
have a material adverse effect on the Company's business, financial condition
and results of operations and on the Company's ability to achieve sufficient
cash flow to service its indebtedness. See "Risk Factors--Risks of Defects in
Operating Systems."
REGIONAL FIELD SERVICE ORGANIZATION
The Company has assembled a regional field service organization comprised of
approximately 145 field service personnel and supporting employees with the
primary goal of providing highly responsive service to its retail distribution
partners. The field service organization is responsible for performing
preventative maintenance and repairs and ensuring the efficient collection and
handling of coins.
FIELD SERVICE PERSONNEL. In all markets in which the Company operates, the
field service employee is the Company's primary direct contact with consumers
and retail distribution partners. Every member of the field service team is
connected to the wide-area communications network. Each Coinstar unit generates
daily performance and operating reports which are transmitted over the network
to headquarters for consolidation and then electronically distributed via the
network to the responsible field service employee. In addition, the Coinstar
unit provides specific service information to the responsible field service
employee by directly paging such employee with current operating information
based on a series of predetermined performance criteria. If a site visit is
required, the field service employee responds on location, often before store
personnel at the site become aware of a problem. Such current operating
information is intended to allow Coinstar personnel to use this unit performance
information to make proactive decisions when maintaining the network of Coinstar
units. The most common problems,
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however, involve simple coin jams, most of which can be readily fixed by the
store manager. More difficult problems are handled by Coinstar field service
personnel.
ARMORED CARRIERS. The Company contracts with armored carrier companies to
handle the transportation and processing of coins deposited in Coinstar units.
The armored carriers are part of the traditional money handling infrastructure
and secure liability and loss insurance to protect the value of the coins
handled by them. The use of these contracted resources facilitates Coinstar's
growth and security with minimal investment in facilities and equipment when
entering new markets. The armored carrier service typically includes removing
the coin trolleys, tagging them for deposit, cleaning of the Coinstar unit,
transporting the coins for processing at the armored carrier's facilities, and
depositing the coins to the Company's local depository for subsequent transfer
to the respective bank accounts of the retail distribution partners and the
Company. The frequency of coin collections by armored carriers is determined by
machine usage and are monitored through the network. By leveraging its wide-area
communications network capabilities with its armored carrier service partners
through ARTS, the Company can efficiently monitor every step of the coin
collection and deposit process and manage the variable costs of pickups.
Generally, the Company contracts with one armored carrier to service a
particular region. Many of these carriers do not have long-standing
relationships with the Company and these contracts generally can be terminated
by either party with advance notice ranging from 30 to 90 days. In the past, the
Company has experienced a sudden disruption in service from an armored carrier
company. The Company does not currently have nor does it expect to have in the
foreseeable future the internal capability to provide back up service in the
event of sudden disruption in service from an armored carrier company. Any
failure by the Company to maintain its existing relationships or to establish
new relationships on a timely basis or on acceptable terms would have a material
adverse effect on the Company's business, financial condition and results of
operations and on the Company's ability to achieve sufficient cash flow to
service its indebtedness. See "Risk Factors--Reliance on Third Party
Manufacturer and Service Providers."
INSTALLATION PERSONNEL. The ability to quickly and reliably perform
large-scale installations of Coinstar units with minimum impact on store
operations is important to building a nationwide network. Each installation is
managed by an individual account manager. For a typical installation, a sales
operations representative visits the store prior to the delivery of the Coinstar
unit to coordinate with the store manager regarding the location of the Coinstar
unit within the store and to review site requirements. Site requirements are
generally limited to a 110 volt outlet and a telephone line. On the day of
delivery, a Coinstar field service employee unpacks, levels and calibrates the
unit and conducts a training and orientation session for store personnel.
The reliability of the Coinstar unit and the utilization of the
communications network, in conjunction with the support of the Company's
regional field service organization, have resulted in median availability of
units in operation of over 98%.
The Company's Coinstar units, first test marketed in 1993, were in operation
in 68 supermarket chains, 6 financial institutions and 2 mass merchants in 40
regional markets across the United States as of December 31, 1997. The following
table sets forth key data which highlight the Company's growth:
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YEAR ENDED DECEMBER 31,
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1993 1994 1995 1996 1997
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Installed base of Coinstar units at end of period........... 17 48 263 1,501 3,204
Number of regional markets.................................. 2 4 11 23 40
Number of full time employees............................... 15 35 56 160 273
Dollar value of coins processed (in thousands).............. $ 74 $ 5,245 $ 17,701 $ 115,476 $ 332,526
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SALES AND MARKETING
The Company's current sales and marketing efforts are focused on expanding
the Coinstar network within the United States and generating higher coin volumes
for each Coinstar unit. The Company's retail distribution partner marketing
strategy is to significantly increase its penetration with existing retail
distribution partners as well as to establish relationships with new retail
distribution partners in the 100 largest DMAs. The Company's consumer marketing
strategy highlights the core benefits to consumers, which the Company believes
are convenience and increased disposable income, to help build market awareness
and increase consumer usage.
MARKETING TO RETAIL DISTRIBUTION PARTNERS
The Company's retail development group is responsible for increasing the
installed base of Coinstar units within retail chains in the 100 largest DMAs.
Since the Coinstar service combines many aspects of the marketing, advertising,
accounting and operations of potential retail distribution partners, sales calls
can be made at the corporate, regional and store level of retail chains in each
DMA. Entry and expansion within a chain is frequently accomplished through a two
stage process, whereby a chain places a limited number of Coinstar units in its
stores for an evaluation period, after which it decides whether to commit to
chain-wide expansion. When marketing to supermarkets, the Company highlights the
following key benefits of its service:
- ENHANCES CUSTOMER SERVICE. Supermarket retailing is a highly competitive
business with low margin, high volume unit economics that demands tight
expense control. As a result, supermarkets continuously pursue cost
savings initiatives and customer service opportunities to encourage
shopper loyalty and attract new shoppers. The Coinstar unit enables
supermarkets to provide a convenient service to their customers using
minimal store space, while incurring virtually no additional cost.
- INCREASES STORE TRAFFIC. The Company believes that installation of the
Coinstar unit helps to increase store traffic. A market study conducted in
1995 by Griggs & Anderson Research, an independent market research firm
hired by the Company, indicated that 33% of the Coinstar unit users were
not in the store in which they normally shop. A survey conducted in 1996
by Northwest Research Group indicated that 87% of the respondents stated
that they would visit another store to use the Coinstar unit if it were
not installed in the store they regularly visit.
- PROMOTES SALES. The Company believes that installation of the Coinstar
unit can promote sales for its retail distribution partners by putting new
disposable income in shoppers' hands while they are in the store. Coinstar
customers are more likely to make a purchase in the store because they
generally must redeem their vouchers at a check-out counter. The Company's
market study indicated that 77% of customers spent some or all of their
voucher in the store. Moreover, the study indicated that, of the Coinstar
users who were not in the store in which they usually shop, 79% made
purchases in that store. Based upon a more recent study, on average, a
typical customer spends approximately 35% of their voucher in the store.
This first opportunity at new "found" money provides supermarkets with an
increased opportunity of generating incremental sales.
- GENERATES MEDIA COVERAGE. In order to increase awareness of the Coinstar
unit and the supermarkets in which they are located, the Company usually
launches a public relations effort in a new region or for a new
supermarket partner, including coverage by the mass media, in-store
merchandising, demonstrations and co-operative advertising.
Generally, the Company enters into 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. The Company
and the retail distribution partner may also agree to certain marketing
arrangements, such as promotional and public relations activities and
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advertising. In addition, Coinstar units in service in several supermarket
chains account for a significant portion of the Company's revenue. In the year
ended December 31, 1997, Coinstar units in service in two supermarket chains
accounted for approximately 42.8% of the Company's revenue. The units in service
in these two chains, Fred Meyer, Inc., which includes Cala Co., Food 4 Less
Supermarkets, Inc., Hughes Markets, Inc., Quality Food Centers, Inc., Ralphs
Grocery Co. and Smith's Food and Drug, some of which were acquired by Fred
Meyer, Inc. subsequent to December 31, 1997 ("Fred Meyer") and The Kroger Co.
("Kroger"), accounted for approximately 25.6% and 17.2%, respectively, of the
Company's revenue in the year ended December 31, 1997. The termination of any
one or more of the Company's contracts with its retail distribution partners
could have a material adverse effect on the Company's business, financial
condition and results of operations and on its ability to achieve sufficient
cash flow to service its indebtedness. See "Risk Factors--Fluctuations in
Quarterly Operating Results" and "Risk Factors-- Possible Termination of Retail
Distribution Partner Agreements."
MARKETING TO CONSUMERS
Since the Company offers a new consumer service, an important element of its
marketing strategy is to increase overall consumer awareness of the benefits of
the service. Independent market research conducted in a sample of installed
regions in October 1996 indicates that a majority of the consumers questioned
were unaware of the Coinstar service. To promote consumer awareness, the Company
is implementing an aggressive awareness-building campaign that it believes will
further increase dollar volumes processed by the Coinstar units.
The Coinstar unit has been designed to be prominently branded, highly
identifiable, easily recognized and capable of self promotion to consumers. The
Coinstar unit is generally located near the primary entrance areas of its retail
distribution partners and in clear view of the check-out counters or service
centers. The Company is continually developing additional techniques such as the
use of sound and animation that, when added to the Coinstar unit, are intended
to attract consumers and stimulate awareness and trial.
The Company markets to its supermarket partners' existing customer base by
communicating through advertising media already used by such supermarket
partners, such as cooperative newspaper advertisements and direct mail
circulars, window signs, bag stuffers or printed bags, shelf talkers, in-store
demonstrations and other merchandising aids.
The Company also promotes the Coinstar unit to consumers in general by media
which include the use of free-standing newspaper advertisements, billboards,
radio and television commercials, targeted mailings and door-hangers. The
Company plans to continue to capitalize on its promotional opportunities as it
enters new markets and expands into existing markets with new or existing retail
distribution partners. The Company has generally found local, regional and
national press to be receptive to the Coinstar service and willing to devote
space and/or air time to communicate the Company's message.
The Company is also developing other programs designed to increase the
breadth and volume of consumer usage. In May 1997, the Company began a
philanthropic service program in the western region of the State of Washington
that the Company believes provides non-profit organizations with a cost-
effective means of raising money. Beginning in October 1997, the Company ran a
similar network-wide three-month pilot program with the United Nations
Children's Fund (UNICEF). These new philanthropic service programs enable
non-profit organizations to be designated by the customer as recipients of the
dollar value of coins processed by the Coinstar unit. These programs provide
consumers with a simple means for making tax-deductible donations. Instead of
receiving a voucher to be redeemed at the retail distribution partner's
check-out counter, the consumer receives a printed receipt evidencing the value
of their donation. The Company has modified the functionality of the Coinstar
unit so that consumers can designate the full value of their processed coins to
a participating organization. The Company and the participating organizations
conduct joint promotional marketing for the new service. The organizations pay
the Company a fee based on the amount of money raised through this new service
that is significantly less,
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in general, than the amount these organizations would otherwise spend to raise
funds. See "Risk Factors-- Dependence on Continued Market Acceptance by
Consumers and Retail Distribution Partners."
PRODUCT RESEARCH AND DEVELOPMENT
The Company has increased its product research and development efforts over
the past several years and expects to continue to spend a significant portion of
its resources on these activities in the foreseeable future. The Company spent
approximately $6.4 million, $4.0 million and $1.8 million for technology,
product and market research and development in 1997, 1996 and 1995,
respectively. The Company presently employs approximately 40 software engineers,
information technology specialists and other professional staff in these efforts
and contracts with a number of specialized outside consultants for additional
services. The main focus of the Company's product research and development
efforts includes improvements to the operating systems and enhancements to the
network to support both the continued expansion of the network and the potential
addition of value-added services. See "Risk Factors--Rapid Technological
Change."
MANUFACTURING AND SUPPLY
The Company's manufacturing strategy is to utilize leading manufacturers to
produce Coinstar units at a reasonable cost. The Company believes that using
contract manufacturers has several advantages including decreasing capital
investment in plant and equipment and working capital, the ability to leverage
contract manufacturers' purchasing relationships for lower material costs,
minimal fixed costs of maintaining unused manufacturing capacity, greater
capacity flexibility and the ability to utilize suppliers' broad technical and
process expertise. Currently, the Coinstar units are assembled under contract
with a contract manufacturer in Redmond, Washington, which utilizes several
subsuppliers to provide components and subassemblies. Each Coinstar unit is
manufactured to the Company's proprietary designs and specifications, and all
designs, documentation, tooling, specialized fixtures and test equipment are
owned by the Company. Each unit is inspected and tested for quality by Company
personnel prior to shipment.
The Company does not conduct manufacturing operations and is dependent and
will continue to be dependent on outside parties for the manufacture of the
Coinstar unit and its key components. While Coinstar intends to significantly
expand its installed base, such expansion may be constrained by the
manufacturing capacity of its third party manufacturers and suppliers. Although
the Company expects that its current contract manufacturer, SeaMed Corporation
("SeaMed"), will be able to produce sufficient units to meet projected demand,
there can be no assurance that SeaMed or other manufacturers will be able to
meet the Company's manufacturing needs in a satisfactory and timely manner. In
the event of an unanticipated increase in demand for Coinstar unit installations
by retail distribution partners, the Company may be unable to meet such demand
due to manufacturing constraints. Although the Company has a contract with
SeaMed, it does not have a long-term obligation to continue the manufacture of
the Coinstar unit or its components. Further, SeaMed is principally engaged in
the manufacture of electronic medical instruments for medical technology
companies. The Company believes that it is SeaMed's only material non-medical
customer. As such, the Company faces an increased risk that SeaMed may choose to
focus exclusively on manufacturing its medical products and cease making the
Company's products. Should SeaMed cease providing services, the Company would be
required to locate and qualify additional suppliers. There can be no assurance
that the Company would be able to locate alternate manufacturers on a timely
basis. See "Risk Factors--Reliance on Third-Party Manufacturers and Service
Providers."
The Company has invented and intends to introduce new proprietary coin
counting technology that is capable of being used in the Coinstar units. The new
coin counting components will be manufactured by SeaMed (see the preceding
paragraph for a discussion of risks associated with third party manufacturers.
The Company currently purchases the coin counter component of the Coinstar unit
solely from Scan Coin AB ("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
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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. Moreover, the Company continues to install
Scan Coin supplied coin counters in its units, and will continue to do so until
the commercial deployment of Coinstar units with the Company's new coin counting
technology. 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.
Currently, only Scan Coin supplied coin counter devices are installed in
commercially deployed Coinstar units. Replacement parts for the coin counter
devices installed in these units are supplied by Scan Coin. 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 replacement 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--Introduction of New Coin Counting Technology" and "Risk Factors--
Reliance on Third Party Manufacturer and Service Providers."
PROPRIETARY RIGHTS
The Company has made several technological advances relating to self-service
coin processing that are important to the successful operation of the Coinstar
unit in a self-service environment. These advancements are implemented both
mechanically and through the Company's software. These technologies enable the
Coinstar unit to handle moisture, dust, lint, dirt, paper, paper clips, and
other debris with infrequent clogging or malfunctioning. In October 1996 and
April 1997, the Company was issued United
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States patents relating to removing debris from coins processed in a
self-service environment and other aspects of self-service coin processing.
These patents will expire in October 2013 and April 2014, respectively.
Sufficient debris removal is important to reduce clogging and malfunctioning.
Reducing these problems and the associated downtime improves the unit
availability for customer use and reduces the amount of time that Company or
retail partner personnel must spend attending to the unit, both of which are
important features of operating in a self-service environment. The Coinstar unit
also has a unique printed circuit board which contains a non-volatile memory for
data storage purposes. This board stores records of transactions and other
significant events which can be recovered in the event of a main CPU or hard
disk failure. This board also supports downloadable code to facilitate software
modification.
No assurance can be given that any patents will be issued 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 claims 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 of found to be invalid. See "Risk Factors--Uncertainty of
Protection of Patents and Proprietary Rights."
COMPETITION
The Company believes that it is the first company to provide a widespread
network of self-service coin processing machines that provides 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 increased 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 or 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. Moreover,
the Company may face direct competition from Scan Coin, or other third parties
to whom Scan Coin may sell its coin counting device. There can be no assurance
that the
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<PAGE>
Company will be able to compete effectively with current or future competitors
or that the competitive pressures faced by the Company will not have a material
adverse effect on the Company's business, financial condition and results of
operations and the Company's ability to achieve sufficient cash flow to service
its indebtedness.
The Company believes its proprietary and patented advances relating to self-
service coin processing, its ability to collect and analyze operating and
financial statistics from Coinstar units through its wide-area communications
network, its installed base of units in supermarkets nationwide and its
dedicated regional field service organization are its principal competitive
strengths. 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 not competitive. See "Risk
Factors--Competition."
EMPLOYEES
As of December 31, 1997, the Company had 313 employees, including 40
part-time employees. The Company has separate internal departments, including
sales and marketing, operations, technology systems and engineering, and finance
and administration. No employee is represented by a union, and the Company has
not experienced a work stoppage. The Company believes its employee relations are
good.
EXECUTIVE OFFICERS
The executive officers of the Company, and their ages as of February 27,
1998 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Jens H. Molbak....................................... 35 President, Chief Executive Officer and Director
Rod W. Brooks........................................ 44 Vice President of Sales and Marketing
Kirk A. Collamer..................................... 45 Vice President and Chief Financial Officer
Aaron R. Finch (1)................................... 39 Vice President of Operations
Daniel A. Gerrity.................................... 36 Vice President and Chief Technical Officer
Michael W. Parks (2)................................. 50 Vice President of Field Operations
</TABLE>
- ------------------------
(1) In October 1997, Mr. Finch informed the Company of his intention to resign
as the Company's Vice President of Operations effective April 2, 1998.
(2) Mr. Parks was elected an executive officer effective February 1, 1998.
EXECUTIVE OFFICERS
JENS H. MOLBAK, the Company's President, Chief Executive Officer and a
director, founded the Company in 1990. Prior to that he served two years as an
analyst at Morgan Stanley & Co., Inc., an investment bank. Mr. Molbak earned his
M.B.A. from Stanford University Graduate School of Business and his B.A. in
Psychobiology from Yale University.
ROD W. BROOKS, the Company's Vice President of Sales and Marketing, joined
the Company in July 1995. From June 1993 until July 1995, he was the Vice
President of Marketing, Consumer Produce Division at Novell, Inc., a computer
networking company. From June 1989 until March 1993, Mr. Brooks served as the
Senior Vice President, Marketing and Merchandising for Egghead, Inc., a software
retailer ("Egghead"). Mr. Brooks has also held Vice President, Marketing
positions at Northern Automotive, Inc. and Quality Food Centers, Inc. Mr. Brooks
obtained his B.A. in Communications from Washington State University in 1975.
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<PAGE>
KIRK A. COLLAMER, the Company's Vice President and Chief Financial Officer,
joined the Company in February 1997. From March 1995 until February 1997, Mr.
Collamer served as the Chief Financial Officer of Muzak Limited Partnership, a
business music services provider. From April 1988 to March 1995, he served in
various capacities at Ameritech Corporation, a telecommunications company,
including serving as Vice President, Finance and Controller and Vice President
and Chief Financial Officer of two subsidiaries. Prior to that he served in
various finance positions at Brown-Forman Corp./Jack Daniel Distillery, a
producer of distilled spirits, and Aladdin Industries, Inc., a marketer of
consumer products. He has been a Certified Public Accountant since 1974 and was
previously employed by the public accounting firm of Arthur Andersen & Co. from
1974 until 1978. Mr. Collamer received his M.B.A. from Vanderbilt University and
his B.A. in Accounting from Michigan State University.
AARON R. FINCH, the Company's Vice President of Operations, joined the
Company in February 1993. Prior to joining the Company, Mr. Finch worked in the
Investment Evaluation Department at Weyerhaeuser Co., a forest products company,
from 1990 until February 1993. He obtained his M.B.A. from Stanford University
Graduate School of Business and his B.S. in Natural Resource Management from
Colorado State University.
DANIEL A. GERRITY, the Company's Vice President and Chief Technical Officer,
joined the Company in November 1993 after serving on the Company's Advisory
Board since 1990. Prior to joining the Company, Mr. Gerrity was an engineering
manager for Slate Corporation, an application software company, from 1990 until
November 1993. Mr. Gerrity earned his M.B.A. from Stanford University Graduate
School of Business, his M.S. in Computer Systems from Stanford University and
his B.S. in Electrical Engineering from Stanford University.
MICHAEL W. PARKS, the Company's Vice President of Field Operations joined
the Company in April 1994 as the Company's Director of Field Operations. From
September 1993 to April 1994, Mr. Parks served as President of Seriphus Group, a
consulting company he founded. From 1969 until August 1993, he served as Vice
President at Seafirst Bank where he helped develop and operate their debit card
program and automated teller machine systems. Mr. Parks is a graduate of the
Post-Graduate Level Banking Program at Pacific Coast Banking School at the
University of Washington and holds a B.A. from Central Washington University.
RISK FACTORS
THE FOLLOWING DISCUSSION IN THIS ANNUAL REPORT ON FORM 10-K CONTAINS
FORWARD-LOOKING STATEMENTS REGARDING THE COMPANY, ITS BUSINESS, PROSPECTS AND
RESULTS OF OPERATIONS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS THAT MAY BE ANTICIPATED BY SUCH
FORWARD-LOOKING STATEMENTS AND DISCUSSED ELSEWHERE 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 CAPTIONS "BUSINESS" AND
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" AS WELL AS THOSE DISCUSSED ELSEWHERE THROUGHOUT THIS ANNUAL REPORT
ON FORM 10-K. IN EVALUATING THE COMPANY'S BUSINESS, PROSPECTS AND RESULTS OF
OPERATIONS, READERS SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS IN ADDITION
TO OTHER INFORMATION PRESENTED IN THIS ANNUAL REPORT ON FORM 10-K AND IN THE
COMPANY'S OTHER REPORTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION THAT
ATTEMPT TO ADVISE INTERESTED PARTIES OF THE RISKS AND FACTORS THAT MAY AFFECT
THE COMPANY'S BUSINESS, PROSPECTS AND RESULTS OF OPERATIONS.
HISTORY OF SUSTAINED OPERATING LOSSES AND CONTINUATION OF SUCH LOSSES. The
Company has incurred substantial and increasing operating losses since inception
in 1991. The Company's net loss for 1995, 1996, and 1997 was $6.2 million, $16.0
million and $29.6 million, respectively. As of December 31, 1997, the Company
had an accumulated deficit of $58.4 million. Operating losses to date have
resulted primarily from expenses incurred in the development, marketing and
operation of the Coinstar units, development and maintenance of the network,
administrative and occupancy expenses at the Company's headquarters, and
depreciation and amortization. The Company expects to continue to incur
substantial and increasing
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<PAGE>
operating losses and negative cash flow from operating and investing activities
as it plans to significantly increase its installed base of Coinstar units. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
LIMITED OPERATING HISTORY. After several years of development, the Company
commenced commercial deployment of Coinstar units in 1994 and placed
approximately 92% of the installed base as of December 31, 1997 in service
during 1996 and 1997. Prospective investors, therefore, have limited historical
financial information on which to base an evaluation of the Company's
performance. The Company's prospects must be considered in light of the risks,
expenses and difficulties frequently encountered by companies in an early stage
of development, particularly companies in new or rapidly evolving markets. There
can be no assurance that the Company will install a sufficient number of its
Coinstar units or obtain sufficient market acceptance to allow the Company to
achieve or sustain profitability, or generate sufficient cash flow to meet the
Company's capital and operating expenses and debt service obligations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business."
UNCERTAINTY OF FUTURE OPERATING RESULTS. Substantially all of the Company's
revenue has been, and the Company believes will continue to be, derived from the
processing fees charged for the Company's coin processing service. Prior growth
rates in the Company's revenue should not be considered indicative of future
operating results. The timing and amount of future revenues will depend almost
entirely on the Company's ability to obtain new agreements with supermarket
chains and other potential retail distribution partners for the installation of
Coinstar units, the successful deployment and operation of the Company's coin
processing network, and customer utilization of the service. Future operating
results will depend upon many factors, including the Company's success in
deploying a substantial number of additional units, the consumer demand for the
Company's coin processing service, the level of product and price competition,
the Company's success in expanding its national network and managing the growth
of such network, the ability of the Company to develop and market product
enhancements, the timing of product enhancements, activities of and acquisitions
by competitors, the ability to hire additional employees and the timing of such
hiring and the ability to control costs. Fluctuations in the volume and value of
coins processed and the rate of unit installations have caused and may continue
to cause material fluctuations in the Company's operating results, particularly
on a quarterly basis. Quarterly revenue and operating results, therefore, depend
on the volume and mix of coins processed and the rate of unit installations
during the quarter, all of which are difficult to forecast. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business--Sales and Marketing."
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. The customer utilization of
the Company's coin processing service varies substantially from unit to unit,
making the Company's revenues difficult to forecast. Customer utilization is
affected by the timing and success of promotions by the Company and its retail
distribution partners, age of the installed unit, adverse weather conditions and
other factors, many of which are not in the Company's control. Based on its
limited operating history, the Company believes that coin processing volumes are
affected by seasonality; in particular the Company believes that on a relative
basis coin processing volumes have been lower in the months of January,
February, September and October. There can be no assurance, however, that such
seasonal trends will continue. Any projections of future seasonality are
inherently uncertain due to the Company's limited operating history, and due to
the lack of comparable companies engaged in the coin processing business. As a
result of these and other factors, revenue for any quarter is subject to
significant variation, and the Company believes that period-to-period
comparisons of its results of operations are not necessarily meaningful and
should not be relied upon as indications of future performance. Because the
Company's operating expenses are based on anticipated revenue trends and because
a large percentage of the Company's expenses are relatively fixed, revenue
variability could cause significant variations in operating results from quarter
to quarter and could result in significant losses. To the extent such expenses
precede, or are not subsequently followed by, increased revenue, the Company's
operating results would be materially adversely affected. Due to all of the
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<PAGE>
foregoing factors, it is likely that in some future quarter the Company's
operating results will be below the expectations of public market analysts and
investors. In such event, the price of the Company's Common Stock would likely
be materially adversely affected. Fluctuations in operating results may also
result in volatility in the price of the Company's Common Stock. See "Risk
Factors--Possible Termination of Retail Distribution Partner Agreements,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Sales and Marketing."
SUBSTANTIAL LEVERAGE AND ABILITY TO SERVICE DEBT. The Company had
outstanding indebtedness as of December 31, 1997 of $78.9 million, which
included $75.4 million of the Company's 13.0% Senior Subordinated Discount Notes
due 2006 (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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
COMPETITION. The Company believes that it is the first company to provide a
widespread network of self-service coin processing machines that provide a
convenient, reliable means for consumers to convert loose coins into cash. The
Company has become aware of two direct competitors that operate self-service
coin processing machines, both of which the Company believes operate an
installed base of less than 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
16
<PAGE>
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. There can be no assurance that the
Company will be able to compete effectively with current or future competitors
or that the competitive pressures faced by the Company will not have a material
adverse effect on the Company's business, financial condition and results of
operations and on its ability to achieve sufficient cash flow to service its
indebtedness. See "Business--Competition."
DEPENDENCE ON CONTINUED MARKET ACCEPTANCE BY CONSUMERS AND RETAIL
DISTRIBUTION PARTNERS. The Company is substantially dependent on continued
market acceptance of its coin processing service by consumers and its retail
distribution partners, which have been almost exclusively supermarket chains.
The self-service coin processing market is relatively new and evolving;
accordingly, it is difficult to predict the future growth rate and size of this
market. There can be no assurance that the Company will be successful in
achieving the large-scale adoption of its coin processing service. While the
Company's existing installed base of Coinstar units has been well received by
both retail distribution partners and customers to date, there can be no
assurance that the operating results of the installed units will continue to be
favorable or past results will be indicative of future market acceptance of the
Company's service. The Company believes that market acceptance of the Coinstar
unit is dependent on the consumer's perception that the units are convenient,
easy to use and reliable. Even if the Company is successful in promoting
awareness of the Coinstar unit among consumers, there can be no assurance that
such consumers will utilize the Coinstar units in sufficient volume to make the
Company profitable. In addition, market acceptance and ongoing use of the
Coinstar service may be adversely affected by the increasing use of alternatives
to coin and currency transactions such as credit and debit cards, checks, wire
transfers, smart cards and other forms of electronic payment. See
"Business--Sales and Marketing."
Market acceptance of the Coinstar units is also dependent on the willingness
of potential retail distribution partners to have the units installed in their
stores. The Company believes that market acceptance by potential retail
distribution partners will be dependent on its ability to demonstrate the
utility of the Coinstar unit as a customer service and as a means to provide
other tangible benefits, including increased customer traffic and the promotion
of store sales. There can be no assurance, however, that potential retail
distribution partners will be willing to place Coinstar units in their stores or
that, once installed, Coinstar units will obtain market acceptance from
consumers. Market acceptance and the Company's revenues may also be affected by
the availability and success of coin processing services offered by competitors.
In the event the Company's service does not achieve market acceptance or does so
less rapidly than expected or the Company's contracts with one or more of its
retail distribution partners is terminated, the Company and its results of
operations, including its ability to achieve sufficient cash flow to service its
indebtedness and achieve profitability, will be materially adversely affected.
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 year ended December 31, 1997, Coinstar units in
service in two supermarket chains accounted for approximately 42.8% of the
Company's revenue. The units in service in these two chains, Fred Meyer and
Kroger, accounted for approximately 25.6% and 17.2%, respectively, of the
Company's revenue in 1997. The termination of any one or more of the Company's
contracts with its retail distribution partners could have a material adverse
effect on the Company's business, financial condition, results of operations and
on its ability to achieve sufficient cash flow to service its indebtedness. See
"Business--Sales and Marketing."
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MANAGEMENT OF GROWTH. The Company has experienced rapid growth and intends
to continue to aggressively expand its operations. The growth in the size and
scale of the Company's business has placed and is expected to continue to place
significant demands on its operational, administrative and financial personnel
and operating systems. Additional planned expansion by the Company may further
strain management and other resources. The Company's ability to manage growth
effectively will depend on its ability to improve its operating systems, to
expand, train and manage its employee base and to develop additional
manufacturing and service capacity. In particular, the Company will be required
to rapidly expand its operating systems and processes in order to support the
projected installations of Coinstar units and the potential addition of
value-added services. Such expansion will require improvements to both hardware
and software and the hiring and training of additional software engineers. In
addition, the Company will be required to establish relationships with
additional third-party service providers. These demands, and others, will
require the addition of new management personnel and the development of
additional expertise by existing management personnel. There can be no assurance
that the Company will be able to effectively manage the expansion of its
operations, or that the Company's systems, procedures or controls will be
adequate to support the Company's operations or that Company management will be
able to achieve and manage the rapid roll-out currently projected. If the
Company is unable to manage growth effectively, the Company's business,
financial condition and results of operations and its ability to achieve
sufficient cash flow to service its indebtedness will be materially adversely
affected. See "Business."
DEPENDENCE ON A SINGLE SERVICE. The Company has and expects for the
foreseeable future to derive substantially all of its revenues from the
operation of Coinstar units. Accordingly, market acceptance of the Company's
coin processing service is critical to the Company's future success. Since there
is only a limited existing market for the Company's coin processing service,
there can be no assurance that an acceptable level of demand will be achieved or
sustained. If sufficient demand for the Company's coin processing service does
not develop due to lack of market acceptance, technological change, competition
or other factors, the Company's business, financial condition and results of
operations and its ability to achieve sufficient cash flow to service its
indebtedness will be materially adversely affected. See "Risk Factors--
Dependence on Continued Market Acceptance By Consumers and Retail Distribution
Partners" and "Business--Sales and Marketing."
INTRODUCTION OF NEW COIN COUNTING TECHNOLOGY. The Company has invented and
intends to introduce new proprietary coin counting technology that is capable of
being used in the Coinstar units. The new coin counting components will be
manufactured by SeaMed. See "Risk Factors--Reliance on Third Party Manufacturer
and Service Providers." The Company currently purchases the coin counter
component 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. Moreover, the Company continues to install
Scan Coin supplied coin counters in its units, and will continue to do so until
the commercial deployment of Coinstar units with the Company's
18
<PAGE>
new coin counting technology. 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.
Currently, only Scan Coin supplied coin counter devices are installed in
commercially deployed Coinstar units. Replacement parts for the coin counter
devices installed in these units are supplied by Scan Coin. 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
"Business--Manufacturing and Supply" and "Risk Factors--Reliance on Third-Party
Manufacturer 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
19
<PAGE>
business, financial condition and results of operation and its ability to
achieve sufficient cash flow to service its indebtedness will be materially
adversely affected. See "Business--Manufacturing and Supply."
The Company relies on third-party service providers for substantial support
and service efforts that the Company currently does not provide directly. In
particular, the Company contracts with armored carriers to arrange for the
pick-up, processing and deposit of coins. The Company generally contracts with
one armored carrier to service a particular region. Many of these carriers do
not have long-standing relationships with the Company and these contracts
generally can be terminated by either party with advance notice ranging from 30
to 90 days. In the past, the Company has experienced a sudden disruption in
service from an armored carrier company. The Company does not currently have nor
does it expect to have in the foreseeable future the internal capability to
provide back up service in the event of sudden disruption in service from an
armored carrier company. Any failure by the Company to maintain its existing
relationships or to establish new relationships on a timely basis or on
acceptable terms would have a material adverse effect on the Company's business,
financial condition and results of operations and on its ability to achieve
sufficient cash flow to service its indebtedness. Moreover, as with any business
that handles large volumes of cash, the Company is susceptible to theft,
counterfeit and other forms of fraud, including security breaches of the
Company's computing system that performs important accounting functions. There
can be no assurance that the Company will be successful in developing product
enhancements and new services to thwart such attempts. See "Business--The
Coinstar System."
RISK OF DEFECTS IN OPERATING SYSTEMS. The Company collects financial and
operating data and monitors unit performance through a wide-area communications
network connecting each of the Coinstar units with a central computing system
located at the Company's headquarters. This information is used to track the
flow of coins, verify coin counts and schedule and dispatch unit service. The
operation of the Coinstar units depends on sophisticated software, computing
systems and communications services that may contain undetected errors or are
subject to failures. These errors and failures may arise particularly when new
services or service enhancements are added or when the volume of services
provided increases. Although each unit is designed to store all data collected,
helping to ensure critical data is not lost due to an operating systems failure,
the inability of the Company to collect the data from its units could lead to a
delay in processing coins and crediting the accounts of its 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. See "Business--The Coinstar System."
20
<PAGE>
DEPENDENCE ON KEY PERSONNEL AND NEED TO HIRE ADDITIONAL PERSONNEL. The
Company's performance is substantially dependent on the performance of its
executive officers and key employees and its long term success will depend on
its ability to recruit, retain and motivate highly skilled personnel. Jens H.
Molbak, President and Chief Executive Officer, Rod W. Brooks, Vice President of
Sales and Marketing, Aaron R. Finch, Vice President of Operations, and Daniel A.
Gerrity, Vice President and Chief Technical Officer, have been primarily
responsible for the development and expansion of the Company's business. In
1997, the Company hired Kirk A. Collamer as Vice President and Chief Financial
Officer. All of the Company's executive officers and employees are employed on
an at-will basis. The loss of the services of any of these executive officers or
other key employees or the inability to attract and retain necessary technical
and managerial personnel could have a material adverse effect upon the Company's
business, financial condition and results of operation and on its ability to
achieve sufficient cash flow to service its indebtedness. Presently, the Company
maintains a "key man" life insurance policy on Mr. Molbak in the amount of $2.0
million. See "Management."
UNCERTAINTY OF PROTECTION OF PATENTS AND PROPRIETARY RIGHTS. The Company's
future success depends, in part, on its ability to protect its intellectual
property and maintain the proprietary nature of its technology through a
combination of patents, licenses and other intellectual property arrangements,
without infringing the proprietary rights of third parties. In October 1996 and
April 1997, the Company was issued United States patents relating to removing
debris from coins processed in a self-service environment and other aspects of
self-service coin processing. These patents will expire in October 2013 and
April 2014, respectively. Sufficient debris removal is important to reducing
clogging and malfunctioning. Reducing these problems and the associated downtime
improves unit availability for customer use and reduces the amount of time that
Company or retail 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
21
<PAGE>
distribution partners against any such claims, regardless of the merits of such
claims. Parties making such claims may be able to obtain injunctive or other
equitable relief which could effectively block the Company's ability to provide
its coin processing service and use the processing equipment in the United
States and abroad, and could result in an award of substantial damages. In the
event of a successful claim of infringement, the Company may need or be required
to obtain one or more licenses from, and/or grant one or more licenses to,
others. There can be no assurance that the Company could obtain necessary
licenses from others at a reasonable cost or at all. The defense of any lawsuit
could result in time-consuming and expensive litigation, damages, license fees,
royalty payments, diversion of the attention of key personnel and restrictions
on or the termination of the Company's ability to provide its coin processing
service and use the processing equipment, any of which could have a material
adverse effect on the Company's business, financial condition and results of
operations and on its ability to achieve sufficient cash flow to service its
indebtedness. The Company also relies on trade secrets to develop and maintain
its competitive position. Although the Company protects its proprietary
technology in part by confidentiality agreements with its employees, consultants
and corporate partners, there can be no assurance that these agreements will not
be breached, that the Company will have adequate remedies for any breach or that
the Company's trade secrets will not otherwise become known or be discovered
independently by its competitors. See "Business--Proprietary Rights."
RAPID TECHNOLOGICAL CHANGE. The self-service coin processing market is
relatively new and evolving. As such, the Company anticipates that, as the
market matures, it will be subject to technological change, new services and
product enhancements, particularly as the Company expands its service offerings.
Accordingly, the Company's success may depend in part upon its ability to
develop product enhancements and new services that keep pace with continuing
changes in technology and consumer preferences while remaining price
competitive. There can be no assurance, however, that the Company would be
successful in developing such product enhancements or new services, that it will
be able to introduce such products or services on a timely basis or that any
such product enhancements or new services will be successful in the marketplace.
The Company's failure to develop technological improvements or to adapt its
products and services to technological change on a timely basis could, over
time, have a material adverse effect on the Company's business, financial
condition and results of operations and on its ability to achieve sufficient
cash flow to service its indebtedness. See "Business--Product Research and
Development."
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.
See "Risk Factors--Possible Termination of Retail Distribution Partners
Agreements," "Risk Factors--Dependence on Continued Market Acceptance By
Consumers and Retail Distribution Partners" and "Risk Factors--Fluctuations in
Quarterly Operating Results."
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
22
<PAGE>
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 to service its indebtedness.
ITEM 2. PROPERTIES
The Company's headquarters occupies a 46,070 square foot facility in
Bellevue, Washington. The Company operates under a lease which expires in August
2004. The Company also leases a 10,196 square foot facility in Bellevue,
Washington under a lease which expires in March 2002. This space is currently
under a sublease agreement to a third party. The sublease expires January 31,
2000. The Company believes this space is adequate for its current needs and that
it will be able to renew its leases and obtain additional space, if necessary.
ITEM 3. LEGAL PROCEEDINGS
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 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1997.
23
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol "CSTR." The following table sets forth the high and low closing prices as
reported by Nasdaq for the Common Stock of the Company since the initial public
offering for the quarters ended as follows. Such quotations represent
inter-dealer prices without retail markup, markdown or commission and may not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
Fiscal 1997:
Third Quarter (beginning July 3, 1997)......................................................... $ 14.125 $ 9.85
Fourth Quarter................................................................................. 12.875 8.063
</TABLE>
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 $3,130,306, of which $1,957,125
represented underwriting discounts and commissions and $1,173,181 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 $28,369,694.
The Company has not used any of the net proceeds from the offering. All net
proceeds have been invested in short term securities. The use of the proceeds
from the offering does not represent a material change in the use of proceeds
described in the prospectus included as part of the Registration Statement.
As of December 31, 1997, there were approximately 202 registered holders of
the Company's Common Stock which number does not include the number of
stockholders whose shares are held of record by a brokerage house or clearing
agency but does include such brokerage house or clearing agency as one record
holder. The Company believes its has excess of 1,000 beneficial holders..
The Company has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain any future earnings to finance
the growth and development of its business and therefore doers not anticipate
paying any cash dividends in the foreseeable future. In addition, the Company's
Indenture governing the Notes restricts the Company's ability to pay dividends.
24
<PAGE>
ITEM 6. SELECTED FINANCIAL AND OTHER DATA
The following selected financial data is qualified by reference to, and
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Financial Statements of
the Company and related Notes thereto included elsewhere in this Annual Report
on Form 10-K.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993(1)
--------- --------- --------- --------- -----------
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT
DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue........................................................... $ 25,007 $ 8,312 $ 1,063 $ 325 $ 15
Expenses:
Direct operating................................................ 17,899 7,258 1,336 488 45
Regional sales and marketing.................................... 3,088 1,505 349 86 3
Product research and development................................ 6,362 3,969 1,830 1,648 1,368
Selling, general and administrative............................. 11,079 5,351 2,790 1,716 402
Depreciation and amortization................................... 8,679 4,135 1,117 440 40
--------- --------- --------- --------- -----------
Loss from operations.............................................. (22,100) (13,906) (6,359) (4,053) (1,843)
Other income (expense)
Interest income................................................. 2,329 848 398 34 29
Interest expense................................................ (9,822) (2,661) (208) (297) --
--------- --------- --------- --------- -----------
Net loss before extraordinary item................................ (29,593) (15,719) (6,169) (4,316) (1,814)
Extraordinary item--loss related to early retirement of debt...... -- (248) -- -- --
--------- --------- --------- --------- -----------
Net loss.......................................................... $ (29,593) $ (15,967) $ (6,169) $ (4,316) $ (1,814)
--------- --------- --------- --------- -----------
Loss per share before extraordinary item, basic and diluted(2).... $ (3.81) $ (20.06) $ (8.23) $ (5.94) $ (2.50)
Extraordinary item per share, basic and diluted(2)................ -- (0.31) -- -- --
--------- --------- --------- --------- -----------
Loss per share, basic and diluted(2).............................. $ (3.81) $ (20.37) $ (8.23) $ (5.94) $ (2.50)
--------- --------- --------- --------- -----------
--------- --------- --------- --------- -----------
Weighted average shares outstanding (000's)(2).................... 7,761 784 750 726 726
OTHER DATA:
Number of new Coinstar units installed during the period.......... 1,703 1,238 215 31 13
Installed base of Coinstar units at end of the period............. 3,204 1,501 263 48 17
Number of regional markets........................................ 40 23 11 4 2
Dollar value of coins processed................................... $ 332,526 $ 115,476 $ 17,701 $ 5,245 $ 74
Capital expenditures.............................................. 29,768 20,820 3,823 2,163 620
Direct contribution (loss)(3)..................................... 7,108 1,054 (273) (163) (30)
Direct operating expense per average installed unit(4)............ 7,636 8,610 11,717 20,353 --
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments(5)............... $ 56,803 $ 56,310 $ 14,120 $ 1,343 $ 1,417
Total assets....................................................... 103,546 82,531 19,601 3,913 2,090
Total debt, including current portion.............................. 78,945 70,065 1,658 4,660 --
Mandatorily Redeemable Preferred Stock............................. -- 24,972 23,548 -- --
Paid in capital.................................................... 61,553 6,871 5,409 4,512 4,239
Total stockholders' equity (deficit)............................... $ 3,109 $ (21,976) $ (7,471) $ (2,224) $ 1,844
</TABLE>
- ------------------------
(1) Commercial deployment of the units did not commence until 1994; therefore,
certain information relating to 1993 is not meaningful.
(2) See Management's Discussion and Analysis "New Accounting Pronouncements" and
Note10 to Financial Statements for an explanation of the determination of
the number of shares used in computing loss per share information, basic and
diluted.
(3) 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.
(4) Based on monthly averages of units in operation over the applicable period.
(5) Cash, cash equivalents and short-term investments include funds in transit,
which represent amounts being processed by armored car carriers or residing
in Coinstar units, of $14.2 million, $5.5 million and $767,000 at December
31, 1997, 1996, and 1995, respectively. Funds in transit prior to such dates
are negligible.
25
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
FINANCIAL STATEMENTS AND RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS ANNUAL
REPORT ON FORM 10-K. EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE
FOLLOWING DISCUSSION IN THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES, SUCH AS THE COMPANY'S PLANS,
OBJECTIVES, EXPECTATIONS AND INTENTIONS. THE COMPANY'S ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM RESULTS THAT MAY BE ANTICIPATED BY SUCH FORWARD-LOOKING
STATEMENTS AND DISCUSSED ELSEWHERE HEREIN. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED
BELOW AS WELL AS THOSE DISCUSSED UNDER THE CAPTIONS "RISK FACTORS" AND
"BUSINESS" AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS ANNUAL REPORT ON FORM
10-K. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING
STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE OF THIS REPORT. THE COMPANY
UNDERTAKES NO OBLIGATION TO REVISE ANY FORWARD-LOOKING STATEMENTS IN ORDER TO
REFLECT EVENTS OR CIRCUMSTANCES THAT MAY SUBSEQUENTLY ARISE. 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 THAT 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
December 31, 1997 had an installed base of 3,204 units located in supermarkets,
financial institutions and mass merchants in 40 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 $58.4
million as of December 31,1997. The continued rapid expansion of its installed
base is expected to result in continued increases in the number of employees,
marketing and field service personnel expenses in new regions and general and
administrative expenses related to the ongoing development of information
systems to support future growth. Consequently, the Company expects to incur
increasing operating losses in the future. The Company has raised capital
through the private sale of equity, the sale of Notes in October 1996 for net
proceeds of $62.9 million and its initial public offering of 3,000,000 shares of
common stock for net proceeds of $28.4 million. To date, the Company has funded
its operating losses and capital expenditure requirements through the private
sale of equity and the sale of Notes. In connection with the debt financing in
October 1996, the Company began to prepare for accelerated future growth of its
installed base by increasing expenditures on its field service organization,
upgrading its systems engineering capabilities and developing and testing new
marketing and promotion programs designed to increase coin processing volumes.
The Company currently derives substantially all its revenues from coin
processing services generated by its installed base of Coinstar units located in
supermarket chains in 30 states across the country. The Company generates
revenues based on a processing fee, currently 7.5%, charged on the total dollar
amount of coins processed in a transaction. Prior to 1996 the Company's
processing fee was 10% on pennies and 5% on all other coins. Beginning in the
first quarter of 1996 the Company began charging a flat 7.5% fee on selected
units and converted all units to this new fee structure by the end of the second
quarter of 1996. Coin processing fee revenue is recognized at the time the
customers' coins are counted by the Coinstar unit. Overall revenue growth is
dependent on both the rate of new installations and the growth in coin
processing volumes of its installed base. The Company's experience to date is
that coin processing volumes per unit have generally increased with the length
of time the unit is in operation as
26
<PAGE>
awareness of the service increases, driving initial consumer trial and repeat
usage. 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 size of its installed base, the average revenue
per unit may decrease even as the per unit dollar volume of mature units
increases.
Direct operating expenses are comprised of the regional expenses associated
with Coinstar unit operations and support and consist primarily of coin pickup
and processing, field operations support and related expenses, and retail
operations support. Coin pickup and processing costs, which represent a major
portion of direct operating expenses, vary based on the level of total coin
processing volume and the density of the units within a region. The Company
believes that while coin pickup and processing costs are variable based on units
in service and coin volume generated, economies related to these direct expense
components can be achieved through increasing the density of units in operation
in regional markets. Field service operations and related expenses vary
depending on the number of geographic regions in which Coinstar units are
located and the density of the units within a region. Regional sales and
marketing expenses are comprised of ongoing marketing, advertising and public
relations efforts in existing market regions and startup marketing expenses
incurred to launch the Coinstar service in new regional markets. Product
research and development expense consists of the development costs of the
Coinstar unit software, network applications, Coinstar unit sustaining
engineering and new product development. Selling, general and administrative
expenses are comprised of management compensation, administrative support for
field operations, the customer service center, sales and marketing support,
systems and engineering support, corporate services, and accounting, human
resources and occupancy expenses. Depreciation and amortization consists
primarily of depreciation charges on Coinstar units and, to a lesser extent,
depreciation on furniture and fixtures, automobiles, computer equipment and
amortization of intangibles.
The Company expects to continue to evaluate new marketing and promotional
programs to increase the breadth and rate of customer utilization of its service
and to engage in systems and product research and development. The Company
intends to continue to invest in sales and marketing and product research and
development, which is expected to negatively impact its operating results. The
Company believes that its future revenue growth, operating margin gains and
profitability will be dependent upon the penetration of its installed base with
retail distribution partners in existing markets, expansion and penetration of
installations in new market regions and successful ongoing marketing and
promotional activities to sustain the growth in unit coin volume over time.
Given the Company's limited operating history, unpredictability of the timing of
installations with retail distribution partners and the resulting revenues, and
the continued market acceptance of the Company's service by consumers and retail
distribution partners, the Company's operating results for any quarter are
subject to significant variation, and the Company believes that period-to-period
comparisons of its results of operations are not necessarily meaningful and
should not be relied upon as indications of future performance. See "Risk
Factors--History of Sustained Operating Losses and Continuation of Such Losses,"
"Risk Factors--Limited Operating History," "Risk Factors--Uncertainty of Future
Operating Results," "Risk Factors--Fluctuations in Quarterly Operating Results,"
"Risk Factors-- Dependence on Continued Market Acceptance By Consumers and
Retail Distribution Partners," "Risk Factors--Possible Termination of Retail
Distribution Partner Agreements," and "Business--Sales and Marketing."
27
<PAGE>
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996
REVENUE
Revenue increased to $25.0 million in the 1997 from $8.3 million in 1996.
The increase was due principally to the increase in the number of Coinstar units
in service during 1997 and the increase in the volume of coins processed by the
units in service during that year. The installed base of Coinstar units
increased to 3,204 as of December 31, 1997 from 1,501 units as of December 31,
1996. The dollar value of coins processed increased to $332.5 million during
1997 from $115.5 million in 1996 .
DIRECT OPERATING EXPENSES
Direct operating expenses increased to $17.9 million in 1997 from $7.3
million in 1996. 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 17 new regional markets in 1997. Direct operating expenses as a percentage
of revenue decreased to 71.6% in 1997 from 87.3% in 1996. The Company
anticipates that direct operating expenses will continue to increase as the
number of installed units increases. However, direct operating expenses as a
percentage of revenue are anticipated to decrease as (i) coin pickup and
processing cost economies from regional densities are realized and (ii) field
service expenses decrease as a percentage of revenue as the Company increases
its density in its existing markets.
REGIONAL SALES AND MARKETING
Regional sales and marketing expenses increased to $3.1 million in 1997 from
$1.5 million in 1996. The increase in regional marketing expense was the result
of an increased level of advertising, cooperative promotion with its retail
distribution partners and public relations efforts focused in the new regions
installed during 1997 and the initial incurrence of ongoing marketing expenses
in existing markets. The Company expects sales and marketing expenses to
continue to increase as the Company expands the installed base of units and
enters new regional markets.
PRODUCT RESEARCH AND DEVELOPMENT
Product research and development expenses increased to $6.4 million in 1997
from $4.0 million in 1996. The principal component of such expenses was
compensation costs and the year-to-year increase was due largely to higher
staffing levels required for the improvement of existing and development of new
Coinstar unit software, hardware, network applications and development costs
related to new service offerings. A portion of the product research and
development expenses related to development of software for internal use may be
capitalized in the future.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expense increased to $11.1 million in
1997 from $5.4 million in 1996. The principal component of such expenses was
personnel compensation and the year-to-year increase primarily reflects an
investment in higher staffing levels during 1997 to support the Company's rapid
growth and expansion. The Company expects selling, general and administrative
expenses to continue to increase as the Company continues to add staff.
28
<PAGE>
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased to $8.7 million in 1997 from
$4.1 million in 1996. The increase was primarily due to the increase in the
installed base of Coinstar units during these periods. The Company expects
depreciation and amortization expense to increase significantly over the next
several years as a result of expected increases in the installation of Coinstar
units.
INTEREST INCOME AND EXPENSE
Interest income increased to $2.3 million in 1997 from $848,000 in 1996. The
increase in interest income is attributable to higher invested cash balances
resulting from net proceeds received from the sale of the Notes in October 1996
and the completion of the Company's initial public offering in July 1997.
Interest expense increased to $9.8 million in 1997 from $2.7 million in
1996. The increase was due to the accretion of the Notes. No cash interest
payments are due on the Notes until April 2000.
NET LOSS
Net loss increased to $29.6 million in 1997 from $16.0 million in 1996. The
increase in net loss primarily was due to the fact that selling, general and
administrative expenses, product research and development expenses, and
depreciation and amortization increased during the year at a disproportionately
higher rate than the Company's direct contribution margin. This was the result
of the Company's decision to build the infrastructure necessary to support the
rapid growth of its installed base of units. In the near term, the Company
expects to continue to add infrastructure to support expected increases in its
installed base, and as a result expects to incur increasing net losses. In the
longer term, the Company expects that it will not be required to add as much
infrastructure to support its installed base and as a result expects to achieve
profitability as its direct contribution margin from its significantly larger
base of installed units grows proportionately faster than its operating
expenses. There can be no assurance, however, that the Company will install a
sufficient number of units or obtain sufficient market acceptance to allow the
Company to achieve or sustain profitability.
YEARS ENDED DECEMBER 31, 1996 AND 1995
REVENUE
Revenue increased to $8.3 million in 1996 from $1.1 million in 1995. The
increase was due principally to the increase in the number of Coinstar units
placed in service during 1996 and the increase in the volume of coins processed
by the units in service during that year. The installed base of Coinstar units
increased to 1,501 at the end of 1996 from 263 at the end of 1995. The dollar
value of coins processed increased to $115.5 million during 1996 from $17.7
million during 1995.
DIRECT OPERATING EXPENSES
Direct operating expenses increased to $7.3 million in 1996 from $1.3
million in 1995. The increase in direct operating expenses was primarily
attributable to increased coin pickup and processing costs as a result of the
increased dollar volumes processed by the network and the increase in field
service personnel expenses associated with the hiring and training of new field
service personnel to support the Company's accelerated growth and its expansion
into 12 new regional markets in 1996. Direct operating expenses as a percentage
of revenue decreased to 87% in 1996 from 126% in 1995.
REGIONAL SALES AND MARKETING
Regional sales and marketing expenses increased to $1.5 million in 1996 from
$349,000 in 1995. The increase in regional marketing expense was the result of
an increased level of advertising, cooperative promotion with its retail
distribution partners and public relations efforts focused in the new regions
29
<PAGE>
installed during 1996. Substantially all of the Company's sales and marketing
expenses in 1996 were attributable to startup marketing activities as the
Company increased its installed base to 23 regions at the end of 1996 from 11
regions in 1995.
PRODUCT RESEARCH AND DEVELOPMENT
Product research and development expenses increased to $4.0 million in 1996
from $1.8 million in 1995 due largely to increased staffing levels required for
the improvement of existing and development of new Coinstar unit software,
hardware, network applications and development costs related to new service
offerings.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased to $5.4 million in
1996 from $2.8 million in 1995. The increase primarily reflects an investment in
higher staffing levels during the second half of 1996 to support the Company's
rapid growth and expansion.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased to $4.1 million in 1996 from
$1.1 million in 1995. The increase was primarily due to the increase in the
installed base of Coinstar units during these years.
INTEREST INCOME AND EXPENSE
Interest income increased to $848,000 in 1996 from $398,000 in 1995. The
increase in interest income is attributable to higher invested cash balances
resulting from net proceeds of $62.9 million received from the sale of the Notes
in October 1996.
Interest expense increased to $2.7 million in 1996 from $208,000 in 1995 as
a result of the sale of the Notes in October 1996 and the accretion of such
Notes since the original issue date to December 31, 1996.
NET LOSS
Net loss increased to $16.0 million in 1996 from $6.2 million in 1995. The
increase in net loss primarily was due to disproportionately higher increases in
operating expenses and interest expense as compared to increases in the
Company's direct contribution margin. This was the result of the Company adding
infrastructure during the year to support an expected increase in the number of
installed units.
INCOME TAXES
At December 31, 1997 and 1996, the Company had net deferred tax assets of
approximately $19.9 million and $9.8 million, respectively, resulting primarily
from net operating loss and credit carryforwards available to offset future
income and tax obligations, respectively. The extent to which the loss
carryforwards can be used to offset future taxable income will be limited
because of the ownership changes within any three-year period as provided in the
Tax Reform Act of 1986. As a result of the Company's initial public offering and
other equity offerings, the Company has been deemed to have had a change in
ownership as defined under Section 382 of the Internal Revenue Code. Such
changes will limit the annual usage of the Company's net operating loss and
credit carryforwards. Such federal carryforwards expire through 2012. Based upon
the Company's history of operating losses and expiration dates of the loss
carryforwards, the Company has recorded a valuation allowance to the full extent
of its net deferred tax assets.
30
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997, the Company had cash and cash equivalents of $20.2
million, short-term investments of $36.6 million and working capital of $34.7
million. Cash and cash equivalents include $14.2 million of funds in transit,
which represent amounts being processed by armored car carriers or residing in
Coinstar units. Net cash used by operating activities was $458,756 for 1997 and
was $3.4 million for 1996. The principal use of cash was to fund net operating
losses incurred, partially offset by depreciation, other non-cash charges, and
an increase in accounts payable and accrued liabilities.
Net cash used by investing activities during 1997 was $31.9 million and
$53.2 million in 1996. Capital expenditures for such years were $29.8 million
and $20.8 million, respectively. The majority of capital expenditures consist of
the purchase of Coinstar units.
Net cash provided by financing activities for 1997 was $28.7 million, and
net cash provided by financing activities for 1996 was $66.3 million.
In January 1996, the Company entered into a loan agreement which allows for
maximum borrowings of $3.0 million to be drawn under specific notes secured by
certain equipment of the Company. During 1996, the Company drew the entire $3.0
million. The effective annual interest rate on this loan is 16.6% and the loan
is due in monthly installments that will be paid through October 1999. In
connection with this loan, the Company issued detachable warrants to purchase
93,750 shares of its Series D Preferred stock at an exercise price of $4.00.
Upon the closing of the initial public offering, such warrants automatically
converted into warrants to purchase an equivalent number of shares of common
stock.
In October 1996, the Company issued and sold a total of $95.0 million in
aggregate principal amount at maturity of the Notes due 2006, and warrants to
purchase an aggregate of 665,000 shares of Common Stock at a nominal exercise
price for aggregate proceeds, net of issuance costs, of $62.9 million. Although
interest is not payable prior to April 1, 2000, the carrying amount of such
indebtedness accretes as the original issue discount is amortized through
maturity in October 2006 and the Company's interest expense includes such
accretion. Cash interest on the Notes will accrue and be payable semi-annually
in arrears at the rate of 13.0% per annum, on October 1 and April 1. No
principal payments on the Notes are due prior to maturity in 2006. The Notes are
redeemable at the option of the Company in whole or in part within 60 days of
the consummation of a public equity offering for an amount equal to 118% of the
accreted value as of the date of redemption, plus accrued and unpaid interest
and liquidated damages, if any. Otherwise the Notes are redeemable after October
1, 2001 at declining redemption prices to maturity. The Indenture governing the
Notes contains certain covenants that, among other restrictions, limit the
Company's ability to pay dividends or make other restricted payments, engage in
transactions with affiliates, incur additional indebtedness, effect asset
dispositions or merge or sell substantially all its assets. Pursuant to its
obligations under a registration rights agreement related to the Notes, the
Company completed an exchange of the Notes for otherwise substantially identical
notes registered under the Securities Act of 1933, as amended.
In July 1997, the Company completed its initial public offering of 3,000,000
million shares of Common Stock at a purchase price of $10.50 per share for net
proceeds of approximately $28.4 million. The net proceeds received by the
Company will be used (i) predominantly to fund capital expenditures and working
capital in connection with the continued expansion of the Coinstar network, (ii)
for product research and development, and deployment of enhancements to the
Coinstar unit and the coin processing network and (iii) for general corporate
purposes.
As of December 31, 1997 the Company had outstanding a secured irrevocable
letter of credit with a bank in the amount of $4.0 million. This letter of
credit, which expires in March 1998, collateralizes the Company's obligations to
a third party. As of December 31, 1997, no amounts were outstanding under the
letter of credit.
The Company believes existing cash equivalents and short-term investments
will be sufficient to fund its cash requirements and capital expenditure needs
for the continued expansion of the Coinstar network
31
<PAGE>
at the recent installation rate for at least the next twelve months. The extent
of additional financing needed will depend on the success of the Company's
business. If the Company significantly increases installations beyond planned
levels or if unit coin processing volumes generated are lower than historical
levels, the Company's cash needs will be increased. The Company's future capital
requirements will depend on a number of factors, including the timing and number
of unit installations, the type and scope of service enhancements, and the level
of market acceptance of the Company's service. In addition, beginning in April
2000, the Company will have debt service obligations under the Notes that were
issued in October 1996 of over $12 million per year until October 2006, at which
time the principal amount of the Notes ($95.0 million) will be due.
QUARTERLY FINANCIAL RESULTS
The following table sets forth selected unaudited quarterly financial
information and operating data for the last eight quarters. This information has
been prepared on the same basis as the Company's Financial Statements and
includes, in the opinion of management, all normal and recurring adjustments
that management considers necessary for a fair statement of the quarterly
results for the periods. The operating results and data for any quarter are not
necessarily indicative of the results for future periods.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30,
1997 1997 1997 1997 1996 1996 1996
------------- ------------- ----------- ----------- ------------- ------------- -----------
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT UNIT AND PER UNIT DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Statements of
Operations Data:
Revenue.............. $ 7,957 $ 7,762 $ 5,294 $ 3,995 $ 3,349 $ 2,830 $ 1,388
Expenses:
Direct operating... 5,208 5,276 3,966 3,450 2,940 2,110 1,321
Regional sales and
marketing........ 689 798 972 630 494 396 407
Product research
and
development...... 1,644 1,637 1,640 1,441 1,533 1,014 762
Selling, general
and
administrative... 3,252 2,669 2,630 2,528 1,987 1,425 1,067
Depreciation and
amortization..... 2,539 2,297 2,158 1,684 1,741 1,098 796
Loss from
operations....... (5,375) $ (4,915) $ (6,072) $ (5,738) $ (5,346) $ (3,213) $ (2,965)
Other Data:
Number of new
Coinstar units
installed during
the period......... 469 400 406 428 292 413 364
Installed base of
Coinstar units at
end of period...... 3,204 2,735 2,335 1,929 1,501 1,209 796
Average age of
network for the
period (months).... 11.7 10.6 9.3 8.3 7.0 6.1 6.4
Number of regional
markets............ 40 35 33 27 23 22 18
Dollar value of coins
processed.......... $ 105,676 $ 103,450 $ 70,661 $ 52,739 $ 44,841 $ 37,637 $ 20,692
Direct contribution
(loss)(1).......... $ 2,749 $ 2,486 $ 1,328 $ 545 $ 409 $ 720 $ 67
Annualized revenue
per average
installed
unit(2)............ $ 10,907 $ 12,284 $ 9,939 $ 9,433 $ 9,623 $ 11,021 $ 9,269
Annualized direct
contribution per
average installed
unit(2)............ $ 3,768 $ 3,935 $ 2,494 $ 1,287 $ 1,175 $ 2,804 $ 449
<CAPTION>
<S> <C>
MARCH 31,
1996
-----------
<S> <C>
Statements of
Operations Data:
Revenue.............. $ 746
Expenses:
Direct operating... 888
Regional sales and
marketing........ 208
Product research
and
development...... 661
Selling, general
and
administrative... 872
Depreciation and
amortization..... 499
Loss from
operations....... $ (2,382)
Other Data:
Number of new
Coinstar units
installed during
the period......... 169
Installed base of
Coinstar units at
end of period...... 432
Average age of
network for the
period (months).... 6.6
Number of regional
markets............ 13
Dollar value of coins
processed.......... $ 12,306
Direct contribution
(loss)(1).......... $ (142)
Annualized revenue
per average
installed
unit(2)............ $ 8,449
Annualized direct
contribution per
average installed
unit(2)............ $ (1,612)
</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.
32
<PAGE>
Based on its limited operating history, the Company believes that coin
processing volumes have been affected by seasonality; in particular the Company
believes that on a relative basis coin processing volumes are lower in the
months of January, February, September and October. There can be no assurance,
however, that such seasonal trends will continue. Any projections of future
seasonality are inherently uncertain due to the Company's limited operating
history, and due to the lack of comparable companies engaged in the coin
processing business. The Company's revenue growth in the third and fourth
quarters of 1996 reflect the acceleration of Coinstar unit installations
beginning in the second quarter of that year and higher coin volumes generated
by its older units in service, offset in part by the seasonally lower coin
processing volume of its installed base. In addition to the seasonal impact of
such fourth quarter revenues, direct contribution in that fourth quarter
reflects higher direct operating expenses as a percentage of revenue and higher
field service expenses from the anticipated entry into new regional markets.
Higher coin pickup and processing costs were attributable principally to
seasonally lower volumes and a semi-fixed pickup schedule largely in effect
during the period. The Company experienced improved pickup efficiencies in the
quarters ended March 31, 1997, June 30, 1997, September 30, 1997, and December
31, 1997 and continues to take measures to optimize such efficiencies.
In addition to fluctuations in revenue resulting from factors affecting
customer usage, timing of unit installations will result in significant
fluctuations in quarterly results. The rate of installations does not follow a
regular pattern, as it depends principally on installation schedules determined
by agreements between the Company and its retail distribution partners, variable
length of partner trial periods and the planned coordination of multiple partner
installations in a given geographic region.
Increasing quarterly losses from operations during the periods presented
were the result of higher direct operating expenses associated with the
significant increase in the Company's installed base, higher depreciation and
amortization expense from the expansion of the installed base and the
significantly higher level of systems infrastructure and management personnel to
support the Company's accelerated growth. The Company expects to continue to
incur substantial and increasing quarterly operating losses from operations as
it plans to significantly increase its installed base of Coinstar units.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standard ("SFAS") No. 128, "Earnings Per
Share," was recently issued and is effective for the Company's fiscal year ended
December 31, 1997. This statement requires a change in the presentation of
earnings per share. On February 3, 1998, the SEC released Staff Accounting
Bulletin ("SAB") No. 98, which requires companies to restate earnings per share
for all prior periods presented in accordance with the provisions of SFAS No.
128, including those periods prior to an initial public offering. As a result of
the timing of the release of SAB No. 98 and the Company's fourth quarter
financial results, the Company's loss per share amounts previously reported have
been restated in accordance with SAB No. 98.
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14(a) for an index to the financial statements and supplementary
data of the Company required by this item.
33
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See the section entitled "Executive Officers" in Part I, Item 1 hereof for
information regarding executive officers.
The information required by this item with respect to directors is
incorporated be reference from the information under the caption of "Election of
Directors," contained in the Company's Definitive Proxy Statement to be filed
with the Commission pursuant to Registration 14A in connection with the 1998
Annual Meeting (the "Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
information under the caption "Executive Compensation" contained in the Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
information under the caption "Security Ownership of Certain Beneficial Owners
and Management" contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated by reference to the
information under the caption "Certain Relationships and Related Transactions"
contained in the Proxy Statement.
34
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The financial statements required by this item are submitted in a separate
section beginning on page F-1 of this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
(a)(1) Index to Financial Statements
Independent Auditors' Report...................................................................... F-1
Balance Sheets.................................................................................... F-2
Statements of Operations.......................................................................... F-4
Statements of Stockholders' Equity (Deficit)...................................................... F-5
Statements of Cash Flows.......................................................................... F-6
Notes to Financial Statements..................................................................... F-7
(a)(2) Index to Financial Statement Schedules.
All schedules have been omitted because they are not applicable or not required, or the required
information is included in the financial statements or notes thereto.
</TABLE>
35
<PAGE>
(a)(3) Index to Exhibits:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF DOCUMENT
- ----------- -----------------------------------------------------------------------------------------------------
<S> <C>
3.1(1) Amended and Restated Certificate of Incorporation of the Registrant in effect after the closing of
the Initial Public Offering.
3.2(1) Amended and Restated Bylaws of the Registrant.
4.1 Reference is made to Exhibits 3.1 through 3.2.
4.2(1) Specimen Stock Certificate.
4.3(1) Second Amended and Restated Investor Rights Agreement, dated August 27, 1996, between the Registrant
and certain investors, as amended October 22, 1996.
4.4(1) Indenture between Registrant and The Bank of New York dated October 1, 1996.
4.5(1) Warrant Agreement between Registrant and The Bank of New York dated October 22, 1996.
4.6(1) Notes Registration Rights Agreement between Registrant and Smith Barney Inc. dated October 22, 1996.
4.7(1) Warrant Registration Rights Agreement between Registrant and Smith Barney Inc. dated October 22,
1996.
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 to be entered into between the Registrant and its executive officers and
directors.
10.5(1) Series E Preferred Stock and Warrant Purchase Agreement between Registrant and Acorn Ventures, Inc.,
dated August 27, 1996.
10.6(1) Office Building Lease between Registrant and Factoria Heights dated June 1, 1994, as amended on
January 24, 1997.
10.7(1) Sublease between Registrant and Maruyama U.S., Inc. dated January 15, 1997.
10.8(1) Lease agreement between Registrant and Spieker Properties, L.P. dated January 29, 1997.
10.9(1) Lease agreement between Registrant and Spieker Properties, L.P. dated January 29, 1997.
10.10(1) Manufacturing Agreement between Registrant and SeaMed Corporation dated September 1, 1996.
10.11+(1) Letter of Intent between Registrant and Scan Coin AB dated March 5, 1997.
10.12+(1) Agreement between Registrant and Scan Coin AB dated April 30, 1993, as amended.
10.13(1) Purchase Agreement between Registrant and Smith Barney Inc. dated October 22, 1996.
12.1 Ratio of Earnings to Fixed Charges
21.1 Subsidiaries
23.1 Consent of Deloitte & Touche LLP, Independent Auditors.
24.1 Power of Attorney. Reference is made to signature page
27.1 Financial Data Schedule.
</TABLE>
- ------------------------
(1) Filed as an Exhibit to the Registrant's Registration Statement on Form S-4
(No. 333-33233), as amended.
+ 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 by the Registrant during the quarter ended
December 31, 1997.
(c) Exhibits
The exhibits required by this item are listed under Item 14(a)(3).
(d) Financial Statement Schedules
The financial statement schedules required by this item are listed under
Item 14(a)(2).
36
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
COINSTAR, INC.
By: /s/ KIRK A. COLLAMER
-----------------------------------------
Kirk A. Collamer
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
Date: March 31, 1998
</TABLE>
KNOWN ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Jens H. Molbak and Kirk A. Collamer, and
each of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place, and
stead, in any and all capacities, to sign any and all amendments to this Report
on Form 10-K, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming that
all said attorneys-in-fact and agents, or any of them or their or his substitute
or substituted, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
President, Chief Executive
/s/ JENS H. MOLBAK Officer and Director
- ------------------------------ (Principal Executive March 31, 1998
Jens H. Molbak Officer)
Vice President and Chief
/s/ KIRK A. COLLAMER Financial Officer
- ------------------------------ (Principal Financial and March 31, 1998
Kirk A. Collamer Accounting Officer)
/s/ GEORGE H. CLUTE Director
- ------------------------------ March 31, 1998
George H. Clute
/s/ LARRY A. HODGES Director
- ------------------------------ March 31, 1998
Larry A. Hodges
/s/ DAVID E. STITT Director
- ------------------------------ March 31, 1998
David E. Stitt
/s/ RONALD A. WEINSTEIN Director
DIRECTOR
- ------------------------------ March 31, 1998
Ronald A. Weinstein
/s/ WILLIAM D. RUCKELSHAUS Director
- ------------------------------ March 31, 1998
William D. Ruckelshaus
37
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Coinstar, Inc.
Bellevue, Washington
We have audited the accompanying balance sheets of Coinstar, Inc. (the
"Company") as of December 31, 1997 and 1996, and the related statements of
operations, stockholders' equity (deficit), and cash flows for each of the three
years in the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 1997 and 1996,
and the results of its operations, and its cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
As discussed in Note 2 to the financial statements, in 1997 the Company
changed its method of accounting for loss per share to conform with Statement of
Financial Accounting Standards No. 128 and, retroactively, restated the 1996 and
1995 financial statements for the change.
<TABLE>
<S> <C>
/s/ DELOITTE & TOUCHE LLP
</TABLE>
Seattle, Washington
February 6, 1998
F-1
<PAGE>
COINSTAR, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
<S> <C> <C>
1997 1996
-------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................................................... $ 20,199,914 $ 23,867,763
Short-term investments available for sale..................................... 36,603,474 32,441,912
Prepaid expenses and other current assets..................................... 1,021,349 865,000
-------------- -------------
Total current assets...................................................... 57,824,737 57,174,675
PROPERTY AND EQUIPMENT:
Coinstar Units................................................................ 51,002,230 24,843,112
Computers..................................................................... 2,792,326 1,653,768
Office furniture and equipment................................................ 1,153,974 413,317
Leased vehicles............................................................... 1,014,873
Leasehold improvements........................................................ 366,090 29,953
Coinstar components........................................................... 110,024 840,167
-------------- -------------
56,439,517 27,780,317
Accumulated depreciation...................................................... (13,511,235) (5,321,063)
-------------- -------------
42,928,282 22,459,254
OTHER ASSETS, net of accumulated amortization of
$359,775 and $78,497............................................................ 2,792,875 2,897,177
-------------- -------------
TOTAL............................................................................. $ 103,545,894 $ 82,531,106
-------------- -------------
-------------- -------------
</TABLE>
See notes to financial statements
F-2
<PAGE>
COINSTAR, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
<S> <C> <C>
1997 1996
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable............................................................. $ 3,238,069 $ 1,779,702
Accrued liabilities.......................................................... 18,253,065 7,690,288
Current portion of long-term debt and capital lease obligations.............. 1,612,451 910,535
-------------- --------------
Total current liabilities................................................ 23,103,585 10,380,525
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, less current portion and net of
unamortized discounts of $19,675,155 and $28,831,550........................... 77,333,005 69,154,936
-------------- --------------
Total liabilities........................................................ 100,436,590 79,535,461
MANDATORILY REDEEMABLE PREFERRED STOCK:
Preferred stock, $.001 par value--Authorized, 16,000,000 shares in 1996:
Series C -- Designated, 6,100,000 shares; issued and outstanding, 0 and
4,659,324 shares (preference in liquidation, $0 and $15,142,803)........... 14,509,472
Series D -- Designated, 3,500,000 shares; issued and outstanding, 0 and
2,556,471 shares (preference in liquidation $0 and $10,225,884)............ 9,862,612
Series E-1 -- Designated, issued, and outstanding, 0 and 100,000 shares
(preference in liquidation, $0 and $600,000)............................... 600,000
-------------- --------------
Total mandatorily redeemable preferred stock............................. 24,972,084
COMMITMENTS AND CONTINGENCIES (Notes 5, 12, and 13)
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $.001 par value -- Authorized, 45,000,000 shares; issued and
outstanding, 15,034,629 and 793,059 shares................................... 61,039,848 18,396
Preferred stock, $.001 par value -- Authorized, 5,000,000 shares:
Series A -- Designated, issued, and outstanding, 0 and 649,775 shares
(preference in liquidation, $0 and $649,775)............................... 649,775
Series B -- Designated, 974,258 shares; issued and outstanding, 0 and 895,506
shares (preference in liquidation, $0 and $3,582,034)...................... 3,582,034
Contributed capital for warrants............................................... 513,584 2,621,160
Accumulated deficit............................................................ (58,444,128) (28,847,804)
-------------- --------------
Total stockholders' equity (deficit)..................................... 3,109,304 (21,976,439)
-------------- --------------
TOTAL............................................................................ $ 103,545,894 $ 82,531,106
-------------- --------------
-------------- --------------
</TABLE>
See notes to financial statements
F-3
<PAGE>
COINSTAR, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
<S> <C> <C> <C>
1997 1996 1995
-------------- -------------- -------------
REVENUE........................................................... $ 25,007,251 $ 8,312,080 $ 1,062,865
EXPENSES:
Direct operating................................................ 17,899,402 7,258,406 1,335,721
Regional sales and marketing.................................... 3,088,370 1,504,633 349,131
Product research and development................................ 6,361,568 3,969,185 1,830,153
Selling, general, and administrative............................ 11,078,649 5,351,476 2,789,538
Depreciation and amortization................................... 8,679,036 4,133,904 1,117,655
-------------- -------------- -------------
Loss from operations.......................................... (22,099,774) (13,905,524) (6,359,333)
OTHER INCOME (EXPENSE):
Interest income................................................. 2,328,031 848,194 398,305
Interest expense................................................ (9,821,619) (2,661,374) (207,687)
-------------- -------------- -------------
Net loss before extraordinary item............................ (29,593,362) (15,718,704) (6,168,715)
EXTRAORDINARY ITEM--
Loss related to early retirement of debt........................ -- 248,631 --
-------------- -------------- -------------
NET LOSS.......................................................... $ (29,593,362) $ (15,967,335) $ (6,168,715)
-------------- -------------- -------------
-------------- -------------- -------------
LOSS PER SHARE:
Loss per share before extraordinary item, basic and diluted..... $ (3.81) $ (20.06) $ (8.23)
Extraordinary item per share, basic and diluted................. $ 0 $ (.31) $ 0
-------------- -------------- -------------
Loss per share, basic and diluted............................... $ (3.81) $ (20.37) $ (8.23)
-------------- -------------- -------------
-------------- -------------- -------------
Weighted average shares outstanding, basic and diluted.......... 7,761,425 783,690 749,540
-------------- -------------- -------------
-------------- -------------- -------------
</TABLE>
See notes to financial statements
F-4
<PAGE>
COINSTAR, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK SERIES A PREFERRED
----------------------- -------------------
SHARES AMOUNT SHARES AMOUNT
---------- ----------- -------- ---------
<S> <C> <C> <C> <C>
BALANCE, January 1, 1995...... 726,225 $ 7,262 649,775 $ 649,775
Exercise of stock options... 53,334 7,084
Contributed capital for
warrants..................
Net loss....................
---------- ----------- -------- ---------
BALANCE, December 31, 1995.... 779,559 14,346 649,775 649,775
Exercise of stock options... 13,500 4,050
Exercise of Series C
Preferred stock
warrants..................
Exercise of Series D
Preferred stock
warrants..................
Contributed capital for
warrants..................
Net loss....................
---------- ----------- -------- ---------
BALANCE, December 31, 1996.... 793,059 18,396 649,775 649,775
Exercise of stock options... 199,078 78,013
Conversion of Series A
Preferred stock........... 649,775 649,775 (649,775) (649,775)
Conversion of Series B
Preferred stock........... 1,023,399 3,582,034
Conversion of Mandatorily
Redeemable Preferred
Stock..................... 7,315,795 24,972,084
Exercise of warrants........ 2,053,523 3,369,852
Issuance of common stock,
net of issuance costs of
$3,130,306................ 3,000,000 28,369,694
Unrealized loss on
short-term investments
available for sale........
Net loss....................
---------- ----------- -------- ---------
BALANCE, December 31, 1997.... 15,034,629 $61,039,848 -- $ --
---------- ----------- -------- ---------
---------- ----------- -------- ---------
<CAPTION>
SERIES B PREFERRED CONTRIBUTED
--------------------- CAPITAL FOR ACCUMULATED
SHARES AMOUNT WARRANTS DEFICIT TOTAL
-------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE, January 1, 1995...... 895,506 $ 3,582,034 $ 272,678 $ (6,711,754) $ (2,200,005)
Exercise of stock options... 7,084
Contributed capital for
warrants.................. 890,641 890,641
Net loss.................... (6,168,715) (6,168,715)
-------- ----------- ----------- ------------ ------------
BALANCE, December 31, 1995.... 895,506 3,582,034 1,163,319 (12,880,469) (7,470,995)
Exercise of stock options... 4,050
Exercise of Series C
Preferred stock
warrants.................. (45,453) (45,453)
Exercise of Series D
Preferred stock
warrants.................. (34,329) (34,329)
Contributed capital for
warrants.................. 1,537,623 1,537,623
Net loss.................... (15,967,335) (15,967,335)
-------- ----------- ----------- ------------ ------------
BALANCE, December 31, 1996.... 895,506 3,582,034 2,621,160 (28,847,804) (21,976,439)
Exercise of stock options... 78,013
Conversion of Series A
Preferred stock...........
Conversion of Series B
Preferred stock........... (895,506) (3,582,034)
Conversion of Mandatorily
Redeemable Preferred
Stock..................... 24,972,084
Exercise of warrants........ (2,107,576) 1,262,276
Issuance of common stock,
net of issuance costs of
$3,130,306................ 28,369,694
Unrealized loss on
short-term investments
available for sale........ (2,962) (2,962)
Net loss.................... (29,593,362) (29,593,362)
-------- ----------- ----------- ------------ ------------
BALANCE, December 31, 1997.... -- $ -- $ 513,584 $(58,444,128) $ 3,109,304
-------- ----------- ----------- ------------ ------------
-------- ----------- ----------- ------------ ------------
</TABLE>
See notes to financial statements
F-5
<PAGE>
COINSTAR, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
<S> <C> <C> <C>
1997 1996 1995
------------- ------------- ------------
OPERATING ACTIVITIES:
Net Loss........................................................................... $ (29,593,362) $ (15,967,335) $ (6,168,715)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization.................................................... 8,679,036 4,133,904 1,117,655
Debt discount amortization....................................................... 9,156,396 1,819,457 88,545
Accrued investment income........................................................ (389,254) (263,063) --
Cash provided (used) by changes in operating assets and liabilities:
Prepaid expenses and other current assets........................................ (156,349) (613,484) (28,956)
Other assets..................................................................... (176,978) (64,803) (867)
Accounts payable................................................................. 1,458,978 869,029 (205,791)
Accrued liabilities.............................................................. 10,562,777 6,734,378 670,839
------------- ------------- ------------
Net cash used by operating activities.............................................. (458,756) (3,351,917) (4,527,290)
INVESTING ACTIVITIES:
Purchases of short-term investments................................................ (47,962,984) (32,245,346) --
Sales and maturities of short-term investments..................................... 45,856,665 -- --
Purchases of fixed assets.......................................................... (29,767,502) (20,819,556) (3,823,307)
Payment of security deposit........................................................ -- (98,791) (33,975)
------------- ------------- ------------
Net cash used by investing activities.............................................. (31,873,821) (53,163,693) (3,857,282)
FINANCING ACTIVITIES:
Borrowings under short-term debt agreements........................................ -- -- 100,000
Payments on short-term debt........................................................ -- -- (460,000)
Payments on long-term debt......................................................... (1,045,255) (6,462,640) --
Borrowings under long-term debt obligations, net of financing costs................ -- 69,840,270 1,549,055
Proceeds from sale of common stock, net of issuance costs.......................... 28,369,694 -- --
Proceeds from sale of Series C Preferred stock..................................... -- 369,232 9,621,737
Proceeds from sale of Series D Preferred stock..................................... -- 375,306 9,452,977
Proceeds from sale of Series E Preferred stock..................................... -- 600,000 --
Proceeds from exercise of stock options............................................ 78,013 4,050 7,084
Contributed capital for warrants................................................... -- 1,537,623 890,641
Proceeds from exercise of warrants................................................. 1,262,276 -- --
------------- ------------- ------------
Net cash provided by financing activities.......................................... 28,664,728 66,263,841 21,161,494
------------- ------------- ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..................................... (3,667,849) 9,748,231 12,776,922
CASH AND CASH EQUIVALENTS:
Beginning of year.................................................................. 23,867,763 14,119,532 1,342,610
------------- ------------- ------------
End of year........................................................................ $ 20,199,914 $ 23,867,763 $ 14,119,532
------------- ------------- ------------
------------- ------------- ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest............................................. $ 668,058 $ 832,061 $ 119,142
SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING ACTIVITIES:
Conversion of debt and accrued interest to Series C Preferred stock................ -- -- 4,473,050
Purchase of vehicles financed by capital lease obligation.......................... 735,970 -- --
Purchase of computer equipment financed by capital lease obligation................ -- 553,065 117,267
Cashless exercises of warrants..................................................... 2,581,426 -- --
</TABLE>
See notes to financial statements
F-6
<PAGE>
COINSTAR, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 1: ORGANIZATION AND BUSINESS
GENERAL: Coinstar, Inc. (the "Company") develops, owns and operates a
network of automated, self-service coin counting and processing machines that
provide consumers with a convenient means to convert loose coins into cash. The
Company has increased its installed base every year since inception, and as of
December 31, 1997, had an installed base of 3,204 units located in supermarkets
and financial institutions in 30 states.
INITIAL PUBLIC OFFERING: On July 9, 1997, the Company completed its initial
public offering of 3,000,000 shares of Common Stock at a purchase price of
$10.50 per share for proceeds, net of issuance costs, of $28.4 million. The net
proceeds received by the Company will be used (i) predominantly to fund capital
expenditures and working capital in connection with the continued expansion of
the Coinstar network, (ii) for product research and development, and deployment
of enhancements to the Coinstar unit and the coin processing network and (iii)
for general corporate purposes.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS: The Company considers all highly liquid
securities purchased with a maturity of three months or less to be cash
equivalents. Cash and cash equivalents includes funds in transit, which
represent amounts being processed by armored carriers or residing in Coinstar
units, of $14.2 million and $5.5 million at December 31, 1997 and 1996,
respectively.
SECURITIES AVAILABLE FOR SALE: The Company's investments are all classified
as available for sale and are stated at fair value in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." This statement specifies that
available for sale securities are reported at fair value with changes in
unrealized gains and losses recorded directly to stockholders' equity. All of
the Company's investments have maturities of one year or less. Realized and
unrealized gains or losses at December 31, 1997 and 1996, were insignificant.
Fair value is based upon quoted market prices.
PROPERTY AND EQUIPMENT: Property and equipment are depreciated using the
following methods and useful lives:
<TABLE>
<CAPTION>
USEFUL
TYPE OF ASSET METHOD LIFE
- ------------------------------------------------------- -------------------------- ------------------
<S> <C> <C>
Coinstar units purchased prior to January 1, 1996...... 150% declining balance 60 months
Coinstar units purchased subsequent to January 1, Straight-line 60 months
1996.................................................
Installation costs for Coinstar units.................. Straight-line 36 months
Furniture and equipment................................ Straight-line 60 months
Computer equipment..................................... Straight-line 36 months
Automobiles and light trucks........................... Straight-line 36 months
Leasehold improvements................................. Straight-line 60 to 84 months
</TABLE>
In order to achieve volume discounts, the Company prepurchases certain
components of the Coinstar units. When a component is placed into service, the
cost is transferred to the appropriate Coinstar equipment account and
depreciated accordingly.
F-7
<PAGE>
COINSTAR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OTHER ASSETS: Other assets include lease and utility deposits, deferred
financing fees for the issuance of the Company's 13% senior subordinated
discount notes (the "Notes") and amounts capitalized relating to organizational
costs. Deferred financing fees and organizational costs are amortized on a
straight-line basis over ten and five years, respectively.
LONG-LIVED ASSETS: The Company periodically reviews long-lived assets,
including identified intangible assets, for impairment to determine whether any
events or circumstances indicate that the carrying amount of the assets may not
be recoverable. Such review includes estimating expected future cash flows.
During 1996, the Company discontinued its preprinted coupon distribution
business line. As a result, a provision for additional depreciation in the
amount of $329,096 was made to write down the recorded value of coupon
dispensing components of the Coinstar units, which are no longer being used in
operations, to their estimated fair value. During 1997, the Company upgraded
certain components of the Coinstar unit. As a result, a provision for additional
depreciation in the amount of $107,054 was made to write down the recorded value
of the obsolete equipment.
REVENUE RECOGNITION. Coin processing fees are recognized at the time the
customers' coins are counted by the Coinstar unit. Units in service with two
retail distribution partners in 1996 accounted for approximately 14.9% and
12.7%, respectively, of the Company's revenues. In 1997, two retail distribution
partners accounted for approximately 25.6% and 17.2%, respectively, of the
Company's revenues.
LOSS PER SHARE: The Company adopted SFAS No. 128, "Earnings Per Share," for
the year ended December 31, 1997, as required. On February 3, 1998, the SEC
released Staff Accounting Bulletin No. 98, which requires companies to restate
all prior periods presented in accordance with the provisions of SFAS No. 128,
including those periods prior to an initial public offering. Because the results
from operations reflect a net loss for all years presented, basic and diluted
loss per share are calculated based on the same weighted average number of
shares outstanding.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The following methods and assumptions
were used to estimate the fair value of each class of financial instruments:
The carrying amounts for cash and cash equivalents, short-term investments,
and account payable approximate fair value because of the short maturity of
these instruments.
At December 31, 1997 and 1996, the carrying amount and estimated fair value
of such financial instruments for which fair value can be determined are as
follows:
<TABLE>
<CAPTION>
1997 1996
-------------------- ---------------------
<S> <C> <C> <C> <C>
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------- --------- ---------- ---------
Cash and cash equivalents.................................. $ 20,200 $ 20,200 $ 23,868 $ 23,868
Short-term investments..................................... 36,603 36,603 32,442 32,442
Accounts payable........................................... 3,238 3,238 1,780 1,780
Long-term debt............................................. 75,356 77,425 66,216 66,216
</TABLE>
STOCK-BASED COMPENSATION: The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board ("APB") Opinion No. 25,
F-8
<PAGE>
COINSTAR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
"Accounting for Stock Issued to Employees." SFAS No. 123, "Accounting for
Stock-Based Compensation," has been adopted by the Company for disclosure of
certain additional information related to its stock option plans.
USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
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.
RECLASSIFICATIONS: Certain reclassifications have been made to the 1996 and
1995 financial statements to conform to the presentation used in 1997.
NOTE 3: ACCRUED LIABILITIES
Accrued liabilities consisted of the following at the respective dates:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
<S> <C> <C>
1997 1996
------------- ------------
Funds in transit..................................................................... $ 14,175,898 $ 5,490,260
Accrued liabilities to service contract providers.................................... 1,598,325 661,449
Accrued Liabilities to manufacturers................................................. 203,470 502,500
Other................................................................................ 2,275,372 1,036,079
------------- ------------
$ 18,253,065 $ 7,690,288
------------- ------------
</TABLE>
F-9
<PAGE>
COINSTAR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 4: LONG-TERM DEBT
Long-term debt, including current portion, consisted of the following at
December 31, 1997 and 1996:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
<S> <C> <C>
1997 1996
------------- -------------
Senior subordinated discount notes, net of unamortized discount of
$19,644,288 and $28,783,847............................................ $ 75,355,712 $ 66,216,153
Equipment loan, net of unamortized discount of $30,867 and $47,703....... 2,458,334 2,994,998
------------- -------------
77,814,046 69,211,151
Less current portion..................................................... 1,032,710 553,500
------------- -------------
Long-term debt........................................................... $ 76,781,336 $ 68,657,651
------------- -------------
</TABLE>
EQUIPMENT LOANS: During 1995, the Company entered into a loan agreement
which allowed for maximum borrowings of $2,000,000 to be drawn under specific
notes and was secured by certain Coinstar equipment. The Company executed three
such notes during 1995 for a total of $1,363,200. Two additional notes were
executed in 1996 for $603,750. All such notes had an effective annual interest
rate of 17.5% and were due in monthly installments through February 1999. The
notes were paid in full in the fourth quarter of 1996. In connection with these
notes, the Company issued 49,231 detachable warrants to purchase shares of
Series C Preferred stock at an exercise price of $3.25. Such warrants were
converted to common stock warrants upon the completion of the Company's initial
public offering
In January 1996, the Company entered into a loan agreement which allows for
maximum borrowings of $3,000,000 under specific notes secured by certain
Coinstar equipment. During the first six months of 1996, the Company drew the
entire $3,000,000. This loan has an effective annual interest rate of 16.6% and
is due in monthly installments through October 1999. In connection with this
loan, the Company issued 93,750 detachable warrants to purchase shares of Series
D Preferred stock at an exercise price of $4.00. Such warrants were converted to
common stock warrants upon the Company's completion of its initial public
offering.
In August 1996, the Company entered into an agreement with a commercial bank
which provides for a term loan allowing for maximum borrowings of $7,000,000 and
an operating line of credit allowing for maximum borrowings of $250,000. The
Company drew $4,473,306 on the term loan and repaid such amount in full during
1996. In connection with the agreement described above, the Company issued
51,176 detachable warrants to purchase shares of Series D Preferred stock at an
exercise price of $4.25 per share. Such warrants were converted to common stock
warrants upon completion of the Company's initial public offering. The values of
the warrants issued in connection with the equipment loans described above are
recorded as contributed capital and represent discounts which are being
amortized over the terms of such loans.
EARLY RETIREMENT OF DEBT: In December 1996, the Company repaid an aggregate
of $5,838,050 in equipment loans prior to scheduled maturity. As a result of the
early repayment, the Company recognized an extraordinary loss of $248,631, which
included early termination penalties of $200,763 and write-off of related
discounts of $47,868.
F-10
<PAGE>
COINSTAR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 4: LONG-TERM DEBT (CONTINUED)
SENIOR SUBORDINATED DISCOUNT NOTES: On October 22, 1996, the Company
completed a private placement offering of 95,000 units, each of which consisted
of a $1,000 principal amount of 13% senior subordinated discount notes, due at
maturity in 2006, and warrants to purchase seven shares of common stock of the
Company, at an exercise price of $.01 per warrant share, subject to adjustment
under certain circumstances. Imputed interest on the discount notes, as
represented by the original issue discount of $29,413,154, accrues until October
1999, at which time interest is payable in semi-annual installments through
maturity.
The Notes are not redeemable at the option of the Company prior to October
1, 2001, other than from the proceeds of a public equity offering. The Notes are
redeemable at the option of the Company, in whole or in part, at any time on and
after October 1, 2001, at specified redemption prices for the relevant year of
redemption, plus accrued and unpaid interest to the date of redemption.
In the event of a change of control (as defined), each holder of the Notes
has the option to require the Company to repurchase such holder notes at 101% of
the accreted value thereof on the date of repurchase plus liquidated damages.
The Notes are subordinate in rank to all existing and future senior indebtedness
of the Company. The Indenture pursuant to which the Notes were issued contains
certain covenants that, among other things, limit the ability of the Company to
make dividend payments, make investments, repurchase outstanding shares of
stock, prepay other debt obligations, incur additional indebtedness, effect
asset dispositions, engage in sale and leaseback transactions, consolidate,
merge or sell all or substantially all of the Company's assets, engage in
transactions with affiliates, or effect certain transactions by its restricted
subsidiaries.
Subsequent to the completion of the Company's initial public stock offering
and pursuant to a related Notes Registration Rights Agreement between the
Company and the initial purchaser of the Notes (the "Registration Rights
Agreement"), the Company completed an exchange offer of the Notes to satisfy its
obligations under the Registration Rights Agreement. The Notes were exchanged
for otherwise substantially identical notes registered under the Securities Act
of 1933, as amended.
The Notes were recorded net of discount of $30,410,654, and the warrants
issued in connection with these notes were recorded as $997,500 of contributed
capital, each as determined by the relative fair values of the Notes and the
warrants as of the closing date. In addition, the Company has recorded deferred
financing fees related to the Notes of $2,714,354. Additional costs associated
with the rights registration of $121,063 were added to the deferred financing
cost. The deferred financing costs and discount attributable to the warrants are
being amortized over the term of the Notes.
F-11
<PAGE>
COINSTAR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 4: LONG-TERM DEBT (CONTINUED)
PRINCIPAL PAYMENTS: Scheduled principal payments on long-term debt for the
next five years ending December 31, are as follows:
<TABLE>
<S> <C>
1998........................................................... $1,032,710
1999........................................................... 1,456,491
2000........................................................... --
2001........................................................... --
2002........................................................... --
Thereafter..................................................... 95,000,000
----------
97,489,201
Less unamortized discounts..................................... 19,675,155
----------
$77,814,046
----------
----------
</TABLE>
NOTE 5: COMMITMENTS
LEASE COMMITMENTS: The Company entered into two lease agreements for office
space which commenced April 1, 1997, and September 1, 1997, and expire on March
31, 2002, and August 31, 2004, respectively. The agreements require the Company
to pay a portion of operating costs and minimum monthly payments, which escalate
annually based on a stated schedule. Each agreement allows the Company to renew
each lease for one consecutive period of five years.
The Company has entered into capital lease agreements to finance the
acquisition of certain Coinstar equipment, computer equipment, and automobiles.
Title to such assets is retained by the Company. These capital leases have terms
of 36 months at imputed interest rates which range from 10.4% to 24.9%. Assets
under capital lease obligations aggregated $2,193,810, and $1,178,937, net of
$1,000,676 and $639,059 of accumulated amortization, at December 31, 1997 and
1996, respectively.
A summary of the Company's minimum lease obligations as of December 31,
1997, are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------------ ------------
<S> <C> <C>
1998.............................................................. $ 696,260 $ 1,285,475
1999.............................................................. 463,763 1,265,643
2000.............................................................. 131,843 1,284,138
2001.............................................................. -- 1,310,969
2002.............................................................. -- 1,158,608
Thereafter........................................................ -- 1,882,340
------------ ------------
Total minimum lease commitments................................... 1,291,866 $ 8,187,173
------------
------------
Less amounts representing interest................................ 160,456
------------
Present value of lease obligations................................ 1,131,410
Less current portion.............................................. 579,741
------------
Long-term portion................................................. $ 551,669
------------
------------
</TABLE>
F-12
<PAGE>
COINSTAR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 5: COMMITMENTS (CONTINUED)
Rental expense was $889,506, $359,842 and $298,931 for the years ended
December 31, 1997, 1996 and 1995, respectively.
SERVICE PROVIDERS: As of December 31, 1997, the Company had outstanding
service contracts with several service providers. These contracts generally
cover a one- to two-year period and have cancellation clauses ranging from 30 to
60 days.
PURCHASE COMMITMENTS: The Company has entered into certain purchase
agreements with suppliers of Coinstar units which require aggregate purchases in
the amount of $10,854,321 in 1998.
CONCENTRATION OF SUPPLIERS: The Company currently buys a significant
component of the Coinstar unit from a single supplier. Although there are a
limited number of suppliers for the component, management believes that other
suppliers could provide similar equipment which would require certain
modifications. Accordingly, a change in suppliers could cause a delay in
manufacturing and a possible slow-down of growth, which could materially
adversely affect future operating results.
LETTER OF CREDIT: In 1997 the Company entered into a secured irrevocable
letter of credit with a bank in the amount of $4.0 million. This letter of
credit, which expires in March 1998, collateralizes the Company's obligations to
a third party. As of December 31, 1997, no amounts were outstanding under the
letter of credit.
NOTE 6: MANDATORILY REDEEMABLE PREFERRED STOCK
In February 1995, the Company issued 3,190,693 shares of Series C Preferred
stock and warrants to purchase 954,344 additional shares of Series C Preferred
stock at exercise prices ranging from $3.00 to $4.00 per share, for an aggregate
issue price of $3.25 per share. The proceeds received from this issue, net of
issuance costs of $300,000, were $9,621,737 for the shares and $448,015 for the
warrants. In addition, holders of certain bridge loans converted their
outstanding principal and accrued interest to Series C Preferred stock at a rate
of one share per $3.25 of debt, resulting in the issuance of an additional
1,376,323 shares.
In December 1995, the Company issued 2,500,000 shares of Series D Preferred
stock and 705,891 warrants to purchase shares of Series D Preferred stock at an
exercise price of $4.25 per share, for an aggregate issue price of $4.00 per
share. The proceeds received from this issue were $9,452,977 for the shares and
$411,719 for the warrants.
In August 1996, the Company issued 100,000 shares of Series E-1 Preferred
stock for $6.00 per share; warrants to purchase 350,000 shares of Series E-2
Preferred stock, with an exercise price of $11.40 per share, for $0.60 per
warrant; and warrants to purchase 550,000 shares of Series E-3 Preferred stock,
with an exercise price of $15.61 per share, for $0.39 per warrant. The Company
has the right to repurchase such warrants if certain events, including
additional capital financings, do not take place as outlined in the Series E
Preferred Stock and Warrant Purchase Agreement.
In December 1996, the Company issued 92,308 shares of Series C Preferred
stock at a price of $4.00 per share and 56,471 shares of Series D Preferred
stock at a price of $4.25 per share as a result of the exercise of certain
warrants.
F-13
<PAGE>
COINSTAR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 6: MANDATORILY REDEEMABLE PREFERRED STOCK (CONTINUED)
All warrants have been recorded at their fair market values as contributed
capital, at their date of issuance.
Pursuant to the terms of the Series C, D, and E Preferred Stock agreements,
the completion of the Company's initial public offering resulted in the
conversion of 4,659,324 shares of Series C, 2,556,471 shares of Series D, and
100,000 shares of Series E Preferred stock on a one-for-one basis into the
Company's common stock.
NOTE 7: STOCKHOLDERS' EQUITY
As a result of the Company's initial public offering, 649,775 shares of
Series A and 895,506 shares of Series B Preferred stock outstanding were
converted to common stock. Series A shares were converted into shares of the
Company's common stock on a one-for-one basis, and Series B shares were
converted on a basis of 1.142857 shares of common stock for each share of
Preferred stock.
In connection with various financing transactions, the Company issued
warrants which entitled the holders to purchase shares of the Company's common
stock and Series B, C, D, E-2, and E-3 Preferred stock. All Preferred stock
warrants were converted to common stock warrants upon completion of the
Company's initial public offering on a basis of 1.142857 common stock warrants
for each Series B Preferred stock warrant, and on a one-for-one basis for the
Series C, D, E-2, and E-3 Preferred stock
F-14
<PAGE>
COINSTAR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 7: STOCKHOLDERS' EQUITY (CONTINUED)
warrants. A summary of the warrants outstanding for the three years in the
period ended December 31, 1997, is as follows:
<TABLE>
<CAPTION>
SERIES B SERIES C
COMMON STOCK PREFERRED STOCK PREFERRED STOCK
------------------------- ------------------------ ------------------------
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER EXERCISE
SHARES PRICE SHARES PRICE OF SHARES PRICE
---------- ------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
OUTSTANDING, January 1, 1995................. -- $ -- 43,752 $ 4.00 465,120 $ 3.00-4.00
Issued..................................... -- -- -- 954,249 3.25-4.00
---------- ------------- ----------- ----- ----------- -----------
OUTSTANDING, December 31, 1995............... -- -- 43,752 4.00 1,419,369 3.00-4.00
Issued..................................... 665,000 $ .01 -- --
Exercised.................................. -- -- (92,308) 4.00
---------- ------------- ----------- ----- ----------- -----------
OUTSTANDING, December 31, 1996............... 665,000 .01 43,752 4.00 1,327,061 3.00-4.00
Issued..................................... -- -- -- -- -- --
Exercised.................................. (665,000) .01 (43,752) 4.00 (1,277,830) 3.00-4.00
Conversion to common stock................. 1,042,981 3.25-15.61 (49,231) 3.25
---------- ------------- ----------- ----- ----------- -----------
OUTSTANDING, December 31, 1997............... 1,042,981 $ 3.25-15.61 -- -- -- --
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
SERIES D SERIES E-2 SERIES E-3
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
------------------------ ------------------------ -----------------------
<S> <C> <C> <C> <C> <C> <C>
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER EXERCISE
SHARES PRICE SHARES PRICE OF SHARES PRICE
----------- ----------- ----------- ----------- ---------- -----------
OUTSTANDING, January 1, 1995........................ -- $ -- -- $ -- -- $ --
Issued............................................ 705,891 4.25 -- -- -- --
----------- ----------- ----------- ----------- ---------- -----------
OUTSTANDING, December 31, 1995...................... 705,891 4.25 -- -- -- --
Issued............................................ 144,926 4.00-4.25 350,000 11.40 550,000 15.61
Exercised......................................... (56,471) 4.25 -- -- -- --
----------- ----------- ----------- ----------- ---------- -----------
OUTSTANDING, December 31, 1996...................... 794,346 4.00-4.25 350,000 11.40 550,000 15.61
Issued............................................
Exercised......................................... (700,596) 4.00-4.25 -- -- -- --
Conversion to common stock........................ (93,750) 4.00 (350,000) 11.40 (550,000) 15.61
----------- ----------- ----------- ----------- ---------- -----------
OUTSTANDING, December 31, 1997...................... -- -- -- -- -- --
----------- ----------- ----------
----------- ----------- ----------
</TABLE>
Certain warrants, which were to expire upon the closing of the initial
public offering, were exercised for 352,907 shares of common stock at an
aggregate exercise price of $1.26 million. Certain warrants, which also were to
expire upon the closing of the initial public offering, were exercised on a
cashless basis resulting in the issuance of 1,035,715 shares of common stock.
The warrants issued in connection with the sale of the Notes were exercised with
cash payments or on a cashless basis, resulting in the issuance of an aggregate
of 664,937 shares of common stock. The remaining warrants have expiration dates
from June 28, 1998, to December 15, 2000, and have been recorded at amounts
which reflect management's best estimate of fair value on the date of issuance.
F-15
<PAGE>
COINSTAR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 8: INCOME TAXES
The components of the Company's deferred tax asset at December 31, 1997 and
1996 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
<S> <C> <C>
1997 1996
-------------- -------------
Tax loss and credit carryforwards........................................ $ 17,901,000 $ 9,941,000
Depreciation and amortization............................................ (1,905,000) (864,000)
Subordinated debt discount amortization.................................. 3,645,000 572,000
Other.................................................................... 231,000 188,000
-------------- -------------
19,872,000 9,837,000
Valuation allowance...................................................... (19,872,000) (9,837,000)
-------------- -------------
$ 0 $ 0
-------------- -------------
-------------- -------------
</TABLE>
A valuation allowance in the full amount of the net deferred tax asset
balances has been established as it is uncertain that the Company will be able
to realize such tax assets in the future. At December 31, 1997, the Company had
net operating loss and credit carryforwards in the amount of $52,651,000, which
expire through 2012.
The Company recorded deferred tax benefits of $10,035,000, $5,422,000 and
$2,107,000 for each of the years ended December 31, 1997, 1996 and 1995. A
valuation allowance in the amount of the deferred tax benefit was recorded each
year.
As a result of the Company's initial public offering and other equity
offerings, the Company has been deemed to have had a change in ownership as
defined under Section 382 of the Internal Revenue Code. Such changes in
ownership will impose certain limitations on the utilization of the Company's
net operating loss and credit carryforwards.
NOTE 9: STOCK-BASED COMPENSATION PLANS
In March 1997, the Company adopted the 1997 Equity Incentive Plan, under
which options generally vest over four years and expire after 10 years. The
Equity Incentive Plan is an amendment and restatement of the Company's 1992
Stock Option Plan, as amended. The Company has reserved a total of 2,900,000
shares of common stock for issuance under the 1997 Equity Incentive Plan. Stock
options have been granted to officers and employees to purchase common stock at
prices ranging from $.10 to $13.94 per share which represented management's best
estimate of fair market value at the dates of grant.
In March 1997, the Company adopted the Non-Employee Directors' Stock Option
Plan, under which the Board of Directors have provided for the automatic grant
of options to purchase shares of common stock to non-employee directors of the
Company. The Company has reserved a total of 100,000 shares of common stock for
issuance under the Non-Employee Directors' Stock Option Plan. Stock options have
been granted to non employee directors to purchase common stock at prices of
$8.63 and $10.00 per share which represents management's best estimate of fair
market value at the date of grant.
The price ranges of all options exercised were $.25 to $.70 in 1997, $.25 to
$.40 in 1996 and $.10 to $.25 in 1995. At December 31, 1997, there were
2,774,086 shares of unissued common stock reserved for
F-16
<PAGE>
COINSTAR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 9: STOCK-BASED COMPENSATION PLANS (CONTINUED)
issuance, of which options for the purchase of 1,845,584 shares were available
for future grants. Numbers of common and converted Preferred series B shares
under the plans are as follows as of December 31:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- ----------- --------- ----------- --------- -----------
Number of common shares under option:
Outstanding, beginning of year........................ 614,950 $ 0.52 376,550 $ 0.37 192,225 $ 0.25
Granted............................................... 494,000 9.93 254,850 0.74 265,300 0.40
Series B Preferred Options
Converted to common stock options................... 39,998 3.50 -- -- -- --
Exercised............................................. (199,078) 0.39 (13,500) 0.30 (53,334) 0.13
Canceled or expired................................... (21,368) 6.94 (2,950) 0.51 (27,641) 0.26
---------- --------- ---------
Outstanding, end of year.............................. 928,502 5.53 614,950 0.52 376,550 0.37
---------- --------- ---------
---------- --------- ---------
Exercisable, end of year................................ 192,385 $ 3.52 84,017 $ 0.32 44,875 $ 0.26
---------- --------- ---------
---------- --------- ---------
Number of Series B preferred shares under option
Outstanding, beginning of year........................ 35,000 $ 4.00 35,000 $ 4.00 35,000 $ 4.00
Converted to common stock options..................... (35,000) 4.00 -- -- -- --
---------- --------- ---------
Outstanding, end of year................................ -- -- 35,000 4.00 35,000 4.00
---------- --------- ---------
---------- --------- ---------
Exercisable, end of year................................ -- -- 35,000 $ 4.00 35,000 $ 4.00
---------- --------- ---------
---------- --------- ---------
</TABLE>
As a result of the Company's initial public offering, all Series B Preferred
stock options converted to common stock options on a 1.142857 to one basis.
The following table summarizes information about common stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------------- ------------------------------------
NUMBER OF OPTIONS WEIGHTED AVERAGE NUMBER OF OPTIONS
OUTSTANDING AT REMAINING WEIGHTED AVERAGE EXERCISABLE AT WEIGHTED AVERAGE
EXERCISE PRICE DECEMBER 31, 1997 CONTRACTUAL LIFE EXERCISE PRICE DECEMBER 31, 1997 EXERCISE PRICE
- -------------------- ----------------- --------------------- ----------------- ----------------- -----------------
<C> <S> <C> <C> <C> <C> <C>
$ 0.25- 3.50..... 453,252 8 $ 0.85 141,551 $ 1.28
8.13- 10.00.... 452,750 9 9.94 50,834 9.73
10.06- 13.94.... 22,500 10 11.18 -- --
------- ------- -----
928,502 9 $ 5.53 192,385 $ 3.52
------- -------
------- -------
</TABLE>
In March 1997, the Company adopted the Employee Stock Purchase Plan (the
"ESPP") under Section 423 of the Internal Revenue Code. Under the ESPP, the
Board of Directors may authorize participation by eligible employees, including
officers, in periodic offerings. The Company has reserved a total of 200,000
shares of common stock for issuance under the Employee Stock Purchase Plan.
Eligible
F-17
<PAGE>
COINSTAR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 9: STOCK-BASED COMPENSATION PLANS (CONTINUED)
employees may participate through payroll deductions in amounts related to their
basic compensation. At the end of each offering period, shares are purchased by
the participants at 85% of the lower of the fair market value at the beginning
or the end of the offering period. No shares were issued under the ESPP during
1997. As of December 31, 1997, payroll deductions totalling $363,035 on behalf
of approximately 189 employees were accrued for the purchase of shares. Actual
shares purchased on January 30, 1998 totalled 58,020 and were issued to
participating employees.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its plans. Accordingly, no compensation cost has been recognized
for its stock option grants. The weighted average fair value of options granted
during 1997, 1996, and 1995 were $9.93, $.20 and $0.11, respectively. The fair
value of each option granted during 1997, 1996, and 1995 is estimated on the
date of grant using the Black-Scholes option-pricing model with the following
assumptions: five year expected life from date of grant; .48 stock volality for
1997 and no stock volatility for 1996 or 1995; risk-free interest rates from
5.17% to 6.95%; and no dividends during the expected term. Had compensation
costs for the Company's stock-based compensation plans been determined based on
the fair value at the grant dates for awards under those plans consistent with
the method prescribed in SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company's net loss and net loss per share would have
increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------
<S> <C> <C> <C>
1997 1996 1995
-------------- -------------- -------------
Net loss:
As reported................................. $ (29,593,362) $ (15,967,335) $ (6,168,715)
Pro forma................................... (30,211,943) (15,981,530) (6,173,058)
Net loss per share, basic and diluted:
As reported................................. (3.81) (20.37) (8.23)
Pro forma................................... (3.89) (20.39) (8.24)
</TABLE>
In January 1997, the Board of Directors approved an agreement for
acceleration of exercise provisions for stock options granted to certain
employees. Under the terms of the agreement, these employees are allowed to
exercise unvested stock options. Any shares purchased by an employee relating to
unvested stock options will be held in escrow until such options are vested. In
addition, the Company has the right to repurchase such shares prior to the
applicable date of vesting should the employee terminate their employment
status. The agreement has not established a new measurement date for the
affected stock options.
NOTE 10: LOSS PER SHARE
The weighted average number of shares outstanding used to compute basic and
diluted loss per share were 7,761,425, 783,690, and 749,540 for the years ended
December 31, 1997, 1996, and 1995, respectively. Because the results from
operations reflect a net loss for all years presented, basic and diluted loss
per share are calculated based on the same weighted average number of shares
outstanding.
F-18
<PAGE>
COINSTAR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 10: LOSS PER SHARE (CONTINUED)
The following warrants, options and Preferred stock were not included in the
computation of diluted loss per share, as of December 31, because the effect was
antidilutive:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------- ------------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
EXERCISE EXERCISE EXERCISE
NUMBER PRICE NUMBER PRICE NUMBER PRICE
---------- ------------- ---------- ------------- ---------- -----------
Stock warrants........................... 1,042,981 $ 4.00-15.61 3,730,159 $ 0.01-15.61 2,169,012 $ 4.00-4.25
Common stock options..................... 928,502 0.25-13.94 649,950 0.25- 1.50 411,550 0.10-0.40
Preferred stock.......................... -- -- 8,861,076 -- 8,612,297 --
</TABLE>
NOTE 11: RETIREMENT PLAN
In July 1995, the Company adopted a tax-qualified employee savings and
retirement plan under Section 401(k) of the Internal Revenue Code of 1986 (the
"Plan") for all employees who satisfy the age and service requirements under the
Plan. The Plan is funded by voluntary employee salary deferral of up to 15% of
annual compensation and employer matching contributions of up to 6% of annual
compensation. As of December 31, 1997, the Company has contributed $36,297 to
the Plan.
NOTE 12: LEGAL PROCEEDINGS
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, alleged 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
claims against Scan Coin AB have 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 13: NEW COIN COUNTING TECHNOLOGY
The Company has invented and intends to introduce new proprietary coin
counting technology that is capable of being used in the Coinstar units. The
Company currently purchases the coin counter component of the Coinstar unit
solely from Scan Coin AB ("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
F-19
<PAGE>
COINSTAR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 13: NEW COIN COUNTING TECHNOLOGY (CONTINUED)
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.
Moreover, the Company continues to install Scan Coin supplied coin counters in
its units, and will continue to do so until the commercial deployment of
Coinstar units with the Company's new coin counting technology.
NOTE 14: SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Following is a presentation of selected financial data for each of the four
quarters of 1997 and 1996:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30,
1997 1997 1997 1997 1996 1996 1996
------------- ------------- --------- ----------- ------------- ------------- ---------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Statements of Operations Data:
Revenue............................ $ 7,957 $ 7,762 $ 5,294 $ 3,995 $ 3,349 $ 2,830 $ 1,388
Expenses:
Direct operating................. 5,208 5,276 3,966 3,450 2,940 2,110 1,321
Regional sales and marketing..... 689 798 972 630 494 396 407
Product research and
development.................... 1,644 1,637 1,640 1,441 1,533 1,014 762
Selling, general and
administrative................. 3,252 2,669 2,630 2,528 1,987 1,425 1,067
Depreciation and amortization.... 2,539 2,297 2,158 1,684 1,741 1,098 796
Loss from operations............... (5,375) $ (4,915) $ (6,072) $ (5,738) $ (5,346) $ (3,213) $ (2,965)
Other income (expense):
Interest income.................. 597 710 440 580 571 22 95
Interest expense................. (2,563) (2,499) (2,415) (2,344) (2,071) (335) (168)
------------- ------------- --------- ----------- ------------- ------------- ---------
Net loss before extraordinary
item............................. $ (7,341) $ (6,704) $ (8,047) $ (7,502) $ (6,846) $ (3,526) $ (3,038)
Extraordinary item
Loss related to early retirement
of debt.......................... -- -- -- -- (249) -- --
------------- ------------- --------- ----------- ------------- ------------- ---------
$ (7,341) $ (6,704) $ (8,047) $ (7,502) $ (7,095) $ (3,526) $ (3,038)
------------- ------------- --------- ----------- ------------- ------------- ---------
------------- ------------- --------- ----------- ------------- ------------- ---------
Loss per share before extraordinary
item, basic and diluted.......... $ (.49) $ (.48) $ (8.18) (8.31) $ (8.63) $ (4.51) $ (3.89)
Extraordinary item per share, basic
and diluted...................... -- -- -- -- (.31) -- --
------------- ------------- --------- ----------- ------------- ------------- ---------
Loss per share, basic and
diluted.......................... $ (.49) $ (.48) $ (8.18) (8.31) $ (8.63) $ (4.51) $ (3.89)
------------- ------------- --------- ----------- ------------- ------------- ---------
------------- ------------- --------- ----------- ------------- ------------- ---------
Weighted average shares
outstanding, basic and diluted... 15,029 13,906 984 903 793 782 780
------------- ------------- --------- ----------- ------------- ------------- ---------
------------- ------------- --------- ----------- ------------- ------------- ---------
<CAPTION>
<S> <C>
MARCH 31,
1996
-----------
<S> <C>
Statements of Operations Data:
Revenue............................ $ 746
Expenses:
Direct operating................. 888
Regional sales and marketing..... 208
Product research and
development.................... 661
Selling, general and
administrative................. 872
Depreciation and amortization.... 499
Loss from operations............... $ (2,382)
Other income (expense):
Interest income.................. 160
Interest expense................. (87)
-----------
Net loss before extraordinary
item............................. $ (2,309)
Extraordinary item
Loss related to early retirement
of debt.......................... --
-----------
$ (2,309)
-----------
-----------
Loss per share before extraordinary
item, basic and diluted.......... $ (2.96)
Extraordinary item per share, basic
and diluted...................... --
-----------
Loss per share, basic and
diluted.......................... $ (2.96)
-----------
-----------
Weighted average shares
outstanding, basic and diluted... 780
-----------
-----------
</TABLE>
F-20
<PAGE>
EXHIBIT 12.1
COINSTAR, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
EARNINGS:
Net loss.......................... (29,593,362) (15,967,335) (6,168,715) (4,316,450) (1,814,335)
-------------- -------------- -------------- -------------- --------------
ADD BACK FIXED CHARGES:
Interest expense including
amortization of deferred
financing costs.................. 9,821,619 2,661,374 207,687 297,758 8,677
Assumed interest component of rent
expense (1)...................... 297,095 120,187 99,843 48,909 4,452
-------------- -------------- -------------- -------------- --------------
Total fixed charges............... 10,118,714 2,781,561 307,530 346,667 13,129
-------------- -------------- -------------- -------------- --------------
Adjusted earnings................. (19,474,648) (13,185,774) (5,861,185) (3,969,783) (1,801,206)
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
Ratio of earnings to fixed
charges.......................... (1.92) (4.74) (19.06) (11.45) (137.19)
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
Deficiency of earnings to fixed
charges.......................... (29,593,362) (15,967,335) (6,168,715) (4,316,450) (1,814,335)
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
</TABLE>
- ------------------------
(1) Estimated as one-third of operating lease expenses.
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-30985 of Coinstar, Inc. on Form S-8 of our report dated February 6, 1998,
included in this Annual Report on Form 10-K of Coinstar, Inc. for the year ended
December 31, 1997.
/s/ DELOITTE & TOUCHE LLP
Seattle, Washington
March 27, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1997 JAN-01-1996
<PERIOD-END> DEC-31-1996 MAR-31-1997 MAR-31-1996
<CASH> 23,867,763 16,301,302 12,076,397
<SECURITIES> 32,441,912 31,882,909 0
<RECEIVABLES> 0 0 0
<ALLOWANCES> 0 0 0
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 57,174,675 49,620,244 12,368,165
<PP&E> 27,780,317 35,449,283 9,964,912
<DEPRECIATION> (5,321,106) (6,929,794) (2,080,359)
<TOTAL-ASSETS> 82,531,063 81,538,470 20,336,896
<CURRENT-LIABILITIES> 10,380,525 15,035,276 4,871,398
<BONDS> 0 0 0
24,972,084 24,972,084 23,675,267
4,231,809 4,231,809 4,231,809
<COMMON> 18,396 93,727 14,346
<OTHER-SE> (26,226,644) (33,774,563) (14,021,669)
<TOTAL-LIABILITY-AND-EQUITY> 82,531,106 81,538,470 20,336,896
<SALES> 0 0 0
<TOTAL-REVENUES> 8,312,080 3,995,024 745,661
<CGS> 0 0 0
<TOTAL-COSTS> 22,217,604 9,732,685 3,127,370
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 2,661,374 2,344,068 87,363
<INCOME-PRETAX> (15,718,704) (7,501,691) (2,309,111)
<INCOME-TAX> 0 0 0
<INCOME-CONTINUING> (15,718,704) (7,501,691) (2,309,111)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> (248,631) 0 0
<CHANGES> 0 0 0
<NET-INCOME> (15,967,335) (7,501,691) (2,309,111)
<EPS-PRIMARY> (20.37) (8.31) (2.96)
<EPS-DILUTED> (20.37) (8.31) (2.96)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997 DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997 APR-01-1996 APR-01-1997
<PERIOD-END> JUN-30-1996 JUN-30-1997 JUN-30-1996 JUN-30-1997
<CASH> 7,283,086 16,271,057 7,283,086 16,271,057
<SECURITIES> 0 23,080,853 0 23,080,853
<RECEIVABLES> 0 0 0 0
<ALLOWANCES> 0 0 0 0
<INVENTORY> 0 0 0 0
<CURRENT-ASSETS> 7,644,554 41,188,942 7,644,554 41,188,942
<PP&E> 16,523,597 43,486,857 16,523,597 43,486,857
<DEPRECIATION> (2,874,393) (8,918,193) (2,874,393) (8,918,193)
<TOTAL-ASSETS> 21,363,134 79,102,985 21,363,134 79,102,985
<CURRENT-LIABILITIES> 6,200,930 18,522,153 6,200,930 18,522,153
<BONDS> 0 0 0 0
23,675,912 24,972,084 23,675,912 24,972,084
4,231,809 4,231,809 4,231,809 4,231,809
<COMMON> 14,346 93,727 14,346 93,727
<OTHER-SE> (17,000,477) (41,799,362) (17,000,477) (41,799,362)
<TOTAL-LIABILITY-AND-EQUITY> 21,363,134 79,102,985 21,363,134 79,102,985
<SALES> 0 0 0 0
<TOTAL-REVENUES> 2,133,643 9,288,582 1,387,982 5,293,558
<CGS> 0 0 0 0
<TOTAL-COSTS> 7,480,104 21,097,599 4,352,734 11,364,914
<OTHER-EXPENSES> 0 0 0 0
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 254,936 4,758,676 167,573 2,414,608
<INCOME-PRETAX> (5,346,844) (15,547,986) (3,037,733) (8,046,295)
<INCOME-TAX> 0 0 0 0
<INCOME-CONTINUING> (5,346,844) (15,547,986) (3,037,733) (8,046,295)
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (5,346,844) (15,547,986) (3,037,733) (8,046,295)
<EPS-PRIMARY> (6.85) (16.47) (3.89) (8.18)
<EPS-DILUTED> (6.85) (16.47) (3.89) (8.18)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 9-MOS 3-MOS 9-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1997 JUL-01-1997 JAN-01-1996 JUL-01-1996
<PERIOD-END> SEP-30-1997 SEP-30-1997 SEP-30-1996 SEP-30-1996
<CASH> 32,646,230 32,646,230 6,414,548 6,414,548
<SECURITIES> 29,036,249 29,036,249 0 0
<RECEIVABLES> 0 0 0 0
<ALLOWANCES> 0 0 0 0
<INVENTORY> 0 0 0 0
<CURRENT-ASSETS> 63,067,603 63,067,603 7,095,052 7,095,052
<PP&E> 51,683,670 51,683,670 22,016,362 22,016,362
<DEPRECIATION> (11,077,660) (11,077,660) (3,968,383) (3,968,383)
<TOTAL-ASSETS> 107,144,107 107,144,107 25,483,817 25,483,817
<CURRENT-LIABILITIES> 21,810,197 21,810,197 9,124,345 9,124,345
<BONDS> 0 0 0 0
0 0 24,275,267 24,275,267
0 0 4,231,809 4,231,809
<COMMON> 60,587,806 60,587,806 18,396 18,396
<OTHER-SE> (50,459,519) (50,459,519) (20,102,589) (20,102,589)
<TOTAL-LIABILITY-AND-EQUITY> 107,144,107 107,144,107 25,483,815 25,483,815
<SALES> 0 0 0 0
<TOTAL-REVENUES> 17,050,337 7,761,755 4,963,344 2,829,701
<CGS> 0 0 0 0
<TOTAL-COSTS> 33,774,808 12,677,206 13,522,497 6,042,392
<OTHER-EXPENSES> 0 0 0 0
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 7,258,108 2,499,432 590,424 335,488
<INCOME-PRETAX> (22,252,091) (6,704,103) (8,872,703) (3,525,855)
<INCOME-TAX> 0 0 0 0
<INCOME-CONTINUING> (22,252,091) (6,704,103) (8,872,703) (3,525,858)
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (22,252,091) (6,704,103) (8,872,703) (3,525,858)
<EPS-PRIMARY> (4.19) (.48) (11.37) (4.51)
<EPS-DILUTED> (4.19) (.48) (11.37) (4.51)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 OCT-01-1997
<PERIOD-END> DEC-31-1997 DEC-31-1997
<CASH> 20,199,914 20,199,914
<SECURITIES> 36,603,474 36,603,474
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 57,824,737 57,824,737
<PP&E> 56,439,517 56,439,517
<DEPRECIATION> (13,511,235) (13,511,235)
<TOTAL-ASSETS> 103,545,894 103,545,894
<CURRENT-LIABILITIES> 23,103,585 23,103,585
<BONDS> 0 0
0 0
0 0
<COMMON> 61,039,848 61,039,848
<OTHER-SE> (57,930,544) (57,930,544)
<TOTAL-LIABILITY-AND-EQUITY> 103,545,894 103,545,894
<SALES> 0 0
<TOTAL-REVENUES> 25,007,251 7,956,914
<CGS> 0 0
<TOTAL-COSTS> 47,107,025 13,332,216
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 9,821,619 2,563,511
<INCOME-PRETAX> (29,593,362) (7,341,271)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (29,593,362) (7,341,271)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (29,593,362) (7,341,271)
<EPS-PRIMARY> (3.81) (.49)
<EPS-DILUTED> (3.81) (.49)
</TABLE>
