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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
FROM THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER: 0-22555
COINSTAR, INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
DELAWARE 94-3156448
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1800 114TH AVENUE SE, BELLEVUE, WASHINGTON 98004
(Address of principal executive offices) (Zip Code)
</TABLE>
(425) 943-8000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.001 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing price of Common Stock on February 28, 1999 as
reported on the Nasdaq National Market, was approximately $242,786,691. Shares
of Common Stock held by each executive officer and director and by each
shareholder whose beneficial ownership exceeds 5% of the outstanding Common
Stock at February 28, 1999 have been excluded in that such persons may be deemed
to be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
The number of outstanding shares of the registrant's Common Stock, par value
$.001 per share, was 15,415,028 on February 28, 1999.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for Registrant's 1999 Annual
Meeting of Stockholders to be held June 16, 1999 are incorporated by reference
in Part III of this Form 10-K.
FORM 10-K
INDEX
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PART I
Item 1. Business............................................................ Page 1
Item 2. Properties.......................................................... Page 17
Item 3. Legal Proceedings................................................... Page 17
Item 4. Submission of Matters to a Vote of Security Holders................. Page 17
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters............................................................. Page 18
Item 6. Selected Financial Data............................................. Page 19
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................... Page 21
Item 7a. Quantitative and Qualitative Disclosures About Market Risk.......... Page 30
Item 8. Financial Statements and Supplementary Data......................... Page 30
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................ Page 30
PART III
Item 10. Directors and Executive Officers of the Registrant.................. Page 30
Item 11. Executive Compensation.............................................. Page 31
Item 12. Security Ownership of Certain Beneficial Owners and Management...... Page 31
Item 13. Certain Relationships and Related Transactions...................... Page 31
PART IV
Item 14. Exhibits, Financial Statements, Financial Statement Schedules, and
Reports on Form 8-K................................................. Page 32
SIGNATURES......................................................................... Page 34
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PART I
ITEM 1. BUSINESS.
THE FOLLOWING DISCUSSION IN THIS ANNUAL REPORT ON FORM 10-K CONTAINS
FORWARD-LOOKING STATEMENTS REGARDING THE COMPANY, ITS BUSINESS, PROSPECTS AND
RESULTS OF OPERATIONS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS THAT MAY BE ANTICIPATED BY SUCH
FORWARD-LOOKING STATEMENTS AND DISCUSSED ELSEWHERE HEREIN. FACTORS THAT COULD
CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED HEREIN AS WELL AS THOSE DISCUSSED UNDER THE CAPTIONS "RISK FACTORS"
AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" AS WELL AS THOSE DISCUSSED ELSEWHERE THROUGHOUT THIS ANNUAL REPORT
ON FORM 10-K. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE
FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE OF THIS REPORT. THE
COMPANY UNDERTAKES NO OBLIGATION TO REVISE ANY FORWARD-LOOKING STATEMENTS IN
ORDER TO REFLECT EVENTS OR CIRCUMSTANCES THAT MAY SUBSEQUENTLY ARISE. READERS
ARE URGED TO CAREFULLY REVIEW AND CONSIDER THE VARIOUS DISCLOSURES MADE BY THE
COMPANY IN THIS REPORT AND IN THE COMPANY'S OTHER REPORTS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION THAT ATTEMPT TO ADVISE INTERESTED PARTIES OF
THE RISKS AND FACTORS THAT MAY AFFECT THE COMPANY'S BUSINESS, PROSPECTS AND
RESULTS OF OPERATIONS.
SUMMARY
Coinstar, Inc. (the "Company") develops, owns and operates what the company
believes to be the first and only national network of automated, self-service
coin counting and processing machines that provide consumers with a convenient
means to convert loose change into cash. The Coinstar units, located in
supermarkets, financial institutions and mass merchants in 37 states across the
country as of December 31, 1998, accept and count accumulated loose coins
deposited by consumers and issue vouchers listing the total number,
denominations and dollar value of coins processed less a processing fee charged
by the Company, currently 8.9%. From January 1996 to December 1998, the Company
charged a 7.5% processing fee. The vouchers are redeemable by customers at store
cashiers for either credit towards retail purchases or cash, regardless of
whether a purchase is made. The Company believes its service addresses a
significant consumer need for a convenient and reliable coin processing method.
The Coinstar service provides consumers with a means of redeeming accumulated
loose coins and an alternative to manually presorting, counting and wrapping
coins typically required for cash redemption at a bank. As of December 31, 1998
the network has processed coins, for a fee, worth over $1.09 billion. The
Company began commercial deployment of the Coinstar network in 1994 and has
increased its installations every year since. As of December 31, 1998, the
Company had an installed base of 4,813 units in 58 regional markets across the
United States.
The Company believes a key competitive advantage is its significant
expertise accumulated over the past six years in designing and manufacturing the
Coinstar units, in developing and supporting a wide-area communications network
capable of receiving and transmitting data to all Coinstar units, and in
building a dedicated field service organization with the ability to rapidly
deploy and service the Coinstar units. The Coinstar unit is a modularly
designed, free-standing machine controlled by an internal computer connected to
the Company's wide-area communications network. The network is critical to
providing high availability of the Coinstar units, maintaining a high level of
customer service and managing direct operating costs. The reliability of the
Coinstar unit and the utilization of the communications network, in conjunction
with the support of the Company's regional field service organization, have
resulted in median availability of units in operation of over 98%. In addition,
the network is used to distribute store-specific promotional programs such as
electronic offers, coupons and advertising.
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THE COINSTAR SYSTEM
COINSTAR UNIT
The Coinstar unit is comprised of a coin input and cleaning process, a coin
counter that is designed to be jam-resistant, coin collection bins, a computer,
a thermal printer, an input keypad, an internal phone and a color monitor. The
Coinstar unit is highly accurate, durable, easy to use and service, and capable
of processing up to 600 coins per minute. The counter detects foreign coins,
slugs, debris and damaged coins and directs the coins processed to collection
trolleys located inside the Coinstar unit. The Company's proprietary advances
relating to certain aspects of coin processing enable the Coinstar unit to
handle moisture, dirt, lint, and other debris with infrequent clogging or
malfunctioning, important features for operating in a self-service environment.
Sufficient debris removal is important to reducing clogging and malfunctioning.
Reducing these problems and the associated downtime improves unit availability
for customer use and reduces the amount of time that Company or retail
distribution partner personnel must spend attending to the unit, both of which
are important features of operating in a self-service environment. The Coinstar
unit is also equipped with a telephone handset that enables supermarket
personnel to connect directly to the Coinstar Customer Service Center via a toll
free number, providing store personnel direct support in the event assistance is
required.
The Coinstar unit is controlled by an internal computer that runs a
multi-tasking operating system. In addition to controlling and coordinating
Coinstar unit functions, the computer electronically records nearly all aspects
of the unit's operation. The unit electronically logs extensive transaction
information such as a unique transaction number, the dollar amount, time and
duration of each transaction, the numbers of each type of coin processed and the
number of rejected coins. Aggregate log information is transmitted daily over
the Company's wide-area communications network to the Company's headquarters for
analysis and backup.
NETWORK SYSTEM AND TECHNOLOGY
The Company believes that the availability of current performance,
configuration, and financial data through the wide-area communications network
is critical to providing high availability of the Coinstar units, maintaining a
high level of customer service, and managing direct operating costs. The Company
also believes the establishment and development of the network functions are a
significant barrier to entry for competitors. This network and associated
features, which enable the Company to provide a higher level of service at a
lower cost than a traditional reactive, dispatch-oriented service organization,
includes the following benefits:
- DOWNLOADABLE SOFTWARE PROGRAMS AND SYSTEMS ENHANCEMENTS. The two-way
network permits headquarters to send information to each Coinstar unit,
customized to the unit's location. In addition, the network is used to
download new versions of application and operating system software from
headquarters to the units in the field, and effect other configuration
changes electronically, avoiding on-site visits by Company personnel.
- UNIT OPERATING PERFORMANCE REPORTING. Each Coinstar unit generates daily
performance and operating reports that are transmitted over the network to
headquarters for consolidation and then electronically distributed via the
network to the responsible field service employee.
- ENHANCEMENT OF FIELD SERVICE PRODUCTIVITY. Performance and operating
reports generated by the network are also used to better utilize field
service and transportation personnel. This information is used by the
Company to manage the efficiency of coin collection and transportation
activities and reduce downtime resulting from full Coinstar units.
- FINANCIAL REPORTING AND RECONCILIATION. The network allows Coinstar units
to transmit key financial data and operating statistics to headquarters on
a daily basis. The financial and accounting information is reconciled at
the Company's headquarters with bank records and coin collection and
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transportation processing data logged into the network to ensure the
accuracy, speed, and control of each deposit. In addition, retail
distribution partners receive weekly automated facsimile or email reports
generated by the network detailing information such as transaction volumes
and deposits made for each store.
- AUTOMATED TRACKING OF COIN COLLECTION, PROCESSING AND DEPOSITS. The
Company has an automated tracking system that enables the Company to track
each deposit to the respective bank account of each retail distribution
partner and the Company.
The wide-area and local area networks at the Company's headquarters are
coupled securely using sophisticated modern networking equipment. These
scaleable networks are integrated using standard tcp/ ip networking protocols
over a 100 Mbps backbone which features automatic segmentation and secure
subnets via firewall and intelligent ethernet switch technology. Headquarters
components of the network operate on widely available personal computers with
advanced reliability features including RAID-5 storage, multi-processor
configurations and clustering. The Company has built an extensive and secure
intranet on top of this physical infrastructure using standard client/server
tools provided by leading industry vendors. The client/server applications
leverage both traditional high performance relational database management
systems technology as well as novel, more flexible, discussion-oriented database
technology. Certain data processing activities occur at the Coinstar unit during
off-peak hours, distributing the processing load from headquarters and allowing
the network of Coinstar units to grow faster than the corresponding headquarters
system capacities. In the event of a network failure, however, availability of
the Coinstar units and related field service would be negatively impacted until
such failure was repaired, and a continued failure for a sustained period could
have a material adverse effect on the Company's business, financial condition
and results of operations and on the Company's ability to achieve sufficient
cash flow to service its indebtedness. See "Risk Factors--Risks of Defects in
Operating System."
REGIONAL FIELD SERVICE ORGANIZATION
The Company has assembled a regional field service organization comprised of
approximately 205 field service personnel and supporting employees with the
primary goal of providing highly responsive service to its retail distribution
partners. The field service organization is responsible for performing
preventative maintenance and repairs and ensuring the efficient collection and
handling of coins.
FIELD SERVICE PERSONNEL. In all markets in which the Company operates, the
field service employee is the Company's primary direct contact with consumers
and retail distribution partners. Every member of the field service team is
connected to the wide-area communications network. Each Coinstar unit generates
daily performance and operating reports which are transmitted over the network
to headquarters for consolidation and then electronically distributed via the
network to the responsible field service employee. In addition, the Coinstar
unit provides specific service information to the responsible field service
employee by directly paging such employee with current operating information
based on a series of predetermined performance criteria.
TRANSPORTATION AND PROCESSING SERVICES. The Company generally contracts
with third party providers to handle the transportation and processing of coins
deposited in Coinstar units. The use of these contracted resources facilitates
Coinstar's growth with minimal investment in facilities and equipment. The
transportation service typically includes removing the coin trolleys, tagging
them for deposit, cleaning of the Coinstar unit, transporting the coins for
processing at the coin processing facilities, and depositing the coins to the
Company's local depository for subsequent transfer to the respective bank
accounts of retail distribution partners and the Company. See "Risk
Factors--Reliance on Third Party Manufacturer and Service Providers."
INSTALLATION PERSONNEL. Each installation is managed by an individual
account manager. For a typical installation, an operations representative visits
the store prior to the delivery of the Coinstar unit to
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coordinate with the store manager regarding the location of the Coinstar unit
within the store and review site requirements. On the day of delivery, a
Coinstar field service employee unpacks the unit and conducts a training and
orientation session for store personnel.
The reliability of the Coinstar unit and the utilization of the
communications network, in conjunction with the support of the Company's
regional field service organization, have resulted in median availability of
units in operation of over 98%.
The Company's Coinstar units, first test marketed in 1993, were in operation
in 106 supermarket chains, 10 financial institutions and 2 mass merchants in 58
regional markets across the United States as of December 31, 1998. The following
table sets forth key data which highlight the Company's growth:
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YEAR ENDED DECEMBER 31,
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1994 1995 1996 1997 1998
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Installed base of Coinstar units........................ 48 263 1,501 3,204 4,813
Number of regional markets.............................. 4 11 23 40 58
Number of full time employees........................... 35 56 160 273 284
Dollar value of coins processed (in thousands).......... $ 5,245 $ 17,701 $ 115,476 $ 332,526 $ 623,258
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SALES AND MARKETING
The Company's current sales and marketing efforts are focused on expanding
the Coinstar network within the United States and generating higher coin volumes
for each Coinstar unit. The Company's retail distribution partner marketing
strategy is to significantly increase its penetration with existing retail
distribution partners as well as to establish relationships with new retail
distribution partners in the 100 largest metropolitan areas in this country. To
help build market awareness and increase consumer usage, the Company's consumer
marketing strategy highlights the core benefits to consumers, which the Company
believes are convenience and increased disposable income.
MARKETING TO RETAIL DISTRIBUTION PARTNERS
The Company's retail development group is responsible for increasing the
installed base of Coinstar units within retail chains in the 100 largest
metropolitan areas in this country. When marketing to supermarkets, the Company
highlights the key benefits of its service, namely, enhancing customer service,
increasing store traffic, promoting sales, reducing internal store coin handling
expenses and increasing revenues.
Generally, the Company enters into separate agreements with each of its
retail distribution partners, providing for the Company's exclusive right to
provide coin processing services in their retail locations. These contracts
generally have terms ranging from one to three years and are generally
terminable by either party with advance notice of at least 90 days. The Company
and the retail distribution partner may also agree to certain marketing
arrangements, such as promotional and public relations activities and
advertising. In addition, Coinstar units in service in several supermarket
chains account for a significant portion of the Company's revenue. In the year
ended December 31, 1998, Coinstar units in service in two supermarket chains
accounted for approximately 37.6% of the Company's revenue. The units in service
in these two chains, Fred Meyer Inc. and The Kroger Co., accounted for
approximately 18.7% and 18.9%, respectively, of the Company's revenue in 1998.
On October 19, 1998, The Kroger Co. and Fred Meyer Inc. announced that they
entered into a definitive merger agreement. The termination of any one or more
of the Company's contracts with its retail distribution partners could have a
material adverse effect on the Company's business, financial condition, results
of operations and on its ability to achieve sufficient cash flow to service its
indebtedness. See "Risk Factors Fluctuations in Quarterly Operating Results" and
"Risk Factors--Possible Termination of Retail Distribution Partner Agreements."
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MARKETING TO CONSUMERS
Since the Company offers a new consumer service, an important element of its
marketing strategy is to increase overall consumer awareness of the benefits of
the service. To promote consumer awareness, the Company uses an
awareness-building campaign that it believes increases dollar volumes processed
by the Coinstar units.
The Company markets to its supermarket partners' existing customer base by
communicating through advertising media already used by such supermarket
partners, such as cooperative newspaper advertisements and direct mail
circulars, window signs, bag stuffers or printed bags, shelf talkers, in-store
demonstrations and other merchandising aids.
The Company also promotes the Coinstar unit to consumers in general by media
which include the use of free-standing newspaper advertisements, billboards,
radio and television commercials, targeted mailings and door-hangers. The
Company plans to continue to capitalize on its promotional opportunities as it
enters new markets and expands into existing markets with new or existing retail
distribution partners. The Company has generally found local, regional and
national press to be receptive to the Coinstar service and willing to devote
space and/or air time to communicate the Company's message.
PRODUCT RESEARCH AND DEVELOPMENT
The Company spent approximately $4.7 million, $6.4 million and $4.0 million
for technology, product and market research and development in 1998, 1997 and
1996, respectively. The Company presently employs approximately 41 software
engineers, information technology specialists and other professional staff in
these efforts and contracts with a number of specialized outside consultants for
additional services. The main focus of the Company's product research and
development efforts includes improvements to the operating systems and
enhancements to the network to support both the continued expansion of the
network and the potential addition of value-added services. See "Risk
Factors--Rapid Technological Change."
MANUFACTURING AND SUPPLY
The Company's manufacturing strategy is to utilize contract manufacturers to
produce Coinstar units at a reasonable cost. The Company believes that using
contract manufacturers has several advantages including decreasing capital
investment in plant and equipment and working capital, the ability to leverage
contract manufacturers' purchasing relationships for lower material costs,
minimal fixed costs of maintaining unused manufacturing capacity, greater
capacity flexibility and the ability to utilize suppliers' broad technical and
process expertise. Currently, the Coinstar units are assembled under contract
with a contract manufacturer in Redmond, Washington, which utilizes several
subsuppliers to provide components and subassemblies. Each Coinstar unit is
manufactured to the Company's proprietary designs and specifications, and all
designs, documentation, tooling, specialized fixtures and test equipment are
owned by the Company. Each unit is inspected and tested for quality by Company
personnel prior to shipment.
The Company has introduced and is currently installing coin-counting devices
of its own proprietary design. However, most of the commercial installed
Coinstar units were supplied with coin-counters developed by an over-seas
manufacturer. The Company still purchases parts from this supplier, although it
no longer purchases coin-counters. The Company believes, if all pending parts
orders from this supplier are received, that it currently has enough parts to
meet demand through 1999. See "Risk Factors-- Termination of Supplier
Relationship and Risk Factors--Reliance on Third Party Manufacturer and Service
Providers."
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PROPRIETARY RIGHTS
The Company has made several technological advances relating to self-service
coin processing that are important to the successful operation of the Coinstar
unit in a self-service environment. These advancements are implemented both
mechanically and through the Company's software. These technologies enable the
Coinstar unit to handle moisture, dust, lint, dirt, paper, paper clips, and
other debris with infrequent clogging or malfunctioning. In October 1996, April
1997, May 1998, September 1998, and December, 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, May 2015, April 2014, and
March 2017 respectively. Sufficient debris removal is important to reducing
clogging and malfunctioning. Reducing these problems and the associated downtime
improves unit availability for customer use and reduces the amount of time that
Company or retail distribution partner personnel must spend attending to the
unit, both of which are important features of operating in a self-service
environment. The Coinstar unit also has a unique printed circuit board which
contains a non-volatile memory for data storage purposes. This board stores
records of transactions and other significant events which can be recovered in
the event of a main CPU or hard disk failure. This board also supports
downloadable code to facilitate software modification.
The Company is currently involved in pending litigation with one of its
competitors, CoinBank Automated Systems Inc. In addition, a prior supplier of
coin-counting equipment has challenged the Company's ownership of certain
intellectual property. For further information with respect to these matters,
see "Risk Factors--Uncertainty of Protection of Patents and Proprietary Rights,
Risk Factors-- Termination of Supplier Relationship, and Item 3. Legal
Proceedings."
COMPETITION
The Company believes that it is the first company to provide a national
network of self-service coin processing machines that provide a convenient,
reliable means for consumers to convert loose coins into cash. The Company
competes on a regional basis with several direct competitors that operate
self-service coin processing machines. There can be no assurances that such
competitors have not or will not substantially increase their installed units
and expand their service nationwide. The Company 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.
The Company believes its proprietary and patented advances relating to
self-service coin processing, its ability to collect and analyze operating and
financial statistics from Coinstar units through its wide-area communications
network, its installed base of units in supermarkets nationwide and its
dedicated regional field service organization are its principal competitive
strengths. There can be no assurance, however, that the Company's competitors,
or others, will not succeed in developing technologies, products or services
that are more effective, less costly or more widely used than those that have
been or are being developed by the Company or that would render the Company's
technologies or products obsolete or not competitive. See "Risk
Factors--Competition."
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EMPLOYEES
As of December 31, 1998, the Company had 349 employees, including 65
part-time employees. The Company has separate internal departments, including
sales and marketing, operations, technology systems and engineering, and finance
and administration. No employee is represented by a union, and the Company has
not experienced a work stoppage. The Company believes its employee relations are
good.
EXECUTIVE OFFICERS
The executive officers of the Company, and their ages as of February 28,
1999 are as follows:
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NAME AGE POSITION
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Jens H. Molbak.................................. 36 Chief Executive Officer and Director
Daniel A. Gerrity............................... 37 President and Chief Operating Officer
Kirk A. Collamer................................ 46 Vice President and Chief Financial Officer
Steven M. Geiger (2)............................ 41 Treasurer and Controller
Michael W. Parks (1)............................ 51 Vice President of Operations
Carol Lewis (2)................................. 48 Vice President of Corporate Organization and Development
Michael L. Doran (2)............................ 48 Vice President of Software Technology
William W. Booth (3)............................ 43 Vice President of Retail Development
Ian G. Melanson (3)............................. 34 Vice President of Sales and Marketing
</TABLE>
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(1) Mr. Parks was appointed an executive officer effective February 1, 1998.
(2) Mr. Geiger, Ms. Lewis, and Mr. Doran were appointed executive officers
effective September 23, 1998.
(3) Mr. Booth and Mr. Melanson were appointed executive officers effective
December 10, 1998.
EXECUTIVE OFFICERS
JENS H. MOLBAK, the Company's Chief Executive Officer and Chairman of the
Board, founded the Company in 1990. Prior to that he served two years as an
analyst at Morgan Stanley & Co., Inc., an investment bank. Mr. Molbak earned his
M.B.A. from Stanford University Graduate School of Business and his B.A. in
Psychobiology from Yale University.
DANIEL A. GERRITY, the Company's President and Chief Operating Officer,
joined the Company in November 1993 after serving on the Company's Advisory
Board since 1990. Prior to joining the Company, Mr. Gerrity was an engineering
manager for Slate Corporation, an application software company, from 1990 until
November 1993. Mr. Gerrity earned his M.B.A. from Stanford University Graduate
School of Business, his M.S. in Computer Systems from Stanford University and
his B.S. in Electrical Engineering from Stanford University.
KIRK A. COLLAMER, the Company's Vice President and Chief Financial Officer,
joined the Company in February 1997. From March 1995 until February 1997, Mr.
Collamer served as the Chief Financial Officer of Muzak Limited Partnership, a
business music services provider. From April 1988 to March 1995, he served in
various capacities at Ameritech Corporation, a telecommunications company,
including serving as Vice President, Finance and Controller and Vice President
and Chief Financial Officer of two subsidiaries. Mr. Collamer received his
M.B.A. from Vanderbilt University and his B.A. in Accounting from Michigan State
University.
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STEVEN M. GEIGER, the Company's Treasurer and Chief Accounting Officer,
joined the Company in June 1996 as the Company's Director of Accounting,
Controller. From January 1991 until June 1996 he served as Corporate Controller
and the Director of Financial Planning and Assistant Treasurer for MIDCOM
Communications, Inc., a communications services company. Mr. Geiger is a
Certified Public Accountant, a Certified Management Accountant and a Certified
Cash Manager. Mr. Geiger received his B.S. in Finance from the University of
Washington.
MICHAEL W. PARKS, the Company's Vice President of Operations, joined the
Company in April 1994 as the Company's Director of Field Operations. From
September 1993 to April 1994, Mr. Parks served as President of Seriphus Group, a
consulting company he founded. Mr. Parks is a graduate of the Post-Graduate
Level Banking Program at Pacific Coast Banking School at the University of
Washington and holds a B.A. from Central Washington University.
CAROL LEWIS, the Company's Vice President of Corporate Organization and
Development, joined the Company in September 1996 as the Company's National
Director, Philanthropic Services. From February 1994 until July 1995, she served
as Executive Director of Pacific Northwest Ballet, a professional ballet
company. Prior to that she served as Senior Vice President of Administration for
Egghead. Ms. Lewis' prior experience includes six years as Deputy Mayor of the
City of Seattle and work as a television news reporter for several Northwest
stations. She has a Masters in Public Policy from the JFK School of Government
at Harvard University and a B.A. from Stanford University.
MICHAEL L. DORAN, the Company's Vice President of Software Technology,
joined the Company in August 1996 as the Company's Director of Information
Systems. From June 1989 to August 1996, Mr. Doran served as Senior Manager,
Application Services for Snohomish Public Utility District where he directed
automation planning and application development. Prior to that, he opened and
managed the Oregon office of Fiserv, Inc., a national service bureau providing
computer services to financial institutions and, while at US Bancorp, Inc., he
managed the bank's automated teller machines and debit card automation projects.
He earned his B.S. in Business Administration from Oregon State University.
WILLIAM W. BOOTH, the Company's Vice President of Retail Development, joined
the Company in April 1995 as the Company's Director of Retail Development. From
April 1992 until March 1995 he served as the Senior Director, Retail Marketing
Services for Catalina Marketing Corporation, a consumer marketing company. From
July 1989 until March 1992 he served as Senior Accountant Executive at Citicorp
POS Information Services. Prior to that he held account management and analyst
positions at Datachecker Systems Inc., and Sweda International, Inc. Mr. Booth
earned his B.A. in Economics/ Business Administration from Washington and
Jefferson College.
IAN G. MELANSON, the Company's Vice President of Sales and Marketing, joined
the Company in December of 1998. Mr. Melanson served the Company as a marketing
consultant from July 1998 to December 1998. From November 1996 until May 1998,
Mr. Melanson was Vice President of Marketing at Digital Media Networks
Corporation, a development stage company in Toronto, Canada. From June 1993 to
November 1996, Mr Melanson was a consultant at McKinsey & Company and active in
both the marketing and retailing practices. From July 1988 to February 1993, Mr
Melanson worked in Brand Management for Procter & Gamble, Inc. Mr. Melanson
earned his B.A. in Marketing, Finance, and Industrial Relations from Queen's
University at Kingston, Ontario Canada.
RISK FACTORS
HISTORY OF SUSTAINED OPERATING LOSSES AND CONTINUATION OF SUCH LOSSES. The
Company has incurred substantial losses since inception in 1991. The Company's
net loss for 1996, 1997 and 1998 was $16.0 million, $29.6 million and $23.9
million, respectively. As of December 31, 1998, the Company had an accumulated
deficit of $82.4 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
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and amortization. The Company expects to continue to incur operating losses 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 95% of the installed base in 1996, 1997, and 1998. Prospective
investors, therefore, have limited historical financial information on which to
base an evaluation of the Company's performance. The Company's prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in an early stage of development, particularly
companies in new or rapidly evolving markets. There can be no assurance that the
Company will install a sufficient number of its Coinstar units or obtain
sufficient market acceptance to allow the Company to achieve or sustain
profitability, or generate sufficient cash flow to meet the Company's capital
and operating expenses and debt service obligations.
UNCERTAINTY OF FUTURE OPERATING RESULTS. Substantially all of the Company's
revenue has been, and the Company believes will continue to be, derived from the
processing fees charged for the Company's coin processing service. Prior growth
rates in the Company's revenue should not be considered indicative of future
operating results. The timing and amount of future revenues will depend almost
entirely on the Company's ability to obtain new agreements with potential retail
distribution partners for the installation of Coinstar units, the successful
deployment and operation of the Company's coin processing network, and customer
utilization of the service. Future operating results will depend upon many
factors, including the Company's success in deploying a substantial number of
additional units, the consumer demand for the Company's coin processing service,
the level of product and price competition, the Company's success in expanding
its network and managing the growth of such network, the ability of the Company
to develop and market product enhancements, the timing of product enhancements,
activities of and acquisitions by competitors, the ability to hire additional
employees and the timing of such hiring and the ability to control costs.
Fluctuations in the volume and value of coins processed and the rate of unit
installations have caused and may continue to cause material fluctuations in the
Company's operating results, particularly on a quarterly basis. Quarterly
revenue and operating results, therefore, depend on the volume and mix of coins
processed and the rate of unit installations during the quarter, all of which
are difficult to forecast.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. The customer utilization of
the Company's coin processing service varies substantially from unit to unit,
making the Company's revenues difficult to forecast. Customer utilization is
affected by the timing and success of promotions by the Company and its retail
distribution partners, age of the installed unit, adverse weather conditions and
other factors, many of which are not in the Company's control. Based on its
limited operating history, the Company believes that coin processing volumes are
affected by seasonality; in particular the Company believes that on a relative
basis coin processing volumes have been lower in the months of January,
February, September and October. There can be no assurance, however, that such
seasonal trends will continue. Any projections of future seasonality are
inherently uncertain due to the Company's limited operating history, and due to
the lack of comparable companies engaged in the coin processing business. As a
result of these and other factors, revenue for any quarter is subject to
significant variation, and the Company believes that period-to-period
comparisons of its results of operations are not necessarily meaningful and
should not be relied upon as indications of future performance. Because the
Company's operating expenses are based on anticipated revenue trends and because
a large percentage of the Company's expenses are relatively fixed, revenue
variability could cause significant variations in operating results from quarter
to quarter and could result in significant losses. To the extent such expenses
precede, or are not subsequently followed by, increased revenue, the Company's
operating results would be materially adversely affected. Due to all of the
foregoing factors, it is likely that in some future quarter the Company's
operating results will be below the expectations of public market analysts and
investors. In such event, the price of the Company's Common 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.
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SUBSTANTIAL LEVERAGE AND ABILITY TO SERVICE DEBT. The Company had
outstanding indebtedness as of December 31, 1998 of $88.1 million, which
included $85.7 million of the Company's 13.0% Senior Subordinated Discount Notes
due 2006 ("the Notes"). The Notes will accrete to $95.0 million by October 1999.
The Company must begin paying cash interest on the Notes in April 2000.
Beginning at that time, the Company will have debt service obligations of over
$12.0 million per year until October 2006 when the principal amount of $95.0
million will be due. The Company's capital expenditures will increase
significantly upon the continued expansion of the Coinstar network, and the
Company expects that its operating cash flow will be insufficient to finance
capital expenditures over the next several years. The ability of the Company to
meet its debt service requirements will depend upon achieving significant and
sustained growth in the Company's expected 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
national network of self-service coin processing machines that provide a
convenient, reliable means for consumers to convert loose coins into cash. The
Company competes regionally with several direct competitors that operate
self-service coin processing machines. There can be no assurances that such
competitors have not or will not substantially increase their installed units
and expand their service nationwide. The Company 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, of Malmo Sweden, the
Company's prior supplier of coin-counting devices, ("Scan Coin"), or other third
parties to whom Scan Coin may sell its coin counting device, as a result of the
Company's intention to discontinue its supply arrangement with Scan Coin. See
"Risk Factors Termination of Supplier Relationship." 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
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Company will not have a material adverse effect on the Company's business,
financial condition and results of operations and on its ability to achieve
sufficient cash flow to service its indebtedness.
DEPENDENCE ON CONTINUED MARKET ACCEPTANCE BY CONSUMERS AND RETAIL
DISTRIBUTION PARTNERS. The Company is substantially dependent on continued
market acceptance of its coin processing service by consumers and its retail
distribution partners, which have been primarily supermarket chains. The
self-service coin processing market is relatively new and evolving; accordingly,
it is difficult to predict the future growth rate and size of this market. There
can be no assurance that the Company will be successful in achieving the
large-scale adoption of its coin processing service. While the Company's
existing installed base of Coinstar units has been well received by both retail
distribution partners and customers to date, there can be no assurance that the
operating results of the installed units will continue to be favorable or past
results will be indicative of future market acceptance of the Company's service.
The Company believes that market acceptance of the Coinstar unit is dependent on
the consumer's perception that the units are convenient, easy to use and
reliable. Even if the Company is successful in promoting awareness of the
Coinstar unit among consumers, there can be no assurance that such consumers
will utilize the Coinstar units in sufficient volume to make the Company
profitable. In addition, market acceptance and ongoing use of the Coinstar
service may be adversely affected by the increasing use of alternatives to coin
and currency transactions such as credit and debit cards, checks, wire
transfers, smart cards and other forms of electronic payment.
Market acceptance of the Coinstar units is also dependent on the willingness
of potential retail distribution partners to have the units installed in their
stores. The Company believes that market acceptance by potential retail
distribution partners will be dependent on its ability to demonstrate the
utility of the Coinstar unit as a customer service and as a means to provide
other tangible benefits, including increased customer traffic and the promotion
of store sales or service. There can be no assurance, however, that potential
retail distribution partners will be willing to place Coinstar units in their
locations or that, once installed, Coinstar units will obtain market acceptance
from consumers. Market acceptance and the Company's revenues may also be
affected by the availability and success of coin processing services offered by
competitors. In the event the Company's service does not achieve market
acceptance or does so less rapidly than expected or the Company's contracts with
one or more of its retail distribution partners is terminated, the Company and
its results of operations, including its ability to achieve sufficient cash flow
to service its indebtedness and achieve profitability, will be materially
adversely affected. Moreover, the Company intends to increase its deployment of
Coinstar units in the international market. However, the Company has not entered
certain international markets or fully penetrated other such markets and there
can be no assurance that initial or further deployment in such markets would be
successful.
RISKS INHERENT IN INTERNATIONAL TRANSACTIONS. Although Coinstar has only
recently begun to expand its business into overseas markets, management
anticipates that Coinstar's international operations will become increasingly
significant to its business. International transactions pose a number of risks,
including, regulatory delays or disapprovals with respect to our product,
exchange rate fluctuations, limits on repatriation of funds, expenses and delays
due to political instability, changes in tariffs, and difficulties with foreign
distributors. Any of these factors could, in the future, adversely affect
Coinstar's business and results of operations.
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
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quarter ended December 31, 1998, Coinstar units in service in two supermarket
chains accounted for approximately 37.6% of the Company's revenue. The units in
service in these two chains, Fred Meyer Inc. and The Kroger Co., accounted for
approximately 18.7% and 18.9%, respectively, of the Company's revenue in 1998.
On October 19, 1998, The Kroger Co. and Fred Meyer Inc. announced that they
entered into a definitive merger agreement. 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
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.
TERMINATION OF SUPPLIER RELATIONSHIP. The Company previously purchased the
coin counter components of the Coinstar unit solely from Scan Coin, pursuant to
an agreement that may be terminated by either party with six months notice at
any time on or after June 30, 1999. In March 1997, the Company entered into a
non-binding letter of intent with Scan Coin for a new agreement. Subsequently,
Scan Coin indicated that the use of any coin counter in the Coinstar units other
than the coin counting device supplied by Scan Coin prior to June 30, 1999 would
violate the prior supply agreement between Scan Coin and the Company. Scan Coin
also reserved the right to assert ownership of any of the Company's intellectual
property that can be deemed an improvement or development of Scan Coin's
intellectual property. The Company believes that the pertinent sections of the
agreements with Scan Coin have been superseded through course of dealing.
Moreover, the Company believes that Scan Coin has no claim on any of the
Company's intellectual property. The Company has evaluated Scan Coin's claims
and believes they are without merit. However, the Company believes that even if
it is determined that the prior supply agreements are still effective and the
Company's use of the new coin counting technology violates these agreements, an
amount that may compensate Scan Coin's claims under the agreements would not be
material to the Company's business. Accordingly, the Company responded to Scan
Coin, declaring that it does not agree with Scan Coin's claims related to the
agreements, and that Scan Coin has no valid claim on any Company owned or
licensed intellectual property. On September 8, 1998, Scan Coin informed the
Company that the Company was in breach of the original agreement and that the
Company had thirty (30) days to cure the default. Scan Coin also restated its
claim to certain intellectual property owned by the
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Company. The Company responded on September 16, 1998 indicating that the Company
repudiates all claims made by Scan Coin in its letter. The Company will continue
to attempt to settle this dispute amicably with Scan Coin. There can be no
assurance that the Company will be able to resolve the dispute with Scan Coin,
nor can there be any assurance that if litigation commences, the Company will
prevail. Failure to prevail in litigation may result in a payment of monetary
damages, the forfeiture of certain intellectual property rights, or both, each
of which, individually, in the event of its occurrence, could have a material
adverse effect on the Company's business, financial condition and results of
operations and on its ability to achieve sufficient cash flow to service its
indebtedness.
Currently, Scan Coin supplied coin counter devices are installed in most
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 1999. However,
there can be no assurance the dispute with Scan Coin will not effect Scan Coin's
decision to fill such orders or others in the future. The Company believes it
can purchase many of these parts from third party suppliers. However, there can
be no assurance that the Company will be able to source all necessary parts from
outside suppliers for the Scan Coin coin counters on a timely basis, if at all.
Failure to secure necessary replacement parts on a timely basis may result in a
slowdown of installation, or in machine downtime.
RELIANCE ON THIRD-PARTY MANUFACTURER AND SERVICE PROVIDERS. The Company
does not conduct manufacturing operations and is dependent and will continue to
be dependent on outside parties for the manufacture of the Coinstar unit and its
key components. While Coinstar intends to significantly expand its installed
base, such expansion may be constrained by the manufacturing capacity of its
third-party manufacturers and suppliers. Although the Company expects that its
current contract manufacturer, SeaMed Corporation ("SeaMed") will be able to
produce sufficient units to meet projected demand, there can be no assurance
that SeaMed or other manufacturers will be able to meet the Company's
manufacturing needs in a satisfactory and timely manner. In the event of an
unanticipated increase in demand for Coinstar unit installations by retail
distribution partners, the Company may be unable to meet such demand due to
manufacturing constraints. Although the Company has a contract with SeaMed, it
does not have a long-term obligation to continue the manufacture of the Coinstar
unit or its components. Further, SeaMed is principally engaged in the
manufacture of electronic medical instruments for medical technology companies.
The Company believes that it is SeaMed's only material non-medical customer. As
such, the Company faces an increased risk that SeaMed may choose to focus
exclusively on manufacturing its medical products and cease making the Company's
products. Should SeaMed cease providing services, the Company would be required
to locate and qualify additional suppliers. There can be no assurance that the
Company would be able to locate alternate manufacturers on a timely basis. The
Company's reliance on third-party manufacturers involves a number of additional
risks, including the absence of guaranteed capacity and reduced control over
delivery schedules, quality assurance, production yields and costs. There can be
no assurance that the manufacturing capability of such third-party manufacturers
will successfully address the Company's needs. In the event the Company is
unable to retain such manufacturing on commercially reasonable terms, its
business, financial condition and results of operation and its ability to
achieve sufficient cash flow to service its indebtedness will be materially
adversely affected.
On March 16, 1999, SeaMed announced that it had entered into an agreement to
merge with Plexus Corp. of Neenah, Wisconsin. The merger is subject to certain
conditions including shareholder approval. Management of SeaMed has assured the
Company that the combined entity will be able to continue to meet the
manufacturing needs of the Company, and that the merger will add additional
capacity. However, there can be no assurance that if the merger is completed,
Plexus will continue to operate in Redmond and/or be able to meet the
manufacturing needs of the Company without additional cost, or at all.
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 and other third party
providers to arrange for the pick-up, processing and deposit of coins. The
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Company generally contracts with one transportation provider and coin processor
to service a particular region. Many of these carriers do not have long-standing
relationships with the Company and these contracts generally can be terminated
by either party with advance notice ranging from 30 to 90 days. In the past, the
Company has experienced a sudden disruption in service from an armored carrier
company. The Company does not currently have nor does it expect to have in the
foreseeable future the internal capability to provide back up service in the
event of sudden disruption in service from an armored carrier company. Any
failure by the Company to maintain its existing relationships or to establish
new relationships on a timely basis or on acceptable terms would have a material
adverse effect on the Company's business, financial condition and results of
operations and on its ability to achieve sufficient cash flow to service its
indebtedness. Moreover, as with any business that handles large volumes of cash,
the Company is susceptible to theft, counterfeit and other forms of fraud,
including security breaches of the Company's computing system that performs
important accounting functions. There can be no assurance that the Company will
be successful in developing product enhancements and new services to thwart such
attempts.
RISK OF DEFECTS IN OPERATING SYSTEM. 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 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
communication services that may contain undetected errors or are subject to
failures. These errors 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 loss of data will operate as intended
and any loss 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 it's
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
disruptions. Further, while the Company has taken significant steps to protect
the security of its network, any breach of such security whether intentional or
from a computer virus could have a material adverse impact on the Company. Any
service disruptions, either due to errors or delays in the Company's software or
computing systems or interruptions or breaches in the communications network, or
security breaches of the system, could have a material adverse affect on the
Company's business, financial condition and results of operations and on its
ability to achieve sufficient cash flow to service its indebtedness.
DEPENDENCE ON KEY PERSONNEL AND NEED TO HIRE ADDITIONAL PERSONNEL. The
Company's performance is substantially dependent on the performance of its
executive officers and key employees and its long term success will depend on
its ability to recruit, retain and motivate highly skilled personnel. All of the
Company's executive officers and employees are employed on an at-will basis. The
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
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flow to service its indebtedness. Presently, the Company maintains a "key man"
life insurance policy on Mr. Molbak in the amount of $2.0 million. See
"Executive Officers."
UNCERTAINTY OF PROTECTION OF PATENTS AND PROPRIETARY RIGHTS. The Company's
future success depends, in part, on its ability to protect its intellectual
property and maintain the proprietary nature of its technology through a
combination of patents, licenses and other intellectual property arrangements,
without infringing the proprietary rights of third parties. In October 1996,
April 1997, May 1998, September 1998, and December 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, May 2015, and March 2017
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 unenforceability 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. On October 27, 1998 the Company added its most recently issued
patent to the pending litigation by agreement of the parties. 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
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time-consuming and expensive litigation, damages, license fees, royalty
payments, diversion of the attention of key personnel and restrictions on or the
termination of the Company's ability to provide its coin processing service and
use the processing equipment, any of which could have a material adverse effect
on the Company's business, financial condition and results of operations and on
its ability to achieve sufficient cash flow to service its indebtedness. The
Company also relies on trade secrets to develop and maintain its competitive
position. Although the Company protects its proprietary technology in part by
confidentiality agreements with its employees, consultants and corporate
partners, there can be no assurance that these agreements will not be breached,
that the Company will have adequate remedies for any breach or that the
Company's trade secrets will not otherwise become known or be discovered
independently by its competitors.
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. Such failure or
malfunction could cause disruptions of operations, including among other things
a temporary inability to process transactions or engage in normal business
activities. 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 or give
erroneous results 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 completed its assessment as to whether any of its retail distribution
partners, suppliers or service providers will be so affected. Failure or
malfunction of the
16
<PAGE>
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.
ITEM 2. PROPERTIES.
The Company's headquarters occupies a 46,070 square foot facility in
Bellevue, Washington. The Company operates under a lease which expires in August
2004. The Company also leases a 10,196 square foot facility in Bellevue,
Washington under a lease which expires in March 2002. This space is currently
under a sublease agreement to a third party. On March 12, 1999 this third party
announced that it was suspending its operations. The Company is currently
evaluating alternative subleasing arrangements. However, the Company believes
that this event will not have a material adverse impact of the Company's
operations or results. The sublease expires January 31, 2000. The Company
believes this space is adequate for its current needs and that it will be able
to renew its leases and obtain additional space, if necessary.
ITEM 3. LEGAL PROCEEDINGS.
On June 18, 1997, the Company filed 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 unenforceability of the subject
patent, and filed a claim for breach of warranty against Scan Coin AB ("Scan
Coin"). The claim against Scan Coin has been dismissed by agreement of the
parties. On January 26, 1998, the court, in response to cross motions for
summary judgment filed by both parties, held that certain of CoinBank's devices
did not infringe on the subject patent, and that there remained a question of
fact as to the infringement of other devices. On October 27, 1998, the Company
added its most recently issued patent to the pending litigation by agreement of
the parties. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of 1998.
17
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol "CSTR." The following table sets forth the high and low closing prices as
reported by Nasdaq for the Common Stock of the Company since the initial public
offering for the quarters ended as follows. Such quotations represent
inter-dealer prices without retail markup, markdown or commission and may not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
Fiscal 1997:
Third Quarter (beginning July 3, 1997)....................................................... $ 14.125 $ 9.85
Fourth Quarter............................................................................... 12.875 8.063
Fiscal 1998:
First Quarter................................................................................ 9.125 8.000
Second Quarter............................................................................... 9.875 6.500
Third Quarter................................................................................ 9.750 4.750
Fourth Quarter............................................................................... 10.750 5.313
</TABLE>
The effective date of the Company's first registration statement, filed on
Form S-1 under the Securities Act of 1993, as amended (Registration No.
333-26843), was July 2, 1997 (the "Registration Statement"). The class of
securities registered was Common Stock. The offering commenced on July 2, 1997
and all securities were sold in the offering. The managing underwriters were
Smith Barney Inc. and Hambrecht & Quist.
Pursuant to the Registration Statement, the Company sold 3,000,000 shares of
its Common Stock for its own account, for an aggregate offering price of
$31,500,000. The Company incurred expenses of approximately $2,837,544, of which
$1,957,125 represented underwriting discounts and commissions and $880,419
represented estimated other expenses, of which expenses $50,149 represented
direct or indirect payments to an affiliate of the Company. The net offering
proceeds to the issuer after total expenses was $28,662,456.
During the second quarter of 1998, the Company began to disburse proceeds
from the initial public offering. To date, offering proceeds were used as
follows: (i) approximately $17.3 million for capital expenditures and working
capital in connection with the continued expansion of the Coinstar network, (ii)
approximately $1.6 million for product research and development to enhance the
Coinstar unit and the coin processing network; and (iii) approximately $330,000
for general corporate purposes.
The remaining net proceeds have been invested in cash equivalents and
short-term securities. The use of the proceeds from the offering does not
represent a material change in the use of proceeds described in the prospectus
included as part of the Registration Statement.
As of December 31, 1998, there were approximately 220 registered holders of
the Company's Common Stock which number does not include the number of
stockholders whose shares are held of record by a brokerage house or clearing
agency but does include such brokerage house or clearing agency as one record
holder. The Company believes its has excess of 2,500 beneficial holders.
The Company has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain any future earnings to finance
the growth and development of its business and therefore doers not anticipate
paying any cash dividends in the foreseeable future. In addition, the Company's
Indenture governing the Notes restricts the Company's ability to pay dividends.
18
<PAGE>
ITEM 6. SELECTED FINANCIAL AND OTHER DATA.
The following selected financial data is qualified by reference to, and
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Financial Statements of
the Company and related Notes thereto included elsewhere in this Annual Report
on Form 10-K.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<CAPTION>
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE,
PER UNIT DATA AND WHERE NOTED)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue................................................................. $ 47,674 $ 25,007 $ 8,312 $ 1,063 $ 325
Expenses:
Direct operating...................................................... 26,565 17,899 7,258 1,336 488
Regional sales and marketing.......................................... 3,778 3,088 1,505 349 86
Product research and development...................................... 4,744 6,362 3,969 1,830 1,648
Selling, general and administrative................................... 14,112 11,079 5,351 2,790 1,716
Depreciation and amortization......................................... 13,237 8,679 4,135 1,117 440
--------- --------- --------- --------- ---------
Loss from operations.................................................... (14,762) (22,100) (13,906) (6,359) (4,053)
Other income (expense)
Interest income....................................................... 1,367 2,329 848 398 34
Interest expense...................................................... (10,817) (9,822) (2,661) (208) (297)
Other income.......................................................... 240 -- -- -- --
--------- --------- --------- --------- ---------
Net loss before extraordinary item...................................... (23,972) (29,593) (15,719) (6,169) (4,316)
Extraordinary item loss related to early retirement of debt............. -- -- (248) -- --
--------- --------- --------- --------- ---------
Net loss................................................................ $ (23,972) $ (29,593) $ (15,967) $ (6,169) $ (4,316)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Loss per share before extraordinary item, basic and diluted(1).......... $ (1.58) $ (3.81) $ (20.06) $ (8.23) $ (5.94)
Extraordinary item per share, basic and diluted(1)...................... -- -- (0.31) -- --
--------- --------- --------- --------- ---------
Loss per share, basic and diluted(1).................................... $ (1.58) $ (3.81) $ (20.37) $ (8.23) $ (5.94)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average shares outstanding (1)................................. 15,150 7,761 784 750 726
OTHER DATA:
Number of new Coinstar units installed during the period................ 1,609 1,703 1,238 215 31
Installed base of Coinstar units at end of the period................... 4,813 3,204 1,501 263 48
Average age of network for the period (months).......................... 15.5 10.0 6.5 7.6 6.4
Number of regional markets.............................................. 58 40 23 11 4
Dollar value of coins processed......................................... 623,258 332,526 115,476 17,701 5,245
Direct contribution (loss)(2)........................................... 21,109 7,108 1,054 (273) (163)
EBITDA(6)............................................................... (1,525) (13,421) (9,771) (5,242) (3,613)
Revenue per average installed unit(3)................................... 11,893 10,709 9,860 2,325 13,542
Direct contribution per average installed unit(2)(3).................... 5,281 3,044 1,250 (2,395) (6,792)
International development costs(5)...................................... 369 -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments(4).................... $ 41,871 $ 56,803 $ 56,310 $ 14,120 $ 1,343
Total assets............................................................ 98,833 103,546 82,531 19,601 3,913
Total debt, including current portion................................... 88,056 78,945 70,065 1,658 4,660
Mandatorily redeemable preferred Stock.................................. -- -- 24,972 23,548 --
Paid in capital......................................................... 62,372 61,553 6,871 5,409 4,512
Total stockholders' equity (deficit).................................... $ (20,039) $ 3,109 $ (21,976) $ (7,471) $ (2,224)
</TABLE>
19
<PAGE>
- ------------------------
(1) See Note 9 to Financial Statements for an explanation of the determination
of the number of shares used in computing loss per share information, basic
and diluted.
(2) 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.
(3) Based on monthly averages of units in operation over the applicable period.
(4) Cash, cash equivalents and short-term investments include funds in transit,
which represent amounts being processed by armored car carriers or residing
in Coinstar units, of $21.8 million, $14.2 million and $5.5 million at
December 31, 1998, 1997, and 1996, respectively. Funds in transit prior to
such dates are negligible.
(5) International development costs represent the costs incurred by Coinstar
International Inc., the Company's wholly owned subsidiary, related to the
exploration of the international expansion. All costs related to
international development (such as market research and travel) are expensed
as incurred in accordance with the American Institute of Certified Public
Accountants Statement of Position ("SOP") 98-5, "Reporting on the Costs of
Start-up Activities," issued on April 3, 1998.
(6) EBITDA represents earnings before interest expense, income taxes,
depreciation, amortization and other income/expense. EBITDA does not
represent and should not be considered as an alternative to net income or
cash flow from operations as determined by generally accepted accounting
principles. The Company, however, believes that EBITDA provides useful
information regarding a company's ability to service and/or incur
indebtedness.
20
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
FINANCIAL STATEMENTS AND RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS ANNUAL
REPORT ON FORM 10-K. EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE
FOLLOWING DISCUSSION IN THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES, SUCH AS THE COMPANY'S PLANS,
OBJECTIVES, EXPECTATIONS AND INTENTIONS. THE COMPANY'S ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM RESULTS THAT MAY BE ANTICIPATED BY SUCH FORWARD-LOOKING
STATEMENTS AND DISCUSSED ELSEWHERE HEREIN. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED
BELOW AS WELL AS THOSE DISCUSSED UNDER THE CAPTIONS "RISK FACTORS" AND
"BUSINESS" AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS ANNUAL REPORT ON FORM
10-K. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING
STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE OF THIS REPORT. THE COMPANY
UNDERTAKES NO OBLIGATION TO REVISE ANY FORWARD-LOOKING STATEMENTS IN ORDER TO
REFLECT EVENTS OR CIRCUMSTANCES THAT MAY SUBSEQUENTLY ARISE. READERS ARE URGED
TO CAREFULLY REVIEW AND CONSIDER THE VARIOUS DISCLOSURES MADE BY THE COMPANY IN
THIS REPORT AND IN THE COMPANY'S OTHER REPORTS FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION THAT ATTEMPT TO ADVISE INTERESTED PARTIES OF THE RISKS AND
FACTORS THAT MAY AFFECT THE COMPANY'S BUSINESS, PROSPECTS AND RESULTS OF
OPERATIONS.
OVERVIEW
The Company develops, owns and operates a network of automated, self-service
coin counting and processing machines that provides consumers with a convenient
means to convert loose coins into cash. The Company began field testing of a
prototype unit in 1992 and commercial installation of units in supermarkets in
1994. The Company has increased its store installation base every year and as of
December 31, 1998 had an installed base of 4,813 units located, primarily in
supermarkets, in 58 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 $82.4
million as of December 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's 13% Senior Subordinated Discount
Notes due at maturity in 2006 (the "Notes") for net proceeds of $62.9 million,
and the Company's initial public offering of 3.0 million shares of Common Stock
for net proceeds of $28.4 million.
The Company currently derives substantially all its revenues from coin
processing services generated by its installed base of Coinstar units located in
supermarket chains in 37 states across the country. The Company generates
revenues based on a processing fee, generally 8.9% at the current time, charged
on the total dollar amount of coins processed in a transaction. Coin processing
fee revenue is recognized at the time the customers' coins are counted by the
Coinstar unit. Overall revenue growth is dependent on both the rate of new
installations and the growth in coin processing volumes of its installed base.
The Company's experience to date is that coin processing volumes per unit have
generally increased with the length of time the unit is in operation as
awareness levels of the service increases, driving initial trial and repeat
usage for the service. The Company believes that coin processing volumes per
unit may also be affected by other factors such as public relations, advertising
and other activities that promote awareness of the units, as well as the amount
of consumer traffic in the stores in which the units are located and
seasonality. Given the Company's limited operating history, there can be no
assurance, however, that unit volumes will continue to increase as a function of
the time the unit is in operation, or that unit volumes will
21
<PAGE>
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
more mature units increases.
The Company established a wholly-owned subsidiary, Coinstar International,
Inc. ("Coinstar International"), in March 1998 to explore expanding the
Company's operations internationally. At the present time, Coinstar
International is piloting an eight store test in Canada to determine the
viability of the Canadian market for the Coinstar service and is piloting five
Coinstar units in the United Kingdom. In addition, Coinstar International is
investigating the viability of the Coinstar service in certain European
countries.
Direct operating expenses are comprised of the regional expenses associated
with Coinstar unit operations and support and consist primarily of coin pickup
and processing, field operations support and related expenses, and retail
operations support. Coin pickup and processing costs, which represent a major
portion of direct operating expenses, vary based on the level of total coin
processing volume and the density of the units within a region. The Company
believes that while coin pickup and processing costs are variable based on units
in service and coin volume generated, economies related to these direct expense
components can be achieved through increasing the density of units in operation
in regional markets. Field service operations and related expenses vary
depending on the number of geographic regions in which Coinstar units are
located and the density of the units within a region. Regional sales and
marketing expenses are comprised of ongoing marketing, advertising and public
relations efforts in existing market regions and startup marketing expenses
incurred to launch the Coinstar service in new regional markets. Product
research and development expense consists of the development costs of the
Coinstar unit software, network applications, Coinstar unit sustaining
engineering and new product development. Selling, general and administrative
expenses are comprised of management compensation, administrative support for
field operations, the customer service center, sales and marketing support,
systems and engineering support, computer network operations, 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.
22
<PAGE>
RESULTS OF OPERATIONS
The following table shows revenue and expense as a percent of revenue for
the last three years:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1998 1997 1996
--------- --------- ---------
Revenue.................................................. 100% 100% 100%
Expenses:
Direct operating..................................... 55.7 71.6 87.3
Regional sales and marketing......................... 7.9 12.3 18.1
Product research and development..................... 10.0 25.4 47.8
Selling, general, and administrative................. 29.6 44.3 64.4
Depreciation and amortization........................ 27.8 34.7 49.7
--------- --------- ---------
Loss from operations..................................... (31.0)% (88.4)% (167.3)%
</TABLE>
YEARS ENDED DECEMBER 31, 1998 AND 1997
REVENUE
Revenue increased to $47.7 million in 1998 from $25.0 million in the
comparable 1997 period. The increase was due principally to the increase in the
number of Coinstar units in service during the 1998 period and the increase in
the volume of coins processed by the units in service during this period. The
installed base of Coinstar units increased to 4,813 as of December 31, 1998 from
3,204 units as of December 31, 1997. The dollar value of coins processed
increased to $623.3 million during the 1998 period from $332.5 million in the
comparable 1997 period.
DIRECT OPERATING EXPENSES
Direct operating expenses increased to $26.6 million in 1998 from $17.9
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 18 new regional markets as of December 31, 1998. Direct operating expenses
as a percentage of revenue decreased to 55.7% in the 1998 period from 71.6% in
the comparable 1997 period. The decrease in direct operating expenses as a
percentage of revenue was the result of (i) the realization of coin pickup and
processing cost economies from regional densities and utilization of cheaper,
more efficient coin pick-up methods, and (ii) field service expenses per unit
declined as a percentage of revenue as the Company increases its density in its
existing markets.
REGIONAL SALES AND MARKETING
Regional sales and marketing expenses increased to $3.8 million in 1998 from
$3.1 million in the comparable 1997 period. The increase in regional marketing
expense was the result of an increased level of television advertising, offset
partially by a decrease in new market launches and promotional activity.
Regional sales and marketing as a percentage of revenue decreased to 7.9% in the
1998 period from 12.3% in the comparable 1997 period. The decrease in regional
sales and marketing as a percentage of revenue was the result of (i) increasing
volumes processed by the network, and (ii) lower advertising costs per unit as
the Company increases the density of units within a region.
PRODUCT RESEARCH AND DEVELOPMENT
Product research and development expenses decreased to $4.7 million in 1998
from $6.4 million in the comparable 1997 period. The decrease in product
research and development costs reflects the decrease in
23
<PAGE>
expenditures associated with the completion of the development of the new coin
counting technology and the completion of the Company's new operating system.
Product research and development as a percentage of revenue decreased to 10.0%
in the 1998 period from 12.3% in the comparable 1997 period. While the Company
currently expenses all product research and development costs, a portion,
related to internally developed software, may be capitalized in the future.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expense increased to $14.1 million in
1998 from $11.1 million in the comparable 1997 period. The principal component
of such expenses was employee compensation and the period-to-period increase
primarily reflects an investment in higher staffing levels to support the
Company's rapid growth and expansion. Selling, general and administrative as a
percentage of revenue decreased to 29.6% in the 1998 period from 44.3% in the
comparable 1997 period. The decrease in selling, general, and administrative as
a percentage of revenue was the result of (i) increasing volumes processed by
the network combined with (ii) the realization of improved operating
efficiencies.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased to $13.2 million in 1998
from $8.7 million in the comparable 1997 period. The increase was primarily due
to the increase in the installed base of Coinstar units during these periods.
Depreciation and amortization as a percentage of revenue decreased to 27.8% in
the 1998 period from 34.7% in the comparable 1997 period. The decrease in
depreciation and amortization as a percentage of revenue was the result of
increasing volumes processed through the network. 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 other income of $240,000 in 1998 due to the subleasing
of excess office space. On March 12, 1999 this third party announced that it was
suspending its operations. The Company is currently evaluating alternative
subleasing arrangements. However, the Company believes that this event will not
have a material adverse impact of the company's operations or results. The
sublease expires January 31, 2000.
Interest income decreased to $1.4 million in 1998 from $2.3 million in the
comparable 1997 period. The decrease in interest income is attributed to a
reduction in invested cash balances resulting from the sale of certain
short-term investments to finance the installation of Coinstar units during the
period.
Interest expense increased to $10.8 million in 1998 from $9.8 million in the
comparable 1997 period. The increase was primarily 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 $24.0 million in 1998 from $29.6 million in the
comparable 1997 period. The decrease in the net loss was primarily 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 reduction in net loss 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.
24
<PAGE>
YEARS ENDED DECEMBER 31, 1997 AND 1996
REVENUE
Revenue increased to $25.0 million in 1997 from $8.3 million in 1996. The
increase was due principally to the increase in the number of Coinstar units in
service during 1997 and the increase in the volume of coins processed by the
units in service during that year. The installed base of Coinstar units
increased to 3,204 as of December 31, 1997 from 1,501 units as of December 31,
1996. The dollar value of coins processed increased to $332.5 million during
1997 from $115.5 million in 1996.
DIRECT OPERATING EXPENSES
Direct operating expenses increased to $17.9 million in 1997 from $7.3
million in 1996. The increase in direct operating expenses was primarily
attributable to increased coin pickup and processing costs as a result of the
increased dollar volumes processed by the network and the increase in field
service personnel expenses associated with the hiring and training of new field
service personnel to support the Company's accelerated growth and its expansion
into 17 new regional markets in 1997. Direct operating expenses as a percentage
of revenue decreased to 71.6% in 1997 from 87.3% in 1996. Direct operating
expenses declined as a percentage of revenue due to (i) realization of coin
pickup and processing cost economies from regional densities and (ii) field
service expenses per unit decreased as a percentage of revenue as the Company
increases its density in its existing markets.
REGIONAL SALES AND MARKETING
Regional sales and marketing expenses increased to $3.1 million in 1997 from
$1.5 million in 1996. The increase in regional marketing expense was the result
of an increased level of advertising, cooperative promotion with its retail
distribution partners and public relations efforts focused in the new regions
installed during 1997 and the initial incurrence of ongoing marketing expenses
in existing markets. Regional sales and marketing decreased as a percentage of
revenue to 12.3% in the 1997 period from 18.1% in the comparable 1996 period.
The decrease in sales and marketing as a percentage of revenue was the result of
(i) increasing volumes processed by the network and (ii) lower advertising costs
per unit as the Company increased the unit density within a region.
PRODUCT RESEARCH AND DEVELOPMENT
Product research and development expenses increased to $6.4 million in 1997
from $4.0 million in 1996. The principal component of such expenses was
compensation costs and the year-to-year increase was due largely to higher
staffing levels required for the improvement of existing and development of new
Coinstar unit software, hardware, network applications and development costs
related to new service offerings. Product research and development decreased as
a percentage of revenue to 25.4% in the 1997 period from 47.8% in the comparable
1996 period. The decrease in product research and development as a percentage of
revenue was the result of increasing volumes processed through the network.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expense increased to $11.1 million in
1997 from $5.4 million in 1996. The principal component of such expenses was
personnel compensation and the year-to-year increase primarily reflects an
investment in higher staffing levels during 1997 to support the Company's rapid
growth and expansion. Selling, general, and administrative decreased as a
percentage of revenue to 44.3% in the 1997 period from 64.4% in the comparable
1996 period. The decrease in selling, general, and administrative as a
percentage of revenue was the result of increasing volumes processed through the
network.
25
<PAGE>
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased to $8.7 million in 1997 from
$4.1 million in 1996. The increase was primarily due to the increase in the
installed base of Coinstar units during these periods. Depreciation and
amortization decreased as a percentage of revenue to 34.7% in the 1997 period
from 49.7% in the comparable 1996 period. The decrease in depreciation and
amortization as a percentage of revenue was the result of increasing volumes
processed through the network.
INTEREST INCOME AND EXPENSE
Interest income increased to $2.3 million in 1997 from $848,000 in 1996. The
increase in interest income is attributable to higher invested cash balances
resulting from net proceeds received from the sale of the Notes in October 1996
and the completion of the Company's initial public offering in July 1997.
Interest expense increased to $9.8 million in 1997 from $2.7 million in
1996. The increase was due to the accretion of the Notes. No cash interest
payments are due on the Notes until April 2000.
NET LOSS
Net loss increased to $29.6 million in 1997 from $16.0 million in 1996. The
increase in net loss primarily was due to the fact that selling, general and
administrative expenses, product research and development expenses, and
depreciation and amortization increased during the year at a disproportionately
higher rate than the Company's direct contribution margin. This was the result
of the Company's decision to build the infrastructure necessary to support the
rapid growth of its installed base of units.
INCOME TAXES
At December 31, 1998 and 1997, the Company had net deferred tax assets of
approximately $28.0 million and $19.8 million, respectively, resulting primarily
from net operating loss and credit carryforwards available to offset future
income and tax obligations, respectively. Such federal carryforwards expire
through 2013. Based upon the Company's history of operating losses and
expiration dates of the loss carryforwards, the Company has recorded a valuation
allowance to the full extent of its net deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, the Company had cash and cash equivalents of $37.7
million, short-term investments of $4.2 million and working capital of $10.1
million. Cash and cash equivalents include $21.8 million of funds in transit,
which represent amounts being processed by armored car carriers or residing in
Coinstar units. Net cash provided by operating activities was $9.5 million for
1998 and used was $458,756 for 1997. The principal use of cash was to fund net
operating losses incurred, offset by depreciation, other non-cash charges, and
an increase in accounts payable and accrued liabilities.
Net cash provided by investing activities during 1998 was $9.0 million and
$31.9 million was used in 1997. Capital expenditures for such years were $23.0
million and $29.8 million, respectively. The majority of capital expenditures
consist of the purchase of Coinstar units.
Net cash used by financing activities for 1998 was $921,541, which
principally was the result of the repayment of long term debt partially offset
by the proceeds of exercised stock options. Net cash provided by financing
activities for 1997 was $28.7 million, which was the result of the Company's
initial public offering and the proceeds of the exercise of stock warrants
offset by the repayment of long term debt.
In July 1997, the Company completed its initial public offering of 3,000,000
million shares of Common Stock at a purchase price of $10.50 per share for net
proceeds of approximately $28.4 million. The net proceeds received by the
Company have been and will be used (i) predominantly to fund capital
26
<PAGE>
expenditures and working capital in connection with the continued expansion of
the Coinstar network, (ii) for product research and development, and deployment
of enhancements to the Coinstar unit and the coin processing network and (iii)
for general corporate purposes.
In November 1998, the Board of Directors approved the adoption of a
Stockholder Rights Plan under which all stockholders receive rights to purchase
shares of new series of Preferred Stock. The rights are exercisable only if a
person or group acquires 20 percent or more of the Company's common stock or
announces a tender offer for 20 percent or more of the common stock. If a person
acquires 20 percent or more of the Company's common stock, all rightsholders
except the purchaser will be entitled to acquire the Company common stock at a
50 percent discount. The rights trade with the common stock, unless and until
they are separated upon the occurrence of certain future events. The Board of
Directors may terminate the Rights Plan at any time or redeem the rights prior
to the time a person acquires more than 20 percent of Coinstar's Common Stock.
As of December 31, 1998 the Company had outstanding secured irrevocable
letters of credit with a bank in the amount of $3.7 million. These letters of
credit, which expire through June 1999, collateralize the Company's obligations
to third parties. As of December 31, 1998, no amounts were outstanding under the
letters of credit.
On February 19, 1999, the Company entered into a Credit Agreement with
Imperial Bank, for itself and as agent of Bank Austria Creditanstalt Corporate
Finance, Inc. ("Bank Austria" and, together with Imperial Bank, the "Lenders").
The Credit Agreement provides Coinstar with a credit facility of up to $25
million, consisting of revolving loans of $5 million from each of the Lenders,
and term loans of $5 million from each of the Lenders. The Credit agreement
requires the Company to maintain certain financial covenants during the term of
the agreement. In addition, amounts available under the term loans will increase
to $7.5 million per Lender after Coinstar has satisfied certain debt ratios.
In connection with the Credit Agreement, Coinstar issued to each of the
Lenders a warrant to purchase 51,326 shares of its common stock. The exercise
price for the warrants, which will expire on February 19, 2009, is $12.18 per
share. Coinstar has agreed, pursuant to certain Registration Rights Agreements
dated February 19, 1999 with the Lenders, to file a registration statement on
Form S-3 to register the shares issuable upon exercise of the warrants within 60
days following the date on which Coinstar has satisfied all of its obligations
under the Credit Agreement (the "Termination Date"). Coinstar must use
reasonable efforts to cause the registration statement to be declared effective
no later than 120 days following the Termination Date and must keep the
registration open for at least 45 days following the date the registration
statement is declared effective. The Registration Rights Agreements also
obligate Coinstar to include the common stock issuable upon exercise of the
warrants in certain registration statements it may file.
The Company believes existing cash equivalents, short-term investments, and
the new Credit Agreement 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 and to fund the pilot deployment of
Coinstar units internationally 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 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, in equal semi-annual payments, 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."
27
<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
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30,
1998 1998 1998 1998 1997 1997 1997
------------ ------------- --------- -------------- ------------ ------------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT UNIT AND PER UNIT DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Statements of Operations Data:
Revenue....................... $ 14,802 $ 13,576 $ 10,472 $ 8,823 $ 7,957 $ 7,762 $ 5,294
Expenses:
Direct operating............ 7,458 7,141 6,142 5,823 5,208 5,276 3,966
Regional sales and
marketing................. 1,077 930 854 917 689 798 972
Product research and
development............... 1,138 867 1,329 1,410 1,644 1,637 1,640
Selling, general and
administrative............ 3,579 3,531 3,726 3,276 3,252 2,669 2,630
Depreciation and
amortization.............. 3,669 3,635 3,120 2,813 2,539 2,297 2,158
Loss from operations.......... $ (2,119) $ (2,528) $ (4,699) $ (5,416) $ (5,375) $ (4,915) $ (6,072)
Other Data:
Number of new Coinstar units
installed during the
period...................... 376 405 501 327 469 400 406
Installed base of Coinstar
units at end of period...... 4,813 4,437 4,032 3,531 3,204 2,735 2,335
Average age of network for the
period (months)............. 17.5 15.8 14.8 13.4 11.7 10.6 9.3
Number of regional markets.... 58 57 49 42 40 35 33
Dollar value of coins
processed................... $ 186,166 $ 180,600 $ 139,227 $ 117,298 $ 105,692 $ 103,442 $ 70,626
Direct contribution(1)........ $ 7,344 $ 6,435 $ 4,330 $ 3,000 $ 2,749 $ 2,486 $ 1,328
Annualized revenue per average
installed unit(2)........... $ 12,937 $ 12,703 $ 11,195 $ 10,597 $ 10,907 $ 12,284 $ 9,939
Annualized direct contribution
per average installed
unit(1)(2).................. $ 6,405 $ 6,021 $ 4,568 $ 3,601 $ 3,768 $ 3,935 $ 2,494
International development
costs(3).................... $ 369 $ 116 $ 241 $ 28 -- -- --
<CAPTION>
<S> <C>
MARCH 31,
1997
-----------
<S> <C>
Statements of Operations Data:
Revenue....................... $ 3,995
Expenses:
Direct operating............ 3,450
Regional sales and
marketing................. 630
Product research and
development............... 1,441
Selling, general and
administrative............ 2,528
Depreciation and
amortization.............. 1,684
Loss from operations.......... $ (5,738)
Other Data:
Number of new Coinstar units
installed during the
period...................... 428
Installed base of Coinstar
units at end of period...... 1,929
Average age of network for the
period (months)............. 8.3
Number of regional markets.... 27
Dollar value of coins
processed................... $ 52,724
Direct contribution(1)........ $ 545
Annualized revenue per average
installed unit(2)........... $ 9,433
Annualized direct contribution
per average installed
unit(1)(2).................. $ 1,287
International development
costs(3).................... --
</TABLE>
- ------------------------------
(1) Direct contribution (loss) is defined as revenue less direct operating
expenses. The Company uses direct contribution (loss) as a measure of
operating performance to assist in understanding its operating results.
Direct contribution (loss) is not a measure of financial performance under
GAAP and should not be considered in isolation or an alternative to gross
margin, income (loss) from operations, net income (loss), or any other
measure of performance under GAAP.
(2) Based on actual quarterly results annualized divided by the monthly averages
of units in operation over the applicable period.
(3) International development costs represent the costs incurred by Coinstar
International related to the exploration of the international expansion. All
costs related to international development (such as market research and
travel) are expensed as incurred in accordance with the American Institute
of Certified Public Accountants Statement of Position ("SOP") 98-5,
"Reporting on the Costs of Start-Up Activities."
Based on its limited operating history, the Company believes that coin
processing volumes have been affected by seasonality; in particular coin
processing volumes are lower in the months of January, February, September and
October. There can be no assurance, however, that such seasonal trends will
continue. Any projections of future seasonality are inherently uncertain due to
the Company's limited operating history, and due to the lack of comparable
companies engaged in the coin processing business.
28
<PAGE>
In addition to fluctuations in revenue resulting from factors affecting
customer usage, timing of unit installations will result in significant
fluctuations in quarterly results. The rate of installations does not follow a
regular pattern, as it depends principally on installation schedules determined
by agreements between the Company and its retail distribution partners, variable
length of partner trial periods and the planned coordination of multiple partner
installations in a given geographic region.
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 operating losses from operations as the Company continues to
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 fiscal
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.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") 133, "Accounting for Derivative
Instruments and Hedging Activities." This pronouncement requires an entity to
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The Company is
currently evaluating the effects of this Standard, however, management believes
the impact of adoption will not be material to the financial statements, taken
as a whole. SFAS 133 is effective for fiscal years beginning after June 15,
1999.
EFFECTS OF YEAR 2000 ON THE 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 ("Internal Operating
Systems"). Such failure or malfunction could cause disruption of operations,
including among other things a temporary inability to process transactions or
engage in normal business activities. 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 or give erroneous results as a result of the upcoming
change in century, with respect to functions that materially affect their
interactions with the Company. Failure or malfunction of the Company's retail
distribution partner's, suppliers or service providers which 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.
During the second and third quarters of 1998, the Company undertook a
program to identify, test, and evaluate the Company's internal operating systems
to determine the impact of the year 2000 on these systems. These tests involved
simulating transactional activity before, during and after the various impacted
dates and assessing the results to ensure the proper handling of the information
by the internal operating system. As a result of these tests performed on the
internal operating systems, the Company does not
29
<PAGE>
believe its computer systems or applications currently in use will be materially
adversely affected by the upcoming change in century.
The Company is in the process of assessing the impact of the year 2000 on
its retail distribution partners, suppliers, and service providers. The Company
expects to complete the review of these customers and providers by the end of
the first quarter 1999. As the Company completes the review, management will be
able to identify and understand the risks that exist and the remedial actions
the Company may need to take to minimize those risks.
The Company does not expect any material costs will be incurred to complete
its review of year 2000 compliance for retail distribution partners, suppliers,
or service providers. The Company has not incurred costs beyond a diminimus
amount to review its systems for year 2000 compliance.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is subject to the risk of fluctuating interest rates in the
normal course of business. The Company's major market risk relates to its
short-term investments, which have a floating rate of interest. These
investments are financed through fixed rate debt. The relationship between fixed
and floating rate debt varies depending on market conditions. The Company does
not enter into speculative derivative transactions or leveraged swap agreements.
The table below presents principal (or notional) amounts and related
weighted average interest rates by year of maturity. All items described in the
table are non-trading and are stated in U.S. dollars.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
IN THOUSANDS ------------------------------------------------------------------
INTEREST RATE RISK 1998 1999 2000 2001 2002 THEREAFTER
- ----------------------------------------------------- --------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Short-term investments............................... 4,005 -- -- -- -- --
Average interest rate.............................. 5.87% -- -- -- -- --
LIABILITIES
Capital Lease obligations............................ 930 352 66 -- -- --
Average interest rate.............................. 11.95% 10.50% 10.50% -- -- --
Long-term debt--Fixed................................ 87,127 94,323 94,422 94,522 94,622 94,722
Average interest rate.............................. 13.3% 13.2% 13.2% 13.2% 13.2% 13.2%
</TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Item 14(a) for an index to the financial statements and supplementary
data of the Company required by this item.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
See the section entitled "Executive Officers" in Part I, Item 1 hereof for
information regarding executive officers.
The information required by this item with respect to directors is
incorporated be reference from the information under the caption of "Election of
Directors," contained in the Company's Definitive Proxy Statement to be filed
with the Commission pursuant to Registration 14A in connection with the 1999
Annual Meeting (the "Proxy Statement").
30
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference to the
information under the caption "Executive Compensation" contained in the Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated by reference to the
information under the caption "Security Ownership of Certain Beneficial Owners
and Management" contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated by reference to the
information under the caption "Certain Relationships and Related Transactions"
contained in the Proxy Statement.
31
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
The financial statements required by this item are submitted in a separate
section beginning on page 37 of this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
(a)(1) Index to Financial Statements
Independent Auditors' Report...................................................................... 37
Consolidated Balance Sheets....................................................................... 38
Consolidated Statements of Operations............................................................. 39
Consolidated Statements of Changes In Stockholders' Equity (Deficit).............................. 40
Consolidated Statements of Cash Flows............................................................. 41
Consolidated Notes to Financial Statements........................................................ 42
(a)(2) Index to Financial Statement Schedules
All schedules have been omitted because they are not applicable or not required, or the required
information is included in the financial statements or notes thereto.
(a)(3) Index to Exhibits:
</TABLE>
<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
4.9(3) Rights Agreement dated as of November 12, 1998 between Registrant and American Securities
Transfer and Trust, Inc.
4.10(3) Registrant's Certificate of Designation of Series A Preferred Stock. Reference is made to Exhibit
A of Exhibit 4.9
4.11(3) Form of Rights Certificate. Reference is made to Exhibit B of Exhibit 4.9
4.12(4) Credit Agreement, dated February 19, 1999, between Coinstar, Inc. and Imperial Bank, for itself
and as agent for Bank Austria Creditanstalt Corporate Finance, Inc.
4.13(4) Form of Warrant, dated February 19, 1999, issued to Imperial Bank.
4.14(4) Form of Warrant, dated February 19, 1999, issued to Bank Austria Creditanstalt Corporate Finance,
Inc.
4.15(4) Registration Rights Agreement, dated February 19, 1999, between Coinstar, Inc. and Imperial Bank.
4.16(4) Registration Rights Agreement, dated February 19, 1999, between Coinstar, Inc. and Bank Austria
Creditanstalt Corporate Finance, Inc.
10.1(1) Registrant's 1997 Equity Incentive Plan.
10.2(1) Registrant's 1997 Employee Stock Purchase Plan.
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
- --------------- -------------------------------------------------------------------------------------------------
<C> <S>
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(2) Manufacturing Agreement between Registrant and SeaMed Corporation dated May 14, 1998.
10.11+(1) Letter of Intent between Registrant and Scan Coin AB dated March 5, 1997.
10.12+(1) Agreement between Registrant and Scan Coin AB dated April 30, 1993, as amended.
10.13(1) Purchase Agreement between Registrant and Smith Barney Inc. dated October 22, 1996.
12.1 Ratio of Earnings to Fixed Charges
21.1 Subsidiaries
23.1 Consent of Deloitte & Touche LLP, Independent Auditors.
24.1 Power of Attorney. Reference is made to signature page
27.1 Financial Data Schedule.
</TABLE>
- ------------------------
(1) Filed as an Exhibit to the Registrant's Registration Statement on Form S-4
(No. 333-33233)
(2) Filed as an Exhibit to the Registrant's Quarterly Report on Form 10-Q for
the Quarter Ended June 30, 1998.
(3) Filed as an Exhibit to the Registrant's Quarterly Report on Form 10-Q for
the Quarter Ended September 30, 1998.
(4) Filed as Exhibit to the Registrant's Report on Form 8-K on March 3, 1999.
+ Certain confidential portions deleted pursuant to Order Granting Application
Under the Securities Act of 1933, as amended, and Rule 406 thereunder
respecting Confidential Treatment.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Registrant during the quarter ended
December 31, 1998.
(c) Exhibits.
The exhibits required by this item are listed under Item 14(a)(3).
(d) Financial Statement Schedules.
The financial statement schedules required by this item are listed under
Item 14(a)(2).
33
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
COINSTAR, INC.
BY: /S/ KIRK A. COLLAMER
-----------------------------------------
Kirk A. Collamer
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
Date: March 31, 1999
KNOWN ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Jens H. Molbak and Kirk A. Collamer, and
each of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place, and
stead, in any and all capacities, to sign any and all amendments to this Report
on Form 10-K, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming that
all said attorneys-in-fact and agents, or any of them or their or his substitute
or substituted, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
<C> <S> <C>
Chief Executive Officer and
/s/ JENS H. MOLBAK Chairman of the Board
- ------------------------------ (Principle Executive March 31, 1999
Jens H. Molbak Officer)
Vice President and Chief
/s/ KIRK A. COLLAMER Financial Officer
- ------------------------------ (Principal Financial and March 31, 1999
Kirk A. Collamer Accounting Officer)
/s/ GEORGE H. CLUTE Director
- ------------------------------ March 31, 1999
George H. Clute
/s/ LARRY A. HODGES Director
- ------------------------------ March 31, 1999
Larry A. Hodges
/s/ DAVID E. STITT Director
- ------------------------------ March 31, 1999
David E. Stitt
/s/ RONALD A. WEINSTEIN Director
- ------------------------------ March 31, 1999
Ronald A. Weinstein
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
<C> <S> <C>
/s/ WILLIAM D. RUCKELSHAUS Director
- ------------------------------ March 31, 1999
William D. Ruckelshaus
/s/ ROBERT O. ADERS Director
- ------------------------------ March 31, 1999
Robert O. Aders
</TABLE>
35
<PAGE>
(This page has been left blank intentionally.)
36
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Coinstar, Inc.
Bellevue, Washington
We have audited the accompanying consolidated balance sheets of Coinstar,
Inc. and subsidiaries (the "Company") as of December 31, 1998 and 1997, and the
related consolidated statements of operations, changes in stockholders' equity
(deficit), and cash flows for each of the three years in the period ended
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company at December 31,
1998 and 1997, and the results of its operations, and its cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
As discussed in Note 2 to the financial statements, in 1997 the Company
changed its method of accounting for loss per share to conform with Statement of
Financial Accounting Standards No. 128 and, retroactively, restated the 1996
financial statements for the change.
February 5, 1999
Seattle, Washington
37
<PAGE>
COINSTAR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
<S> <C> <C>
1998 1997
------------- --------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................................................... $ 37,688,205 $ 20,199,914
Short-term investments available for sale....................................... 4,182,315 36,603,474
Prepaid expenses and other current assets....................................... 1,043,010 1,021,349
------------- --------------
Total current assets.......................................................... 42,913,530 57,824,737
PROPERTY AND EQUIPMENT:
Coinstar Units.................................................................. 73,191,704 51,002,230
Computers....................................................................... 3,060,899 2,792,326
Office furniture and equipment.................................................. 1,191,221 1,153,974
Leased vehicles................................................................. 1,637,647 1,014,873
Leasehold improvements.......................................................... 437,593 366,090
Coinstar components............................................................. 94,865 110,024
------------- --------------
79,613,929 56,439,517
Accumulated depreciation........................................................ (26,263,528) (13,511,235)
------------- --------------
53,350,401 42,928,282
OTHER ASSETS, net of accumulated amortization of $617,961 and $359,775............ 2,569,187 2,792,875
------------- --------------
TOTAL............................................................................. $ 98,833,118 $ 103,545,894
------------- --------------
------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable................................................................ $ 3,828,459 $ 3,238,069
Accrued liabilities............................................................. 26,987,334 18,253,065
Current portion of long-term debt and capital lease obligations, net of
unamortized discount of $14,031 and $0........................................ 2,020,696 1,612,451
------------- --------------
Total current liabilities..................................................... 32,836,489 23,103,585
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, less current portion and net of
unamortized discounts of $9,315,552 and $19,675,155............................. 86,035,758 77,333,005
------------- --------------
Total liabilities............................................................. 118,872,247 100,436,590
COMMITMENTS AND CONTINGENCIES (Notes 5, 11, and 12)
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $.001 par value Authorized, 45,000,000 shares; Issued and
outstanding, 15,217,504 and 15,034,629 shares................................. 61,858,154 61,039,848
Preferred stock, $.001 par value Authorized, 5,000,000 shares; Issued and
outstanding, 0 shares.........................................................
Contributed capital for warrants................................................ 513,584 513,584
Accumulated other comprehensive income.......................................... 3,171 (2,962)
Accumulated deficit............................................................. (82,414,038) (58,441,166)
------------- --------------
Total stockholders' equity (deficit).......................................... (20,039,129) 3,109,304
------------- --------------
TOTAL............................................................................. $ 98,833,118 $ 103,545,894
------------- --------------
------------- --------------
</TABLE>
See notes to consolidated financial statements
38
<PAGE>
COINSTAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
<S> <C> <C> <C>
1998 1997 1996
-------------- -------------- --------------
REVENUE.......................................................... $ 47,673,651 $ 25,007,251 $ 8,312,080
EXPENSES:
Direct operating............................................... 26,564,505 17,899,402 7,258,406
Regional sales and marketing................................... 3,777,995 3,088,370 1,504,633
Product research and development............................... 4,744,110 6,361,568 3,969,185
Selling, general, and administrative........................... 14,112,213 11,078,649 5,351,476
Depreciation and amortization.................................. 13,237,234 8,679,036 4,133,904
-------------- -------------- --------------
Loss from operations........................................... (14,762,406) (22,099,774) (13,905,524)
OTHER INCOME (EXPENSE):
Interest income................................................ 1,366,580 2,328,031 848,194
Interest expense............................................... (10,816,858) (9,821,619) (2,661,374)
Other.......................................................... 239,812
-------------- -------------- --------------
Net loss before extraordinary item............................. (23,972,872) (29,593,362) (15,718,704)
EXTRAORDINARY ITEM
Loss related to early retirement of debt....................... 248,631
-------------- -------------- --------------
NET LOSS......................................................... $ (23,972,872) $ (29,593,362) $ (15,967,335)
-------------- -------------- --------------
-------------- -------------- --------------
LOSS PER SHARE:
Loss per share before extraordinary item, basic and diluted.... $ (1.58) $ (3.81) $ (20.06)
Extraordinary item per share, basic and diluted................ $ -- $ -- $ (.31)
-------------- -------------- --------------
Loss per share, basic and diluted.............................. $ (1.58) $ (3.81) $ (20.37)
-------------- -------------- --------------
-------------- -------------- --------------
Weighted average shares outstanding, basic and diluted......... 15,150,463 7,761,425 783,690
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
See notes to consolidated financial statements
39
<PAGE>
COINSTAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICT)
<TABLE>
<CAPTION>
ACCU.
COMMON STOCK SERIES A PREFERRED SERIES B PREFERRED CONTRIBUTED OTHER
----------------------- -------------------- ---------------------- CAPITAL FOR COMP.
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT WARRANTS INCOME
---------- ----------- --------- --------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1996....... 779,559 $ 14,346 649,775 $ 649,775 895,506 $ 3,582,034 $1,163,319 $ --
Exercise of stock options...... 13,500 4,050
Exercise of Series C Preferred
stock warrants............... (45,453)
Exercise of Series D Preferred
stock warrants............... (34,329)
Contributed capital for
warrants..................... 1,537,623
Net loss.......................
---------- ----------- --------- --------- --------- ----------- ----------- ---------
BALANCE, December 31, 1996..... 793,059 18,396 649,775 649,775 895,506 3,582,034 2,621,160 0
Exercise of stock options...... 199,078 78,013
Conversion of Series A
Preferred stock.............. 649,775 649,775 (649,775) (649,775)
Conversion of Series B
Preferred stock.............. 1,023,399 3,582,034 (895,506) (3,582,034)
Conversion of Mandatorily
Redeemable Preferred stock... 7,315,795 24,972,084
Exercise of warrants........... 2,053,523 3,369,852 (2,107,576)
Issuance of common stock, net
of issuance costs of
$3,130,306................... 3,000,000 28,369,694
Comprehensive income
Unrealized loss on short-term
investments available for
sale....................... (2,962)
Net loss.......................
Comprehensive income...........
---------- ----------- --------- --------- --------- ----------- ----------- ---------
BALANCE, December 31, 1997..... 15,034,629 61,039,848 -- -- -- -- 513,584 (2,962)
Issuance of shares under
employee stock purchase
plan......................... 98,239 738,968
Exercise of stock options...... 80,418 42,713
Non-cash stock-based
compensation................. 4,218 36,625
Comprehensive income
Other comprehensive income
Unrealized loss on short-
term investments
available for sale....... 6,007
Unrealized gain on foreign
currency translation..... 126
Other comprehensive income...
Net loss.......................
Comprehensive income...........
---------- ----------- --------- --------- --------- ----------- ----------- ---------
BALANCE, December 31, 1998..... 15,217,504 $61,858,154 -- $ -- -- $ -- $ 513,584 $ 3,171
---------- ----------- --------- --------- --------- ----------- ----------- ---------
---------- ----------- --------- --------- --------- ----------- ----------- ---------
<CAPTION>
ACCUMULATED
DEFICIT TOTAL
------------ ------------
<S> <C> <C>
BALANCE, January 1, 1996....... $(12,880,469) $ (7,470,995)
Exercise of stock options...... 4,050
Exercise of Series C Preferred
stock warrants............... (45,453)
Exercise of Series D Preferred
stock warrants............... (34,329)
Contributed capital for
warrants..................... 1,537,623
Net loss....................... (15,967,335) (15,967,335)
------------ ------------
BALANCE, December 31, 1996..... (28,847,804) (21,976,439)
Exercise of stock options...... 78,013
Conversion of Series A
Preferred stock..............
Conversion of Series B
Preferred stock..............
Conversion of Mandatorily
Redeemable Preferred stock... 24,972,084
Exercise of warrants........... 1,262,276
Issuance of common stock, net
of issuance costs of
$3,130,306................... 28,369,694
Comprehensive income
Unrealized loss on short-term
investments available for
sale....................... (2,962)
Net loss....................... (29,593,362) (29,593,362)
Comprehensive income........... (29,596,324)
------------ ------------
BALANCE, December 31, 1997..... (58,441,166) 3,109,304
Issuance of shares under
employee stock purchase
plan......................... 738,968
Exercise of stock options...... 42,713
Non-cash stock-based
compensation................. 36,625
Comprehensive income
Other comprehensive income
Unrealized loss on short-
term investments
available for sale....... 6,007
Unrealized gain on foreign
currency translation..... 126
------------
Other comprehensive income... 6,133
------------
Net loss....................... (23,972,872) (23,972,872)
------------
Comprehensive income........... (23,966,739)
------------ ------------
BALANCE, December 31, 1998..... $(82,414,038) $(20,039,129)
------------ ------------
------------ ------------
</TABLE>
See notes to consolidated financial statements
40
<PAGE>
COINSTAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Loss............................................................ $ (23,972,873) $ (29,593,362) $ (15,967,335)
Adjustments to reconcile net loss to net cash used by operating
activities:
Depreciation and amortization..................................... 13,237,234 8,679,036 4,133,904
Debt discount amortization........................................ 10,345,573 9,156,396 1,819,457
Accrued investment income......................................... 483,502 (389,254) (263,063)
Non-cash stock-based compensation................................. 36,625 -- --
Unrealized gain on foreign currency............................... 117 -- --
Cash provided (used) by changes in operating assets and liabilities:
Prepaid expenses and other current assets......................... (21,661) (156,349) (613,484)
Other assets...................................................... 2,592 (176,978) (64,803)
Accounts payable.................................................. 590,390 1,458,978 869,029
Accrued liabilities............................................... 8,753,736 10,562,777 6,734,378
-------------- -------------- --------------
Net cash provided/(used) by operating activities.................... 9,455,235 (458,756) (3,351,917)
INVESTING ACTIVITIES:
Purchases of short-term investments............................... (24,258,982) (47,962,984) (32,245,346)
Sales and maturities of short-term investments.................... 56,202,659 45,856,665
Purchases of fixed assets......................................... (22,991,701) (29,767,502) (20,819,556)
Other............................................................. 2,622 -- (98,791)
-------------- -------------- --------------
Net cash provided/(used) by investing activities.................... 8,954,598 (31,873,821) (53,163,693)
FINANCING ACTIVITIES:
Payments on long-term debt........................................ (1,703,222) (1,045,255) (6,462,640)
Borrowings under long-term debt obligations, net of financing
costs........................................................... -- -- 69,840,270
Proceeds from sale of common stock, net of issuance costs......... 28,369,694
Proceeds from sale of Series C, D & E Preferred stock............. -- -- 1,344,538
Proceeds from exercise of stock options and issuance of shares
under employee stock purchase plan.............................. 781,681 78,013 4,050
Contributed capital for warrants.................................. -- -- 1,537,623
Proceeds from exercise of warrants................................ -- 1,262,276 --
-------------- -------------- --------------
Net cash provided/(used) by financing activities.................... (921,541) 28,664,728 66,263,841
-------------- -------------- --------------
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS...................... 17,488,292 (3,667,849) 9,748,231
CASH AND CASH EQUIVALENTS:
Beginning of year................................................. 20,199,913 23,867,763 14,119,532
-------------- -------------- --------------
End of year....................................................... $ 37,688,205 $ 20,199,914 $ 23,867,763
-------------- -------------- --------------
-------------- -------------- --------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest............................ $ 486,298 $ 668,058 $ 832,061
SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING ACTIVITIES:
Purchase of vehicles financed by capital lease obligations........ 504,811 735,970 --
Purchase of computer equipment financed by capital lease
obligations..................................................... -- -- 553,065
Cashless exercises of warrants.................................... -- 2,581,426 --
</TABLE>
See notes to consolidated financial statements
41
<PAGE>
COINSTAR, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 1: ORGANIZATION AND BUSINESS
GENERAL: Coinstar, Inc. (the "Company") develops, owns and operates a
network of automated, self-service coin counting and processing machines that
provide consumers with a convenient means to convert loose coins into cash. The
Company has increased its installed base every year since inception, and as of
December 31, 1998, had an installed base of 4,813 units located in supermarkets
and financial institutions in 37 states.
PRINCIPLES OF CONSOLIDATION: The financial statements include the accounts
of Coinstar, Inc. and its wholly owned subsidiaries, including Coinstar
International, Inc., which was formed for the purpose of exploring the expansion
of the Coinstar network internationally. All costs incurred by Coinstar, Inc.
and its subsidiaries relating to the development of domestic and international
markets are expensed as incurred.
INITIAL PUBLIC OFFERING: On July 9, 1997, the Company completed its initial
public offering of 3,000,000 shares of Common Stock at a purchase price of
$10.50 per share for proceeds, net of issuance costs, of $28.4 million. The net
proceeds received by the Company have been and will be used (i) predominantly to
fund capital expenditures and working capital in connection with the continued
expansion of the Coinstar network, (ii) for product research and development,
and deployment of enhancements to the Coinstar unit and the coin processing
network and (iii) for general corporate purposes.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS: The Company considers all highly liquid
securities purchased with a maturity of three months or less to be cash
equivalents. Cash and cash equivalents includes funds in transit, which
represent amounts being processed by armored carriers or residing in Coinstar
units, of $21.8 million and $14.2 million at December 31, 1998 and 1997,
respectively.
SECURITIES AVAILABLE FOR SALE: The Company's investments are all classified
as available for sale and are stated at fair value in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." This statement specifies that
available for sale securities are reported at fair value with changes in
unrealized gains and losses recorded directly to stockholders' equity. All of
the Company's investments have maturities of one year or less. Realized and
unrealized gains or losses at December 31, 1998 and 1997, were insignificant.
Fair value is based upon quoted market prices.
PROPERTY AND EQUIPMENT: Property and equipment are depreciated using the
following methods and useful lives:
<TABLE>
<CAPTION>
TYPE OF ASSET METHOD USEFUL LIFE
- ------------------------------------------------------------- ------------------------------- ------------------
<S> <C> <C>
Coinstar units purchased prior to January 1, 1996............ 150% declining balance 60 months
Coinstar units purchased subsequent to Straight-line
January 1, 1996............................................ 60 months
Installation costs for Coinstar units........................ Straight-line 36 months
Furniture and equipment...................................... Straight-line 60 months
Computer equipment........................................... Straight-line 36 months
Automobiles and light trucks................................. Straight-line 36 months
Leasehold improvements....................................... Straight-line 60 to 84 months
</TABLE>
42
<PAGE>
COINSTAR, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In order to achieve volume discounts, the Company prepurchases certain
components of the Coinstar units. When a component is placed into service, the
cost is transferred to the appropriate Coinstar equipment account and
depreciated accordingly.
OTHER ASSETS: Other assets include lease and utility deposits, deferred
financing fees for the issuance of the Company's 13% senior subordinated
discount notes (the "Notes") and amounts capitalized relating to organizational
costs. Deferred financing fees and organizational costs are amortized on a
straight-line basis over ten and five years, respectively.
LONG-LIVED ASSETS: The Company periodically reviews long-lived assets,
including identified intangible assets, for impairment to determine whether any
events or circumstances indicate that the carrying amount of the assets may not
be recoverable. Such review includes estimating expected future cash flows.
During 1996, the Company discontinued its preprinted coupon distribution
business line. As a result, a provision for additional depreciation in the
amount of $329,096 was made to write down the recorded value of coupon
dispensing components of the Coinstar units, which are no longer being used in
operations, to their estimated fair value. During 1997, the Company upgraded
certain components of the Coinstar unit. As a result, a provision for additional
depreciation in the amount of $107,054 was made to write down the recorded value
of the obsolete equipment. During 1998, the Company reduced the carrying value
of certain components of the Coinstar unit resulting in a provision for
additional depreciation of $170,097.
REVENUE RECOGNITION. Coin processing fees are recognized at the time the
customers' coins are counted by the Coinstar unit. Units in service with two
retail distribution partners in 1997 accounted for approximately 25.6% and
17.2%, respectively, of the Company's revenues. In 1998, two retail distribution
partners accounted for approximately 18.7% and 18.9%, respectively, of the
Company's revenues.
LOSS PER SHARE: The Company adopted SFAS No. 128, "Earnings Per Share," for
the year ended December 31, 1997, as required. On February 3, 1998, the SEC
released Staff Accounting Bulletin No. 98, which requires companies to restate
all prior periods presented in accordance with the provisions of SFAS No. 128,
including those periods prior to an initial public offering. Because the results
from operations reflect a net loss for all years presented, basic and diluted
loss per share are calculated based on the same weighted average number of
shares outstanding.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The following methods and assumptions
were used to estimate the fair value of each class of financial instruments:
The carrying amounts for cash and cash equivalents, short-term investments,
and accounts payable approximate fair value because of the short maturity of
these instruments.
43
<PAGE>
COINSTAR, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
At December 31, 1998 and 1997, the carrying amount and estimated fair value
of such financial instruments for which fair value can be determined are as
follows:
<TABLE>
<CAPTION>
1998 1997
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Cash and cash equivalents............................................. $ 37,688 $ 37,688 $ 20,200 $ 20,200
Short-term investments................................................ 4,182 4,182 36,603 36,603
Accounts payable...................................................... 3,828 3,828 3,238 3,238
Long-term debt........................................................ 85,684 76,950 75,356 77,425
</TABLE>
STOCK-BASED COMPENSATION: The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees." SFAS No. 123, "Accounting for Stock-Based Compensation," has been
adopted by the Company for disclosure of certain additional information related
to its stock option plans.
USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS: In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards ("SFAS") 133,
"Accounting for Derivative Instruments and Hedging Activities." This
pronouncement requires an entity to recognize all derivatives as either assets
or liabilities in the statement of financial position and measure those
instruments at fair value. The Company is currently evaluating the effects of
this Standard, however, management believes the impact of adoption will not be
material to the financial statements, taken as a whole. SFAS 133 is effective
for fiscal years beginning after June 15, 1999.
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 fiscal
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.
44
<PAGE>
COINSTAR, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 3: ACCRUED LIABILITIES
Accrued liabilities consisted of the following at the respective dates:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1998 1997
------------- -------------
<S> <C> <C>
Funds in transit................................................................... $ 21,786,686 $ 14,175,898
Accrued liabilities for revenue sharing............................................ 1,193,000 539,198
Accrued liabilities to service contract providers.................................. 1,021,890 1,598,325
Accrued liabilities for taxes...................................................... 768,466 571,320
Other.............................................................................. 2,214,292 1,368,324
------------- -------------
$ 26,987,334 $ 18,253,065
------------- -------------
------------- -------------
</TABLE>
NOTE 4: LONG-TERM DEBT
Long-term debt, including current portion, consisted of the following at
December 31, 1998 and 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1998 1997
------------- -------------
<S> <C> <C>
Senior subordinated discount notes, net of unamortized discount of $9,315,551 and
$19,644,288...................................................................... $ 85,684,448 $ 75,355,712
Equipment loan, net of unamortized discount of $14,031 and $30,867................. 1,442,460 2,458,334
------------- -------------
87,126,908 77,814,046
Less current portion............................................................... 1,442,460 1,032,710
------------- -------------
Long-term debt..................................................................... $ 85,684,448 $ 76,781,336
------------- -------------
------------- -------------
</TABLE>
EQUIPMENT LOANS: In January 1996, the Company entered into a loan agreement
which allows for maximum borrowings of $3,000,000 under specific notes secured
by certain Coinstar equipment. During the first six months of 1996, the Company
drew the entire $3,000,000. This loan has an effective annual interest rate of
16.6% and is due in monthly installments through October 1999.
EARLY RETIREMENT OF DEBT: In December 1996, the Company repaid an aggregate
of $5,838,050 in equipment loans prior to scheduled maturity. As a result of the
early repayment, the Company recognized an extraordinary loss of $248,631, which
included early termination penalties of $200,763 and write-off of related
discounts of $47,868.
SENIOR SUBORDINATED DISCOUNT NOTES: On October 22, 1996, the Company
completed a private placement offering of 95,000 units, each of which consisted
of a $1,000 principal amount of 13% senior subordinated discount notes, due at
maturity in 2006, and warrants to purchase seven shares of common stock of the
Company, at an exercise price of $.01 per warrant share, subject to adjustment
under certain circumstances. Imputed interest on the discount notes, as
represented by the original issue discount of $29,413,154, accrues until October
1999, at which time interest is payable in semi-annual installments through
maturity.
The Notes are not redeemable at the option of the Company prior to October
1, 2001, other than from the proceeds of a public equity offering. The Notes are
redeemable at the option of the Company, in
45
<PAGE>
COINSTAR, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 4: LONG-TERM DEBT (CONTINUED)
whole or in part, at any time on and after October 1, 2001, at specified
redemption prices for the relevant year of redemption, plus accrued and unpaid
interest to the date of redemption.
In the event of a change of control (as defined), each holder of the Notes
has the option to require the Company to repurchase such holder notes at 101% of
the accreted value thereof on the date of repurchase plus liquidated damages.
The Notes are subordinate in rank to all existing and future senior indebtedness
of the Company. The Indenture pursuant to which the Notes were issued contains
certain covenants that, among other things, limit the ability of the Company to
make dividend payments, make investments, repurchase outstanding shares of
stock, prepay other debt obligations, incur additional indebtedness, effect
asset dispositions, engage in sale and leaseback transactions, consolidate,
merge or sell all or substantially all of the Company's assets, engage in
transactions with affiliates, or effect certain transactions by its restricted
subsidiaries.
Subsequent to the completion of the Company's initial public stock offering
and pursuant to a related Notes Registration Rights Agreement between the
Company and the initial purchasers of the Notes (the "Registration Rights
Agreement"), the Company completed an exchange offer of the Notes to satisfy its
obligations under the Registration Rights Agreement. The Notes were exchanged
for otherwise substantially identical notes registered under the Securities Act
of 1933, as amended.
The Notes were recorded net of discount of $30,410,654, and the warrants
issued in connection with these notes were recorded as $997,500 of contributed
capital, each as determined by the relative fair values of the Notes and the
warrants as of the closing date. In addition, the Company has recorded deferred
financing fees related to the Notes of $2,714,354. Additional costs associated
with the rights registration of $121,063 were added to the deferred financing
cost. The deferred financing costs and discount attributable to the warrants are
being amortized over the term of the Notes.
PRINCIPAL PAYMENTS: Scheduled principal payments on long-term debt for the
next five years ending December 31, are as follows:
<TABLE>
<S> <C>
1999........................................................... $1,456,491
2000........................................................... --
2001........................................................... --
2002........................................................... --
2003........................................................... --
Thereafter..................................................... 95,000,000
----------
96,456,491
Less unamortized discounts, including current portion.......... 9,329,583
----------
$87,126,908
----------
----------
</TABLE>
NOTE 5: COMMITMENTS
LEASE COMMITMENTS: The Company entered into two lease agreements for office
space which commenced April 1, 1997, and September 1, 1997, and expire on March
31, 2002, and August 31, 2004, respectively. The agreements require the Company
to pay a portion of operating costs and minimum
46
<PAGE>
COINSTAR, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 5: COMMITMENTS (CONTINUED)
monthly payments, which escalate annually based on a stated schedule. Each
agreement allows the Company to renew each lease for one consecutive period of
five years.
The Company has entered into capital lease agreements to finance the
acquisition of certain Coinstar equipment, computer equipment, and automobiles.
Title to such assets is retained by the Company. These capital leases have terms
of 36 months at imputed interest rates which range from 10.4% to 24.9%. Assets
under capital lease obligations aggregated $2,300,694, and $2,193,810, net of
$1,122,119 and $1,016,627 of accumulated amortization, at December 31, 1998 and
1997, respectively.
A summary of the Company's minimum lease obligations as of December 31,
1998, are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------------ ------------
<S> <C> <C>
1999.................................................................................. $ 651,391 $ 1,265,643
2000.................................................................................. 306,232 1,284,138
2001.................................................................................. 67,311 1,310,969
2002.................................................................................. -- 1,158,608
2003.................................................................................. -- 1,122,723
Thereafter............................................................................ -- 759,617
------------ ------------
Total minimum lease commitments....................................................... 1,024,934 6,901,698
------------
------------
Less amounts representing interest.................................................... 95,388
------------
Present value of lease obligation..................................................... 929,546
Less current portion.................................................................. 578,236
------------
Long-term portion..................................................................... $ 351,310
------------
------------
</TABLE>
Rental expense was $1,365,148, $889,506 and $359,842 for the years ended
December 31, 1998, 1997 and 1996, respectively.
SERVICE PROVIDERS: As of December 31, 1998, the Company had outstanding
service contracts with several service providers. These contracts generally
cover a one- to two-year period and have cancellation clauses ranging from 30 to
60 days.
PURCHASE COMMITMENTS: The Company has entered into certain purchase
agreements with suppliers of Coinstar units which require aggregate purchases in
the amount of $11,208,712 in 1999.
CONCENTRATION OF SUPPLIERS: The Company currently buys a significant
component of the Coinstar unit from a single supplier. Although there are a
limited number of suppliers for the component, management believes that other
suppliers could provide similar equipment which would require certain
modifications. Accordingly, a change in suppliers could cause a delay in
manufacturing and a possible slow-down of growth, which could materially
adversely affect future operating results.
LETTER OF CREDIT: As of December 31, 1998 the Company had outstanding
secured irrevocable letters of credit with a bank in the amount of $3.7 million.
These letters of credit, which expires through
47
<PAGE>
COINSTAR, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 5: COMMITMENTS (CONTINUED)
June 1999, collateralize the Company's obligations to third parties. As of
December 31, 1998, no amounts were outstanding under the letters of credit.
NOTE 6: STOCKHOLDERS' EQUITY
As a result of the Company's initial public offering, 649,775 shares of
Series A and 895,506 shares of Series B Preferred stock outstanding were
converted to common stock. Series A shares were converted into shares of the
Company's common stock on a one-for-one basis, and Series B shares were
converted on a basis of 1.142857 shares of common stock for each share of
Preferred stock.
Pursuant to the terms of Series C, D, and E Preferred Stock agreements, the
completion of the Company's initial public offering resulted in the conversion
of 4,659,324 shares of Series C, 2,556,471 shares of Series D, and 100,000
shares of Series E Preferred stock on a on-for-one basis into the Company's
common stock.
In connection with various financing transactions, the Company issued
warrants which entitled the holders to purchase shares of the Company's common
stock and Series B, C, D, E-2, and E-3 Preferred stock. All Preferred stock
warrants were converted to common stock warrants upon completion of the
Company's initial public offering on a basis of 1.142857 common stock warrants
for each Series B Preferred stock warrant, and on a one-for-one basis for the
Series C, D, E-2, and E-3 Preferred stock warrants. A summary of the warrants
outstanding for the three years in the period ended December 31, 1998, is as
follows:
<TABLE>
<CAPTION>
SERIES B SERIES C
COMMON STOCK PREFERRED STOCK PREFERRED STOCK
------------------------- ------------------------ ------------------------
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- ------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
OUTSTANDING, January 1, 1996................. 43,752 $ 4.00 1,419,369 $ 3.00-4.00
Issued..................................... 665,000 $ .01
Exercised.................................. (92,308) 4.00
---------- ------------- ----------- ----------- ----------- -----------
OUTSTANDING, December 31, 1996 665,000 .01 43,752 4.00 1,327,061 3.00-4.00
Issued.....................................
Exercised.................................. (665,000) .01 (43,752) 4.00 (1,277,830) 3.00-4.00
Conversion to common stock warrants........ 1,042,981 $ 3.25-15.61 (49,231) 3.25
---------- ------------- ----------- ----------- ----------- -----------
OUTSTANDING, December 31,
1997 & 1998................................ 1,042,981 $ 3.25-15.61 -- --
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
48
<PAGE>
COINSTAR, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 6: STOCKHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
SERIES D SERIES E-2 SERIES E-3
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
------------------------- ------------------------ ------------------------
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER EXERCISE
SHARES PRICE SHARES PRICE OF SHARES PRICE
---------- ------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
OUTSTANDING, January 1, 1996................. 705,891 $ 4.25 -- $ -- -- $ --
Issued..................................... 144,926 4.00-4.25 350,000 11.40 550,000 15.61
Exercised.................................. (56,471) 4.25 -- -- -- --
---------- ------------- ----------- ----------- ----------- -----------
OUTSTANDING, December 31, 1996............... 794,346 4.00-4.25 350,000 11.40 550,000 15.61
Issued.....................................
Exercised.................................. (700,596) 4.00-4.25
Conversion to common stock warrants........ (93,750) 4.00 (350,000) 11.40 (550,000) 15.61
---------- ------------- ----------- ----------- ----------- -----------
OUTSTANDING, December 31,
1997 & 1998................................ -- -- --
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
Certain warrants, which were to expire upon the closing of the initial
public offering, were exercised for 352,907 shares of common stock at an
aggregate exercise price of $1.26 million. Certain warrants, which also were to
expire upon the closing of the initial public offering, were exercised on a
cashless basis resulting in the issuance of 1,035,715 shares of common stock.
The warrants issued in connection with the sale of the Notes were exercised with
cash payments or on a cashless basis, resulting in the issuance of an aggregate
of 664,937 shares of common stock. The remaining warrants have expiration dates
from June 28, 1998, to December 15, 2000, and have been recorded at amounts
which reflect management's best estimate of fair value on the date of issuance.
In November 1998, the Board of Directors approved the adoption of a
Stockholder Rights Plan under which all stockholders receive rights to purchase
shares of new series of Preferred Stock. The rights are exercisable only if a
person or group acquires 20 percent or more of the Company's common stock or
announces a tender offer for 20 percent or more of the common stock. If a person
acquires 20 percent or more of the Company's common stock, all rightsholders
except the purchaser will be entitled to acquire the Company common stock at a
50 percent discount. The rights trade with the common stock, unless and until
they are separated upon the occurrence of certain future events. The Board of
Directors may terminate the Rights Plan at any time or redeem the rights prior
to the time a person acquires more than 20 percent of Coinstar's Common Stock.
49
<PAGE>
COINSTAR, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 7: INCOME TAXES
The components of the Company's deferred tax asset at December 31, 1998 and
1997 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1998 1997
------------- -------------
<S> <C> <C>
Tax loss and credit carryforwards.................................................. $ 24,236,000 $ 17,901,000
Depreciation and amortization...................................................... (3,614,000) (1,905,000)
Subordinated debt discount amortization............................................ 7,124,000 3,645,000
Other.............................................................................. 216,000 231,000
------------- -------------
27,962,000 19,872,000
Valuation allowance................................................................ (27,962,000) (19,872,000)
------------- -------------
$ 0 $ 0
------------- -------------
------------- -------------
</TABLE>
A valuation allowance in the full amount of the net deferred tax asset
balances has been established as it is uncertain that the Company will be able
to realize such tax assets in the future. At December 31, 1998, the Company had
net operating loss and credit carryforwards in the amount of $71,230,000 which
expire through 2013.
The Company recorded deferred tax benefits of $8,113,000, $10,036,000, and
$5,422,000 for each of the years ended December 31, 1998, 1997 and 1996. A
valuation allowance in the amount of the deferred tax benefit was recorded each
year.
NOTE 8: STOCK-BASED COMPENSATION PLANS
In March 1997, the Company adopted the 1997 Equity Incentive Plan, under
which options generally vest over four years and expire after 10 years. The
Company has also granted certain options under the 1997 Equity Incentive Plan
that have accelerated vesting provisions that are based on specified performance
goals being met. If these goals are met, the options vest immediately. If the
goals are not met, the options vest after five years. All options with
performance-accelerated vesting that were granted in 1998 were vested in 1998.
The Equity Incentive Plan is an amendment and restatement of the Company's 1992
Stock Option Plan, as amended. The Company has reserved a total of 2,900,000
shares of common stock for issuance under the 1997 Equity Incentive Plan. Stock
options have been granted to officers and employees to purchase common stock at
prices ranging from $.10 to $13.94 per share which represented management's best
estimate of fair market value at the dates of grant. The Company did not
recognize any compensation expense related to the options issued under the 1997
Equity Incentive Plan.
In March 1997, the Company adopted the Non-Employee Directors' Stock Option
Plan, under which the Board of Directors has provided for the automatic grant of
options to purchase shares of common stock to non-employee directors of the
Company. The Company has reserved a total of 100,000 shares of common stock for
issuance under the Non-Employee Directors' Stock Option Plan. Stock options have
been granted to non-employee directors to purchase common stock at prices of
$7.75 and $10.00 per share which represents management's best estimate of fair
market value at the date of grant. The price ranges of all options exercised
were $.25 to $1.50 in 1998, and $.25 to $.70 in 1997. At December 31, 1998,
there were 2,689,450 shares of unissued common stock reserved for issuance, of
which options for the purchase of
50
<PAGE>
COINSTAR, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 8: STOCK-BASED COMPENSATION PLANS (CONTINUED)
1,010,891 shares were available for future grants. Numbers of common and
converted Preferred series B shares under the plans are as follows as of
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------- ----------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- ----------- ---------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Number of common shares under option:
Outstanding, beginning of year...................... 978,502 $ 5.76 614,950 $ 0.52 376,550 $ 0.37
Granted............................................. 1,033,944 7.81 544,000 9.93 254,850 0.74
Series B Preferred options converted to common stock
options........................................... -- 39,998 3.50
Exercised........................................... (84,636) .51 (199,078) 0.39 (13,500) 0.30
Canceled or expired................................. (249,251) 7.19 (21,368) 6.94 (2,950) 0.51
---------- ---------- ---------
Outstanding, end of year.............................. 1,678,559 7.08 978,502 5.76 614,950 0.52
---------- ---------- ---------
---------- ---------- ---------
Exercisable, end of year.............................. 464,811 $ 5.46 192,385 $ 3.52 84,017 $ 0.32
---------- ---------- ---------
---------- ---------- ---------
Number of Series B preferred shares
under option
Outstanding, beginning of year...................... -- -- 35,000 $ 4.00 35,000 $ 4.00
Converted to common stock options................... -- -- (35,000) 4.00 -- --
---------- ---------- ---------
Outstanding, end of year.............................. -- -- -- -- 35,000 4.00
---------- ---------- ---------
---------- ---------- ---------
Exercisable, end of year.............................. -- -- -- -- 35,000 $ 4.00
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
As a result of the Company's initial public offering, all Series B Preferred
stock options converted to common stock options on a 1.142857 to one basis.
The following table summarizes information about common stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------------ -----------------------------------
NUMBER OF OPTIONS WEIGHTED AVERAGE NUMBER OF OPTIONS
OUTSTANDING AT REMAINING WEIGHTED AVERAGE EXERCISABLE AT WEIGHTED AVERAGE
EXERCISE PRICE DECEMBER 31, 1998 CONTRACTUAL LIFE EXERCISE PRICE DECEMBER 31, 1998 EXERCISE PRICE
- ------------------------- ----------------- ----------------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
$0.25-3.50.............. 317,685 6.81 $ 0.98 229,491 $ 1.09
3.75-7.75.............. 114,226 9.69 5.66 22,726 7.75
8.00-8.00.............. 696,356 9.11 8.00 0
8.13-9.50.............. 137,200 9.27 8.79 12,250 8.52
10.00-13.94............. 413,092 8.17 10.03 200,344 10.03
----------------- --- ------- ------- -------
1,678,559 8.49 $ 7.08 464,811 $ 5.46
----------------- -------
----------------- -------
</TABLE>
51
<PAGE>
COINSTAR, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 8: STOCK-BASED COMPENSATION PLANS (CONTINUED)
In March 1997, the Company adopted the Employee Stock Purchase Plan (the
"ESPP") under Section 423 of the Internal Revenue Code. Under the ESPP, the
Board of Directors may authorize participation by eligible employees, including
officers, in periodic offerings. The Company has reserved a total of 200,000
shares of common stock for issuance under the Employee Stock Purchase Plan.
Eligible employees may participate through payroll deductions in amounts related
to their basic compensation. At the end of each offering period, shares are
purchased by the participants at 85% of the lower of the fair market value at
the beginning or the end of the offering period. No shares were issued under the
ESPP during 1997. As of December 31, 1998, payroll deductions totaling $994,642
on behalf of approximately 249 employees were collected for the purchase of
shares. Actual shares purchased by participating employees as of December 31,
1998 totaled 98,239 at an average price of $7.52.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its plans. Accordingly, no compensation cost has been recognized
for its stock option grants. The weighted average fair value of options granted
during 1998, 1997, and 1996 were $3.46, $2.80 and $.20, respectively. The fair
value of each option granted during 1998, 1997, and 1996 is estimated on the
date of grant using the Black-Scholes option-pricing model with the following
assumptions: four to five year expected life from date of grant; weighted .49
stock volality for 1998; .48 stock volality for 1997 and no stock volatility for
1996; risk-free interest rates from 4.2% to 6.95%; and no dividends during the
expected term. Had compensation costs for the Company's stock-based compensation
plans been determined based on the fair value at the grant dates for awards
under those plans consistent with the method prescribed in SFAS No. 123,
"Accounting for Stock-Based Compensation," the Company's net loss and net loss
per share would have increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Net loss:
As reported.................................................... $ (23,972,872) $ (29,593,362) $ (15,967,335)
Pro forma...................................................... (25,512,452) (30,211,943) (15,981,530)
Net loss per share, basic and diluted:
As reported.................................................... (1.58) (3.81) (20.37)
Pro forma...................................................... (1.68) (3.89) (20.39)
</TABLE>
In January 1997, the Board of Directors approved an agreement for
acceleration of exercise provisions for stock options granted to certain
employees. Under the terms of the agreement, these employees are allowed to
exercise unvested stock options. Any shares purchased by an employee relating to
unvested stock options will be held in escrow until such options are vested. In
addition, the Company has the right to repurchase such shares prior to the
applicable date of vesting should the employee terminate their employment
status. The agreement has not established a new measurement date for the
affected stock options.
NOTE 9: LOSS PER SHARE
The weighted average number of shares outstanding used to compute basic and
diluted loss per share were 15,150,463, 7,761,425, and 783,690 for the years
ended December 31, 1998, 1997, and 1996,
52
<PAGE>
COINSTAR, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 9: LOSS PER SHARE (CONTINUED)
respectively. Because the results from operations reflect a net loss for all
years presented, basic and diluted loss per share are calculated based on the
same weighted average number of shares outstanding.
The following warrants, options and Preferred stock were not included in the
computation of diluted loss per share, as of December 31, because the effect was
antidilutive:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------- --------------------------- ---------------------------
EXERCISE EXERCISE EXERCISE
NUMBER PRICE NUMBER PRICE NUMBER PRICE
---------- ------------- ---------- --------------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Stock warrants.................... 1,042,981 $ 3.25-15.61 1,042,981 $ 4.00-15.61 3,730,159 $ 0.01-15.61
Common stock options.............. 1,668,559 .25-13.94 978,502 0.25-13.94 649,950 0.25-1.50
Preferred stock................... -- -- -- -- 8,861,076 --
</TABLE>
NOTE 10: RETIREMENT PLAN
In July 1995, the Company adopted a tax-qualified employee savings and
retirement plan under Section 401(k) of the Internal Revenue Code of 1986 (the
"Plan") for all employees who satisfy the age and service requirements under the
Plan. The Plan is funded by voluntary employee salary deferral of up to 15% of
annual compensation and employer matching contributions of up to 6% of annual
compensation. Effective October 1, 1998, the Company adopted an amendment to the
plan, whereby participating employees are 100% vested for the Company matched
contributions. The Company has contributed $170,243 and $36,297 to the plan for
the years ended December 31, 1998 and 1997.
NOTE 11: 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 unenforceability of the subject
patent, and filed a claim for breach of warranty against Scan Coin AB ("Scan
Coin"). The claim against Scan Coin has been dismissed by agreement of the
parties. On January 26, 1998, the court, in response to cross motions for
summary judgment filed by both parties, held that certain of CoinBank's devices
did not infringe on the subject patent, and that there remained a question of
fact as to the infringement of other devices. On October 27, 1998, the Company
added its most recently issued patent to the pending litigation by agreement of
the parties. 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 12: TERMINATION OF SUPPLIER RELATIONSHIP
The Company has invented and introduced new proprietary coin counting
technology that is capable of being used in the Coinstar units. The Company
previously purchased the coin counter components of the Coinstar unit solely
from Scan Coin, pursuant to an agreement that may be terminated by either party
with six months notice at any time on or after June 30, 1999. In March 1997, the
Company entered into a non-binding letter of intent with Scan Coin for a new
agreement. Subsequently Scan Coin indicated that
53
<PAGE>
COINSTAR, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 12: TERMINATION OF SUPPLIER RELATIONSHIP (CONTINUED)
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.
On September 8, 1998 Scan Coin informed the Company that the Company was in
breach of the original agreement and that the Company had thirty (30) days to
cure the default. Scan Coin also restated its claim to certain intellectual
property owned by the Company. The Company responded on September 16, 1998
indicating that the Company repudiates all claims made by Scan Coin in its
letter. The Company will continue to attempt to settle this dispute amicably
with Scan Coin.
NOTE 13: SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Following is a presentation of selected financial data for each of the four
quarters of 1998 and 1997:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------------------------
DEC. 31, SEPT. 30, JUNE 30, MARCH 31, DEC. 31, SEPT. 30, JUNE 30,
1998 1998 1998 1998 1997 1997 1997
----------- ----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Statements of Operations Data:
Revenue.................................. $ 14,802 $ 13,576 $ 10,472 $ 8,823 $ 7,957 $ 7,762 $ 5,294
Expenses:
Direct operating....................... 7,458 7,141 6,142 5,823 5,208 5,276 3,966
Regional sales and marketing........... 1,077 930 854 917 689 798 972
Product research and development....... 1,138 867 1,329 1,410 1,644 1,637 1,640
Selling, general and administrative.... 3,579 3,531 3,726 3,276 3,252 2,669 2,630
Depreciation and amortization.......... 3,669 3,635 3,120 2,813 2,539 2,297 2,158
Loss from operations..................... (2,119) (2,528) (4,699) (5,416) (5,375) $ (4,915) $ (6,072)
Other income (expense):
Interest income........................ 206 273 386 501 597 710 440
Interest expense....................... (2,827) (2,758) (2,660) (2,571) (2,563) (2,499) (2,415)
Other income........................... 78 59 63 39
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net loss................................. $ (4,661) $ (4,954) $ (6,910) $ (7,447) $ (7,341) $ (6,704) $ (8,047)
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
Loss per share, basic and Diluted........ $ (.31) $ (.33) $ (.46) $ (.49) $ (.49) $ (.48) $ (8.18)
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
Weighted average shares outstanding,
basic and diluted...................... 15,216 15,187 15,116 15,080 15,029 13,906 984
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
MARCH 31,
1997
-----------
<S> <C>
Statements of Operations Data:
Revenue.................................. $ 3,995
Expenses:
Direct operating....................... 3,450
Regional sales and marketing........... 630
Product research and development....... 1,441
Selling, general and administrative.... 2,528
Depreciation and amortization.......... 1,684
Loss from operations..................... $ (5,738)
Other income (expense):
Interest income........................ 580
Interest expense....................... (2,344)
Other income...........................
-----------
Net loss................................. $ (7,502)
-----------
-----------
Loss per share, basic and Diluted........ (8.31)
-----------
-----------
Weighted average shares outstanding,
basic and diluted...................... 903
-----------
-----------
</TABLE>
54
<PAGE>
COINSTAR, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 14: BUSINESS SEGMENT INFORMATION
SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION establishes standards for the way that companies report information
about operating segments. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers.
The Company generates substantially all of its revenues through a common
delivery infrastructure, and therefore the Company has only one reportable
segment. Substantially all revenues are generated from domestic sources.
Substantially all Company long-lived assets are physically located within the
United States.
NOTE 15: SUBSEQUENT EVENT
On February 19, 1999, Coinstar entered into a Credit Agreement with Imperial
Bank, for itself and as agent of Bank Austria Creditanstalt Corporate Finance,
Inc. ("Bank Austria" and, together with Imperial Bank, the "Lenders"). The
Credit Agreement provides Coinstar with a credit facility of up to $25 million,
consisting of revolving loans of $5 million from each of the Lenders, and term
loans of $5 million from each of the Lenders. The amounts available under the
term loans will increase to $7,500,000 per Lender after Coinstar has satisfied
certain debt ratios.
In connection with the Credit Agreement, Coinstar issued to each of the
Lenders a warrant to purchase 51,326 shares of its common stock. The exercise
price for the warrants, which will expire on February 19, 2009, is $12.177 per
share. Coinstar has agreed, pursuant to Registration Rights Agreements with the
Lenders, to file a registration statement on Form S-3 to register the shares
issuable upon exercise of the warrants within 60 days following the date on
which Coinstar has satisfied all of its obligations under the Credit Agreement
(the "Termination Date"). Coinstar must use reasonable efforts to cause the
registration statement to be declared effective no later than 120 days following
the Termination Date and must keep the registration open for at least 45 days
following the date the registration statement is declared effective. The
Registration Agreements also obligate Coinstar to include the common stock
issuable upon exercise of the warrants in certain registration statements it may
file.
55
<PAGE>
EXHIBIT 12.1
COINSTAR, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
-------------- -------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
EARNINGS:
Net loss......................... $ (23,972,872) $ (29,593,362) $ (15,967,335) $ (6,168,715) $ (4,316,450)
ADD BACK FIXED CHARGES:
Interest expense including
amortization of deferred
financing costs................ 10,816,858 9,821,619 2,661,374 207,687 297,758
Assumed interest component of
rent expense (1)............... 454,594 297,095 120,187 99,843 48,909
-------------- -------------- -------------- ------------- -------------
Total fixed charges.......... 11,271,452 10,118,714 2,781,561 307,530 346,667
-------------- -------------- -------------- ------------- -------------
Adjusted earnings................ $ (12,701,420) $ (19,474,648) $ (13,185,774) $ (5,861,185) $ (3,969,783)
-------------- -------------- -------------- ------------- -------------
-------------- -------------- -------------- ------------- -------------
Ratio of earnings to fixed
charges.......................... (1.13) (1.92) (4.74) (19.06) (11.45)
-------------- -------------- -------------- ------------- -------------
-------------- -------------- -------------- ------------- -------------
Deficiency of earnings to fixed
charges........................ $ (23,972,872) $ (29,593,362) $ (15,967,335) $ (6,168,715) $ (4,316,450)
-------------- -------------- -------------- ------------- -------------
-------------- -------------- -------------- ------------- -------------
</TABLE>
- ------------------------
(1) Estimated as one-third of operating lease expenses.
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF COINSTAR, INC.
Coinstar International, Inc., a Delaware corporation (100% owned by Coinstar,
Inc.)
My Shoppinglist.com, Inc., a Delaware corporation (100% owned by Coinstar, Inc.)
Coinstar, Limited, a United Kingdom corporation (100% owned by Coinstar
International, Inc.)
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333- 30985 of Coinstar, Inc. on Form S-8 of our report dated February 5, 1999,
included in this Annual Report on Form 10-K of Coinstar, Inc. for the year ended
December 31, 1998.
/s/ DELOITTE & TOUCHE LLP
Seattle, Washington
March 27, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> OCT-01-1998 JAN-01-1998
<PERIOD-END> DEC-31-1998 DEC-31-1998
<CASH> 37,688,205 37,688,205
<SECURITIES> 4,182,315 4,182,315
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 42,913,530 42,913,530
<PP&E> 79,613,929 79,613,929
<DEPRECIATION> 26,263,528 26,263,528
<TOTAL-ASSETS> 98,833,118 98,833,118
<CURRENT-LIABILITIES> 32,836,489 32,836,489
<BONDS> 0 0
0 0
0 0
<COMMON> 61,858,154 61,858,154
<OTHER-SE> (81,897,283) (81,897,283)
<TOTAL-LIABILITY-AND-EQUITY> 98,833,118 98,833,118
<SALES> 0 0
<TOTAL-REVENUES> 14,802,490 47,673,651
<CGS> 0 0
<TOTAL-COSTS> 16,920,498 62,436,057
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 2,827,337 10,816,858
<INCOME-PRETAX> (4,661,561) (23,972,872)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (4,661,561) (23,972,872)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (4,661,561) (23,972,872)
<EPS-PRIMARY> (.31) (1.58)
<EPS-DILUTED> (.31) (1.58)
</TABLE>
