<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
FOR THREE MONTH PERIOD ENDED MARCH 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-22555
------------------------
COINSTAR, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3156448
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1800 114TH AVENUE SE, BELLEVUE,
WASHINGTON
(Address of principal executive offices) 98004
(Zip Code)
(425) 943-8000
(Registrant's telephone number, including area code)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
------------------------
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
<TABLE>
<S> <C>
CLASS OUTSTANDING AT APRIL 30, 1999
Common Stock, $0.001 par value 15,508,560
</TABLE>
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1
<PAGE>
COINSTAR, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of March 31, 1999 (unaudited) and
December 31, 1998......................................................................... 3
Consolidated Statements of Operations for the three month periods ended
March 31, 1999 and 1998 (unaudited)....................................................... 4
Consolidated Statement of Stockholders' Equity (Deficit) for the three month period ended
March 31, 1999 (unaudited)................................................................ 5
Consolidated Statements of Cash Flows for the three month periods ended
March 31, 1999 and 1998 (unaudited)....................................................... 6
Notes to Consolidated Financial Statements for the three month periods ended March 31,
1999 and 1998............................................................................. 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................ 27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................................................................... 28
Item 2. Changes in Securities and Use of Proceeds................................................. 28
Item 6. Exhibits and Reports on Form 8-K.......................................................... 29
SIGNATURES............................................................................................ 31
EXHIBIT INDEX......................................................................................... 32
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COINSTAR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
-------------- --------------
<S> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................................................... $ 37,865,222 $ 37,688,205
Short-term investments available for sale....................................... 2,098,645 4,182,315
Prepaid expenses and other current assets....................................... 1,582,336 1,043,010
-------------- --------------
Total current assets............................................................ 41,546,203 42,913,530
PROPERTY AND EQUIPMENT:
Coinstar units.................................................................. 77,866,918 73,191,704
Computers....................................................................... 3,271,536 3,060,899
Office furniture and equipment.................................................. 1,208,821 1,191,221
Leased vehicles................................................................. 2,022,555 1,637,647
Leasehold improvements.......................................................... 437,593 437,593
Coinstar components............................................................. 64,875 94,865
-------------- --------------
84,872,298 79,613,929
Accumulated depreciation........................................................ (30,195,857) (26,263,528)
-------------- --------------
54,676,441 53,350,401
OTHER ASSETS...................................................................... 3,062,723 2,569,187
-------------- --------------
TOTAL............................................................................. $ 99,285,367 $ 98,833,118
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable................................................................ $ 4,717,837 $ 3,828,459
Accrued liabilities............................................................. 27,700,156 26,987,334
Current portion of long-term debt and capital lease obligations................. 1,777,849 2,020,696
-------------- --------------
Total current liabilities....................................................... 34,195,842 32,836,489
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS...................................... 88,162,731 86,035,758
-------------- --------------
Total liabilities............................................................... 122,358,573 118,872,247
COMMITMENTS AND CONTINGENCIES (Notes 3, 4, and 5)
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock.................................................................... 62,531,295 61,858,154
Contributed capital for warrants................................................ 1,347,035 513,584
Accumulated other comprehensive income.......................................... (3,043) 3,171
Accumulated deficit............................................................. (86,948,493) (82,414,038)
-------------- --------------
Total stockholders' (deficit)................................................... (23,073,206) (20,039,129)
-------------- --------------
TOTAL............................................................................. $ 99,285,367 $ 98,833,118
-------------- --------------
-------------- --------------
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
COINSTAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTH PERIODS
ENDED MARCH 31,
----------------------------
1999 1998
------------- -------------
<S> <C> <C>
REVENUE............................................................................ $ 15,791,424 $ 8,822,835
EXPENSES:
Direct operating................................................................. 7,938,563 5,823,711
Regional sales and marketing..................................................... 1,318,144 916,896
Product research and development................................................. 939,915 1,409,817
Selling, general, and administrative............................................. 3,380,651 3,275,628
Depreciation and amortization.................................................... 4,102,747 2,813,277
------------- -------------
Loss from operations............................................................. (1,888,596) (5,416,494)
OTHER INCOME (EXPENSE):
Interest income.................................................................. 162,636 501,407
Interest expense................................................................. (2,850,614) (2,571,057)
Other Income..................................................................... 42,119 39,108
------------- -------------
NET LOSS........................................................................... $ (4,534,455) $ (7,447,036)
------------- -------------
------------- -------------
Net loss per share, basic and diluted............................................ $ (0.30) $ (0.49)
------------- -------------
Weighted average shares outstanding, basic and diluted........................... 15,357,980 15,079,985
------------- -------------
------------- -------------
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
COINSTAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
ACCU.
COMMON STOCK CONTRIBUTED OTHER
----------------------- CAPITAL FOR COMP. ACCUMULATED
SHARES AMOUNT WARRANTS INCOME DEFICIT TOTAL
---------- ----------- ----------- ------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1999............................. 15,217,504 $61,858,154 $ 513,584 $ 3,171 $(82,414,038) $(20,039,129)
Issuance of shares under employee stock purchase
plan............................................... 35,446 304,664 304,664
Exercise of stock options............................ 129,200 309,550 309,550
Exercise of stock warrants........................... 59,461 58,927 (58,927)
Issuance of warrants under revolving credit
facility........................................... 723,211 723,211
Issuance of warrants for acquisition of assets....... 169,167 169,167
Comprehensive income.................................
Other comprehensive income.........................
Unrealized loss on short-term investments available
for sale......................................... (5,298) (5,298)
Unrealized gain on foreign currency translation.... (916) (916)
Other comprehensive income......................... (6,214)
Net loss............................................. (4,534,455) (4,534,455)
Comprehensive income................................. (4,540,669)
---------- ----------- ----------- ------- ------------- ------------
BALANCE, March 31,1999............................... 15,441,611 $62,531,295 $1,347,035 $(3,043) $(86,948,493) $(23,073,206)
---------- ----------- ----------- ------- ------------- ------------
---------- ----------- ----------- ------- ------------- ------------
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
COINSTAR, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTH
PERIODS ENDED
MARCH 31,
-----------------------------
1999 1998
------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss........................................................................... $ (4,534,455) $ (7,447,036)
Adjustments to reconcile net loss to net cash used by operating activities:........
Depreciation and amortization.................................................... 4,102,747 2,813,277
Debt discount amortization....................................................... 2,765,950 2,433,187
Accrued investment income........................................................ 79,528 164,509
Non-cash stock-based compensation................................................ -- 10,754
Unrealized loss on cash equivalents.............................................. (5,298) --
Unrealized loss on foreign currency translation.................................. (916) --
CASH PROVIDED (USED) BY CHANGES IN OPERATING ASSETS AND LIABILITIES:
Prepaid expenses and other current assets........................................ (500,466) (88,551)
Other assets..................................................................... (85,664) 588
Accounts payable................................................................. 889,378 481,235
Accrued liabilities.............................................................. 721,960 (1,256,764)
------------- --------------
Net cash provided/(used) by operating activities................................... 3,432,764 (2,888,801)
INVESTING ACTIVITIES:
Purchase of short-term investments............................................... -- (15,537,936)
Sale of short-term investments................................................... 2,004,140 19,998,755
Purchase of fixed assets......................................................... (4,986,790) (4,735,679)
Costs to dispose of equipment.................................................... (923) --
------------- --------------
Net cash provided/(used) by investing activities................................. (2,983,573) (274,860)
FINANCING ACTIVITIES:
Principal payments on long-term debt............................................. (467,257) (407,920)
Financing costs associated with long term credit facility........................ (419,133) --
Proceeds from exercise of stock options and employee stock purchase plan......... 614,214 429,614
------------- --------------
Net cash provided/(used) by financing activities................................. (272,176) 21,694
------------- --------------
INCREASE /(DECREASE) IN CASH AND CASH EQUIVALENTS.................................. 177,017 (3,141,967)
CASH AND CASH EQUIVALENTS:
Beginning of period.............................................................. 37,688,205 20,199,913
------------- --------------
End of period.................................................................... $ 37,865,222 $ 17,057,946
------------- --------------
------------- --------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest......................................... $ 109,731 $ 141,952
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Purchase of vehicles financed by capital lease obligation........................ 308,235 74,637
Cash less exercise of warrants................................................... 137,156 --
Purchase of assets with warrants................................................. 169,167 --
Issuance of warrants under revolving credit facility............................. 723,211 --
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
COINSTAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIODS ENDED MARCH 31, 1999 AND 1998
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The unaudited consolidated financial statements of
Coinstar, Inc. and its wholly-owned subsidiaries (collectively, the "Company",
"we" and "us") included herein reflect all adjustments, consisting only of
normal recurring adjustments which, in the opinion of management, are necessary
to present fairly the Company's consolidated financial position, results of
operations and cash flows for the periods presented.
These financial statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission (the "SEC"). Certain
information and footnote disclosures, normally included in financial statements
prepared in accordance with generally accepted accounting principles, have been
omitted pursuant to such SEC rules and regulations. These financial statements
should be read in conjunction with our audited financial statements and the
accompanying notes included in our Form 10-K for the year ended December 31,
1998 filed with the SEC. The results of operations for the three month periods
ended March 31, 1999 are not necessarily indicative of the results to be
expected for any subsequent quarter or for the entire fiscal year.
PRINCIPLES OF CONSOLIDATION: The financial statements include the accounts
of Coinstar, Inc. and its wholly owned subsidiaries Coinstar International,
Inc., and Myshoppinglist.com, Inc.
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. 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.
NOTE 2: LETTERS OF CREDIT
As of March 31, 1999 we had available secured irrevocable letters of credit
with a bank which totaled $2.9 million. These letters of credit, which expire
through August 1999, are available to collateralize certain obligations to third
parties. As of March 31, 1999, no amounts were outstanding under these letters
of credit agreements.
NOTE 3: LEGAL PROCEEDINGS
On June 18, 1997 we filed suit in the United States District Court, Northern
District of California against CoinBank Automated Systems, Inc., one of our
competitors, based on alleged infringement of one of our United States patents.
On June 27, 1997 CoinBank answered our patent infringement claim and
counterclaimed for declaration of non-infringement, invalidity and
unenforceability of this 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 some 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 we added our most
recently issued patent to the pending litigation by agreement of the parties. We
cannot
7
<PAGE>
COINSTAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
assure you that we will prevail in our patent infringement claim against
CoinBank or on any claim that may be filed by CoinBank against us or, that as a
result of the patent infringement claim, our patents will not be limited in
scope or found to be invalid.
On May 11, 1999, we received information that we were among a number of
entities named in a lawsuit filed in United States District Court, for the
District of New Jersey. We understand through conversations with one of the
other parties to the suit, that this lawsuit concerns a fire that caused
considerable damage to a supermarket and shopping mall. We have not been served,
and we have not had an opportunity to review the lawsuit or the claims against
us. We don't believe that we are responsible for the damage caused by the fire.
However, there can be no assurance that the claims are without merit or that the
company will prevail in any litigation. No amounts for estimated damages have
been accrued in the accompanying financial statements.
NOTE 4: TERMINATION OF SUPPLIER RELATIONSHIP
Our sole source of coin counter components has been Scan Coin, pursuant to
an agreement originally entered into in 1993 and subsequently amended. Scan Coin
claims that this agreement requires that only Scan Coin coin counters may be
used in Coinstar units. Additionally, Scan Coin claims that the agreement gives
ownership to Scan Coin of any improvements or developments to the coin counter.
Through our and Scan Coin's conduct over time and our course of business with
each other, we believe important sections of the agreement are now void. On
September 8, 1998 Scan Coin informed us that we were in violation of the
original agreement and we had 30 days to correct the violation. Scan Coin also
restated its claim to our intellectual property. We responded on September 16,
1998 indicating that we rejected all claims made by Scan Coin in its letter. On
May 5, 1999 Scan Coin informed us that it was terminating the original supply
agreement. Scan Coin also reiterated its claims to our intellectual property and
stated that it will seek full compensation for all damages suffered. We have not
responded to this letter. We will continue to attempt to settle this dispute
amicably with Scan Coin. We believe that Scan Coin has no claim on any of our
intellectual property. We have evaluated Scan Coin's claims and believe they are
meritless. However, even if it is determined that the prior agreement and
amendments are still effective and our use of the new coin counting technology
violates these agreements, we believe that the amount of damages to which Scan
Coin would be entitled would not be material to our business. Our evaluation of
the amount of damages to which Scan Coin could be entitled is subject to
significant uncertainty, and it is possible that we could be found to be liable
for damages that would be material to our business. We cannot be certain that we
will resolve the dispute with Scan Coin, nor can we assure you that if
litigation commences, we will prevail. Our failure to prevail in litigation may
result in a payment of monetary damages, the forfeiture of certain intellectual
property rights, or both. The occurrence of either event could seriously harm
our business, financial condition and results of operations and ability to
achieve sufficient cash flow to service our indebtedness. No amounts for
estimated damages have been accrued in the accompanying financial statements.
NOTE 5: REVOLVING CREDIT FACILITY
On February 19, 1999 we entered into a Credit Agreement with Imperial Bank,
for itself and as agent of Bank Austria Creditanstalt Corporate Finance, Inc.
(the Bank Austria and, together with Imperial Bank, the "Lenders"). The Credit
Agreement provides us 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 us to maintain
certain financial covenants during the term of the agreement, which, among other
things, restrict our ability to pay dividends. In addition, amounts available
under the term loans will increase to $7.5 million per Lender after we have
satisfied certain debt ratios.
8
<PAGE>
COINSTAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In connection with the Credit Agreement, we issued to each of the Lenders a
warrant to purchase 51,326 shares of our common stock. The exercise price for
the warrants, which will expire on February 19, 2009, is $12.18 per share. The
values of the warrants issued in connection with the Credit Agreement are
recorded as contributed capital and represent discounts which are being
amortized ratably over the term of the related debt. We have 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 we have
satisfied all of our obligations in full under the Credit Agreement and the
Lenders have no further commitment to make loans or extend credit under the
Credit Agreement (the "Loan Termination Date"). We must use reasonable efforts
to cause the registration statement to be declared effective no later than 120
days following the Loan 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 us to include the
common stock issuable upon exercise of the warrants in certain registration
statements we may file.
NOTE 6: NONCASH ASSET ACQUISITION
In March, 1999 we acquired assets consisting of internet domain names,
software, fixed assets, contracts, and web site content from Compucook, Inc. In
consideration for the purchase, we issued 25,000 common stock warrants at an
exercise price of $15.63 per warrant, which expire on March 2, 2004.
NOTE 7: SUBSEQUENT EVENT
On April 15, 1999 we acquired certain assets consisting of internet domain
names, fixed assets, contracts, and web site content from Nu World Marketing
Limit Inc. In consideration for the purchase, we issued 25,000 shares of common
stock.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE DISCUSSION IN THIS FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS
REGARDING US, OUR BUSINESS, PROSPECTS AND RESULTS OF OPERATIONS THAT INVOLVE
RISKS AND UNCERTAINTIES. OUR ACTUAL BUSINESS, PROSPECTS AND RESULTS OF
OPERATIONS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN. FACTORS THAT
COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO,
THOSE DISCUSSED HEREIN AS WELL AS THOSE DISCUSSED UNDER THE CAPTION "RISK
FACTORS" HEREIN AND IN OUR FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998. YOU
ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS,
WHICH REFLECT MANAGEMENT'S ANALYSIS ONLY AS OF THE DATE HEREOF. WE UNDERTAKE NO
OBLIGATION TO PUBLICLY RELEASE THE RESULTS OF ANY REVISION TO THESE FORWARD-
LOOKING STATEMENTS WHICH MAY BE MADE TO REFLECT EVENTS OR CIRCUMSTANCES AFTER
THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS. YOU ARE
URGED TO CAREFULLY REVIEW AND CONSIDER THE VARIOUS DISCLOSURES MADE BY US IN
THIS REPORT AND IN OUR OTHER REPORTS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION THAT ATTEMPT TO ADVISE INTERESTED PARTIES OF THE RISKS AND FACTORS
AND MAY AFFECT OUR BUSINESS, PROSPECTS AND RESULTS OF OPERATIONS.
OVERVIEW
We are the first and only company to provide a national network of
self-service coin-counting machines. Through our partnerships with approximately
150 retail distributors, we currently operate more than 5,400 Coinstar units in
approximately 65 regional markets across the United States. Since inception, our
network has counted and processed more than 44 million customer transactions
worth over $1.3 billion. We installed the first Coinstar unit in 1993 and since
January 1, 1996 we have installed an average of 1,517 Coinstar units per year.
We believe that our rapid growth is due to our intelligent network and highly
trained field service organization that have enabled us to maintain a
system-wide Coinstar unit availability of 98%.
We currently derive substantially all our revenues from coin processing
services generated by our installed base of Coinstar units located in
supermarket chains in 37 states across the country. We generate revenues based
on a processing fee charged on the total dollar amount of coins processed in a
transaction. In December 1998, we changed this processing fee at most locations
to 8.9% from the previous rate of 7.5%. 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 our installed base. Our 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
increase, driving initial trial and repeat usage for the service. We believe
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 our limited operating history, there
can be no assurance, however, that unit volumes will continue to increase as a
function of the time the unit is in operation, or that unit volumes will be
affected by such other factors. We expect that as we continue to aggressively
expand installations relative to the size of our installed base, the average
revenue per unit may decrease even as the per unit dollar volume of more mature
units increases.
We established a wholly-owned subsidiary, Coinstar International, Inc., in
March 1998 to explore expanding our 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 our services and is piloting
eight Coinstar units in the United Kingdom. In addition, Coinstar International
is investigating the viability of our services in certain other European
countries. We established a wholly-owed subsidiary, Myshoppinglist.com, Inc., in
December 1998 to explore the development and deployment of electronic commerce
technology.
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, retail operations
support and the amount of our service fee that we share with our retail
10
<PAGE>
partners. 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. We believe 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 our
services 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.
Since 1995, we have 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 our installed
base of Coinstar units. The cost of this expansion and the significant
depreciation expense of our installed network have resulted in significant
operating losses to date and an accumulated stockholders' deficit of $86.9
million as of March 31, 1999. We expect to continue to evaluate new marketing
and promotional programs to increase the breadth and rate of customer
utilization of our service and to engage in systems and product research and
development. We expect these expenses will negatively impact our operating
results. We believe that our future revenue growth, operating margin gains and
profitability will be dependent upon the penetration of our 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 our limited operating history, unpredictability of the timing of
installations with retail distribution partners and the resulting revenues, and
the continued market acceptance of our service by consumers and retail
distribution partners, our operating results for any quarter are subject to
significant variation, and we believe that period-to-period comparisons of our
results of operations are not necessarily meaningful and should not be relied
upon as indications of future performance.
RESULTS OF OPERATIONS
The following table shows revenue and expense as a percent of revenue for
the quarters ending:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
-----------------
1999 1998
------- -------
<S> <C> <C>
Revenue................................................................................... 100.0% 100.0%
Expenses:
Direct operating.......................................................................... 50.3 66.0
Regional sales and marketing.............................................................. 8.3 10.4
Product research and development.......................................................... 6.0 16.0
Selling, general, and administrative...................................................... 21.4 37.1
Depreciation and amortization............................................................. 26.0 31.9
------- -------
Loss from operations...................................................................... (12.0)% (61.4)%
------- -------
------- -------
</TABLE>
11
<PAGE>
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
REVENUE
Revenue increased by 79.5% to $15.8 million for the quarter ended March 31,
1999 from $8.8 million in the comparable 1998 period. The increase was due to
(1) the increase in the number of Coinstar units in service during the 1999
period, (2) the increase in the volume of coins processed by the units in
service during this period, and (3) the increase in the service fee from 7.5% to
8.9% in December 1998. The installed base of Coinstar units increased to 5,241
as of March 31, 1999 from 3,531 units as of March 31, 1998. The dollar value of
coins processed increased to $177.2 million during the quarter ended March 31,
1999 from $117.3 million in the comparable 1998 period.
DIRECT OPERATING EXPENSES
Direct operating expenses increased to $7.9 million for the quarter ended
March 31, 1999 from $5.8 million in the comparable 1998 period. The increase in
direct operating expenses was primarily attributable to (1) an increase in
revenue sharing resulting from the increase in December 1998 of the amount of
service fee that we share with our retail partners, and (2) the increase in
field service personnel and direct support expenses associated with our growth
and expansion into six new regional markets. Direct operating expenses as a
percentage of revenue decreased to 50.3% in the quarter ended March 31, 1999
from 66.0% in the comparable 1998 period. The decrease in direct operating
expenses as a percentage of revenue was the result of (1) the realization of
coin pickup and processing cost economies from increased regional densities and
utilization of cheaper, more efficient coin pick-up methods, and (2) the decline
in field service expenses per unit as a percentage of revenue brought about by
our increased density in our existing markets.
REGIONAL SALES AND MARKETING
Regional sales and marketing expenses increased to $1.3 million for the
quarter ended March 31, 1999 from $917,000 in the comparable 1998 period. The
increase in regional marketing expense was the result of an increased level of
radio and television advertising in selected markets, offset partially by a
decrease in new market launches and promotional activity. Regional sales and
marketing as a percentage of revenue decreased to 8.3% in the quarter ended
March 31, 1999 from 10.4% in the comparable 1998 period. The decrease in
regional sales and marketing as a percentage of revenue was the result of (1)
increasing volumes processed by the network, and (2) lower advertising costs per
unit as we increase the density of units within a region.
PRODUCT RESEARCH AND DEVELOPMENT
Product research and development expenses decreased to $940,000 for the
quarter ended March 31, 1999 from $1.4 million in the comparable 1998 period.
The decrease in product research and development costs reflects the decrease in
expenditures associated with the completion of the development of the new coin
counting technology and the completion of our new operating system. Product
research and development as a percentage of revenue decreased to 6.0% in the
quarter ended March 31, 1999 from 16.0% in the comparable 1998 period. While we
currently expense 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 $3.4 million for
the quarter ended March 31, 1999 from $3.3 million in the comparable 1998
period. Selling, general and administrative as a percentage of revenue decreased
to 21.4.% in the quarter ended March 31, 1999 from 37.1% in the comparable 1998
period. The decrease in selling, general, and administrative as a percentage of
revenue was the result of
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(1) increasing volumes processed by the network combined with (2) the
realization of improved operating efficiencies.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased to $4.1 million for the
quarter ended March 31, 1999 from $2.8 million in the comparable 1998 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 26.0% in the quarter ended March 31, 1999 from 31.9% in the
comparable 1998 period. During the quarter, we wrote off certain obsolete
equipment resulting in a one time charge of $68,000 during the period. The
decrease in depreciation and amortization as a percentage of revenue was the
result of increasing volumes processed through the network. We expect
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
We generated other income of $42,000 for the quarter ended March 31, 1999
due to the subleasing of excess office space. On March 12, 1999 this third party
lessor announced that it was suspending its operations and vacated the space as
of March 31, 1999. We are currently evaluating alternative subleasing
arrangements. However, we believe that this event will not have a material
adverse impact on our results of operations.
Interest income decreased to $163,000 for the quarter ended March 31, 1999
from $501,000 in the comparable 1998 period. The decrease in interest income is
attributed to a reduction in invested cash balances resulting from the sale of
certain short-term investments to finance the installation of Coinstar units
during the period.
Interest expense increased to $2.9 million for the quarter ended March 31,
1999 from $2.6 million in the comparable 1998 period. The increase was primarily
due to the accretion of the Senior Subordinated Discount Notes due 2006 ("the
Notes"). No cash interest payments are due on the Notes until April 2000.
NET LOSS
Net loss decreased to $4.5 million for the three month quarter ended March
31, 1999 from $7.4 million in the comparable 1997 period. The decrease in the
net loss was primarily due to an increase in our direct contribution (i.e.,
revenue minus direct operating expenses) combined with a reduction in the rate
of growth of expenses. As a result, the reduction in net loss reflects the
operating leverage of the Coinstar network resulting from the relatively fixed
nature of a number of our costs. In the longer term, we expect that we will not
be required to add as much infrastructure as we have in the past to support our
installed base and as a result expect to achieve profitability as our revenue
from our larger base of installed units grows proportionately faster than our
expenses. There can be no assurance, however, that we will install a sufficient
number of units or obtain sufficient market acceptance to allow us to achieve or
sustain profitability.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999 we had cash and cash equivalents of $37.9 million,
short-term investments of $2.1 million and working capital of $7.4 million. Cash
and cash equivalents include $21.5 million of funds in transit, which represent
amounts being processed by armored car carriers or residing in Coinstar units.
Net cash provided by operating activities was $3.4 million for the quarter ended
March 31, 1999 compared to net cash used in operating activities of $2.9 million
for the comparable period in 1998. The principal use of cash was to fund net
operating losses incurred, offset by depreciation, other non-cash charges
including discount accretion on the Notes, and an increase in accounts payable
and accrued liabilities.
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Net cash used by investing activities for the three month ended March 31,
1999 was $3.0 million and $275,000 in comparable period in 1998. Capital
expenditures during the quarter ended March 31, 1999 were $5.0 million and in
the comparable 1998 period were $4.7 million. The majority of capital
expenditures consist of the purchase of Coinstar units.
Net cash used by financing activities for the three month ended March 31,
1999 was $272,000, which principally was the result of the repayment of long
term debt and the payment of fees associated with the closing of the long term
Credit Agreement. The use of funds was partially offset by the proceeds from the
exercise of stock options and employee stock purchases. Net cash provided by
financing activities for the comparable 1998 period was $22,000, which was the
result of the proceeds of the exercise of employee stock options and stock
purchases, offset by the repayment of long term debt.
As of March 31, 1999 we had available secured irrevocable letters of credit
with a bank which totaled $2.9 million. These letters of credit, which expire
through August 1999, are available to collateralize certain obligations to third
parties. As of March 31, 1999, no amounts were outstanding under these letters
of credit agreements.
On February 19, 1999 we entered into a Credit Agreement with Imperial Bank,
for itself and as agent of Bank Austria Creditanstalt Corporate Finance, Inc.
(the Bank Austria and, together with Imperial Bank, the "Lenders"). The Credit
Agreement provides us 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 us to maintain
certain financial covenants during the term of the agreement, which, among other
things, restrict our ability to pay dividends. In addition, amounts available
under the term loans will increase to $7.5 million per Lender after we have
satisfied certain debt ratios.
In connection with the Credit Agreement, we issued to each of the Lenders a
warrant to purchase 51,326 shares of our common stock. The exercise price for
the warrants, which will expire on February 19, 2009, is $12.18 per share. The
values of the warrants issued in connection with the Credit Agreement are
recorded as contributed capital and represent discounts which are being
amortized ratably over the term of the related debt. We have 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 we have
satisfied all of our obligations in full under the Credit Agreement and the
Lenders have no further commitment to make loans or extend credit under the
Credit Agreement (the "Loan Termination Date"). We must use reasonable efforts
to cause the registration statement to be declared effective no later than 120
days following the Loan 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 obligates us to include the
common stock issuable upon exercise of the warrants in certain registration
statements we may file.
In March, 1999 we acquired assets consisting of internet domain names,
software, fixed assets, contracts, and web site content from Compucook, Inc. In
consideration for the purchase, we issued 25,000 common stock warrants at an
exercise price of $15.63 per warrant, which expire on March 2, 2004. On April
15, 1999 we acquired certain assets consisting of internet domain names, fixed
assets, contracts, and web site content from Nu World Marketing Limit Inc. In
consideration for the purchase, we issued 25,000 shares of common stock.
As of March 31, 1999 we also had outstanding $88.4 million of our 13.0%
Senior Subordinated Discount Notes due 2006 ("the Notes"). The indebtedness
associated with the Notes will accrete to $95.0 million by October 1999. We must
begin paying cash interest on the Notes in April 2000. Beginning at that time,
we 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
Indenture governing the Notes contains covenants that, among other restrictions,
limit our ability to pay dividends or make other restricted payments, engage
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in transactions with affiliates, incur additional indebtedness, effect asset
dispositions, or merge or sell substantially all our assets.
We believe existing cash equivalents, short-term investments, and our Credit
Agreement will be sufficient to fund our 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 our business. If we
significantly increase installations beyond planned levels or if unit coin
processing volumes generated are lower than historical levels, our cash needs
will be increased. Our 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 our service, the
feasibility of international expansion, and potential new product and service
offerings and product and service enhancements. See "Risk Factors--Our future
operating results remain uncertain," "--Our quarterly operating results may
fluctuate due to different usage rates of individual Coinstar units, seasonality
of use and other factors," and "--We have substantial indebtedness."
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 our 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 MONTHS ENDED
-------------------------------------------------------------------------------
JUNE 30, SEP. 30, DEC. 31, MAR. 31, JUNE 30, SEP. 30, DEC. 31, MAR. 31,
1997 1997 1997 1998 1998 1998 1998 1999
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT UNIT AND PER UNIT DATA)
STATEMENTS OF OPERATIONS DATA:
Revenue........................................... $ 5,294 $ 7,762 $ 7,957 $ 8,823 $ 10,472 $ 13,576 $ 14,802 15,791
Expenses:
Direct operating.................................. 3,966 5,276 5,208 5,823 6,142 7,141 7,458 7,939
Regional sales and marketing...................... 972 798 689 917 854 930 1,077 1,318
Product research and development.................. 1,640 1,637 1,644 1,410 1,329 867 1,138 940
Selling, general and administrative............... 2,630 2,669 3,252 3,276 3,726 3,531 3,579 3,381
Depreciation and amortization..................... 2,158 2,297 2,539 2,813 3,120 3,635 3,669 4,102
Loss from operations.............................. $(6,072) $ (4,915) $ (5,375) $ (5,416) $ (4,699) $ (2,528) $ (2,119) $ (1,889)
OTHER DATA:
Number of new Coinstar units installed during the
period.......................................... 406 400 469 327 501 405 376 428
Installed base of Coinstar units at end of
period.......................................... 2,335 2,735 3,204 3,531 4,032 4,437 4,813 5,241
Average age of network for the period (months).... 9.3 10.6 11.7 13.4 14.8 15.8 17.5 19.2
Number of regional markets........................ 33 35 40 42 49 57 58 64
Dollar value of coins processed................... $70,626 $103,442 $105,692 $117,298 $139,227 $180,600 $186,166 $177,248
Direct contribution(1)............................ $ 1,328 $ 2,486 $ 2,749 $ 3,000 $ 4,330 $ 6,435 $ 7,344 $ 7,852
EBITDA (4)........................................ $(3,914) $ (2,618) $ (2,836) $ (2,603) $ (1,579) $ 1,107 $ 1,550 $ 2,213
Annualized revenue per average installed
unit(2)......................................... $ 9,939 $ 12,284 $ 10,907 $ 10,597 $ 11,195 $ 12,703 $ 12,937 $ 12,699
Annualized direct contribution per average
installed unit(1)(2)............................ $ 2,494 $ 3,935 $ 3,768 $ 3,601 $ 4,568 $ 6,021 $ 6,405 $ 6,331
International development costs(3) -- -- -- $ 28 $ 241 $ 116 $ 369 $ 275
</TABLE>
- ------------------------------
(1) Direct contribution (loss) is defined as revenue less direct operating
expenses. We use direct contribution (loss) as a measure of operating
performance to assist in understanding our 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.
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(3) International development costs represent the costs incurred by Coinstar
International related to the exploration of 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 98-5, "Reporting on
the Costs of Start-Up Activities," issued on April 13, 1998.
(4) 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 GAAP. We, however, believe that
EBITDA provides useful information regarding a company's ability to service
and/or incur indebtedness.
Based on our limited operating history, we believe 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 our limited
operating history and the lack of comparable companies engaged in the coin
processing business.
In addition to fluctuations in revenue resulting from factors affecting
customer usage, timing of unit installations will result in significant
fluctuations in quarterly results. The rate of installations does not follow a
regular pattern, as it depends principally on installation schedules determined
by agreements between us and our 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 our 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 our accelerated
growth. We expect to continue to incur substantial operating losses from
operations as we continue to increase our installed base of Coinstar units.
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. 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 year field. These year fields will need to
accept four digit year 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.
We rely on computer applications for our coin processing machines and to manage
and monitor our accounting and administrative functions. 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, our retail distribution partners, suppliers and service
providers (including financial institutions) rely 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 us. Failure or malfunction of our
software or that of our retail distribution partner's, suppliers or service
providers could seriously harm our business, financial condition and results of
operations and on our ability to achieve sufficient cash flow service to our
indebtedness.
During the second and third quarters of 1998, we undertook a program to
identify, test, and evaluate our internal operating systems to determine the
impact of the year 2000 on these systems. These tests
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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, we do not believe our computer
systems or applications currently in use will be harmed by the upcoming change
in century.
We completed our review of the year 2000 impact on our retail partners,
suppliers, and service providers in the first quarter of 1999. Our partners have
made, and continue to make, significant progress towards completing their year
2000 projects. We have not incurred any significant costs in reviewing our
systems or those of our retail distribution partners, suppliers or service
providers for year 2000 compliance. We do not foresee any significant harm from
our partners' year 2000 issues. We will continue to monitor the status of our
partners' year 2000 activities.
We will complete our year 2000 contingency planning during the second
quarter of 1999. This planning involves an assessment of problem scenarios that
could disrupt critical business functions and the steps to be taken to minimize
the risk and impact of these problems. Accordingly, we have not yet fully
developed a contingency plan to address situations that may result if we are
unable to achieve year 2000 readiness of our critical operations. The cost of
developing and implementing such a plan may itself be significant.
RISK FACTORS
WE HAVE A HISTORY OF SUSTAINED OPERATING LOSSES AND WE EXPECT SUCH LOSSES TO
CONTINUE.
We have incurred substantial losses since inception in 1991. Our net loss
was $16.0 million for 1996, $29.6 million for 1997 and $24.0 million for 1998.
As of March 31, 1999 we had an accumulated deficit of $86.9 million. Our
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 our
headquarters and depreciation and amortization. We expect to continue to incur
operating losses as we continue to increase our installed base of Coinstar units
and seek to develop and market new products, services and enhancements.
WE HAVE A LIMITED OPERATING HISTORY AND FACE UNCERTAINTY IN OUR ABILITY TO
BECOME A PROFITABLE COMPANY.
After several years of development, we commenced commercial deployment of
Coinstar units in 1994 and placed approximately 95% of our current installed
base in 1996, 1997, 1998 and the first three months of 1999. Therefore, you have
limited historical financial information on which to base an evaluation of our
performance. You should consider our prospects in light of the risks, expenses
and difficulties frequently encountered by companies in an early stage of
development and operation, particularly companies in new or rapidly evolving
markets. We cannot be certain that we will install a sufficient number of our
Coinstar units or obtain sufficient market acceptance to allow us to achieve or
sustain profitability, or generate sufficient cash flow to meet our capital and
operating expenses and debt service obligations.
OUR COIN PROCESSING SERVICE IS OUR SOLE SOURCE OF REVENUE AND OUR CURRENT MARKET
IS LIMITED.
We have derived until now, and expect for the foreseeable future to derive,
substantially all of our revenues from the operation of Coinstar units.
Accordingly, market acceptance of our coin processing service is critical to our
future success. Since there is only a limited current market for our coin
processing service, we cannot assure you that an acceptable level of demand will
be achieved or sustained. If sufficient demand for our coin processing service
does not develop due to lack of market acceptance, technological change,
competition or other factors, our business, financial condition and results of
operations and ability to achieve sufficient cash flow to service our
indebtedness could be seriously harmed.
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<PAGE>
OUR FUTURE OPERATING RESULTS REMAIN UNCERTAIN.
You should not consider prior growth rates in our revenue to be indicative
of our future operating results. The timing and amount of future revenues will
depend almost entirely on our ability to obtain new agreements with potential
retail distribution partners for the installation of Coinstar units, the
successful deployment and operation of our coin processing network and on
customer utilization of our service. Our future operating results will depend
upon many other factors, including:
- the level of product and price competition,
- the service fee we charge consumers to use our service, which we recently
changed to 8.9% and may change in the future,
- the amount of our processing fee that we share with our retail partners,
- our success in expanding our network and managing our growth,
- our ability to develop and market product enhancements and new products,
such as our Coinstar Shopper-TM-,
- our ability to enter into and penetrate new international markets, such as
the United Kingdom, Canada, the European Union and other selected foreign
markets,
- 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.
OUR BUSINESS IS DEPENDENT ON CONTINUED MARKET ACCEPTANCE BY CONSUMERS.
We are substantially dependent on continued market acceptance of our coin
processing service by consumers. The self-service coin processing market is
relatively new and evolving and we cannot predict the future growth rate and
size of this market. In addition, we may not be successful in achieving the
large-scale adoption of our coin processing service or acceptance of our change
in the processing fee from 7.5% to 8.9%. While consumers to date have been
somewhat receptive to our existing installed base of Coinstar units, we cannot
be certain that the operating results of the installed units will continue to be
favorable or that past results will be indicative of future market acceptance of
our service.
We believe 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 we are successful in promoting awareness of the Coinstar unit among
consumers, consumers may not utilize the Coinstar units in sufficient numbers
and frequency to make us profitable. In addition, 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 may
adversely affect market acceptance and ongoing use of the Coinstar service. If
our coin-processing service does not achieve general market acceptance among
consumers or does so less rapidly than expected, our business, financial
condition and results of operations and ability to achieve sufficient cash flow
to service our indebtedness could be seriously harmed.
OUR BUSINESS IS DEPENDENT ON OUR RETAIL DISTRIBUTION PARTNERS, WHICH ARE
PRIMARILY SUPERMARKET CHAINS.
Market acceptance of the Coinstar units depends on the willingness of
potential retail distribution partners to agree to installation and retention of
Coinstar units in their stores, primarily supermarkets. We believe that market
acceptance by potential retail distribution partners will depend on our ability
to demonstrate the utility of the Coinstar unit as a customer service and as a
means to provide other tangible benefits to potential and existing retail
partners, including increased customer traffic and customer
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spending in the form of voucher dollars in the store. If our service does not
achieve market acceptance, especially among supermarket chains, or does so less
rapidly than expected, our business, financial condition and results of
operations and ability to achieve sufficient cash flow to service our
indebtedness could be seriously harmed.
We generally have separate agreements with each of our retail distribution
partners, providing for our exclusive right to provide coin processing services
in 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. Coinstar units in service in two supermarket chains, Fred
Meyer Inc. and The Kroger Co., accounted for approximately 18.7% and 18.9%,
respectively, of our revenue in 1998. In the quarter ended March 31, 1999 these
two chains accounted for approximately 34.8% of our revenue. 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 our contracts with our
retail distribution partners could seriously harm our business, financial
condition, results of operations and ability to achieve sufficient cash flow to
service our indebtedness.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE DUE TO DIFFERENT USAGE RATES OF
INDIVIDUAL COINSTAR UNITS, SEASONALITY OF USE AND OTHER FACTORS.
Customer utilization of our coin processing service varies substantially
from unit to unit, making our revenues difficult to forecast. Customer
utilization is affected by the timing and success of promotions by us and our
retail distribution partners, age of the installed unit, adverse weather
conditions and other factors, many of which are not in our control. Based on our
limited operating history, we believe that coin processing volumes are affected
by seasonality; in particular we believe that on a relative basis, coin
processing volumes have been lower in the months of January, February, September
and October. We cannot be certain, however, that such seasonal trends will
continue. Any projections of future trends in use are inherently uncertain due
to our limited operating history and the lack of comparable companies engaged in
the coin processing business.
In addition, our quarterly operating results are affected by the timing and
number of Coinstar units installed during the quarter. The timing of Coinstar
unit installations during a particular quarter is largely dependent on
installation schedules determined by agreements with our retail distribution
partners, the variable length of trial periods of our retail distribution
partners and the planned coordination of multiple installations in a given
geographic region.
As a result of these and other factors, revenue for any quarter is subject
to significant variation, and we believe that period-to-period comparisons of
our results of operations are not necessarily meaningful and should not be
relied upon as indications of future performance. Because our operating expenses
are based on anticipated revenue trends and because a large percentage of our
expenses are relatively fixed, revenue variability could cause significant and
disproportionate variations in operating results from quarter to quarter and
could result in significant losses. To the extent such expenses precede, or are
not followed by, increased revenue, our operating results would be seriously
harmed.
WE HAVE SUBSTANTIAL INDEBTEDNESS.
As of March 31, 1999 we had outstanding indebtedness of $89.9 million, which
included $88.4 million of our 13.0% Senior Subordinated Discount Notes due 2006
(the "Notes") and our capital lease obligations. The outstanding indebtedness
associated with the Notes will grow to $95.0 million by October 1999. We must
begin paying cash interest on the Notes in April 2000. Beginning at that time,
we 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. Our
ability to meet our debt service requirements will depend upon achieving
significant and sustained growth in our expected cash flow, which will be
affected by our success in implementing our business strategy, prevailing
economic conditions and financial, business and other
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factors, some of which are beyond our control. Accordingly, we cannot be certain
as to whether or when we will have sufficient resources to meet our debt service
obligations. If we are unable to generate sufficient cash flow to service our
indebtedness, we will have to reduce or delay planned capital expenditures, sell
assets, restructure or refinance our indebtedness or seek additional equity
capital. We cannot assure you that any of these strategies can be effected on
satisfactory terms, if at all, particularly in light of our high levels of
indebtedness. In addition, the extent to which we continue to have substantial
indebtedness could have significant consequences, including:
- our 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,
- a substantial portion of our cash flow from operations may need to be
dedicated to the payment of principal and interest on our indebtedness and
therefore not available to finance our business, and
- our high degree of indebtedness may make us more vulnerable to economic
downturns, limit our ability to withstand competitive pressures or reduce
our flexibility in responding to changing business and economic
conditions.
OUR MARKET IS INCREASINGLY COMPETITIVE.
We are 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. We compete regionally with several direct
competitors that operate self-service coin processing machines. We cannot be
certain that these competitors have not or will not substantially increase their
installed units and expand their service nationwide. We compete indirectly with
manufacturers of machines and devices that enable consumers to count or sort
coins themselves, and we also compete or may compete directly or indirectly with
banks and similar depository institutions for coin conversion customers.
Currently, we believe 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 us.
Moreover, we may face direct competition from Scan Coin AB of Malmo, Sweden, our
prior supplier of coin-counting devices, or other third parties to whom Scan
Coin may sell its coin counting device. See "--Our business could be harmed by a
dispute with our supplier."
In addition, we may face new competition as we seek to expand into
international markets and develop new products, services and enhancements. Our
ability to expand internationally may subject us to competition with banks that
offer services competitive with ours and with manufacturers and other companies
that have established or are seeking to establish coin counting networks
competitive with ours. Many of the competitors have greater experience than we
do in operating in these international markets. Moreover, new products that we
intend to develop, such as those involving the Internet, may subject us to
competition from companies with significantly greater technological resources
and experience.
Many of our potential competitors have longer operating histories, greater
name recognition, larger customer bases and significantly greater financial,
technical, marketing and public relations resources than we have. These
competitors may be able to undertake more extensive marketing campaigns, adopt
more aggressive pricing policies and make more attractive offers to consumers
and businesses. Our competitors might 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 us or that would render our
technologies or products obsolete or noncompetitive. We cannot be certain that
we will be able to compete effectively with current or future competitors.
Competitive pressures could seriously harm our business, financial condition and
results of operations and our ability to achieve sufficient cash flow to service
our indebtedness.
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THE SUCCESS OF OUR POTENTIAL NEW SERVICES AND PRODUCTS IS UNCERTAIN.
We have committed, and expect to continue to commit, significant resources
and capital to develop and market existing product and service enhancements and
new products and services such as those which enhances our current service
through value-added services and promotions, and Coinstar Shopper-TM-, which is
a multifunction Internet portal. These products and services are relatively
untested, and we cannot assure you that we will achieve market acceptance for
these products and services, or other new products and services. Moreover, these
and other new products and services may be subject to significant competition
with offerings by potential competitors in addition to companies that compete in
our coin processing business. Many of these potential competitors have
significantly greater technological expertise and financial and other resources
than we do. In addition, new products, services and enhancements may pose a
variety of technical challenges and require us to enhance the capabilities of
our network and attract additional qualified employees. The failure to develop
and market new products, services or enhancements successfully could seriously
harm our business, financial condition and results of operations and ability to
achieve sufficient cash flow to service our indebtedness.
OUR FAILURE TO MANAGE GROWTH COULD HARM OUR BUSINESS.
We have experienced rapid growth and intend to continue to expand our
operations aggressively. The growth in the size and scale of our business has
placed, and we expect it will continue to place, significant demands on our
operational, administrative and financial personnel and operating systems. Our
additional planned expansion may further strain management and other resources.
Our ability to manage growth effectively will depend on our ability to improve
our operating systems, to expand, train and manage our employee base, to
identify additional manufacturing capacity and to develop additional service
capacity. In particular, we will be required to rapidly expand our operating
systems and processes in order to support the projected installations of
Coinstar units and the potential addition of value-added services. In addition,
we will be required to establish relationships with additional third-party
service providers. We may be unable to effectively manage the expansion of our
operations, to implement and develop our systems, procedures or controls, to
adequately support our operations or to achieve and manage the currently
projected installations. If we are unable to manage growth effectively, our
business, financial condition and results of operations and our ability to
achieve sufficient cash flow to service our indebtedness could be seriously
harmed.
OUR BUSINESS COULD BE HARMED BY A DISPUTE WITH OUR SUPPLIER.
Our sole source of coin counter components has been Scan Coin, pursuant to
an agreement originally entered into in 1993 and subsequently amended. Scan Coin
claims that this agreement requires that only Scan Coin coin counters may be
used in Coinstar units. Additionally, Scan Coin claims that the agreement gives
ownership to Scan Coin of any improvements or developments to the coin counter.
Through our and Scan Coin's conduct over time and our course of business with
each other, we believe important sections of the agreement are now void. On
September 8, 1998 Scan Coin informed us that we were in violation of the
original agreement and we had 30 days to correct the violation. Scan Coin also
restated its claim to our intellectual property. We responded on September 16,
1998 indicating that we rejected all claims made by Scan Coin in its letter. On
May 5, 1999 Scan Coin informed us that it was terminating the original supply
agreement. Scan Coin also reiterated its claims to our intellectual property and
stated that it will seek full compensation for all damages suffered. We have not
responded to this letter. We will continue to attempt to settle this dispute
amicably with Scan Coin. We believe that Scan Coin has no claim on any of our
intellectual property. We have evaluated Scan Coin's claims and believe they are
meritless. However, even if it is determined that the prior agreement and
amendments are still effective and our use of the new coin counting technology
violates these agreements, we believe that the amount of damages to which Scan
Coin would be entitled would not be material to our business. Our evaluation of
the amount of damages to which Scan Coin could be entitled is subject to
significant uncertainty, and it is possible that we could be
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found to be liable for damages that would be material to our business. We cannot
be certain that we will resolve the dispute with Scan Coin, nor can we assure
you that if litigation commences, we will prevail. Our failure to prevail in
litigation may result in a payment of monetary damages, the forfeiture of
certain intellectual property rights, or both. The occurrence of either event
could seriously harm our business, financial condition and results of operations
and ability to achieve sufficient cash flow to service our indebtedness.
Currently, coin counter devices supplied by Scan Coin are installed in most
commercially deployed Coinstar units. Replacement parts for the coin counter
devices installed in these units are supplied by Scan Coin. We believe, if all
pending parts orders from Scan Coin are received, that we currently have enough
parts to meet demand through the end of 1999. However, we cannot be certain that
the dispute with Scan Coin, or Scan Coin's purported termination of our
agreement with them, will not affect Scan Coin's decision to fill such orders or
others in the future. We believe we can purchase many of these parts from third
party suppliers. However, we may not be able to source all necessary parts from
outside suppliers for the Scan Coin counters on a timely basis, if at all. Our
failure to secure necessary replacement parts on a timely basis may result in a
slowdown of installation or in machine downtime, either of which could seriously
harm our business, financial condition and results of operations and ability to
achieve sufficient cash flow to service our indebtedness.
WE DEPEND UPON THIRD-PARTY MANUFACTURERS AND SERVICE PROVIDERS.
We do not conduct manufacturing operations and depend, and will continue to
depend, on outside parties for the manufacture of the Coinstar unit and its key
components. We intend to significantly expand our installed base, and such
expansion may be limited by the manufacturing capacity of our third-party
manufacturers and suppliers. Although we expect that our current contract
manufacturer, SeaMed Corporation, will be able to produce sufficient units to
meet projected demand, SeaMed or other manufacturers may not be able to meet our
manufacturing needs in a satisfactory and timely manner. If there is an
unanticipated increase in demand for Coinstar unit installations, we may be
unable to meet such demand due to manufacturing constraints. Although we have a
contract with SeaMed, SeaMed 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. We believe that we are SeaMed's only material
non-medical customer. As such, we face an increased risk that SeaMed may choose
to focus exclusively on manufacturing medical products and cease making our
products. Should SeaMed cease manufacturing Coinstar units, we would be required
to locate and qualify additional suppliers. We may be unable to locate alternate
manufacturers on a timely basis.
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
conditions, including shareholder approval. SeaMed's management has assured us
that the combined entity will be able to continue to meet our manufacturing
needs and that the merger will add additional capacity. However, we cannot be
certain that if the merger is completed, Plexus will continue to operate in
Redmond, Washington or be able to meet our manufacturing needs without
additional cost, or at all.
In addition, we obtain some key hardware components used in the Coinstar
units from sole source suppliers. We cannot be certain that we will be able to
continue to obtain an adequate supply of these components in a timely manner or,
if necessary, from alternative sources. If we are unable to obtain sufficient
quantities of components or to locate alternative sources of supply on a timely
basis, we may experience delays in installing or maintaining Coinstar units,
either of which could seriously harm our business, financial condition and
results of operations and ability to achieve sufficient cash flow to service our
indebtedness.
We rely on third-party service providers for substantial support and service
efforts that we currently do not provide directly. In particular, we contract
with armored carriers and other third party providers to
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arrange for pick-up, processing and deposit of coins. We generally contract with
one transportation provider and coin processor to service a particular region.
Many of these service providers do not have long-standing relationships with us
and our contracts with them generally can be terminated by either party with
advance notice ranging from 30 to 90 days. We do not currently have nor do we
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 us to maintain our existing relationships or to
establish new relationships on a timely basis or on acceptable terms would harm
our business, financial condition and results of operations and our ability to
achieve sufficient cash flow to service our indebtedness. Moreover, as with any
business that handles large volumes of cash, we are susceptible to theft,
counterfeit and other forms of fraud, including security breaches of our
computing system that performs important accounting functions. We cannot be
certain that we will be successful in developing product enhancements and new
services to thwart such attempts.
WE MAY BE UNABLE TO ADEQUATELY PROTECT OR ENFORCE OUR PATENTS AND PROPRIETARY
RIGHTS.
Our future success depends, in part, on our ability to protect our
intellectual property and maintain the proprietary nature of our technology
through a combination of patents, licenses and other intellectual property
arrangements, without infringing the proprietary rights of third parties. We
have 5 issued patents relating to the removal of debris from coins processed in
a self-service environment and other aspects of self-service coin processing.
We cannot assure you that any of our patents will be held valid if
challenged, that any pending patent applications will issue, or that other
parties will not claim rights in or ownership of our patents and other
proprietary rights. Moreover, patents issued to us may be circumvented or fail
to provide adequate protection. Our competitors might independently develop or
patent technologies that are substantially equivalent or superior to our
technologies.
On June 18, 1997 we filed suit in the United States District Court, Northern
District of California against CoinBank Automated Systems, Inc., one of our
competitors, based on alleged infringement of one of our United States patents.
On June 27, 1997 CoinBank answered our patent infringement claim and
counterclaimed for declaration of non-infringement, invalidity and
unenforceability of this 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 some 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 we added our most
recently issued patent to the pending litigation by agreement of the parties. We
cannot assure you that we will prevail in our patent infringement claim against
CoinBank or on any claim that may be filed by CoinBank against us or, that as a
result of the patent infringement claim, our patents 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 our products. We cannot be certain that others
will not assert patent infringement claims or claims of misappropriation against
us based on patents, copyrights or trade secrets or that such claims will not be
successful. In addition, defending our company and our retail distribution
partners against these types of claims, regardless of their merits, could
require us to incur substantial costs and divert the attention of key personnel.
Parties making these types of claims may be able to obtain injunctive or other
equitable relief which could effectively block our ability to provide our coin
processing service and use our 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, we may need or be required to obtain one or
more licenses from, as well as grant one or more licenses to, others. We cannot
assure you that we could obtain necessary licenses from others at a reasonable
cost or at all.
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We also rely on trade secrets to develop and maintain our competitive
position. Although we protect our proprietary technology in part by
confidentiality agreements with our employees, consultants and corporate
partners, we cannot assure you that these agreements will not be breached, that
we will have adequate remedies for any breach or that our trade secrets will not
otherwise become known or be discovered independently by our competitors. The
failure to protect our intellectual property rights effectively or to avoid
infringing the intellectual property rights of others could seriously harm our
business, financial condition and results of operations and ability to achieve
sufficient cash flow to service our indebtedness.
THERE ARE MANY RISKS ASSOCIATED WITH DOING BUSINESS IN INTERNATIONAL MARKETS.
We intend to increase our deployment of Coinstar units in select
international markets. We have only recently begun to expand our business
internationally through limited trials in the United Kingdom and Canada and,
accordingly, have limited experience in operating in international markets. We
anticipate that our international operations will become increasingly
significant to our business. International transactions pose a number of risks,
including:
- failure of customer acceptance,
- risks of regulatory delays or disapprovals with respect to our products
and services,
- competition from potential and current coin counting businesses,
- exposure to exchange rate risks,
- restrictions on the repatriation of funds,
- political instability,
- adverse changes in tax, tariff and trade regulations,
- difficulties with foreign distributors,
- difficulties in managing an organization spread over several countries,
and
- weaker legal protection for intellectual property rights.
These risks could seriously harm our business, financial condition, results
of operations and ability to achieve sufficient cash flow to service our
indebtedness.
Our expansion into Europe will present challenges different from those faced
in the United States. We expect to face greater competition than currently is
the case in the United States because banks in Europe typically offer coin
counting services to their customers and most of the world's self-service coin
counting machine manufacturers are located in Europe. Some of these
manufacturers have been involved in attempts to set up networks similar to ours.
In addition, local laws and market conditions may require us to change our fee
structure. We also will face a number of technical challenges as we attempt to
expand into Europe. In several areas, close national borders may require that
our units be able to handle as many as six different national coin sets, as well
as the new Euro coin. Supermarkets in Europe tend to be smaller than those in
the United States. Because of this, floor space is more of an issue than in the
typical supermarket in the United States. As a result, it may be necessary for
us to reduce the size of our unit to succeed in Europe. Reducing our unit size
could present technical challenges, and the smaller capacity that might result
from a smaller unit could increase operating costs in servicing the units. Many
local laws do not permit stores to be operated on a 24-hour, seven day per week
basis. This could reduce volumes and present challenges in our servicing of the
units. We also expect to face higher telecommunications costs in Europe than in
the United States, and a European network may need to make extensive use of
cellular communications.
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WE DEPEND UPON KEY PERSONNEL AND NEED TO HIRE ADDITIONAL PERSONNEL.
Our performance is substantially dependent on the continued services of our
executive officers and key employees, all of whom we employ on an at-will basis.
Our long-term success will depend on our ability to recruit, retain and motivate
highly skilled personnel. Competition for such personnel is intense. We have at
times experienced difficulties in recruiting qualified personnel, and we may
experience difficulties in the future. The inability to attract and retain
necessary technical and managerial personnel could seriously harm our business,
financial condition and results of operations and our ability to achieve
sufficient cash flow to service our indebtedness. Currently, we maintain a "key
man" life insurance policy on our chairman and chief executive officer, Jens
Molbak, in the amount of $2.0 million. See "Management--Executive Officers,
Directors and Key Employees."
DEFECTS IN OR FAILURES OF OUR OPERATING SYSTEM COULD HARM OUR BUSINESS.
We collect financial and operating data, and monitor performance of Coinstar
units, through a wide-area communications network connecting each of the
Coinstar units with a central computing system at our headquarters. This
information is used to track the flow of coins, verify coin counts and schedule
the dispatch unit service and coin pickup. The operation of Coinstar units
depends on sophisticated software, computing systems and communication services
that may contain undetected errors or may be 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 Coinstar unit is
designed to store all data collected, thereby helping to ensure that critical
data is not lost due to an operating systems failure, our inability to collect
the data from our Coinstar units could lead to a delay in processing coins and
crediting the accounts of our retail distribution partners for vouchers already
redeemed. The design of the operating systems to prevent loss of data may not
operate as intended. Any loss or delay in collecting coin processing data would
seriously harm our operations.
We have in the past experienced limited delays and disruptions resulting
from upgrading or improving our operating systems. Although such disruptions
have not had a material effect on our operations, future upgrades or
improvements could result in delays or disruptions that would seriously harm our
operations. In particular, we are currently planning some significant
improvements in our operating platform in order to support our projected
expansion of the installed base of Coinstar units and the potential addition of
value-added services. While we are taking steps to ensure that the potential
adverse impact of such improvements on our operations is minimized, we cannot be
certain that the platform will be able to handle the increased volume of
services expected from the continued expansion of our 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.
The communications network on which we rely is not owned by us and is
subject to service disruptions. Further, while we have taken significant steps
to protect the security of our network, any breach of security whether
intentional or from a computer virus could seriously harm us. Any service
disruptions, either due to errors or delays in our software or computing systems
or interruptions or breaches in the communications network, or security breaches
of the system, could seriously harm our business, financial condition and
results of operations and ability to achieve sufficient cash flow to service our
indebtedness.
WE MUST KEEP PACE WITH RAPID TECHNOLOGICAL CHANGES TO REMAIN COMPETITIVE.
The self-service coin processing market is relatively new and evolving. We
anticipate that, as the market matures, it will be subject to technological
change, new services and product enhancements, particularly as we expand our
service offerings. Accordingly, our success may depend in part upon our ability
keep pace with continuing changes in technology and consumer preferences while
remaining price competitive. Our failure to develop technological improvements
or to adapt our products and services to
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technological change on a timely basis could, over time, seriously harm our
business, financial condition and results of operations and our ability to
achieve sufficient cash flow to service our indebtedness.
OUR STOCK PRICE HAS BEEN AND MAY CONTINUE TO BE VOLATILE.
Our common stock price has fluctuated substantially since our initial public
offering in July 1997. The market price of our common stock could decline from
current levels or continue to fluctuate. The market price of our common stock
may be significantly affected by the following factors:
- announcements of technological innovations or new products or services by
us or our competitors,
- trends and fluctuations in use of Coinstar units,
- the termination of one or more retail distribution contracts,
- timing of installations relative to financial reporting periods,
- release of reports,
- operating results below market expectations,
- changes in, or our failure 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, and
- period-to-period fluctuations in our financial results.
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 our common stock.
OUR BUSINESS COULD BE HARMED BY YEAR 2000 COMPLIANCE ISSUES.
Many currently installed computer systems and software programs were
designed to use only a two-digit year field. These year fields will need to
accept four digit year 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.
We rely on computer applications for our coin processing machines and to manage
and monitor our 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, our retail distribution partners, suppliers and service
providers, including financial institutions, rely 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 us. While we do not believe our
computer systems or applications currently in use will be harmed by the upcoming
change in century, we have not completed our assessment as to whether any of our
retail distribution partners, suppliers or service providers will be so
affected. Failure or malfunction of our software or that of our retail
distribution partners, suppliers or service providers could seriously harm our
business, financial condition and results of operations and on our ability to
achieve sufficient cash flow to service to our indebtedness. We have not yet
fully developed a contingency plan to address situations that may result if we
are unable to achieve Year 2000 readiness of our critical operations. The cost
of developing and implementing such a plan may itself be significant.
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WE DO NOT INTEND TO PAY DIVIDENDS IN THE FORESEEABLE FUTURE.
We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain any future earnings for funding growth and,
therefore, do not expect to pay any dividends in the foreseeable future. See
"Dividend Policy."
SOME ANTI-TAKEOVER PROVISIONS MAY AFFECT THE PRICE OF OUR COMMON STOCK.
Provisions of our certificate of incorporation, bylaws and rights plan and
of Delaware law could make it more difficult for a third party to acquire us,
even if doing so would be beneficial to our stockholders.
ITEM 3. 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>
PERIOD ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
$ IN THOUSANDS ------------ ------------------------------------------------------------------
INTEREST RATE RISK 1999 1999 2000 2001 2002 2003 THEREAFTER
- -------------------------------- ------------ --------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Short-term investments.......... $ 2,001
Average interest rate......... 6.25%
LIABILITIES
Capital Lease obligations....... $ 2,227 492 155 7
Average interest rate......... 13.92% 10.78% 11.10% 12.86%
Long-term debt-fixed............ $ 94,278 $ 94,323 $ 94,422 $ 94,522 $ 94,622 $ 94,722 $ 94,822
Average interest rate......... 13.2% 13.2% 13.2% 13.2% 13.2% 13.2% 13.2%
</TABLE>
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 18, 1997, we filed suit in the United States District Court,
Northern District of California against CoinBank Automated Systems, Inc., one of
our competitors, based on alleged infringement of one of our United States
patents. On June 27, 1997, CoinBank answered our patent infringement claim and
counterclaimed for declaration of non-infringement, invalidity and
unenforceability of this 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 some 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 we added our most
recently issued patent to the pending litigation by agreement of the parties. We
cannot assure you that we will prevail in our patent infringement claim against
CoinBank or on any claim that may be filed by CoinBank against us or, that as a
result of the patent infringement claim, our patents will not be limited in
scope or found to be invalid.
On May 11, 1999, we received information that we were among a number of
entities named in a lawsuit filed in United States District Court, for the
District of New Jersey. We understand through conversations with one of the
other parties to the suit, that this lawsuit concerns a fire that caused
considerable damage to a supermarket and shopping mall. We have not been served,
and we have not had an opportunity to review the lawsuit or the claims against
us. We don't believe that we are responsible for the damage caused by the fire.
However, there can be no assurance that the claims are without merit or that the
company will prevail in any litigation.
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
The effective date of the Company's first registration statement, filed on
Form S-1 under the Securities Act of 1993, as amended (Registration No.
333-26843), was July 2, 1997 (the "Registration Statement"). The class of
securities registered was Common Stock. The offering commenced on July 2, 1997
and all securities were sold in the offering. The managing underwriters were
Smith Barney Inc. and Hambrecht & Quist.
Pursuant to the Registration Statement, the Company sold 3,000,000 shares of
its Common Stock for its own account, for an aggregate offering price of
$31,500,000. The Company incurred expenses of approximately $2,837,544, of which
$1,957,125 represented underwriting discounts and commissions and $880,419
represented estimated other expenses, of which expenses $50,149 represented
direct or indirect payments to an affiliate of the Company. The net offering
proceeds to the issuer after total expenses was $28,662,456.
During the second quarter of 1998, the Company began to disburse proceeds
from the initial public offering. To date, offering proceeds were used as
follows: (i) approximately $22.4 million for capital expenditures and working
capital in connection with the continued expansion of the Coinstar network, (ii)
approximately $2.1 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.
In March, 1999 we acquired assets consisting of internet domain names,
software, fixed assets, contracts, and web site content from Compucook, Inc. In
consideration for the purchase, we issued 25,000 common stock warrants at an
exercise price of $15.63 per warrant, which expire on March 2, 2004. On April
15, 1999 we acquired certain assets consisting of internet domain names, fixed
assets, contracts, and
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web site content from Nu World Marketing Limit Inc. In consideration for the
purchase, we issued 25,000 shares of common stock.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<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.
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.
</TABLE>
29
<PAGE>
<TABLE>
<C> <S>
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.
10.14 Amendment of Registrant's 1997 Equity Incentive Plan.
10.15 Amendment of Registrant's 1997 Employee Stock Purchase Plan.
10.16 Amendment of Registrant's 1997 Non-Employee Directors' Stock Option Plan.
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:
The Company filed a report on Form 8-K on March 3, 1999 covering the Credit
and Warrant Agreements between Imperial Bank and Bank Austria Creditanstalt
Corporate Finance, Inc. 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.
Items 3, 4 and 5 are not applicable and have been omitted.
30
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C> <C>
COINSTAR, INC.
(registrant)
Date: May 17, 1999
By: /s/ KIRK A. COLLAMER
-----------------------------------------
Kirk A. Collamer
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
</TABLE>
31
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ---------- ------------------------------------------------------------------------------------------------------
<C> <S>
3.1(1) Amended and Restated Certificate of Incorporation of the Registrant in effect after the closing of the
Initial Public Offering.
3.2(1) Amended and Restated Bylaws of the Registrant.
4.1 Reference is made to Exhibits 3.1 through 3.2.
4.2(1) Specimen Stock Certificate.
4.3(1) Second Amended and Restated Investor Rights Agreement, dated August 27, 1996, between the Registrant
and certain investors, as amended October 22, 1996.
4.4(1) Indenture between Registrant and The Bank of New York dated October 1, 1996.
4.5(1) Warrant Agreement between Registrant and The Bank of New York dated
October 22, 1996.
4.6(1) Notes Registration Rights Agreement between Registrant and Smith Barney Inc. dated October 22, 1996.
4.7(1) Warrant Registration Rights Agreement between Registrant and Smith Barney Inc. dated October 22, 1996.
4.8(1) Specimen 13% Senior Discount Note Due 2006
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.
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.
10.14 Amendment of Registrant's 1997 Equity Incentive Plan.
10.15 Amendment of Registrant's 1997 Employee Stock Purchase Plan.
10.16 Amendment of Registrant's 1997 Non-Employee Directors' Stock Option Plan.
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.
32
<PAGE>
Exhibit 10.14
AMENDMENT DATED MARCH 25, 1999
TO
COINSTAR, INC.
1997 EQUITY INCENTIVE PLAN
The Coinstar, Inc. 1997 Equity Incentive Plan (the "Plan") is hereby
amended as follows:
Section 4(a) of the Plan is amended to read as follows:
"(a) Subject to the provisions of Section 12 relating to
adjustments upon changes in stock, the stock that may be issued
pursuant to Stock Awards shall not exceed in the aggregate Three
Million Five Hundred Eighty Thousand (3,580,000) shares of Common
Stock. If any Stock Award shall for any reason expire or otherwise
terminate, in whole or in part, without having been exercised in full
(or vested in the case of Restricted Stock), the stock not acquired
under such Stock Award shall revert to and again become available for
issuance under the Plan."
The date of the adoption of such amendment by the Board of Directors of
the corporation is March 25, 1999.
The effective date of such amendment shall be March 25, 1999, the date
of adoption by the Board, unless the stockholders of the corporation fail to
approve such amendment within twelve months before or after the date of adoption
by the Board of Directors.
<PAGE>
Exhibit 10.15
AMENDMENT DATED MARCH 25, 1999
TO
COINSTAR, INC.
EMPLOYEE STOCK PURCHASE PLAN
The Coinstar, Inc. Employee Stock Purchase Plan (the "Plan") is hereby
amended as follows:
Section 3(a) of the Plan is amended to read as follows:
"(a) Subject to the provisions of paragraph 12 relating to
adjustments upon changes in stock, the stock that may be sold pursuant
to rights granted under the Plan shall not exceed in the aggregate Four
Hundred Thousand (400,000) shares of the Company's Common Stock (the
"Common Stock"). If any right granted under the Plan shall for any
reason terminate without having been exercised, the Common Stock not
purchased under such right shall again become available for the Plan."
The date of the adoption of such amendment by the Board of Directors of
the corporation is March 25, 1999.
The effective date of such amendment shall be March 25, 1999, the date
of adoption by the Board, unless the stockholders of the corporation fail to
approve such amendment within twelve months before or after the date of adoption
by the Board of Directors.
<PAGE>
Exhibit 10.16
COINSTAR, INC.
1997 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
ADOPTED ON MARCH 28, 1997
AS AMENDED ON MARCH 25, 1999
1. PURPOSE
(a) The purpose of the 1997 Non-Employee Directors' Stock Option Plan
(the "Plan") is to provide a means by which each director of Coinstar, Inc., a
Delaware corporation (the "Company") who is not otherwise an employee of the
Company or of any Affiliate of the Company (each such person being hereafter
referred to as a "Non-Employee Director") will be given an opportunity to
purchase stock of the Company.
(b) The word "Affiliate" as used in the Plan means any parent
corporation or subsidiary corporation of the Company as those terms are defined
in Sections 424(e) and (f), respectively, of the Internal Revenue Code of 1986,
as amended from time to time (the "Code").
(c) The Company, by means of the Plan, seeks to secure and retain the
services of persons capable of serving as Non-Employee Directors of the Company,
and to provide incentives for such persons to exert maximum efforts for the
success of the Company.
2. ADMINISTRATION
The Plan shall be administered by the Board of Directors of the Company
(the "Board").
3. SHARES SUBJECT TO THE PLAN
(a) Subject to the provisions of paragraph 10 relating to adjustments
upon changes in stock, the stock that may be sold pursuant to options granted
under the Plan shall not exceed in the aggregate Two Hundred Thousand (200,000)
shares of the Company's common stock. If any option granted under the Plan shall
for any reason expire or otherwise terminate without having been exercised in
full, the stock not purchased under such option shall again become available for
the Plan.
<PAGE>
(b) The stock subject to the Plan may be unissued shares or reacquired
shares, bought on the market or otherwise.
4. ELIGIBILITY
Options shall be granted only to Non-Employee Directors of the Company.
5. NON-DISCRETIONARY GRANTS
(a) Each person who is elected or appointed for the first time to be a
Non-Employee Director automatically shall, upon the date of his or her initial
election or appointment to be a Non-Employee Director by the Board or
stockholders of the Company, be granted an option to purchase ten thousand
(10,000) shares of common stock of the Company on the terms and conditions set
forth herein (each, an "Intial Grant").
(b) On the date of each Annual Meeting of Stockholders of the Company,
each person who is then a Non-Employee Director automatically shall be granted
an option to purchase five thousand (5,000) shares of common stock of the
Company on the terms and conditions set forth herein (each, an "Annual Grant");
PROVIDED, that any Non-Employee Director who has at any time received an award
pursuant to the provisions of Section 5(c) below shall not receive an award of
an Annual Grant pursuant to this Section 5(b); and PROVIDED, FURTHER, that if
the Non-Employee Director receiving an Annual Grant has not served for twelve
months prior to the date of the Annual Grant, then the number of shares subject
to that Non-Employee Director's option under this paragraph 5(b) shall be equal
to the number set forth in the previous sentence, adjusted by a fraction, the
numerator of which fraction shall be equal to the number of days on which the
individual was a Non-Employee Director during the preceding twelve months and
the denominator of which fraction shall be three hundred sixty five (365),
increased to the next higher whole number of shares.
-2-
<PAGE>
(c) ON THE DATE OF EACH ANNUAL MEETING OF STOCKHOLDERS OF THE COMPANY,
COMMENCING WITH THE ANNUAL MEETING OF STOCKHOLDERS OCCURRING IN 1999,
EACH PERSON WHO IS AT THAT MEETING ELECTED BY THE STOCKHOLDERS TO SERVE
AS A NON-EMPLOYEE DIRECTOR AUTOMATICALLY SHALL BE GRANTED AN OPTION TO
PURCHASE FIFTEEN THOUSAND (15,000) SHARES OF COMMON STOCK OF THE
COMPANY ON THE TERMS AND CONDITIONS SET FORTH HEREIN (EACH, AN
"ELECTION GRANT")[; PROVIDED, THAT IF A NON-EMPLOYEE DIRECTOR RECEIVING
AN AWARD PURSUANT TO THIS SECTION 5(c) HAS NOT SERVED FOR TWELVE MONTHS
PRIOR TO THE DATE OF SUCH ANNUAL MEETING, THEN THE NUMBER OF SHARES
SUBJECT TO THAT NON-EMPLOYEE DIRECTOR'S ELECTION GRANT SHALL BE REDUCED
BY AN AMOUNT (THE "REDUCTION AMOUNT") EQUAL TO FIVE THOUSAND (5,000)
MULTIPLIED BY A FRACTION, THE NUMERATOR OF WHICH FRACTION SHALL BE
EQUAL TO THE NUMBER OF DAYS ON WHICH THE INDIVIDUAL WAS NOT AN
NON-EMPLOYEE DIRECTOR DURING THE PRECEDING TWELVE MONTHS AND THE
DENOMINATOR OF WHICH FRACTION SHALL BE THREE HUNDRED SIXTY FIVE (365),
INCREASED TO THE NEXT HIGHER WHOLE NUMBER OF SHARES.]6. OPTION
PROVISIONS
Each option shall contain the following terms and conditions:
(a) The term of each option commences on the date it is
granted and, unless sooner terminated as set forth herein, expires on the date
("Expiration Date") then (10) years from the date of grant. If the optionee's
service as a Director or as an employee of or consultant to the Company or any
Affiliate of the Company terminates for any reason or for no reason, the option
shall terminate on the earlier of the Expiration Date or the date three (3)
months following the date of termination of service; PROVIDED, HOWEVER, that if
such termination of service is due to the optionee's death, the option shall
terminate on the earlier of the Expiration Date or twelve (12) months following
the date of the optionee's death. In any and all circumstances, an option may be
exercised following termination of the optionee's service as a Director of the
Company only as to that number of shares as to which it was exercisable on the
date of termination of such service under the provisions of subparagraph 6(e).
(b) The exercise price of each option shall be one hundred
percent (100%) of the fair market value of the stock subject to such option on
the date such option is granted.
(c) The optionee may elect to make payment of the exercise
price under one of the following alternatives:
-3-
<PAGE>
(i) Payment of the exercise price per share in cash
at the time of exercise; or
(ii) Provided that at the time of the exercise the
Company's common stock is publicly traded and quoted regularly in the Wall
Street Journal, payment by delivery of shares of common stock of the Company
already owned by the optionee, held for the period required to avoid a charge to
the Company's reported earnings, and owned free and clear of any liens, claims,
encumbrances or security interest, which common stock shall be valued at fair
market value on the date preceding the date of exercise; or
(iii) Payment by a combination of the methods of
payment specified in subparagraph 6(c)(i) and 6(c)(ii) above.
Notwithstanding the foregoing, this option may be exercised pursuant to
a program developed under Regulation T as promulgated by the Federal Reserve
Board which results in the receipt of cash (or check) by the Company prior to
the issuance of shares of the Company's common stock.
(d) An option shall not be transferable except by will or by
the laws of descent and distribution, and shall be exercisable during the
lifetime of the person to whom the option is granted only by such person or by
his or her guardian or legal representative, unless otherwise specified in the
option, in which case the option may be transferred upon such terms and
conditions as are set forth in the option, as the Board or the Committee shall
determine in its discretion, including (without limitation) pursuant to a
"domestic relations order." Notwithstanding the foregoing, the person to whom an
option is granted may, by delivering written notice to the Company, in a form
satisfactory to the Company, designate a third party who, in the event of the
death of the optionee, shall thereafter be entitled to exercise the option.
(e) Options granted pursuant to this Plan shall vest and
become exercisable as follows:
(i) Each Initial Grant and each Annual Grant shall be
fully vested and exercisable
at all times; and
(ii) Each Election Grant shall vest and become
exercisable according to the following schedule, provided the Non-Employee
Director is serving as a director on each of the vesting dates set forth
below:
-4-
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF SHARES SUBJECT TO OPTION
VESTING DATE THAT BECOME VESTED AND EXERCISABLE
<S> <C>
Date of grant 5,000, [minus the Reduction Amount (if any)]
Date of the first Annual Meeting following the date of
grant 5,000
Date of the second Annual Meeting following the date of
grant 5,000
</TABLE>
(f) The Company may require any optionee, or any person to
whom an option is transferred under subparagraph 6(d), as a condition of
exercising any such option: (i) to give written assurances satisfactory to the
Company as to the optionee's knowledge and experience in financial and business
matters; and (ii) to give written assurances satisfactory to the Company stating
that such person is acquiring the stock subject to the option for such person's
own account and not with any present intention of selling or otherwise
distributing the stock. These requirements, and any assurances given pursuant to
such requirements, shall be inoperative if (i) the issuance of the shares upon
the exercise of the option has been registered under a then-currently-effective
registration statement under the Securities Act of 1933, as amended (the
"Securities Act"), or (ii), as to any particular requirement, a determination is
made by counsel for the Company that such requirement need not be met in the
circumstances under the then-applicable securities laws.
(g) Notwithstanding anything to the contrary contained herein,
an option may not be exercised unless the shares issuable upon exercise of such
option are then registered under the Securities Act or, if such shares are not
then so registered, the Company has determined that such exercise and issuance
would be exempt from the registration requirements of the Securities Act.
7. COVENANTS OF THE COMPANY
(a) During the terms of the options granted under the Plan, the Company
shall keep available at all times the number of shares of stock required to
satisfy such options.
(b) The Company shall seek to obtain from each regulatory commission or
agency having jurisdiction over the Plan such authority as may be required to
issue and sell shares of stock upon exercise of the options granted under the
Plan; PROVIDED, HOWEVER, that this undertaking shall not require the Company to
register under the
-5-
<PAGE>
Securities Act either the Plan, any option granted under the Plan, or any stock
issued or issuable pursuant to any such option. If the Company is unable to
obtain from any such regulatory commission or agency the authority which counsel
for the Company deems necessary for the lawful issuance and sale of stock under
the Plan, the Company shall be relieved from any liability for failure to issue
and sell stock upon exercise of such options.
8. USE OF PROCEEDS FROM STOCK
Proceeds from the sale of stock pursuant to options granted under the
Plan shall constitute general funds of the Company.
9. MISCELLANEOUS
(a) Neither an optionee nor any person to whom an option is transferred
under subparagraph 6(d) shall be deemed to be the holder of, or to have any of
the rights of a holder with respect to, any shares subject to such option unless
and until such person has satisfied all requirements for exercise of the option
pursuant to its terms.
(b) Nothing in the Plan or in any instrument executed pursuant thereto
shall confer upon any Non-Employee Director any right to continue in the service
of the Company or any Affiliate or shall impair any right of the Company, its
Board or stockholders or any Affiliate to terminate the service of any
Non-Employee Director.
(c) No Non-Employee Director, individually or as a member of a group,
and no beneficiary or other person claiming under or through such Non-Employee
Director, shall have any right, title or interest in or to any option reserved
for the purposes of the Plan except as to such shares of common stock, if any,
as shall have been reserved for such Non-Employee Director pursuant to any
previous option grant.
(d) In connection with each option made pursuant to the Plan, it shall
be a condition precedent to the Company's obligation to issue or transfer shares
to a Non-Employee Director, or to evidence the removal of any restrictions on
transfer, that such Non-Employee Director make arrangements satisfactory to the
Company to insure that the amount of any federal or other withholding tax
required to be withheld with respect to such sale or transfer, or such removal,
is made available to the Company for timely payment of such tax.
-6-
<PAGE>
10. ADJUSTMENTS UPON CHANGES IN STOCK
(a) If any change is made in the stock subject to the Plan, or subject
to any option granted under the Plan, without the receipt of consideration by
the Company (through merger, consolidation, reorganization, recapitalization,
stock dividend, dividend in property other than cash, stock split, liquidating
dividend, combination of shares, exchange of shares, change in corporate
structure or other transaction not involving the receipt of consideration by the
Company), the Plan will be appropriately adjusted in the class(es) and maximum
number of shares subject to the Plan, and the outstanding options will be
appropriately adjusted in the class(es) and number of shares and price per share
of stock subject to such outstanding options. Such adjustments shall be made by
the Board or the Committee, the determination of which shall be final, binding
and conclusive. (The conversion of any convertible securities of the Company
shall not be treated as a "transaction not involving the receipt of
consideration by the Company").
(b) In the event of: (1) a merger or consolidation in which the Company
is not the surviving corporation; (2) a reverse merger in which the Company is
the surviving corporation but the shares of the Company's common stock
outstanding immediately preceding the merger are converted by virtue of the
merger into other property, whether in the form of securities, cash or
otherwise; or (3) any other capital reorganization in which more than fifty
percent (50%) of the shares of the Company entitled to vote are exchanged, the
vesting of options outstanding under the Plan shall accelerate such that each
option may be exercised with respect to 100% of the shares, and the options
shall terminate if not exercised prior to such event.
11. AMENDMENT OF THE PLAN
(a) The Board at any time, and from time to time, may amend the Plan.
Except as provided in paragraph 10 relating to adjustments upon changes in
stock, no amendment shall be effective unless approved by the stockholders of
the Company to the extent stockholder approval is necessary for the Plan to
satisfy any Nasdaq or securities exchange listing requirements.
(b) Rights and obligations under any option granted before any
amendment of the Plan shall not be altered or impaired by such amendment unless
(i) the Company requests the consent of the person to whom the option was
granted and (ii) such person consents in writing.
-7-
<PAGE>
12. TERMINATION OR SUSPENSION OF THE PLAN
(a) The Board may suspend or terminate the Plan at any time. Unless
sooner terminated, the Plan shall terminate on the tenth (10th) anniversary of
its adoption by the Board. No options may be granted under the Plan while the
Plan is suspended or after it is terminated.
(b) Rights and obligations under any option granted while the Plan is
in effect shall not be altered or impaired by suspension or termination of the
Plan, except with the consent of the person to whom the option was granted.
(c) The Plan shall terminate upon the occurrence of any of the events
described in Section 10(b) above.
13. EFFECTIVE DATE OF PLAN; CONDITIONS OF EXERCISE
(a) The Plan shall become effective upon adoption by the Board of
Directors, subject to the condition subsequent that the Plan is approved by the
stockholders of the Company.
(b) No option granted under the Plan shall be exercised or exercisable
unless and until the condition of subparagraph 13(a) above has been met.
-8-
<PAGE>
EXHIBIT G
9
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 37,865,222
<SECURITIES> 2,098,645
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 41,546,203
<PP&E> 84,872,298
<DEPRECIATION> (30,195,857)
<TOTAL-ASSETS> 99,285,367
<CURRENT-LIABILITIES> 34,195,842
<BONDS> 0
0
0
<COMMON> 62,531,295
<OTHER-SE> (85,604,501)
<TOTAL-LIABILITY-AND-EQUITY> 99,285,367
<SALES> 0
<TOTAL-REVENUES> 15,791,424
<CGS> 0
<TOTAL-COSTS> 17,680,020
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,850,614
<INCOME-PRETAX> (4,534,458)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,534,458)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,534,458)
<EPS-PRIMARY> (.30)
<EPS-DILUTED> (.30)
</TABLE>
