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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
FOR THREE MONTH PERIOD ENDED MARCH 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-22555
------------------------
COINSTAR, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3156448
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1800 114TH AVENUE SE, BELLEVUE, WASHINGTON 98004
(Address of principal executive offices) (Zip Code)
(425) 943-8000
(Registrant's telephone number, including area code)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /.
------------------------
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
<TABLE>
<S> <C>
CLASS OUTSTANDING AT APRIL 30, 1998
Common Stock, $0.001 par value 15,111,548
</TABLE>
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COINSTAR, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE NO.
---------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of March 31, 1998 (unaudited) and December 31, 1997........... 1
Consolidated Statements of Operations for the three month periods ended March 31, 1998 and
1997 (unaudited)........................................................................... 2
Consolidated Statement of Stockholders' Equity (Deficit) for the three month periods ended
March 31, 1998 (unaudited)................................................................. 3
Consolidated Statements of Cash Flows for the three month periods ended March 31, 1998 and
1997 (unaudited)........................................................................... 4
Notes to Consolidated Financial Statements for the three month periods ended March 31, 1998
and 1997................................................................................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........ 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................................ 22
Item 2. Changes in Securities and Use of Proceeds.................................................... 22
Item 6. Exhibits and Reports on Form 8-K............................................................. 23
SIGNATURES.............................................................................................. 24
EXHIBIT INDEX........................................................................................... 25
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COINSTAR, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
1997
MARCH 31, --------------
1998
--------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................................ $ 17,057,946 $ 20,199,914
Short-term investments available for sale...................................... 31,968,293 36,603,474
Prepaid expenses and other current assets...................................... 1,109,900 1,021,349
-------------- --------------
Total current assets......................................................... 50,136,139 57,824,737
PROPERTY AND EQUIPMENT, net......................................................
Coinstar Units................................................................. 55,678,222 51,002,230
Computers...................................................................... 2,892,620 2,792,326
Office furniture and equipment................................................. 1,161,744 1,153,974
Leased vehicles................................................................ 1,236,192 1,014,873
Leasehold improvements......................................................... 404,533 366,090
Coinstar components............................................................ 0 110,024
-------------- --------------
61,373,311 56,439,517
Accumulated depreciation....................................................... (16,255,960) (13,511,235)
-------------- --------------
45,117,351 42,928,282
OTHER ASSETS..................................................................... 2,690,103 2,792,875
-------------- --------------
TOTAL............................................................................ $ 97,943,593 $ 103,545,894
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable............................................................... $ 3,719,304 $ 3,328,069
Accrued liabilities............................................................ 16,997,867 18,253,065
Current portion of long-term debt and capital lease obligations................ 1,661,353 1,612,451
-------------- --------------
Total current liabilities.................................................... 22,378,524 23,103,585
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS..................................... 79,472,286 77,333,005
COMMITMENTS AND CONTINGENCIES (Note 3,4)
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock................................................................... 61,480,216 61,039,848
Contributed capital for warrants............................................... 513,584 513,584
Accumulated deficit............................................................ (65,901,017) (58,444,128)
-------------- --------------
Total stockholders equity (deficit).......................................... (3,907,217) 3,109,304
-------------- --------------
TOTAL............................................................................ $ 97,943,593 $ 103,545,984
-------------- --------------
-------------- --------------
</TABLE>
See notes to consolidated financial statements
1
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COINSTAR, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTH PERIODS ENDED
MARCH 31,
----------------------------
1998 1997
------------- -------------
<S> <C> <C>
REVENUE.......................................................................... $ 8,822,835 $ 3,995,024
EXPENSES:
Direct operating............................................................... 5,823,711 3,450,144
Regional sales and marketing................................................... 916,896 629,908
Product research and development............................................... 1,409,817 1,440,642
Selling, general, and administrative........................................... 3,275,628 2,527,663
Depreciation and amortization.................................................. 2,813,277 1,684,328
------------- -------------
Loss from operations............................................................. (5,416,494) (5,737,661)
OTHER INCOME (EXPENSE):
Interest income................................................................ 501,407 580,038
Interest expense............................................................... (2,571,057) (2,344,068)
Other Income................................................................... 39,108 --
------------- -------------
NET LOSS......................................................................... $ (7,447,036) $ (7,501,691)
------------- -------------
------------- -------------
Net loss per share, basic and diluted.......................................... $ (0.49) $ (8.31)
------------- -------------
------------- -------------
Weighted average shares outstanding, basic and diluted......................... 15,079,985 903,497
------------- -------------
------------- -------------
</TABLE>
See notes to consolidated financial statements.
2
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COINSTAR, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK CONTRIBUTED
--------------------------- FOR CAPITAL ACCUMULATED
SHARES AMOUNT WARRANTS DEFICIT TOTAL
------------ ------------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, January 1, 1998................ 15,034,629 $ 61,039,848 $ 513,584 $ (58,444,128) $ 3,109,304
Issuance of shares under employee stock
purchase plan......................... 58,020 425,271 -- -- 425,271
Exercise of stock options............... 10,282 15,097 -- -- 15,097
Unrealized loss on short-term
investments available for sale........ -- -- -- (9,853) (9,853)
Net loss................................ (7,447,036) (7,447,036)
------------ ------------- ----------- -------------- -------------
BALANCE, March 31, 1998................. 15,102,931 $ 61,480,216 $ 513,584 $ (65,901,017) $ (3,907,217)
------------ ------------- ----------- -------------- -------------
------------ ------------- ----------- -------------- -------------
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
COINSTAR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTH PERIODS
ENDED MARCH 31,
-----------------------------
1998 1997
-------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss......................................................................... $ (7,447,036) $ (7,501,691)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization.................................................. 2,813,277 1,684,328
Debt discount amortization..................................................... 2,433,187 2,204,942
Accrued investment income...................................................... 164,509 (283,178)
Non-cash stock-based compensation.............................................. 10,754 --
Cash provided (used) by changes in operating assets and liabilities:
Prepaid expenses and other current assets.................................... $ (88,551) $ (571,033)
Other assets................................................................. 588 (570,736)
Accounts payable............................................................. 481,235 876,313
Accrued liabilities.......................................................... (1,256,764) 3,480,901
-------------- -------------
Net cash used by operating activities............................................ $ (2,888,801) $ (680,154)
INVESTING ACTIVITIES:
Purchase of short-term investments............................................... $ (15,537,936) $ (2,970,693)
Sale of short-term investments................................................... 19,998,755 3,766,644
Purchase of fixed assets......................................................... (4,735,679) (7,675,390)
-------------- -------------
Net cash used by investing activities............................................ $ (274,860) $ (6,879,439)
FINANCING ACTIVITIES:
Payments on long-term debt....................................................... (407,920) (82,199)
Net proceeds from issuance of common stock....................................... 425,271 --
Net proceeds from exercise of stock options...................................... 15,097 75,331
-------------- -------------
Net cash provided (used) by financing activities................................. $ 21,694 $ (6,868)
-------------- -------------
DECREASE IN CASH AND CASH EQUIVALENTS.............................................. $ (3,141,967) $ (7,566,461)
CASH AND CASH EQUIVALENTS:
Beginning of period.............................................................. $ 20,199,913 $ 23,867,763
-------------- -------------
End of period.................................................................... $ 17,057,946 $ 16,301,302
-------------- -------------
-------------- -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest......................................... $ 141,952 $ 139,126
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
Purchase of vehicles financed by capital lease obligation........................ $ 74,637
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
COINSTAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIOD ENDING MARCH 31, 1998
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The unaudited consolidated financial statements of
Coinstar, Inc. and its newly formed subsidiary Coinstar International, Inc.
(collectively, the "Company") included herein reflect all adjustments,
consisting only of normal recurring adjustments which, in the opinion of
management, are necessary to present fairly the Company's financial position,
results of operations and cash flows for the periods presented.
These financial statements have been prepared by the Company pursuant to the
rules and regulations of the Securities and Exchange Commission (the "SEC").
Certain information and footnote disclosures, normally included in financial
statements prepared in accordance with generally accepted accounting principles,
have been omitted pursuant to such SEC rules and regulations. These financial
statements should be read in conjunction with the Company's audited financial
statements and the accompanying notes included in the Company's Form 10-K for
the year ended December 31, 1997 filed with the SEC. The results of operations
for the three month period ended March 31, 1998 are not necessarily indicative
of the results to be expected for any subsequent quarter or for the entire
fiscal year.
PRINCIPLES OF CONSOLIDATION: The financial statements include the accounts
of Coinstar, Inc. and its wholly owned subsidiary Coinstar International, Inc.
Coinstar International, Inc. was formed in March 1998 for the purpose of
exploring the expansion of the Coinstar network internationally. For the three
month period ending March 31, 1998, there has been no activity in Coinstar
International Inc.
NEW ACCOUNTING PRONOUNCEMENTS: The Accounting Standards Executive Committee
of the American Institute of Certified Public Accountants issued Statement of
Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use," on March 4, 1998. This SOP is effective for the
Company's year ending December 31, 1999 and requires certain of the Company's
product research and development expenses related to development of software for
internal use to be capitalized. The Company is currently evaluating the effects
of this Statement, and management is uncertain as to the impact of its adoption
on the financial statements, taken as a whole.
Statement of Financial Accounting Standards (SFAS) No. 130, "REPORTING
COMPREHENSIVE INCOME" and SFAS No. 131, "DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION," were also recently issued and are effective
for the Company's year ending December 31, 1998. The Company is currently
evaluating the effects of these Standards, however, management believes the
impact of adoption will not be material to the financial statements, taken as a
whole.
NOTE 2: LETTER OF CREDIT
As of March 31, 1998 the Company had outstanding a secured irrevocable
letter of credit with a bank in the amount of $2.5 million. This letter of
credit, which expires in July 1998, collateralizes the Company's obligations to
a third party. As of March 31, 1998, no amounts were outstanding under the
letter of credit.
NOTE 3: LEGAL PROCEEDINGS
On June 18, 1997, the Company filed in the United States District Court,
Northern District of California against CoinBank Automated Systems, Inc.
("CoinBank"), one of its competitors, a complaint for infringement of one of the
Company's United States patents (the "Patent Infringement Claim"). On June 27,
1997, CoinBank answered the Patent Infringement Claim and counterclaimed for
declaration of
5
<PAGE>
COINSTAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTH PERIOD ENDING MARCH 31, 1998
NOTE 3: LEGAL PROCEEDINGS (CONTINUED)
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 or found to be invalid.
NOTE 4: 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 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.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE DISCUSSION IN THIS FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS
REGARDING THE COMPANY, ITS BUSINESS, PROSPECTS AND RESULTS OF OPERATIONS THAT
INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL BUSINESS, PROSPECTS AND
RESULTS OF OPERATIONS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED HEREIN AS WELL AS THOSE DISCUSSED UNDER THE CAPTION
"RISK FACTORS" IN THE COMPANY'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997.
READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING
STATEMENTS, WHICH REFLECT MANAGEMENT'S ANALYSIS ONLY AS OF THE DATE HEREOF. THE
COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY RELEASE THE RESULTS OF ANY REVISION
TO THESE FORWARD-LOOKING STATEMENTS WHICH MAY BE MADE TO REFLECT EVENTS OR
CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF
UNANTICIPATED EVENTS. READERS ARE URGED TO CAREFULLY REVIEW AND CONSIDER THE
VARIOUS DISCLOSURES MADE BY THE COMPANY IN THIS REPORT AND IN THE COMPANY'S
OTHER REPORTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION THAT ATTEMPT TO
ADVISE INTERESTED PARTIES OF THE RISKS AND FACTORS AND MAY AFFECT THE COMPANY'S
BUSINESS, PROSPECTS AND RESULTS OF OPERATIONS.
OVERVIEW
The Company develops, owns and operates a network of automated, self-service
coin counting and processing machines that provides consumers with a convenient
means to convert loose coins into cash. The Company began field testing of a
prototype unit in 1992 and commercial installation of units in supermarkets in
1994. The Company has increased its store installation base every year and as of
March 31, 1998 had an installed base of 3,531 units located in supermarkets,
financial institutions and mass merchants in 42 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 $65.9
million as of March 31,1998. The continued rapid expansion of its installed base
is expected to result in continued increases in the number of employees,
marketing and field service personnel expenses in new regions and general and
administrative expenses related to the ongoing development of information
systems to support future growth. Consequently, the Company expects to incur
operating losses in the future. To date, the Company has funded its operating
losses and capital expenditure requirements through the private sale of equity
and, in October 1996, the sale of the Company 13% Senior Subordinated Discount
notes due at maturity in 2006 (the "Notes") for net proceeds of $62.9 million.
The Company also raised capital through its initial public offering of 3.0
million shares of Common Stock for net proceeds of $28.4 million. In connection
with the debt financing in October 1996, the Company began to prepare for
accelerated future growth of its installed base by increasing expenditures on
its field service organization, upgrading its systems engineering capabilities
and developing and testing new marketing and promotion programs designed to
increase coin processing volumes.
The Company currently derives substantially all its revenues from coin
processing services generated by its installed base of Coinstar units located in
supermarket chains in 30 states across the country. The Company established a
wholly-owned subsidiary in March 1998 to explore expanding the Company's
operations internationally. At the present time, however, the Company has not
expanded its operations internationally. 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
7
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awareness levels of the service increases, driving initial trial and repeat
usage for the service. The Company believes that coin processing volumes per
unit may also be affected by other factors such as public relations, advertising
and other activities that promote awareness of the units, as well as the amount
of consumer traffic in the stores in which the units are located and
seasonality. Given the Company's limited operating history, there can be no
assurance, however, that unit volumes will continue to increase as a function of
the time the unit is in operation, or that unit volumes will be affected by such
other factors. The Company expects that as it continues to aggressively expand
installations relative to the 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. Other income consists of rental income from a
sublease of unused office space.
The Company expects to continue to evaluate new marketing and promotional
programs to increase the breadth and rate of customer utilization of its service
and to engage in systems and product research and development. The Company
intends to continue to invest in sales and marketing and product research and
development, which is expected to negatively impact its operating results. The
Company believes that its future revenue growth, operating margin gains and
profitability will be dependent upon the penetration of its installed base with
retail distribution partners in existing markets, expansion and penetration of
installations in new market regions and successful ongoing marketing and
promotional activities to sustain the growth in unit coin volume over time.
Given the Company's limited operating history, unpredictability of the timing of
installations with retail distribution partners and the resulting revenues, and
the continued market acceptance of the Company's service by consumers and retail
distribution partners, the Company's operating results for any quarter are
subject to significant variation, and the Company believes that period-to-period
comparisons of its results of operations are not necessarily meaningful and
should not be relied upon as indications of future performance.
RESULTS OF OPERATIONS
THREE MONTH PERIODS ENDED MARCH 31, 1998 AND 1997
REVENUE
Revenue increased to $8.8 million in the three month period ended March 31,
1998 from $4.0 million in the comparable 1997 period. The increase was due
principally to the increase in the number of Coinstar units in service during
the three month period and the increase in the volume of coins processed by the
8
<PAGE>
units in service during this period. The installed base of Coinstar units
increased to 3,531 as of March 31, 1998 from 1,929 units as of March 31, 1997.
During the first quarter of 1998, 327 units were installed compared to 428 for
the same period in 1997. The reduced number of installations during the first
quarter of 1998 was primarily due to a six week delay in installations for one
retail distribution partner. Without this delay, the Company would have
installed approximately 470 units during the quarter. Retail distribution
partner related delays often affect the timing of installations. The dollar
value of coins processed in the first quarter of 1998 increased to $117.3
million compared to $52.7 million in the comparable 1997 period.
DIRECT OPERATING EXPENSES
Direct operating expenses increased to $5.8 million in the three month
period ended March 31, 1998 from $3.5 million in the comparable 1997 period. The
increase in direct operating expenses was primarily attributable to increased
coin pickup and processing costs as a result of the increased dollar volumes
processed by the network and the increase in field service personnel expenses
associated with the hiring and training of new field service personnel to
support the Company's growth and its expansion into 2 new regions as of March
31, 1998. Direct operating expense as a percentage of revenue decreased to 66%
for the three month period ended March 31, 1998 from 86.4% in the comparable
1997 period. The Company anticipates that direct operating expense will continue
to increase as the number of installed units increases. However, direct
operating expenses as a percentage of revenue are expected to decrease as (i)
coin pickup and processing cost economies from regional densities are realized,
(ii) field service expenses decrease as a percentage of revenue as the Company
increases its density in its existing markets, and (iii) the Company integrates
its new coin counting technology into the network, which is expected to increase
the productivity of the Company's field service organization.
REGIONAL SALES AND MARKETING
Regional sales and marketing expense increased to $917,000 in the three
month period ended March 31, 1998 from $630,000 in the comparable 1997 period.
The increase in regional marketing expense was the result of an increased level
of advertising, cooperative promotion with its retail distribution partners and
public relation efforts focused on increasing the awareness of the Coinstar
service in the first quarter of 1998. 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. However, as a percentage of revenue, the
Company expects regional sales and marketing costs to decrease over the year
ending 1998 compared with the year ending 1997.
PRODUCT RESEARCH AND DEVELOPMENT
Product research and development expenses remained at $1.4 million in the
three month period ended March 31, 1998 compared to $1.4 million in the
comparable 1997 period. The principal component of such expenses was personnel
compensation. The Company expects to maintain its product research and
development expenditures at the present levels for 1998. However, as a
percentage of revenue, the Company expects its product research and development
expenditures to decrease over the year ending 1998 compared with the year ending
1997. While the Company currently expenses all product research and development
costs, a portion may be capitalized in the future.
SELLING, GENERAL, AND ADMINISTRATIVE
Selling, general, and administrative expense increased to $3.3 million in
the three month period ended March 31, 1998 from $2.5 million in the comparable
1997 period. The principal component of such expenses was personnel compensation
and the period-to-period increase reflects an investment in higher staffing
levels to support the Company's rapid growth and expansion. The Company expects
selling, general and administrative expenses to continue to increase in 1998 as
the Company continues to add staff.
9
<PAGE>
However, as a percentage of revenue, the Company expects its selling, general
and administrative to decrease over the year ending 1998 compared with the year
ending 1997.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased to $2.8 million in the three
month period ended March 31, 1998 from $1.7 million in the comparable 1997
period. The increase was primarily due to the increase in the installed base of
Coinstar units. The Company expects depreciation and amortization expense to
increase significantly over the next several years as a result of expected
increases in the installation of Coinstar units.
OTHER INCOME AND EXPENSE
The Company generated income of $39,000 in the three month period ended
March 31, 1998 due to the subleasing of excess office space. The Company expects
to maintain this income source until the year 2000, as this sublease agreement
has a two year term.
Interest income decreased to $501,000 in the three month period ended March
31, 1998 from $580,000 in the comparable 1997 period. The decrease in interest
income is attributed to a reduction in invested cash balances resulting from the
sale of certain short-term investments to finance the installation of Coinstar
units during the period.
Interest expense increased to $2.6 million in the three month period ended
March 31, 1998 from $2.3 million in the comparable 1997 period. The increase was
due to the accretion of the Notes. No cash interest payments are due on the
Notes until April 2000.
NET LOSS
Net loss decreased to $7.4 million in the three month period ended March 31,
1998 from $7.5 million in the comparable 1997 period. The decrease in the net
loss primarily was due to an increase in the Company's contribution margin
combined with a reduction in the rate of growth of expenses. As a result, the
improvement in net income reflects improved operating leverage of the Coinstar
network. In the longer term, the Company expects that it will not be required to
add as much infrastructure as it has in the past to support its installed base
and as a result expects to achieve profitability as its direct contribution
margin from its larger base of installed units grows proportionately faster than
its expenses. There can be no assurance, however, that the Company will install
a sufficient number of units or obtain sufficient market acceptance to allow the
Company to achieve or sustain profitability.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1998, the Company had cash and cash equivalents of $17.1
million, short-term investments of $32.0 million and working capital of $27.8
million. Cash and cash equivalents include $13.6 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 $2.9 million for the
three month period ended March 31, 1998 and was $680,000 for the comparable
period in 1997. 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 combined with a decrease in accrued liabilities.
Net cash used by investing activities was $275,000 for the three month
period ended March 31, 1998 and $6.9 million for the comparable period in 1997.
Capital expenditures during the three month period ended March 31, 1998 and the
comparable period in 1997 were $4.7 million and $7.7 million, respectively. The
majority of capital expenditures consist of the manufacturing of Coinstar units.
Net cash provided by financing activities was $21,694 for the three month
period ended March 31, 1998 and net cash used by financing activities for the
comparable period in 1997 was $6,868.
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<PAGE>
As of March 31, 1998 the Company had outstanding a secured irrevocable
letter of credit with a bank in the amount of $2.5 million. This letter of
credit, which expires in July 1998, collateralizes the Company's obligations to
a third party. As of March 31, 1998, 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 domestic Coinstar network at the recent
installation rate for at least the next twelve months. The extent of additional
financing needed will depend on the success of the Company's business. If the
Company significantly increases installations beyond planned levels or if unit
coin processing volumes generated are lower than historical levels, the
Company's cash needs will be increased. The Company's future capital
requirements will depend on a number of factors, including the timing and number
of unit installations, the type and scope of service enhancements, the level of
market acceptance of the Company's service and the feasibility of international
expansion. In addition, beginning in April 2000, the Company will have debt
service obligations under the Notes that were issued in October 1996 of over $12
million per year until October 2006, at which time the principal amount of the
Notes ($95.0 million) will be due. See "Risk Factors--Uncertainty of Future
Operating Results; Fluctuations in Quarterly Operating Results; and Substantial
Leverage and Ability to Service Debt."
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<PAGE>
QUARTERLY FINANCIAL RESULTS
The following table sets forth selected unaudited quarterly financial
information and operating data for the last eight quarters. This information has
been prepared on the same basis as the Company's unaudited consolidated
financial statements and includes, in the opinion of management, all normal and
recurring adjustments that management considers necessary for a fair statement
of the quarterly results for the periods. The operating results and data for any
quarter are not necessarily indicative of the results for future periods.
<TABLE>
<CAPTION>
THREE MONTH PERIODS ENDED
---------------------------------------------------------------------------------------------------------
MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30,
1998 1997 1997 1997 1997 1996 1996 1996
--------- ------------ ------------- -------- --------- ------------ ------------- --------
(DOLLARS IN THOUSANDS, EXCEPT UNIT AND PER UNIT DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statements of Operations
Data:
Revenue................. $ 8,823 $ 7,957 $ 7,762 $ 5,294 $ 3,995 $ 3,349 $ 2,830 $ 1,388
Expenses:
Direct operating...... 5,823 5,208 5,276 3,966 3,450 2,940 2,110 1,321
Regional sales and
marketing........... 917 689 798 972 630 494 396 407
Product research and
development......... 1,410 1,644 1,637 1,640 1,441 1,533 1,014 762
Selling, general and
administrative...... 3,276 3,252 2,669 2,630 2,528 1,987 1,425 1,067
Depreciation and
amortization........ 2,813 2,539 2,297 2,158 1,684 1,741 1,098 796
Loss from operations.... (5,416) (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............ 327 598 400 406 428 292 413 364
Installed base of
Coinstar units at end
of period............. 3,531 3,204 2,735 2,335 1,929 1,501 1,209 796
Average age of network
for the period
(months).............. 13.4 11.7 10.6 9.3 8.3 7.0 6.1 6.4
Number of regional
markets............... 42 40 35 33 27 23 22 18
Dollar value of coins
processed............. 117,298 $105,692 $103,442 $70,626 $52,724 $44,841 $37,637 $20,692
Direct contribution
(loss)(1)............. 3,000 $ 2,749 $ 2,486 $ 1,328 $ 545 $ 409 $ 720 $ 67
Annualized revenue per
average installed
unit(2)............... $ 10,597 $ 10,907 $ 12,284 $ 9,939 $ 9,433 $ 9,623 $11,021 $ 9,269
Annualized direct
contribution per
average installed
unit(1)(2)............ $ 3,601 $ 3,768 $ 3,935 $ 2,494 $ 1,287 $ 1,175 $ 2,804 $ 449
</TABLE>
- --------------------------
(1) Direct contribution (loss) is defined as revenue less direct operating
expenses. The Company uses direct contribution (loss) as a measure of
operating performance to assist in understanding its operating results.
Direct contribution (loss) is not a measure of financial performance under
GAAP and should not be considered in isolation or an alternative to gross
margin, income (loss) from operations, net income (loss), or any other
measure of performance under GAAP.
(2) Based on monthly averages of units in operation over the applicable period.
Based on its limited operating history, the Company believes that coin
processing volumes have been affected by seasonality; in particular 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
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<PAGE>
projections of future seasonality are inherently uncertain due to the Company's
limited operating history, and due to the lack of comparable companies engaged
in the coin processing business.
In addition to fluctuations in revenue resulting from factors affecting
customer usage, timing of unit installations will result in significant
fluctuations in quarterly results. The rate of installations does not follow a
regular pattern, as it depends principally on installation schedules determined
by agreements between the Company and its retail distribution partners, variable
length of partner trial periods and the planned coordination of multiple partner
installations in a given geographic region.
Increasing quarterly losses from operations during the periods presented
were the result of higher direct operating expenses associated with the
significant increase in the Company's installed base, higher depreciation and
amortization expense from the expansion of the installed base and the
significantly higher level of systems infrastructure and management personnel to
support the Company's accelerated growth. The Company expects to continue to
incur substantial and increasing quarterly operating losses from operations as
it plans to significantly increase its installed base of Coinstar units.
NEW ACCOUNTING PRONOUNCEMENTS
The Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants issued Statement of Position ("SOP") 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," on March 4, 1998. This SOP is effective for the Company's year
ending December 31, 1999 and requires certain of the Company's product research
and development expenses related to development of software for internal use to
be capitalized. The Company is currently evaluating the effects of this SOP, and
management is uncertain as to the impact of its adoption on the financial
statements, taken as a whole.
Statement of Financial Accounting Standards (SFAS) No. 130, "REPORTING
COMPREHENSIVE INCOME" and SFAS No. 131, "DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION," were also recently issued and are effective
for the Company's year ending December 31, 1998. The Company is currently
evaluating the effects of these Standards, however, management believes the
impact of adoption will not be material to the financial statements, taken as a
whole.
RISK FACTORS
IN EVALUATING THE COMPANY'S BUSINESS, PROSPECTS AND RESULTS OF OPERATIONS,
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS IN
ADDITION TO THE OTHER INFORMATION PRESENTED IN THIS REPORT AND IN THE COMPANY'S
OTHER REPORTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION THAT ATTEMPT TO
ADVISE INTERESTED PARTIES OF THE RISKS AND FACTORS THAT MAY AFFECT THE COMPANY'S
BUSINESS, PROSPECTS AND RESULTS OF OPERATIONS.
HISTORY OF SUSTAINED OPERATING LOSSES AND CONTINUATION OF SUCH LOSSES. The
Company has incurred substantial and increasing operating losses since inception
in 1991. The Company's net loss for 1996, 1997 and the three month period ended
March 31, 1998 was $16.0 million, $29.6 million and $7.4 million, respectively.
As of March 31, 1998, the Company had an accumulated deficit of $65.9 million.
Operating losses to date have resulted primarily from expenses incurred in the
development, marketing and operation of the Coinstar units, expansion and
maintenance of the network, administrative and occupancy expenses at the
Company's headquarters, and depreciation and amortization. The Company expects
to continue to incur operating losses and negative cash flow from operating and
investing activities as it continues to increase its installed base of Coinstar
units.
LIMITED OPERATING HISTORY. After several years of development, the Company
commenced commercial deployment of Coinstar units in 1994 and placed
approximately 93% of the installed base in 1996, 1997, and the three month
period ended March 31, 1998. Prospective investors, therefore, have limited
historical financial information on which to base an evaluation of the Company's
performance. The Company's prospects must be considered in light of the risks,
expenses and difficulties frequently
13
<PAGE>
encountered by companies in an early stage of development, particularly
companies in new or rapidly evolving markets. There can be no assurance that the
Company will install a sufficient number of its Coinstar units or obtain
sufficient market acceptance to allow the Company to achieve or sustain
profitability, or generate sufficient cash flow to meet the Company's capital
and operating expenses and debt service obligations.
UNCERTAINTY OF FUTURE OPERATING RESULTS. Substantially all of the Company's
revenue has been, and the Company believes will continue to be, derived from the
processing fees charged for the Company's coin processing service. Prior growth
rates in the Company's revenue should not be considered indicative of future
operating results. The timing and amount of future revenues will depend almost
entirely on the Company's ability to obtain new agreements with potential retail
distribution partners for the installation of Coinstar units, the successful
deployment and operation of the Company's coin processing network, and customer
utilization of the service. Future operating results will depend upon many
factors, including the Company's success in deploying a substantial number of
additional units, the consumer demand for the Company's coin processing service,
the level of product and price competition, the Company's success in expanding
its network and managing the growth of such network, the ability of the Company
to develop and market product enhancements, the timing of product enhancements,
activities of and acquisitions by competitors, the ability to hire additional
employees and the timing of such hiring and the ability to control costs.
Fluctuations in the volume and value of coins processed and the rate of unit
installations have caused and may continue to cause material fluctuations in the
Company's operating results, particularly on a quarterly basis. Quarterly
revenue and operating results, therefore, depend on the volume and mix of coins
processed and the rate of unit installations during the quarter, all of which
are difficult to forecast.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. The customer utilization of
the Company's coin processing service varies substantially from unit to unit,
making the Company's revenues difficult to forecast. Customer utilization is
affected by the timing and success of promotions by the Company and its retail
distribution partners, age of the installed unit, adverse weather conditions and
other factors, many of which are not in the Company's control. Based on its
limited operating history, the Company believes that coin processing volumes are
affected by seasonality; in particular the Company believes that on a relative
basis coin processing volumes have been lower in the months of January,
February, September and October. There can be no assurance, however, that such
seasonal trends will continue. Any projections of future seasonality are
inherently uncertain due to the Company's limited operating history, and due to
the lack of comparable companies engaged in the coin processing business. As a
result of these and other factors, revenue for any quarter is subject to
significant variation, and the Company believes that period-to-period
comparisons of its results of operations are not necessarily meaningful and
should not be relied upon as indications of future performance. Because the
Company's operating expenses are based on anticipated revenue trends and because
a large percentage of the Company's expenses are relatively fixed, revenue
variability could cause significant variations in operating results from quarter
to quarter and could result in significant losses. To the extent such expenses
precede, or are not subsequently followed by, increased revenue, the Company's
operating results would be materially adversely affected. Due to all of the
foregoing factors, it is likely that in some future quarter the Company's
operating results will be below the expectations of public market analysts and
investors. In such event, the price of the Company's Common Stock would likely
be materially adversely affected. Fluctuations in operating results may also
result in volatility in the price of the Company's Common Stock.
SUBSTANTIAL LEVERAGE AND ABILITY TO SERVICE DEBT. The Company had
outstanding indebtedness as of March 31, 1998 of $81.1 million, which included
$77.8 million of the Notes. The Notes will accrete to $95.0 million by October
1999. The Company must begin paying cash interest on the Notes in April 2000.
Beginning at that time, the Company will have debt service obligations of over
$12.0 million per year until October 2006 when the principal amount of $95.0
million will be due. The Company's capital expenditures will increase
significantly upon the continued expansion of the Coinstar network, and the
Company expects that its operating cash flow will be insufficient to finance
capital expenditures over the next several years.
14
<PAGE>
The ability of the Company to meet its debt service requirements will depend
upon achieving significant and sustained growth in the Company's cash flow,
which will be affected by its success in implementing its business strategy,
prevailing economic conditions and financial, business and other factors,
certain of which are beyond the Company's control. Accordingly, there can be no
assurance as to whether or when the Company's operations will generate positive
cash flow or become profitable or whether the Company will at any time have
sufficient resources to meet its debt service obligations. If the Company is
unable to generate sufficient cash flow to service its indebtedness, it will
have to reduce or delay planned capital expenditures, sell assets, restructure
or refinance its indebtedness or seek additional equity capital. There can be no
assurance that any of these strategies could be effected on satisfactory terms,
if at all, particularly in light of the Company's high levels of indebtedness.
In addition, the degree to which the Company is leveraged could have significant
consequences, including, but not limited to, the following: (i) the Company's
ability to obtain additional financing in the future for working capital,
capital expenditures, product research and development, acquisitions, and other
general corporate purposes may be materially limited or impaired, (ii) a
substantial portion of the Company's cash flow from operations may need to be
dedicated to the payment of principal and interest on its indebtedness and
therefore not available to finance the Company's business and (iii) the
Company's high degree of leverage may make it more vulnerable to economic
downturns, may limit its ability to withstand competitive pressures and may
reduce its flexibility in responding to changing business and economic
conditions.
COMPETITION. The Company believes that it is the first company to provide a
widespread network of self-service coin processing machines that provide a
convenient, reliable means for consumers to convert loose coins into cash. The
Company has become aware of two direct competitors that operate self-service
coin processing machines, both of which the Company believes operate an
installed base of less than 150 units in certain regions of the United States.
There can be no assurance, however, that such competitors have not or will not
increase their installed base of units or expand their service nationwide. The
Company also competes indirectly with manufacturers of machines and devices that
enable consumers to count or sort coins themselves. The Company also competes or
may compete directly or indirectly with banks and similar depository
institutions for coin conversion customers. Currently, banks are the primary
alternative available to consumers for converting coins into cash, and they
generally do not charge a fee for accepting rolled coins. As the market for coin
processing develops, banks and other businesses may decide to offer additional
coin processing services, either as a customer service or on a self-service
basis, and compete directly with the Company. Many of these potential
competitors have longer operating histories, greater name recognition, larger
customer bases and significantly greater financial, technical, marketing and
public relations resources than the Company. Such competitors may be able to
undertake more extensive marketing campaigns, adopt more aggressive pricing
policies and make more attractive offers to consumers and businesses. There can
be no assurance, however, that the Company's competitors, or others will not
succeed in developing technologies, products or services that are more
effective, less costly or more widely used than those that have been or are
being developed by the Company or that would render the Company's technologies
or products obsolete or noncompetitive. Moreover, the Company may face direct
competition from Scan Coin AB ("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.
DEPENDENCE ON CONTINUED MARKET ACCEPTANCE BY CONSUMERS AND RETAIL
DISTRIBUTION PARTNERS. The Company is substantially dependent on continued
market acceptance of its coin processing service by consumers and its retail
distribution partners, which have been primarily supermarket chains. The self-
service coin processing market is relatively new and evolving; accordingly, it
is difficult to predict the future growth rate and size of this market. There
can be no assurance that the Company will be successful in achieving the
large-scale adoption of its coin processing service. While the Company's
existing installed
15
<PAGE>
base of Coinstar units has been well received by both retail distribution
partners and customers to date, there can be no assurance that the operating
results of the installed units will continue to be favorable or past results
will be indicative of future market acceptance of the Company's service. The
Company believes that market acceptance of the Coinstar unit is dependent on the
consumer's perception that the units are convenient, easy to use and reliable.
Even if the Company is successful in promoting awareness of the Coinstar unit
among consumers, there can be no assurance that such consumers will utilize the
Coinstar units in sufficient volume to make the Company profitable. In addition,
market acceptance and ongoing use of the Coinstar service may be adversely
affected by the increasing use of alternatives to coin and currency transactions
such as credit and debit cards, checks, wire transfers, smart cards and other
forms of electronic payment.
Market acceptance of the Coinstar units is also dependent on the willingness
of potential retail distribution partners to have the units installed in their
stores. The Company believes that market acceptance by potential retail
distribution partners will be dependent on its ability to demonstrate the
utility of the Coinstar unit as a customer service and as a means to provide
other tangible benefits, including increased customer traffic and the promotion
of store sales or service. There can be no assurance, however, that potential
retail distribution partners will be willing to place Coinstar units in their
locations or that, once installed, Coinstar units will obtain market acceptance
from consumers. Market acceptance and the Company's revenues may also be
affected by the availability and success of coin processing services offered by
competitors. In the event the Company's service does not achieve market
acceptance or does so less rapidly than expected or the Company's contracts with
one or more of its retail distribution partners is terminated, the Company and
its results of operations, including its ability to achieve sufficient cash flow
to service its indebtedness and achieve profitability, will be materially
adversely affected. Moreover, the Company intends to increase its deployment of
Coinstar units in banks, convenience stores and mass merchants and is exploring
opportunities for deployment in the international market. However, the Company
has not entered or fully penetrated such markets and there can be no assurance
that initial or further deployment in such markets would be successful.
POSSIBLE TERMINATION OF RETAIL DISTRIBUTION PARTNER AGREEMENTS. The Company
is substantially dependent upon its ability to enter into agreements with retail
distribution partners for the installation of its Coinstar units. In addition,
the Company generally has separate agreements with each of its retail
distribution partners, providing for the Company's exclusive right to provide
coin processing services in their retail locations. These contracts generally
have terms ranging from two to three years and are generally terminable by
either party with advance notice of at least 90 days. In addition, Coinstar
units in service in several supermarket chains account for a significant portion
of the Company's revenue. In the quarter ended March 31, 1998, Coinstar units in
service in two supermarket chains accounted for approximately 40.8% of the
Company's revenue. The units in service in these two chains, Fred Meyer and
Kroger, accounted for approximately 22.5% and 18.3%, respectively, of the
Company's revenue in 1998. The termination of any one or more of the Company's
contracts with its retail distribution partners could have a material adverse
effect on the Company's business, financial condition, results of operations and
on its ability to achieve sufficient cash flow to service its indebtedness.
MANAGEMENT OF GROWTH. The Company has experienced rapid growth and intends
to continue to aggressively expand its operations. The growth in the size and
scale of the Company's business has placed and is expected to continue to place
significant demands on its operational, administrative and financial personnel
and operating systems. Additional planned expansion by the Company may further
strain management and other resources. The Company's ability to manage growth
effectively will depend on its ability to improve its operating systems, to
expand, train and manage its employee base and to develop additional
manufacturing and service capacity. In particular, the Company will be required
to rapidly expand its operating systems and processes in order to support the
projected installations of Coinstar units and the potential addition of
value-added services. In addition, the Company will be required to establish
16
<PAGE>
relationships with additional third-party service providers. There can be no
assurance that the Company will be able to effectively manage the expansion of
its operations, or that the Company's systems, procedures or controls will be
adequate to support the Company's operations or that Company management will be
able to achieve and manage the installations currently projected. If the Company
is unable to manage growth effectively, the Company's business, financial
condition and results of operations and its ability to achieve sufficient cash
flow to service its indebtedness will be materially adversely affected.
DEPENDENCE ON A SINGLE SERVICE. The Company has and expects for the
foreseeable future to derive substantially all of its revenues from the
operation of Coinstar units. Accordingly, market acceptance of the Company's
coin processing service is critical to the Company's future success. Since there
is only a limited existing market for the Company's coin processing service,
there can be no assurance that an acceptable level of demand will be achieved or
sustained. If sufficient demand for the Company's coin processing service does
not develop due to lack of market acceptance, technological change, competition
or other factors, the Company's business, financial condition and results of
operations and its ability to achieve sufficient cash flow to service its
indebtedness will be materially adversely affected.
INTRODUCTION OF NEW COIN COUNTING TECHNOLOGY. The Company has invented and
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 Corporation ("SeaMed"). 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 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
17
<PAGE>
Coin coin counters on a timely basis, if at all. Failure to secure necessary
parts on a timely basis may result in a slowdown of installations, or in machine
downtime.
There can be no assurance that the transition to the Company's proprietary
coin counting technology will proceed on schedule, or that there will be no
conversion problems. The coin counter is a complex mechanical and electronic
device that is difficult to manufacture. In addition, implementation of the new
device will require the distribution of parts, the retraining of Company
personnel, and the retraining of third party personnel that help service the
Coinstar units. There can be no assurance that these tasks can be completed
without delay, nor can there be any assurance that SeaMed will be able to
produce the device in the required quantities or in a timely manner. Any such
delay or problems may result in machine downtime, or a delay, or cessation of
installations for an indeterminate period, each of which, individually, in the
event of its occurrence, could have a material adverse effect on the Company's
business, financial condition and results of operations and on its ability to
achieve sufficient cash flow to service its indebtedness. See "Risk
Factors--Reliance on Third Party Manufacturers and Service Providers".
RELIANCE ON THIRD-PARTY MANUFACTURER AND SERVICE PROVIDERS. The Company
does not conduct manufacturing operations and is dependent and will continue to
be dependent on outside parties for the manufacture of the Coinstar unit and its
key components. While Coinstar intends to significantly expand its installed
base, such expansion may be constrained by the manufacturing capacity of its
third-party manufacturers and suppliers. Although the Company expects that its
current contract manufacturer, SeaMed will be able to produce sufficient units
to meet projected demand, there can be no assurance that SeaMed or other
manufacturers will be able to meet the Company's manufacturing needs in a
satisfactory and timely manner. In the event of an unanticipated increase in
demand for Coinstar unit installations by retail distribution partners, the
Company may be unable to meet such demand due to manufacturing constraints.
Although the Company has a contract with SeaMed, it does not have a long-term
obligation to continue the manufacture of the Coinstar unit or its components.
Further, SeaMed is principally engaged in the manufacture of electronic medical
instruments for medical technology companies. The Company believes that it is
SeaMed's only material non-medical customer. As such, the Company faces an
increased risk that SeaMed may choose to focus exclusively on manufacturing its
medical products and cease making the Company's products. Should SeaMed cease
providing services, the Company would be required to locate and qualify
additional suppliers. There can be no assurance that the Company would be able
to locate alternate manufacturers on a timely basis. The Company's reliance on
third-party manufacturers involves a number of additional risks, including the
absence of guaranteed capacity and reduced control over delivery schedules,
quality assurance, production yields and costs. There can be no assurance that
the manufacturing capability of such third-party manufacturers will successfully
address the Company's needs. In the event the Company is unable to retain such
manufacturing on commercially reasonable terms, its business, financial
condition and results of operation and its ability to achieve sufficient cash
flow to service its indebtedness will be materially adversely affected.
The Company relies on third-party service providers for substantial support
and service efforts that the Company currently does not provide directly. In
particular, the Company contracts with armored carriers to arrange for the
pick-up, processing and deposit of coins. The Company generally contracts with
one armored carrier to service a particular region. Many of these carriers do
not have long-standing relationships with the Company and these contracts
generally can be terminated by either party with advance notice ranging from 30
to 90 days. In the past, the Company has experienced a sudden disruption in
service from an armored carrier company. The Company does not currently have nor
does it expect to 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,
18
<PAGE>
including security breaches of the Company's computing system that performs
important accounting functions. There can be no assurance that the Company will
be successful in developing product enhancements and new services to thwart such
attempts.
RISK OF DEFECTS IN OPERATING SYSTEMS. The Company collects financial and
operating data and monitors unit performance through a wide-area communications
network connecting each of the Coinstar units with a central computing system
located at the Company's headquarters. This information is used to track the
flow of coins, verify coin counts and schedule and dispatch unit service. The
operation of the Coinstar units depends on sophisticated software, computing
systems and communications services that may contain undetected errors or are
subject to failures. These errors and failures may arise particularly when new
services or service enhancements are added or when the volume of services
provided increases. Although each unit is designed to store all data collected,
helping to ensure critical data is not lost due to an operating systems failure,
the inability of the Company to collect the data from its units could lead to a
delay in processing coins and crediting the accounts of its retail distribution
partners for vouchers already redeemed. Further, there can be no assurance that
the design of the operating systems to prevent the loss of data will operate as
intended and any loss of or delay in collecting coin processing data would
materially and adversely effect the Company's operations. In addition, the
Company has in the past experienced limited delays and disruptions resulting
from upgrading or improving its operating systems. Although such disruptions
have not had a material effect on the Company's operations, there can be no
assurance that future upgrades or improvements will not result in delays or
disruptions that would have a material adverse impact on the Company's
operations. In particular, the Company is currently planning some significant
improvements in its operating platform in order to support its projected
expansion of the installed base of Coinstar units and the potential addition of
value-added services. While the Company is taking steps to ensure that the
potential adverse impact of such improvements on the Company's operations is
minimized, there can be no assurance that the platform will be able to handle
the increased volume of services expected from the continued expansion of the
Company's network and the potential addition of value-added services or that the
improvements will occur on a timely basis so as not to disrupt such continued
expansion and potential addition of value-added services. In addition, the
communications network on which the Company relies is not owned by the Company
and is subject to service interruptions. Further, while the Company has taken
significant steps to protect the security of its network, any breach of such
security whether intentional or from a computer virus could have a material
adverse impact on the Company. Any service disruptions, either due to errors or
delays in the Company's software or computing systems or interruptions or
breaches in the communications network, or security breaches of the system,
could have a material adverse affect on the Company's business, financial
condition and results of operations and on its ability to achieve sufficient
cash flow to service its indebtedness.
DEPENDENCE ON KEY PERSONNEL AND NEED TO HIRE ADDITIONAL PERSONNEL. The
Company's performance is substantially dependent on the performance of its
executive officers and key employees and its long term success will depend on
its ability to recruit, retain and motivate highly skilled personnel. Jens H.
Molbak, Chief Executive Officer, Daniel A. Gerrity, President and Chief
Operating Officer, Kirk A. Collamer, Vice President and Chief Financial Officer,
Rod W. Brooks, Vice President of Sales and Marketing, and Michael W. Parks, Vice
President of Operations, have been primarily responsible for the development and
expansion of the Company's business. All of the Company's executive officers and
employees are employed on an at-will basis. The loss of the services of any of
these executive officers or other key employees or the inability to attract and
retain necessary technical and managerial personnel could have a material
adverse effect upon the Company's business, financial condition and results of
operation and on its ability to achieve sufficient cash flow to service its
indebtedness. Presently, the Company maintains a "key man" life insurance policy
on Mr. Molbak in the amount of $2.0 million.
UNCERTAINTY OF PROTECTION OF PATENTS AND PROPRIETARY RIGHTS. The Company's
future success depends, in part, on its ability to protect its intellectual
property and maintain the proprietary nature of its technology through a
combination of patents, licenses and other intellectual property arrangements,
without infringing
19
<PAGE>
the proprietary rights of third parties. In October 1996, April 1997 and May
1998, the Company was issued United States patents relating to removing debris
from coins processed in a self-service environment and other aspects of
self-service coin processing. These patents will expire in October 2013, April
2014 and May 2015, respectively. Sufficient debris removal is important to
reducing clogging and malfunctioning. Reducing these problems and the associated
downtime improves unit availability for customer use and reduces the amount of
time that Company or retail distribution partner personnel must spend attending
to the unit, both of which are important features of operating in a self-service
environment. No assurance can be given that any patents from any pending patent
applications or from any future patent applications will be issued, that any of
the Company's patents will be held valid if subsequently challenged or that
others will not claim rights in or ownership of the patents and other
proprietary rights held by the Company. Moreover, there can be no assurance that
any patents issued to the Company will not be challenged, invalidated or
circumvented, or that the rights granted thereunder will provide proprietary
protection to the Company. Despite the Company's efforts to safeguard and
maintain its proprietary rights, there can be no assurance that the Company will
be successful in doing so or that the Company's competitors will not
independently develop or patent technologies that are substantially equivalent
or superior to the Company's technologies.
On June 18, 1997, the Company filed suit in the United States District
Court, Northern District of California against CoinBank Automated Systems, Inc.
("CoinBank"), one of its competitors, a complaint for infringement of one of the
Company's United States patents (the "Patent Infringement Claim"). On June 27,
1997, CoinBank answered the Patent Infringement Claim and counterclaimed for
declaration of non-infringement, invalidity and unenforcability of the subject
patent, and filed a claim for breach of warranty against Scan Coin. The claim
against Scan Coin has been dismissed by agreement of the parties. On January 26,
1998, the court, in response to cross motions for summary judgment filed by both
parties, held that certain of CoinBank's devices did not infringe on the subject
patent, and that there remained a question of fact as to the infringement of
other devices. There can be no assurance that the Company will prevail in such
Patent Infringement Claim or on any claim that may be filed by CoinBank against
the Company or that as a result of such Patent Infringement Claim, the Company's
patent will not be limited in scope or found to be invalid.
Since patent applications in the United States are not publicly disclosed
until the patent is issued, applications may have been filed by others which, if
issued as patents, could cover the Company's products. The Company is subject to
the risk of claims and litigation alleging infringement of the intellectual
property rights of others. There can be no assurance that others will not assert
infringement or misappropriation claims against the Company in the future based
on patents, copyrights or trade secrets or that such claims will not be
successful. The Company could incur substantial costs in defending itself and
its retail distribution partners against any such claims, regardless of the
merits of such claims. Parties making such claims may be able to obtain
injunctive or other equitable relief which could effectively block the Company's
ability to provide its coin processing service and use the processing equipment
in the United States and abroad, and could result in an award of substantial
damages. In the event of a successful claim of infringement, the Company may
need or be required to obtain one or more licenses from, and/or grant one or
more licenses to, others. There can be no assurance that the Company could
obtain necessary licenses from others at a reasonable cost or at all. The
defense of any lawsuit could result in time-consuming and expensive litigation,
damages, license fees, royalty payments, diversion of the attention of key
personnel and restrictions on or the termination of the Company's ability to
provide its coin processing service and use the processing equipment, any of
which could have a material adverse effect on the Company's business, financial
condition and results of operations and on its ability to achieve sufficient
cash flow to service its indebtedness. The Company also relies on trade secrets
to develop and maintain its competitive position. Although the Company protects
its proprietary technology in part by confidentiality 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
20
<PAGE>
Company's trade secrets will not otherwise become known or be discovered
independently by its competitors.
RAPID TECHNOLOGICAL CHANGE. The self-service coin processing market is
relatively new and evolving. As such, the Company anticipates that, as the
market matures, it will be subject to technological change, new services and
product enhancements, particularly as the Company expands its service offerings.
Accordingly, the Company's success may depend in part upon its ability to
develop product enhancements and new services that keep pace with continuing
changes in technology and consumer preferences while remaining price
competitive. There can be no assurance, however, that the Company would be
successful in developing such product enhancements or new services, that it will
be able to introduce such products or services on a timely basis or that any
such product enhancements or new services will be successful in the marketplace.
The Company's failure to develop technological improvements or to adapt its
products and services to technological change on a timely basis could, over
time, have a material adverse effect on the Company's business, financial
condition and results of operations and on its ability to achieve sufficient
cash flow to service its indebtedness.
POTENTIAL VOLATILITY OF STOCK PRICE. The Company's Common Stock price has
fluctuated substantially since its initial public offering in July 1997. There
can be no assurance that the market price of the Company's Common Stock will not
decline further or continue to fluctuate. Announcements of technological
innovations or new products or services by the Company or its competitors, the
termination of one or more retail distribution contracts, release of reports,
changes in or failure of the Company to meet financial estimates by securities
analysts, industry developments, market acceptance of the Coinstar service by
retail distribution partners and consumers, economic and other external factors,
as well as period-to-period fluctuations in the Company's financial results, may
have a significant and adverse impact on the market price of the Common Stock.
In addition, the securities markets have from time to time experienced
significant price and volume fluctuations that are unrelated to the operating
performance of particular companies. These market fluctuations may also
materially and adversely affect the market price of the Company's Common Stock.
UNCERTAINTY OF EFFECTS OF YEAR 2000 ON COMPUTER PROGRAMS AND SYSTEMS. Many
currently installed computer systems and software programs were designed to use
only a two-digit date field. These date code fields will need to accept four
digit entries to distinguish 21st century dates from 20th century dates. Until
the date fields are updated, the systems and programs could fail or give
erroneous results when referencing dates following December 31, 1999. Such
failure or errors could occur prior to the actual change in century. The Company
relies on computer applications for its coin processing machines and to manage
and monitor its accounting and administrative functions. In addition, the
Company's retail distribution partners, suppliers and service providers
(including financial institutions) are reliant upon computer applications, some
of which may contain software that may fail as a result of the upcoming change
in century, with respect to functions that materially affect their interactions
with the Company. While the Company does not believe its computer systems or
applications currently in use will be adversely affected by the upcoming change
in century, the Company has not made an assessment as to whether any of its
retail distribution partners, suppliers or service providers will be so
affected. Failure of the Company's software or that of its retail distribution
partners, suppliers or service providers could have a material adverse impact on
the Company's business, financial condition and results of operations and on its
ability to achieve sufficient cash flow service to its indebtedness.
21
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 18, 1997, the Company filed in the United States District Court,
Northern District of California against CoinBank Automated Systems, Inc.
("CoinBank"), one of its competitors, a complaint for infringement of one of the
Company's United States patents (the "Patent Infringement Claim"). On June 27,
1997, CoinBank answered the Patent Infringement Claim and counterclaimed for
declaration of non-infringement, invalidity and unenforcability of the subject
patent, and filed a claim for breach of warranty against Scan Coin AB. The claim
against Scan Coin AB has been dismissed by agreement of the parties. On January
26, 1998, the court, in response to cross motions for summary judgment filed by
both parties, held that certain of CoinBank's devices did not infringe on the
subject patent, and that there remained a question of fact as to the
infringement of other devices. There can be no assurance that the Company will
prevail in such Patent Infringement Claim or on any claim that may be filed by
CoinBank against the Company, or that as a result of such Patent Infringement
Claim, the Company's patent will not be limited in scope of found to be invalid.
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
The effective date of the Company's first registration statement, filed on
Form S-1 under the Securities Act of 1993, as amended (Registration No.
333-26843), was July 2, 1997 (the "Registration Statement"). The class of
securities registered was Common Stock. The offering commenced on July 2, 1997
and all securities were sold in the offering. The managing underwriters were
Smith Barney Inc. and Hambrecht & Quist.
Pursuant to the Registration Statement, the Company sold 3,000,000 shares of
its Common Stock for its own account, for an aggregate offering price of
$31,500,000. The Company incurred expenses of approximately $2,837,544, of which
$1,957,125 represented underwriting discounts and commissions and $880,419
represented estimated other expenses, of which expenses $50,149 represented
direct or indirect payments to an affiliate of the Company. The net offering
proceeds to the issuer after total expenses was $28,662,456.
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.
22
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ ----------------------------------------------------------------------
<C> <S>
3.1 (1) Amended and Restated Certificate of Incorporation of the Registrant in
effect after the closing of the Initial Public Offering.
3.2 (1) Amended and Restated Bylaws of the Registrant.
4.1 Reference is made to Exhibits 3.1 through 3.2.
4.2 (1) Specimen Stock Certificate.
4.3 (1) Second Amended and Restated Investor Rights Agreement, dated August
27, 1996, between the Registrant and certain investors, as amended
October 22, 1996.
4.4 (1) Indenture between Registrant and The Bank of New York dated October 1,
1996.
4.5 (1) Warrant Agreement between Registrant and The Bank of New York dated
October 22, 1996.
4.6 (1) Notes Registration Rights Agreement between Registrant and Smith
Barney Inc. dated October 22, 1996.
4.7 (1) Warrant Registration Rights Agreement between Registrant and Smith
Barney Inc. dated October 22, 1996.
4.8 (1) Specimen 13% Senior Discount Note Due 2006
10.1 (1) Registrant's 1997 Equity Incentive Plan.
10.2 (1) Registrant's 1997 Employee Stock Purchase Plan.
10.3 (1) Registrant's 1997 Non-Employee Directors' Stock Option Plan.
10.4 (1) Form of Indemnity Agreement between the Registrant and its executive
officers and directors.
10.5 (1) Series E Preferred Stock and Warrant Purchase Agreement between
Registrant and Acorn Ventures, Inc., dated August 27, 1996.
10.6 (1) Office Building Lease between Registrant and Factoria Heights dated
June 1, 1994, as amended on January 24, 1997.
10.7 (1) Sublease between Registrant and Maruyama U.S., Inc. dated January 15,
1997.
10.8 (1) Lease agreement between Registrant and Spieker Properties, L.P. dated
January 29, 1997.
10.9 (1) Lease agreement between Registrant and Spieker Properties, L.P. dated
January 29, 1997.
10.10(1) Manufacturing Agreement between Registrant and SeaMed Corporation
dated September 1, 1996.
10.11+(1) Letter of Intent between Registrant and Scan Coin AB dated March 5,
1997.
10.12+(1) Agreement between Registrant and Scan Coin AB dated April 30, 1993, as
amended.
10.13(1) Purchase Agreement between Registrant and Smith Barney Inc. dated
October 22, 1996.
11.1 Computation of Earnings Per Share.
27.1 Financial Data Schedule.
</TABLE>
- ------------------------
(1) Filed as an Exhibit to the Registrant's Registration Statement on Form S-4
(No. 333-33233)
+ Certain confidential portions deleted pursuant to Order Granting Application
Under the Securities Act of 1933, as amended, and Rule 406 thereunder
respecting Confidential Treatment.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended March 31,
1998.
Items 3, 4 and 5 are not applicable and have been omitted.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COINSTAR, INC.
(Registrant)
/s/ KIRK A. COLLAMER
------------------------------------------
Kirk A. Collamer
Date: May , 1998 VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
24
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ ----------------------------------------------------------------------
<C> <S>
3.1 (1) Amended and Restated Certificate of Incorporation of the Registrant in
effect after the closing of the Initial Public Offering.
3.2 (1) Amended and Restated Bylaws of the Registrant.
4.1 Reference is made to Exhibits 3.1 through 3.2.
4.2 (1) Specimen Stock Certificate.
4.3 (1) Second Amended and Restated Investor Rights Agreement, dated August
27, 1996, between the Registrant and certain investors, as amended
October 22, 1996.
4.4 (1) Indenture between Registrant and The Bank of New York dated October 1,
1996.
4.5 (1) Warrant Agreement between Registrant and The Bank of New York dated
October 22, 1996.
4.6 (1) Notes Registration Rights Agreement between Registrant and Smith
Barney Inc. dated October 22, 1996.
4.7 (1) Warrant Registration Rights Agreement between Registrant and Smith
Barney Inc. dated October 22, 1996.
4.8 (1) Specimen 13% Senior Discount Note Due 2006
10.1 (1) Registrant's 1997 Equity Incentive Plan.
10.2 (1) Registrant's 1997 Employee Stock Purchase Plan.
10.3 (1) Registrant's 1997 Non-Employee Directors' Stock Option Plan.
10.4 (1) Form of Indemnity Agreement between the Registrant and its executive
officers and directors.
10.5 (1) Series E Preferred Stock and Warrant Purchase Agreement between
Registrant and Acorn Ventures, Inc., dated August 27, 1996.
10.6 (1) Office Building Lease between Registrant and Factoria Heights dated
June 1, 1994, as amended on January 24, 1997.
10.7 (1) Sublease between Registrant and Maruyama U.S., Inc. dated January 15,
1997.
10.8 (1) Lease agreement between Registrant and Spieker Properties, L.P. dated
January 29, 1997.
10.9 (1) Lease agreement between Registrant and Spieker Properties, L.P. dated
January 29, 1997.
10.10(1) Manufacturing Agreement between Registrant and SeaMed Corporation
dated September 1, 1996.
10.11+(1) Letter of Intent between Registrant and Scan Coin AB dated March 5,
1997.
10.12+(1) Agreement between Registrant and Scan Coin AB dated April 30, 1993, as
amended.
10.13(1) Purchase Agreement between Registrant and Smith Barney Inc. dated
October 22, 1996.
11.1 Computation of Earnings Per Share.
27.1 Financial Data Schedule.
</TABLE>
- ------------------------
(1) Filed as an Exhibit to the Registrant's Registration Statement on Form S-4
(No. 333-33233)
+ Certain confidential portions deleted pursuant to Order Granting Application
Under the Securities Act of 1933, as amended, and Rule 406 thereunder
respecting Confidential Treatment.
25
<PAGE>
EXHIBIT 11.1
COINSTAR, INC.
COMPUTATION OF EARNINGS PER SHARE
Calculations of net loss per share are based on the following:
<TABLE>
<CAPTION>
THREE MONTH PERIODS
ENDED MARCH 31,
-----------------------
1998 1997
------------ ---------
<S> <C> <C>
Weighted average common shares outstanding............................................ 15,079,985 903,497
Effect of convertible preferred shares................................................ 0 0
Effect of stock warrants outstanding.................................................. 0 0
Effect of stock options outstanding................................................... 0 0
------------ ---------
Weighted average common and equivalent shares outstanding............................. 15,079,985 903,497
------------ ---------
------------ ---------
</TABLE>
26
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 17,057,946
<SECURITIES> 31,968,293
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 50,136,139
<PP&E> 61,373,311
<DEPRECIATION> (16,255,960)
<TOTAL-ASSETS> 97,943,593
<CURRENT-LIABILITIES> 22,378,524
<BONDS> 0
0
0
<COMMON> 61,480,216
<OTHER-SE> (65,387,433)
<TOTAL-LIABILITY-AND-EQUITY> 97,943,593
<SALES> 0
<TOTAL-REVENUES> 8,822,835
<CGS> 0
<TOTAL-COSTS> 14,239,329
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,571,057
<INCOME-PRETAX> (7,447,036)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,447,036)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,447,036)
<EPS-PRIMARY> (.49)
<EPS-DILUTED> (.49)
</TABLE>
