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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 JUNE 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-22555
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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, 98004
WASHINGTON (Zip Code)
(Address of principal executive offices)
(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 JULY 31, 1999
Common Stock, $0.001 par value 20,008,412
</TABLE>
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<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 June 30, 1999 (unaudited) and
December 31, 1998......................................................................... 3
Consolidated Statements of Operations for the six and three month periods ended June 30,
1999 (unaudited) and 1998 (unaudited)..................................................... 4
Consolidated Statement of Stockholders' Equity (Deficit) for the six month period ended
June 30, 1999 (unaudited)................................................................. 5
Consolidated Statements of Cash Flows for the six month periods ended
June 30, 1999 (unaudited) and 1998 (unaudited)............................................ 6
Notes to Consolidated Financial Statements for the six month periods ended June 30, 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................................ 30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................................................................... 31
Item 2. Changes in Securities and Use of Proceeds................................................. 31
Item 4. Submission of Matters to a Vote of Securities Holders..................................... 32
Item 5. Other Information......................................................................... 33
Item 6. Exhibits and Reports on Form 8-K.......................................................... 33
SIGNATURES............................................................................................ 35
EXHIBIT INDEX......................................................................................... 36
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
COINSTAR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
-------------- --------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents...................................... $ 117,249,157 $ 37,688,205
Short-term investments available for sale...................... 5,821,027 4,182,315
Prepaid expenses and other current assets...................... 1,524,371 1,043,010
-------------- --------------
Total current assets........................................... 124,594,555 42,913,530
PROPERTY AND EQUIPMENT:
Coinstar units................................................. 85,853,734 73,191,704
Computers...................................................... 3,664,537 3,060,899
Office furniture and equipment................................. 1,244,357 1,191,221
Leased vehicles................................................ 2,133,243 1,637,647
Leasehold improvements......................................... 437,593 437,593
Coinstar components............................................ 9,547 94,865
-------------- --------------
93,343,012 79,613,929
Accumulated depreciation....................................... (34,449,571) (26,263,528)
-------------- --------------
58,893,441 53,350,401
OTHER ASSETS..................................................... 3,727,112 2,569,187
-------------- --------------
TOTAL............................................................ $ 187,215,108 $ 98,833,118
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable............................................... $ 4,724,386 $ 3,828,459
Accrued liabilities............................................ 32,657,797 26,987,334
Current portion of long-term debt and capital lease
obligations.................................................. 1,443,210 2,020,696
-------------- --------------
Total current liabilities...................................... 38,825,393 32,836,489
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS..................... 91,119,548 86,035,758
-------------- --------------
Total liabilities.............................................. 129,944,941 118,872,247
COMMITMENTS AND CONTINGENCIES (Notes 3 and 4)
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock................................................... 147,055,370 61,858,154
Contributed capital for warrants............................... 1,316,128 513,584
Accumulated other comprehensive (loss) income.................. (3,163) 3,171
Accumulated deficit............................................ (91,098,168) (82,414,038)
-------------- --------------
Total stockholders' equity (deficit)........................... 57,270,167 (20,039,129)
-------------- --------------
TOTAL............................................................ $ 187,215,108 $ 98,833,118
-------------- --------------
-------------- --------------
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
COINSTAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTH PERIODS THREE MONTH PERIODS
ENDED JUNE 30, ENDED JUNE 30,
----------------------------- ----------------------------
1999 1998 1999 1998
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUE............................................. $ 34,049,135 $ 19,294,739 $ 18,257,710 $ 10,471,904
EXPENSES:
Direct operating.................................. 17,114,178 11,965,843 9,175,617 6,142,132
Regional sales and marketing...................... 2,331,045 1,770,696 1,012,901 853,800
Product research and development.................. 2,094,638 2,738,850 1,154,724 1,329,033
Selling, general, and administrative.............. 7,008,915 7,002,175 3,628,264 3,726,547
Depreciation and amortization..................... 8,682,334 5,933,123 4,579,586 3,119,846
------------- -------------- ------------- -------------
Loss from operations.............................. (3,181,975) (10,115,948) (1,293,382) (4,699,454)
OTHER INCOME (EXPENSE):
Interest income................................... 280,167 887,469 117,532 386,062
Interest expense.................................. (5,843,981) (5,231,691) (2,993,367) (2,660,634)
Other Income...................................... 61,659 102,884 19,542 63,776
------------- -------------- ------------- -------------
NET LOSS............................................ $ (8,684,130) $ (14,357,286) $ (4,149,675) $ (6,910,250)
------------- -------------- ------------- -------------
------------- -------------- ------------- -------------
Net loss per share, basic and diluted............. $ (.56) $ (.95) $ (.26) $ (.46)
------------- -------------- ------------- -------------
Weighted average shares outstanding, basic and
diluted......................................... 15,606,597 15,098,294 15,852,482 15,116,403
------------- -------------- ------------- -------------
------------- -------------- ------------- -------------
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
COINSTAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 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...................... 154,164 448,476 448,476
Exercise of stock warrants..................... 100,057 89,824 (89,834) (10)
Issuance of common stock, net of issuance costs
of $5,531,998................................ 4,000,000 83,968,002 83,968,002
Issuance of common stock for acquisition of
assets....................................... 25,000 386,250 386,250
Issuance of warrants under revolving credit
facility..................................... 723,211 723,211
Issuance of warrants for acquisition of
assets....................................... 169,167 169,167
Comprehensive (loss)
Other comprehensive (loss)
Unrealized loss on short-term investments
available for sale......................... (4,046)
Unrealized (loss) on foreign currency
translation................................ (2,288)
Other comprehensive (loss)................... (6,334)
Net loss....................................... (8,684,130) (8,684,130)
-----------
Comprehensive (loss)........................... (8,690,464)
--------- ----------- ----------- ----------- ------------ -----------
BALANCE, June 30, 1999......................... 19,532,171 $147,055,370 $1,316,128 $ (3,163) ($91,098,168) $57,270,167
--------- ----------- ----------- ----------- ------------ -----------
--------- ----------- ----------- ----------- ------------ -----------
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
COINSTAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTH
PERIODS ENDED JUNE 30,
------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss.......................................................................... $ (8,684,130) $ (14,357,286)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization................................................... 8,682,332 5,933,122
Debt discount amortization...................................................... 5,669,866 4,970,055
Accrued investment income....................................................... 161,602 108,103
Non-cash stock-based compensation............................................... 36,625
Unrealized loss on cash equivalents............................................. (4,046)
Unrealized loss on foreign currency translation................................. (2,288)
CASH PROVIDED (USED) BY CHANGES IN OPERATING ASSETS AND LIABILITIES:
Prepaid expenses and other current assets....................................... (442,500) (165,709)
Other assets.................................................................... (267,225) 2,592
Accounts payable................................................................ 895,927 2,077,948
Accrued liabilities............................................................. 5,684,565 4,684,026
-------------- --------------
Net cash provided by operating activities....................................... $ 11,694,103 $ 3,289,476
INVESTING ACTIVITIES:
Purchase of short-term investments.............................................. $ (5,804,815) $ (20,607,391)
Sale of short-term investments.................................................. 4,004,469 35,300,692
Purchase of fixed assets........................................................ (13,539,228) (11,422,424)
Net proceeds from the sale of equipment......................................... 30,963 2,247
-------------- --------------
Net cash (used)/provided by investing activities................................ $ (15,308,611) $ 3,273,124
FINANCING ACTIVITIES:
Principal payments on long-term debt............................................ $ (947,561) $ (855,705)
Financing costs associated with long term credit facility....................... (598,121)
Proceeds from sale of common stock, net of issuance costs....................... 83,968,002
Proceeds from exercise of stock options and employee stock purchase plan........ 753,140 438,914
-------------- --------------
Net cash provided/(used) by financing activities................................ $ 83,175,460 $ (416,791)
-------------- --------------
INCREASE IN CASH AND CASH EQUIVALENTS............................................. 79,560,952 6,145,809
CASH AND CASH EQUIVALENTS:
Beginning of period............................................................. $ 37,688,205 $ 20,199,914
-------------- --------------
End of period................................................................... $ 117,249,157 $ 26,345,723
-------------- --------------
-------------- --------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest........................................ $ 209,144 $ 268,583
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Purchase of vehicles financed by capital lease obligation....................... $ 571,937 $ 267,387
Cash less exercise of warrants.................................................. 165,220 --
Purchase of assets with warrants................................................ 169,167 --
Issuance of warrants under revolving credit facility............................ 723,211 --
Purchase of assets with common stock............................................ 386,250 --
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
COINSTAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTH PERIODS ENDED JUNE 30, 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 six and three month
periods ended June 30, 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., which was formed for the purpose of exploring the expansion of the
Coinstar network internationally and Myshoppinglist.com, Inc, which was formed
for the purpose of exploring the development and deployment of electronic
commerce technology.
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, as amended by SFAS 137, is effective for
fiscal years beginning after June 15, 2000.
NOTE 2: LETTERS OF CREDIT
As of June 30, 1999 we had available secured irrevocable letters of credit
with two banks which totaled $7.6 million. These letters of credit, which expire
through August 1999, are available to collateralize certain obligations to third
parties. As of June 30, 1999, no amounts were outstanding under these letters of
credit agreements.
NOTE 3: LEGAL PROCEEDINGS
We are currently involved in pending litigation with one of our competitors,
CoinBank Automated Systems Inc. On June 18, 1997, we filed in the United States
District Court, Northern District of California against CoinBank a complaint for
infringement of one of our United States patents. On June 27, 1997, CoinBank
answered this patent infringement claim and counterclaimed for declaration of
non-infringement, invalidity and unenforceability, and filed a claim for breach
of warranty against Scan Coin. The claim against Scan Coin was dismissed by
agreement of the parties. On January 26, 1998, the court held that certain of
CoinBank's devices did not infringe our patent, but there remained a question of
fact as to the infringement by other devices. On October 27, 1998, we added our
then most recently issued
7
<PAGE>
COINSTAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3: LEGAL PROCEEDINGS (CONTINUED)
patent to the pending litigation by agreement of the parties. CoinBank has filed
a motion for summary judgment, dated June 4, 1999, contending that one of our
patents that is the subject of the lawsuit is invalid, or alternatively that
CoinBank machines do not infringe the patent. In addition, we have commenced
settlement discussions with CoinBank. We cannot assure you that we will prevail
in this action or on any claim that may be filed by CoinBank against us, or that
as a result of this action, our patents will not be limited in scope or found to
be invalid.
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.
We believe that Scan Coin has no claim on any of our intellectual property. 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 agreement. Scan
Coin also reiterated its claims to our intellectual property and stated that it
will seek full compensation for all damages suffered. On May 28, 1999, we
received a letter indicating that Scan Coin intended to commence arbitration
proceedings without delay. Scan Coin stated that it would seek compensation for
its financial losses and seek a declaratory judgment regarding ownership of
certain intellectual property. On June 3, 1999, we responded to Scan Coin's
letter in an effort to settle this dispute amicably. We will continue to attempt
to settle this dispute amicably with Scan Coin. However, even if it is
determined that our use of the new coin-counting technology violates the
agreement, 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.
("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, prohibit us from paying dividends without the Lenders' consent. In
addition, amounts available under the term loans will increase to $7.5 million
per Lender after we have satisfied certain debt ratios. Upon the closing of this
offering, the Credit Agreement will terminate according to its terms. We intend
to amend the Credit Agreement or enter into a new credit facility but we cannot
assure you that we will be able to do so on reasonable terms or at all.
8
<PAGE>
COINSTAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5: REVOLVING CREDIT FACILITY (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 $12.177 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.
On June 7, 1999 we amended the Credit Agreement with the Lenders to allow
the Company or its domestic subsidiaries to develop electronic commerce or
internet related businesses subject to certain aggregate limits. On June 14,
1999 the Lenders issued a Limited Waiver of certain mandatory prepayments and
reduction of the revolving commitment of the Credit Agreement upon the issuance
of equity by the Company. The Limited Waiver requires the Company to maintain
minimum deposits with Imperial Bank for the term of the Credit Agreement.
NOTE 6: ISSUANCE OF COMMON STOCK
In June 1999, we completed a public offering of 4,000,000 shares of common
stock at a purchase price of $22.375 per share for net proceeds of approximately
of $84.0 million (after deducting applicable issuance costs and expenses.) The
net proceeds received by the Company will be used to expand the network in the
United States, to support planned expansion internationally, to develop and
market new products and product enhancements, for working capital and general
corporate purposes.
NOTE 7: NONCASH ASSET ACQUISITION
On March 3, 1999 we acquired from Compucook, Inc. assets consisting of
Internet domain names, software, fixed assets, contracts, and web site content.
In consideration of 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 from Nu World Marketing Limit Inc. assets consisting of
Internet domain names, fixed assets, contracts, and web site content. As
consideration for this purchase, we issued 25,000 shares of common stock.
NOTE 8: SUBSEQUENT EVENT
In July 1999 the underwriters exercised their option to purchase an
additional 466,400 shares of common stock at a purchase price of $22.375 per
share for net proceeds of approximately of $9.8 million (after deducting
applicable issuance costs and expenses.)
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 AND
THE QUARTERLY REPORT ON FORM 10Q FOR THE THREE MONTH ENDED MARCH 31, 1999. 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 currently derive substantially all our revenue from coin processing
services generated by our installed base of Coinstar units located in
supermarket chains in 38 states across the United States. We generate revenue
based on a processing fee charged on the total dollar amount of coins processed
in a transaction. In December 1998, we changed the 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 trial 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 trials 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 fourteen 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 European countries. We
have also established a wholly-owed subsidiary, MyShoppinglist.com, Inc., in
December 1998 to explore the development and deployment of electronic commerce
technology, including Coinstar Shopper.
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
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
10
<PAGE>
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 improvements 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, 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 $91.1
million as of June 30, 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 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 partners and the
resulting revenues, and the continued market acceptance of our service by
consumers and retail 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 expenses as a percent of revenue for
the periods ended:
<TABLE>
<CAPTION>
SIX MONTH PERIODS THREE MONTH
ENDED PERIODS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue............................................... 100.0% 100.0% 100.0% 100.0%
Expenses:
Direct operating...................................... 50.3 62.0 50.3 58.7
Regional sales and marketing.......................... 6.8 9.2 5.5 8.2
Product research and development...................... 6.2 14.2 6.3 12.7
Selling, general, and administrative.................. 20.6 36.3 19.9 35.6
Depreciation and amortization......................... 25.5 30.7 25.1 29.8
------- ------- ------- -------
Loss from operations.................................. (9.3)% (52.4)% (7.1)% (44.9)%
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
THREE MONTH PERIODS ENDED JUNE 30, 1999 AND 1998
REVENUE
Revenue increased by $7.8 million (74.3%) to $18.3 million for the quarter
ended June 30, 1999 from $10.5 million in the comparable 1998 period. The
installed base of Coinstar units increased 1,756 units (43.6%) to 5,788 as of
June 30, 1999 from 4,032 units in the comparable 1998 period. The dollar value
of coins processed increased $65.9 million (47.3%) to $205.1 million for the
quarter ended June 30, 1999 from $139.2 million in the comparable 1998 period.
The increase in revenue was due primarily to (1) the
11
<PAGE>
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.
DIRECT OPERATING EXPENSES
Direct operating expenses increased $3.0 million (49.4%) to $9.2 million for
the quarter ended June 30, 1999 from $6.1million 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 twenty-five new regional markets since June 1998.
Direct operating expenses as a percentage of revenue decreased to 50.3% in the
quarter ended June 30, 1999 from 58.7% in the comparable 1998 period. The
decrease in direct operating expenses as a percentage of revenue was the result
primarily 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 $159,000 (18.6%) to $1.0
million for the quarter ended June 30, 1999 from $854,000 in the comparable 1998
period. The increase in regional marketing expense was the result of an
increased level of television advertising in selected markets. Regional sales
and marketing as a percentage of revenue decreased to 5.5% in the quarter ended
June 30, 1999 from 8.2% in the comparable 1998 period. The decrease in regional
sales and marketing as a percentage of revenue was the result primarily 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 $174,000 (13.1%) to $1.1
million for the quarter ended June 30, 1999 from $1.3 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
offset by an increase in expenditures associated with the development in
e-services. Product research and development as a percentage of revenue
decreased to 6.3% in the quarter ended June 30, 1999 from 12.7% 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 decreased $98,000 (2.6%) to $3.6
million for the quarter ended June 30, 1999 from $3.7 million in the comparable
1998 period. Selling, general and administrative as a percentage of revenue
decreased to 19.9% in the quarter ended June 30, 1999 from 35.6% in the
comparable 1998 period. The decrease in selling, general, and administrative as
a percentage of revenue was the result primarily of (1) increasing volumes
processed by the network combined with (2) the realization of improved operating
efficiencies.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased $1.5 million (46.8%) to $4.6
million for the quarter ended June 30, 1999 from $3.1 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
12
<PAGE>
a percentage of revenue decreased to 25.1% in the quarter ended June 30, 1999
from 29.8% in the comparable 1998 period. During the quarter, we wrote off
certain obsolete equipment resulting in a one time charge of $14,000 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 $20,000 for the quarter ended June 30, 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 $118,000 for the quarter ended June 30, 1999
from $386,000 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 $3.0 million for the quarter ended June 30,
1999 from $2.7 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 $2.8 million (40.0%) to $4.1 million for the quarter
ended June 30, 1999 from $6.9 million in the comparable 1998 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.
SIX MONTH PERIODS ENDED JUNE 30, 1999 AND 1998
REVENUE
Revenue increased by $14.8 million (76.5%) to $34.0 million for the six
months ended June 30, 1999 from $19.3 million in the comparable 1998 period. The
installed base of Coinstar units increased 1,756 units (43.6%) to 5,788 as of
June 30, 1999 from 4,032 units in the comparable 1998 period. The dollar value
of coins processed increased $125.9 million (49.1%) to $382.4 million during the
1999 period from $256.5 million in the comparable 1998 period. The increase was
primarily 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.
DIRECT OPERATING EXPENSES
Direct operating expenses increased $5.1 million (43.0%) to $17.1 million
for the six months ended June 30, 1999 from $12.0 million in the comparable 1998
period. The increase in direct operating expenses
13
<PAGE>
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 sixteen new
regional markets. Direct operating expenses as a percentage of revenue decreased
to 50.3% in the six months ended June 30, 1999 from 62.0% in the comparable 1998
period. The decrease in direct operating expenses as a percentage of revenue was
the result primarily 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 $560,000 (31.7%) to $2.3
million for the six months ended June 30, 1999 from $1.8 million in the
comparable 1998 period. The increase in regional marketing expense was the
result of an increased level of television advertising in selected markets.
Regional sales and marketing as a percentage of revenue decreased to 6.8% in the
six months ended June 30, 1999 from 9.2% in the comparable 1998 period. The
decrease in regional sales and marketing as a percentage of revenue was the
result primarily 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 $640,000 (23.5%) to $2.1
million for the six months ended June 30, 1999 from $2.7 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 offset by an increase in expenditures associated with the
development in e-services. Product research and development as a percentage of
revenue decreased to 6.2% in the six months period ended June 30, 1999 from
14.2% 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 remained unchanged at $7.0 million for
the six months ended June 30, 1999 and 1998. Selling, general and administrative
as a percentage of revenue decreased to 20.6% in the six months ended June 30,
1999 from 36.3% in the comparable 1998 period. The decrease in selling, general,
and administrative as a percentage of revenue was the result primarily of (1)
increasing volumes processed by the network combined with (2) the realization of
improved operating efficiencies.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased $2.7 million (46.3%) to $8.7
million for the six months ended June 30, 1999 from $5.9 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 25.5% in the six months
period ended June 30, 1999 from 30.7% in the comparable 1998 period. During the
six month period, we wrote off certain obsolete equipment resulting in a one
time charge of $82,000. 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.
14
<PAGE>
OTHER INCOME AND EXPENSE
We generated other income of $62,000 for the six months ended June 30, 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 $280,000 for the six months ended June 30, 1999
from $887,000 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 $5.8 million for the six months ended June 30,
1999 from $5.2 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 $5.7 million (39.6%) to $8.7 million for the six months
ended June 30, 1999 from $14.4 million in the comparable 1998 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 June 30, 1999 we had cash and cash equivalents of $117.2 million,
short-term investments of $5.8 million and working capital of $85.8 million.
Cash and cash equivalents include $25.6 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 $11.7 million for
the six months ended June 30, 1999 compared to net cash provided by operating
activities of $3.3 million for the comparable period in 1998. Improvement in
cash provided by operating activities was principally the result of a $5.7
million improvement in our net loss.
Net cash used by investing activities for the six months ended June 30, 1999
was $15.3 million compared to $3.2 million provided in the comparable period in
1998. Capital expenditures during the six months ended June 30, 1999 were $13.5
million and in the comparable 1998 period were $11.4 million. The majority of
capital expenditures consist of the purchase of Coinstar units.
Net cash provided by financing activities for the six month ended June 30,
1999 was $83.2 million which principally was the result of the issuance of (1)
issuance of 4.0 million additional shares of common stock at a net issuance cost
of $84.0 million, and (2) proceeds from the exercise of stock options and
employee stock purchases, offset by (3) repayment of long term debt and the
payment of fees associated with the closing of the long term Credit Agreement.
Net cash used by financing activities for the comparable 1998 period was
$417,000 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 June 30, 1999 we had available secured irrevocable letters of credit
with two banks which totaled $7.6 million. These letters of credit, which expire
through August 1999, are available to collateralize certain
15
<PAGE>
obligations to third parties. As of June 30, 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.
("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, prohibit us from paying dividends without the Lenders' consent. In
addition, amounts available under the term loans will increase to $7.5 million
per Lender after we have satisfied certain debt ratios. Upon the closing of this
offering, the Credit Agreement will terminate according to its terms. We intend
to amend the Credit Agreement or enter into a new credit facility but we cannot
assure you that we will be able to do so on reasonable terms or at all.
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 $12.177 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.
On March 3, 1999 we acquired from Compucook, Inc. assets consisting of
Internet domain names, software, fixed assets, contracts, and web site content.
In consideration of 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 from Nu World Marketing Limit Inc. assets consisting of
Internet domain names, fixed assets, contracts, and web site content. As
consideration for this purchase, we issued 25,000 shares of common stock.
On June 7, 1999 we amended the Credit Agreement with the Lenders to allow
the Company or its domestic subsidiaries to develop electronic commerce or
internet related businesses subject to certain aggregate limits. On June 14,
1999 the Lenders issued a Limited Waiver of certain mandatory prepayments and
reduction of the revolving commitment of the Credit Agreement upon the issuance
of equity by the Company. The Limited Waiver requires the Company to maintain
minimum deposits with Imperial Bank for the term of the Credit Agreement.
As of June 30, 1999 we also had outstanding $91.3 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 in
transactions with affiliates, incur additional indebtedness, effect asset
dispositions, or merge or sell substantially all our assets.
16
<PAGE>
In July 1999 the underwriters exercised their option to purchase an
additional 466,400 shares of common stock at a purchase price of $22.375 per
share for net proceeds of approximately of $9.8 million (after deducting
applicable issuance costs and expenses.)
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; to fund the pilot deployment of Coinstar units
internationally for at least the next twelve months; and to fund the development
and marketing of new products and enhancements. 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 MONTH PERIODS ENDED
--------------------------------------------------------------------------------------
JUNE 30, MAR. 31, DEC. 31, SEP. 30, JUNE 30, MAR. 31, DEC. 31, SEP. 30,
1999 1999 1998 1998 1998 1998 1997 1997
--------- --------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT UNIT AND PER UNIT DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue................................... $ 18,258 $ 15,791 $ 14,802 $ 13,576 $ 10,472 $ 8,823 $ 7,957 $ 7,762
Expenses:
Direct operating.......................... 9,176 7,939 7,458 7,141 6,142 5,823 5,208 5,276
Regional sales and marketing.............. 1,012 1,318 1,077 930 854 917 689 798
Product research and development.......... 1,155 940 1,138 867 1,329 1,410 1,644 1,637
Selling, general and administrative....... 3,628 3,381 3,579 3,531 3,726 3,276 3,252 2,669
Depreciation and amortization............. 4,580 4,103 3,669 3,635 3,120 2,813 2,539 2,297
Loss from operations...................... $ (1,293) $ (1,890) $ (2,119) $ (2,528) $ (4,699) $ (5,416) $ (5,375) $ (4,915)
OTHER DATA:
Number of new Coinstar units installed
during the period....................... 547 428 376 405 501 327 469 400
Installed base of Coinstar units at end of
period.................................. 5,788 5,241 4,813 4,437 4,032 3,531 3,204 2,735
Average age of network for the period
(months)................................ 20.0 19.2 17.5 15.8 14.8 13.4 11.7 10.6
Number of regional markets................ 74 64 58 57 49 42 40 35
Dollar value of coins processed........... $ 205,143 $ 177,248 $ 186,166 $ 180,600 $ 139,227 $ 117,298 $ 105,692 $ 103,442
Direct contribution(1).................... $ 9,082 $ 7,852 $ 7,344 $ 6,435 $ 4,330 $ 3,000 $ 2,749 $ 2,486
EBITDA(5)................................. $ 3,287 $ 2,213 $ 1,550 $ 1,107 $ (1,579) $ (2,603) $ (2,836) $ (2,618)
Annualized revenue per average installed
unit(2)................................. $ 13,343 $ 12,721 $ 12,937 $ 12,703 $ 11,048 $ 10,597 $ 10,907 $ 12,284
Annualized direct contribution per average
installed unit(1)(2).................... $ 6,637 $ 6,331 $ 6,405 $ 6,021 $ 4,568 $ 3,601 $ 3,768 $ 3,935
International development costs(3)........ $ 406.3 $ 275 $ 369 $ 116 $ 241 $ 28 -- --
Internet development costs(4)............. $ 312.8 $ 64.4 -- -- -- -- -- --
</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
17
<PAGE>
performance under GAAP and should not be considered in isolation or an
alternative to gross margin, income (loss) from operations, net income
(loss), or any other measure of performance under GAAP.
(2) Based on actual quarterly results annualized divided by the monthly averages
of units in operation over the applicable period.
(3) International development costs represent the costs incurred by Coinstar
International related to the exploration of 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 ("SOP 98-5").
(4) Internet development costs represent the costs incurred by Coinstar Inc
related to the exploration of e-services product. All costs related to the
internet development (such as market research and travel) are expensed as
incurred in accordance with the American Institute of Certified Public SOP
98-5.
(5) 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, as amended by SFAS 137, is effective for
fiscal years beginning after June 15, 2000.
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
18
<PAGE>
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 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 will
retest our systems during the third quarter of 1999 to reconfirm our year 2000
compliance to ensure no additional year 2000 issues have been introduced since
our original testing in 1998.
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 have completed our year 2000 contingency planning during the second
quarter of 1999. This planning involved 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. Our contingency plans will continue to be
reviewed and updated as the yearend approaches and further information on
potential problem scenarios become available.
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RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE MAKING AN
INVESTMENT DECISION. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE
ONLY ONES FACING OUR COMPANY. ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY
KNOWN TO US OR THAT WE CURRENTLY DEEM IMMATERIAL ALSO MAY IMPAIR OUR BUSINESS
OPERATIONS. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS COULD BE
HARMED. IN SUCH CASE, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE AND
YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT.
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 June 30, 1999 we had an accumulated deficit of $91.1 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 over 95% of our current installed base in
1996, 1997, 1998 and the first six 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 revenue 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.
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 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,
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- 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 PARTNERS, WHICH ARE PRIMARILY
SUPERMARKET CHAINS.
Market acceptance of the Coinstar unit depends on the willingness of
potential retail partners to agree to installation and retention of Coinstar
units in their stores, primarily supermarkets. We believe that market acceptance
by potential retail 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 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 partners,
providing for our exclusive right to provide coin processing services in retail
locations. These contracts generally have terms ranging from one to three years
and are generally terminable by either party with advance notice of at least 90
days. Coinstar units in service in one supermarket chain, The Kroger Co.,
accounted for approximately 37.6% of our revenue in 1998. In the quarter ended
June 30, 1999, this supermarket chain accounted for approximately 33.9% of our
revenue. The termination of any one or more of our contracts with our retail
partners could seriously harm our business, financial condition, results of
operations and ability to achieve sufficient cash flow to service our
indebtedness.
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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 revenue difficult to forecast. Customer
utilization is affected by the timing and success of promotions by us and our
retail 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 partners, the
variable length of trial periods of our retail 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 June 30, 1999 we had outstanding indebtedness of $92.6 million, which
included $91.3 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 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
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- 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.
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 through value-added services and promotions.
One example is 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
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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.
We believe that Scan Coin has no claim on any of our intellectual property. 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 agreement. Scan
Coin also reiterated its claims to our intellectual property and stated that it
will seek full compensation for all damages suffered. On May 28, 1999, we
received a letter indicating that Scan Coin intended to commence arbitration
proceedings without delay. Scan Coin stated that it would seek compensation for
its financial losses and seek a declaratory judgment regarding ownership of
certain intellectual property. On June 3, 1999, we responded to Scan Coin's
letter in an effort to settle this dispute amicably. We will continue to attempt
to settle this dispute amicably with Scan Coin. However, even if it is
determined that our use of the new coin-counting technology violates the
agreement, 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.
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 will have enough parts
to meet our estimated 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
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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 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.
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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 five 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.
CoinBank has filed a motion for summary judgment, dated June 4, 1999, contending
that one of our patents that is the subject of the lawsuit is invalid, or
alternatively that CoinBank machines do not infringe the patent. In addition, we
have commenced settlement discussions with CoinBank. 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 current or pending U.S. and/or foreign patents, copyrights or trade
secrets or that such claims will not be successful. In addition, defending our
company and our retail 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.
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.
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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.
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
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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 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 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,
28
<PAGE>
- 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 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 date field. These date code fields will need to
accept four digit entries to distinguish 21st century dates from 20th century
dates. Until the date fields are updated, the systems and programs could fail or
give erroneous results when referencing dates following December 31, 1999. Such
failure or errors could occur prior to the actual change in century. 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 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. We do not believe our computer systems or
applications currently in use nor the systems of our key retail partners,
suppliers, and service providers will be harmed by the upcoming change in
century. Failure or malfunction of our software or that of our retail 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.
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.
29
<PAGE>
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
JUNE 30, 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.......... $ 5,805
Average interest rate......... 5.16%
LIABILITIES
Capital Lease obligations....... $ 1,948 $ 748 $ 327 $ 48
Average interest rate......... 13.04% 9.6% 9.6% 9.6%
Long-term debt-fixed............ $ 94,273 $ 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>
30
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We are currently involved in pending litigation with one of our competitors,
CoinBank Automated Systems Inc. On June 18, 1997, we filed in the United States
District Court, Northern District of California against CoinBank a complaint for
infringement of one of our United States patents. On June 27, 1997, CoinBank
answered this patent infringement claim and counterclaimed for declaration of
non-infringement, invalidity and unenforceability, and filed a claim for breach
of warranty against Scan Coin. The claim against Scan Coin was dismissed by
agreement of the parties. On January 26, 1998, the court held that certain of
CoinBank's devices did not infringe our patent, but there remained a question of
fact as to the infringement by other devices. On October 27, 1998, we added our
then most recently issued patent to the pending litigation by agreement of the
parties. CoinBank has filed a motion for summary judgment, dated June 4, 1999,
contending that one of our patents that is the subject of the lawsuit is
invalid, or alternatively that CoinBank machines do not infringe the patent. In
addition, we have commenced settlement discussions with CoinBank. We cannot
assure you that we will prevail in this action or on any claim that may be filed
by CoinBank against us, or that as a result of this action, our patents will not
be limited in scope or found to be invalid. See "Risk Factors--We may be unable
to adequately protect or enforce our patents and proprietary rights".
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, we sold 3,000,000 shares of common
stock for its own account, for an aggregate offering price of $31,500,000. We
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 $50,149 represented direct or indirect payments to an
affiliate of the Company. The net offering proceeds to us after total expenses
was $28,662,456.
During the second quarter of 1998, we began to disburse proceeds from the
initial public offering. To date, offering proceeds disbursed were approximately
$23.4 million for capital expenditures and working capital in connection with
the continued expansion of the Coinstar network; product research and
development to enhance the Coinstar unit and the coin processing network; and
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.
The effective date of our second registration statement, filed on Form S-3
under the Securities Act of 1993, as amended (Registration No.), was June 23,
1999 (the "Secondary Registration Statement"). The class of securities
registered was common stock. The offering commenced on June 23, 1999 and all
securities were sold in the offering. The managing underwriters were Goldman,
Sachs & Co, Donaldson, Lufkin & Jenrette, and Hambrecht & Quist.
Pursuant to the Registration Statement, we sold 4,466,400 shares of its
Common Stock for its own account, for an aggregate offering price of
$99,935,700. We incurred expenses of approximately $6,129,000, of which
$5,716,992 represented underwriting discounts and commissions and $412,008
represented estimated other expenses. The net offering proceeds to the issuer
after total expenses was $93,806,700. The net proceeds received by the Company
will be used to expand the network in the United States, to support
31
<PAGE>
planned expansion internationally, to develop and market new products and
product enhancements, for working capital and general corporate purposes. None
of the net offering proceeds were paid directly or indirectly to directors,
officers, or general partners of the Company or their associates, persons owning
10% or more of any class of the Company's securities, or affiliates of the
Company. The Company has not used any of the net offering proceeds for
construction of plant, building or facilities, purchases of real estate,
acquisition of other businesses, or repayment of indebtedness.
The 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.
On March 3, 1999 we acquired from Compucook, Inc. assets consisting of
Internet domain names, software, fixed assets, contracts, and web site content.
In consideration of 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 from Nu World Marketing Limit Inc. assets consisting of
Internet domain names, fixed assets, contracts, and web site content. As
consideration for this purchase, we issued 25,000 shares of common stock.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held its Annual Meeting of Stockholders on June 16, 1999. The
stockholders voted as follows:
The stockholders elected each of the two nominees for director to hold
office until the 2002 Annual Meeting of Stockholders. The elected directors and
the votes cast in favor and withheld for each are as follows:
<TABLE>
<CAPTION>
VOTES IN
FAVOR VOTES WITHHELD
------------- --------------
<S> <C> <C>
David E. Stitt................................................. 10,772,700 127,239
Ronald A. Weinstein............................................ 10,772,800 127,139
</TABLE>
Directors continuing in office are as follows:
<TABLE>
<CAPTION>
UNTIL ANNUAL MEETING
OF SHAREHOLDERS
-------------------------
<S> <C>
George H. Clute....................................................... 2000
Larry A. Hodges....................................................... 2000
Jens H. Molbak........................................................ 2001
William D. Ruckelshaus................................................ 2001
Robert O. Aders....................................................... 2001
</TABLE>
The shareholders approved the amendment to the Company's 1997 equity
incentive plan to increase the number of shares authorized for issuance under
the plan from 2,900,000 shares to 3,580,000 with 6,181,801 votes in favor,
762,836 votes against, and 5,909 abstentions.
The shareholders approved the amendment to the Company's employee stock
purchase plan to increase the number of shares authorized for issuance under the
plan from 200,000 to 400,000 shares with 6,737,515 votes in favor, 206,131 votes
against, and 6,900 abstentions.
The shareholders approved the 1997 non-employee director's stock option
plan, as amended and restated to increase the number of shares authorized for
issuance under the plan from 100,000 to 200,000 shares with 6,754,961 votes in
favor, 184,161 votes against, and 11,424 abstentions
The stockholders ratified the selection of Deloitte & Touche LLP as
independent auditors for the Company with 10,807,805 votes in favor, 88,376
votes against and 3,758 abstentions.
32
<PAGE>
ITEM 5. OTHER INFORMATION.
Pursuant to the Company's bylaws, stockholders who wish to bring matters or
propose nominees for the directors at the Company's 2000 Annual Meeting of
Shareholders must provide specific information to the Company between 60 and 90
days prior to the first anniversary of the 1999 Annual Meeting of Stockholders,
which was held on June 16, 1999 (unless such matters are included in the
Company's proxy statement pursuant to Rule 14a-8 under the Securities Exchange
Act of 1934, as amended).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
<TABLE>
<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.
4.17 June 7, 1999 amendment to Credit Agreement, dated February 19, 1999
4.18 June 14, 1999 limited waiver to Credit Agreement dated February 19, 1999
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.
</TABLE>
33
<PAGE>
<TABLE>
<C> <S>
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(5) Amendment of Registrant's 1997 Equity Incentive Plan.
10.15(5) Amendment of Registrant's 1997 Employee Stock Purchase Plan.
10.16(5) 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.
(5) Filed as Exhibit to the Registrant's Quarterly Report on Form 10-Q for the
Quarter Ended March 31, 1999.
+ Certain confidential portions deleted pursuant to Order Granting Application
Under the Securities Act of 1933, as amended, and Rule 406 thereunder
respecting Confidential Treatment.
(b) Reports on Form 8-K:
No reports filed on Form 8-K were filed during the quarter ended June 30, 1999.
Items 3, 4 and 5 are not applicable and have been omitted.
34
<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: August 16, 1999
By: /s/ KIRK A. COLLAMER
-----------------------------------------
Kirk A. Collamer
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
</TABLE>
35
<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.
4.17 June 7, 1999 amendment to Credit Agreement, dated February 19, 1999
4.18 June 14, 1999 limited waiver to Credit Agreement dated February 19, 1999
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(5) Amendment of Registrant's 1997 Equity Incentive Plan.
10.15(5) Amendment of Registrant's 1997 Employee Stock Purchase Plan.
10.16(5) 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.
36
<PAGE>
(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.
(5) Filed as Exhibit to the Registrant's Quarterly Report on Form 10-Q for the
Quarter Ended March 31, 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.
37
<PAGE>
FIRST AMENDMENT TO CREDIT AGREEMENT
This FIRST AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is
entered into as of June 7, 1999, by and among Coinstar, Inc., a Delaware
corporation ("Borrower"), the financial institutions named on the signature
pages hereof (each, a "Lender" and collectively the "Lenders"), and Imperial
Bank, as Agent for the Lenders ("Agent"), with reference to the following
facts:
A. Borrower, Agent, and Lenders are parties to that certain
Credit Agreement dated as of February 19, 1999 (the "Credit Agreement").
B. The parties desire to amend the Credit Agreement in accordance
with the terms of this Amendment.
NOW, THEREFORE, in consideration of the promises and the agreements,
provisions and covenants herein contained, the parties hereto agree as follows:
1. DEFINED TERMS. Capitalized terms not otherwise defined herein
shall have the same meanings as set forth in the Credit Agreement.
2. AMENDMENTS TO CREDIT AGREEMENT. The Credit Agreement is hereby
amended as follows:
(a) Section 6.2(z) is amended in its entirety to read as
follows:
(z) RESTRICTIONS ON TRANSFERS TO SUBSIDIARIES;
RESTRICTIONS ON EXPENDITURES FOR ELECTRONIC COMMERCE. Notwithstanding
any other provisions of this Agreement to the contrary, allow the total
aggregate amounts of any (a) consideration given in any Acquisition
from a Domestic Subsidiary or a Foreign Person pursuant to Section
6.2(k)(ii)(iv), (b) loans to, Investments in, or guaranties of the
obligations of any Domestic or Foreign Subsidiaries pursuant to Section
6.2(l)(v), (c) Contingent Liabilities in favor of any Domestic or
Foreign Subsidiaries pursuant to Section 6.2(m)(iv), (d) sales, leases,
or transfers of assets to Domestic or Foreign Subsidiaries pursuant to
Section 6.2(n)(iii), (e) amounts transferred to any Domestic or Foreign
Subsidiaries prior to the date of this Agreement as set forth on
Schedule 5.1(n), and (f) amounts expended or used by the Borrower or
any Subsidiary for the development of electronic commerce or
internet-related business, in each case individually or in the
aggregate, to exceed $5,000,000 at any time.
(b) EXHIBIT F is deleted and replaced with EXHIBIT F
hereto.
3. CONDITIONS TO EFFECTIVENESS.
This Amendment shall become effective as of June 7, 1999 (the
"Effective Date"), only upon:
(a) receipt by the Agent of the following (each of which
shall be in form and substance satisfactory to the Agent and its counsel):
-1-
<PAGE>
(i) counterparts of this Amendment duly executed
on behalf of the Borrower and the Lenders;
(ii) copies of resolutions of the Board of
Directors or other authorizing documents of the Borrower, authorizing the
execution and delivery of this Amendment; and
(iii) an affirmation of the Guaranty, duly
executed on behalf of the Guarantor.
4. REPRESENTATIONS AND WARRANTIES. In order to induce the Lenders
to enter into this Amendment, the Borrower represents and warrants to the
Lenders that the following statements are true, correct and complete as of the
effective date of this Amendment:
(a) CORPORATE POWER AND AUTHORITY. The Borrower has all
requisite corporate power and authority to enter into this Amendment and to
carry out the transactions contemplated by, and perform its obligations under,
the Credit Agreement as amended by this Amendment (the "Amended Agreement"). The
Certificate of Incorporation and Bylaws of the Borrower have not been amended
since the copies previously delivered to the Lenders.
(b) AUTHORIZATION OF AGREEMENTS. The execution and
delivery of this Amendment and the performance by the Borrower of the Amended
Agreement have been duly authorized by all necessary corporate action on the
part of the Borrower.
(c) NO CONFLICT. The execution and delivery by the
Borrower of this Amendment do not and will not contravene (i) any law or any
governmental rule or regulation applicable to the Borrower, except to the extent
not resulting in a Material Adverse Effect, (ii) the Certificate of
Incorporation or Bylaws of the Borrower, (iii) any order, judgment or decree of
any court or other agency of government binding on the Borrower, or (iv) any
material agreement or instrument binding on the Borrower, except to the extent
not resulting in a Material Adverse Effect.
(d) GOVERNMENTAL CONSENTS. The execution and delivery by
the Borrower of this Amendment and the performance by the Borrower of the
Amended Agreement do not and will not require any registration with, consent or
approval of, or notice to, or other action to, with or by, any federal, state or
other governmental authority or regulatory body (except routine reports required
pursuant to the Securities and Exchange Act of 1934, as amended, which reports
will be made in the ordinary course of business).
(e) BINDING OBLIGATION. This Amendment and the Amended
Agreement have been duly executed and delivered by the Borrower and are the
binding obligations of the Borrower, enforceable against the Borrower in
accordance with their respective terms, except in each case as such
enforceability may be limited by bankruptcy, insolvency, reorganization,
liquidation, moratorium or other similar laws and equitable principles relating
to or affecting creditors' rights.
-2-
<PAGE>
(f) INCORPORATION OF REPRESENTATIONS AND WARRANTIES FROM
CREDIT AGREEMENT. The representations and warranties contained in Section 5.1 of
the Credit Agreement are correct on and as of the effective date of this
Amendment as though made on and as of such date.
(g) ABSENCE OF DEFAULT. No event has occurred and is
continuing or will result from the consummation of the transactions contemplated
by this Amendment that would constitute an Event of Default or a Potential Event
of Default.
5. MISCELLANEOUS.
(a) REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT AND
THE OTHER LOAN DOCUMENTS.
(i) On and after the Effective Date, each
reference in the Credit Agreement to "this Agreement," "hereunder,"
"hereof," "herein" or words of like import referring to the Credit
Agreement, and each reference in the other Loan Documents to the
"Credit Agreement," "thereunder," "thereof" or words of like import
referring to the Credit Agreement, shall mean and be a reference to the
Amended Agreement.
(ii) Except as specifically amended by this
Amendment, the Credit Agreement and the other Loan Documents shall
remain in full force and effect and are hereby ratified and confirmed.
(iii) The execution, delivery and performance of
this Amendment shall not, except as expressly provided herein,
constitute a waiver of any provision of, or operate as a waiver of any
right, power or remedy of the Agent or Lenders under the Credit
Agreement or any of the other Loan Documents.
(b) FEES AND EXPENSES. All costs and expenses of the
Agent and Lenders, including, but not limited to, reasonable attorneys' fees,
incurred by the Agent and Lenders in the preparation and negotiation of this
Amendment constitute costs and expenses in connection with the amendment and
restructuring of the Loan Documents, and as such are payable by the Borrower in
accordance with Section 9.5 of the Credit Agreement.
(c) HEADINGS. Section and subsection headings in this
Amendment are included herein for convenience of reference only and shall not
constitute a part of this Amendment for any other purpose or be given any
substantive effect.
(d) APPLICABLE LAW. THIS AMENDMENT SHALL BE GOVERNED BY,
AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE
STATE OF CALIFORNIA, WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES.
(e) COUNTERPARTS. This Amendment may be executed in any
number of counterparts and by different parties hereto in separate counterparts,
each of which when so executed and delivered shall be deemed an original, but
all such counterparts together shall constitute but one and the same instrument;
signature pages may be detached from multiple
-3-
<PAGE>
separate counterparts and attached to a single counterpart so that all
signature pages are physically attached to the same document.
[REMAINDER INTENTIONALLY LEFT BLANK]
-4-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers thereunto duly authorized, as of the date
first above written.
BORROWER:
COINSTAR, INC.
By:
----------------------------
Title:
-------------------------
AGENT:
IMPERIAL BANK
By:
---------------------------
Title:
-------------------------
LENDERS:
IMPERIAL BANK
By:
----------------------------
Title:
-------------------------
BANK AUSTRIA CREDITANSTALT
CORPORATE FINANCE, INC.
By:
----------------------------
Title:
-------------------------
By:
----------------------------
Title:
-------------------------
-5-
<PAGE>
EXHIBIT F
[FORM OF COMPLIANCE CERTIFICATE]
COMPLIANCE CERTIFICATE
1. This Compliance Certificate ("Compliance Certificate") is
executed and delivered by Coinstar, Inc., a Delaware corporation (the
"Borrower") to Imperial Bank (the "Agent") pursuant to Section 6.1(a)(iv)(B)
of the Credit Agreement dated as of February 19, 1999 among the Borrower, the
financial institutions named therein and the Agent. Any terms used herein and
not defined herein shall have the meanings defined in the Credit Agreement.
This Compliance Certificate covers the Borrower's:
Calendar month ended _________, 19__
Fiscal quarter ended _________, 19__
Fiscal year ended ________, 19__
2. The following paragraphs set forth calculations in compliance with
obligations pursuant to Section 6.2(a), (b), (c), (d), (e), (f), (g) and (z) of
the Credit Agreement, as of the end of the fiscal period set forth in paragraph
1 hereof.
A. DIRECT CONTRIBUTION MARGIN TO COINSTAR PROCESSING REVENUE
(SEC. 6.2(a)):
(a) Direct Contribution Margin $______
(b) Coinstar Processing Revenue $______
Ratio (a) : (b) _______
Minimum Permitted Ratio: (i) 0.40 to 1.0 as of the last
day of any calendar month during the period from
January 1, 1999 through June 30, 1999; (ii) 0.425 to 1.0
as of the last day of any calendar month during the period
from July 1, 1999 through September 30, 1999; or
(iii) 0.45 to 1.0 as of the last day of any calendar month
during the period from October 1, 1999 through
December 31, 1999.
B. DIRECT CONTRIBUTION MARGIN LESS BASE LINE OVERHEAD TO
CONSOLIDATED PROFORMA DEBT SERVICE (SEC. 6.2(b)):
(a) Direct Contribution Margin
less $10,000,000 $______
(b) Consolidated Proforma Debt Service $______
F-1
<PAGE>
Ratio (a) : (b) ________
Minimum Permitted Ratio: (i) 1.50 to 1.0 as of the last
day of any calendar month during the period from
January 1, 1999 through June 30, 1999; or (ii) 1.75 to 1.0
as of the last day of any calendar month during the period
from July 1, 1999 through December 31, 1999.
C. CONSOLIDATED SENIOR DEBT TO COINSTAR UNITS (SEC. 6.2(c)):
1. Consolidated Senior Debt $_______
2. Coinstar Units ________
Ratio (a) : (b) ________
Maximum Permitted Ratio: (i) $3,000 to 1 as of the last
day of any calendar month during the period from
January 1, 1999 through December 31, 1999; or (ii) $4,000
to 1 as of the last day of any fiscal quarter of the
Borrower from and after January 1, 2000
D. CONSOLIDATED EBITDA TO CONSOLIDATED SENIOR DEBT SERVICE
(SEC. 6.2(d)):
(a) Consolidated EBITDA $_______
(b) Consolidated Senior Debt Service $_______
Ratio (a) to (b) ________
Minimum Permitted Ratio: (i) 1.75 to 1.0 as of the last
day of any fiscal quarter of the Borrower during the
period from January 1, 2000 through December 31, 2000; or
(ii) 2.0 to 1.0 as of the last day of any fiscal quarter
of the Borrower from and after January 1, 2001.
E. CONSOLIDATED EBITDA TO CONSOLIDATED TOTAL DEBT SERVICE
(SEC. 6.2(e)):
(a) Consolidated EBITDA $_______
(b) Consolidated Total Debt Service $_______
F-2
<PAGE>
Ratio (a) to (b) ________
Minimum Permitted Ratio: (i) 1.25 to 1.0 as of the last
day of any fiscal quarter of the Borrower during the
period from January 1, 2000 through December 31, 2000;
(ii) 1.50 to 1.0 as of the last day of any fiscal quarter
of the Borrower during the period from January 1, 2001
through December 31, 2001; or (iii) 1.75 to 1.0 as of the
last day of any fiscal quarter of the Borrower from and
after January 1, 2002.
F. CONSOLIDATED SENIOR DEBT TO CONSOLIDATED EBITDA
(SEC. 6.2(f)):
(a) Consolidated Senior Debt $_______
(b) Consolidated EBITDA $_______
Ratio (a) to (b) ________
Maximum Permitted Ratio: (i) 2.0 to 1.0 as of the last
day of any fiscal quarter of the Borrower during the
period from January 1, 2000 through December 31, 2000; or
(ii) 1.50 to 1.0 as of the last day of any fiscal quarter
of the Borrower from and after from January 1, 2001.
G. CONSOLIDATED TOTAL DEBT TO CONSOLIDATED EBITDA
(SEC. 6.2(g)):
(a) Consolidated Total Debt $_______
(b) Consolidated EBITDA $_______
Ratio (a) to (b) ________
F-3
<PAGE>
Maximum Permitted Ratio: (i) 6.50 to 1.0 as of the last
day of either of the fiscal quarters ending March 31, 2000
or June 30, 2000; (ii) 5.0 to 1.0 as of the last day of
either of the fiscal quarters ending September 30, 2000 or
December 31, 2000; (iii) 4.0 to 1.0 as of the last day of
either of the fiscal quarters ending March 31, 2001 or
June 30, 2001; (iv) 3.50 to 1.0 as of the last day of
either of the fiscal quarters ending September 30, 2001 or
December 31, 2001; or (v) 2.50 to 1.0 as of the last day
of any fiscal quarter of the Borrower from and after
January 1, 2002.
H. TRANSFERS TO SUBSIDIARIES; ELECTRONIC COMMERCE
(SEC. 6.2(z))
(a) Acquisitions from Domestic $_______
Subsidiaries or Foreign Persons
(b) Loans to, Investments in, $_______
guarantees of obligations of Domestic
or Foreign Subsidiaries
(c) Contingent Liabilities in favor $_______
of Domestic or Foreign Subsidiaries
(d) Sales, leases, transfers of $_______
assets to Domestic or Foreign
Subsidiaries
(e) Amounts transferred to $_______
Domestic or Foreign Subsidiaries prior
to closing
(f) Amounts used for Electronic $_______
Commerce or Internet Related Business
Total: $_______
Total must not exceed $5,000,000
F-4
<PAGE>
3. The undersigned has reviewed the terms of the Credit
Agreement and has made, or caused to be made under his/her supervision, a
review in reasonable detail of the transactions and condition of the Borrower
and its Domestic Subsidiaries during the fiscal period covered by this
Compliance Certificate. The undersigned does not (either as a result of such
review or otherwise) have any knowledge of the existence as of the date of
this Compliance Certificate of any condition or event that constitutes an
Event of Default or a Potential Event of Default, with the exception set
forth below in response to which the Borrower is taking or proposes to take
the following actions (if none, so state):
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
4. The undersigned hereby certifies that the representations
and warranties contained in the Agreement and the other Loan Documents are
true and correct in all material respects on and as of the date hereof
(except to the extent they relate specifically to any earlier date, in which
case such representations and warranties shall continue to have been correct
as of such date).
5. This Compliance Certificate is executed on _______________,
____ by the Chief Executive Officer, Chief Financial Officer, Treasurer or
Controller of the Borrower. The undersigned hereby certifies that each and
every matter contained herein is derived from the Borrower's books and
records and is, to the best knowledge of the undersigned, true and correct.
COINSTAR, INC.,
a Delaware corporation
By:
------------------------------
Title:
---------------------------
F-5
<PAGE>
AFFIRMATION OF GUARANTY
The undersigned Guarantor hereby acknowledges and agrees to the
terms of the foregoing First Amendment to Credit Agreement (the "Amendment"),
and further acknowledges and agrees that nothing contained in the Amendment
in any way affects the validity and enforceability of that certain Subsidiary
Guaranty (the "Guaranty") dated as of February 19, 1999, executed by the
undersigned Guarantor in favor of Lenders, the validity and effectiveness of
which Guaranty is hereby reaffirmed as of the Effective Date of the Amendment.
MY SHOPPINGLIST.COM, INC.
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
<PAGE>
LIMITED WAIVER
This LIMITED WAIVER (this "Agreement") is entered into as of June 14, 1999,
by and among Coinstar, Inc., a Delaware corporation ("Borrower"), the financial
institutions named on the signature pages hereof (each, a "Lender" and
collectively the "Lenders"), and Imperial Bank, as Agent for the Lenders
("Agent"), with reference to the following facts:
A. Borrower, Agent, and Lenders are parties to that certain Credit
Agreement dated as of February 19, 1999 (the "Credit Agreement");
B. Borrower proposes to undertake an underwritten public offering (the
"Offering") with Goldman, Sachs & Co., Donaldson, Lufkin & Jenrette Securities
Corporation and Hambrecht and Quist LLC, as representatives of the underwriters,
of shares of Common Stock of the Borrower pursuant to a Registration Statement
on Form S-3 to be filed with the Securities and Exchange Commission;
C. Section 2.2(b)(i) of the Credit Agreement requires that the Borrower
make certain mandatory prepayments of Loans upon any Equity Issuance by the
Borrower during the term of the Credit Agreement, and Section 2.2(b)(v) operates
to reduce the Revolving Commitments and/or the Term Commitments, subject to
certain conditions set forth in the Credit Agreement, in the amount of such
mandatory prepayments;
D. Borrower has requested that the Lenders waive the provisions of
Section 2.2(b)(i) and (v) of the Credit Agreement with respect to the Offering,
and the Lenders have agreed, all on the terms set forth herein.
NOW, THEREFORE, in consideration of the promises and the agreements,
provisions and covenants herein contained, the parties hereto agree as follows:
1. DEFINED TERMS. Capitalized terms not otherwise defined herein shall
have the same meanings as set forth in the Credit Agreement.
2. LIMITED WAIVER. Subject to the terms and conditions contained
herein, and in reliance on the representations and warranties of the Borrower
set forth herein, for so long as the Borrower shall maintain in one or more
deposit accounts with the Agent an amount not less than the greater of (i)
Fifteen Million Dollars ($15,000,000) or (ii) the aggregate amount of the
outstanding Loans and the Letter of Credit Usage under the Credit Agreement,
Lenders hereby waive the provisions of Sections 2.2(b)(i) and (v) of the Credit
Agreement with respect to the Offering. It shall be a condition precedent to
the waiver set forth herein that the Agent, for the benefit of the Lenders,
shall have a first priority perfected security interest in such account(s).
Without limiting the generality of the provisions of Section 9.1 of the Credit
Agreement, the waiver set forth herein shall be limited precisely as written,
and nothing in this Agreement shall be deemed to (i) constitute a waiver of any
such provision of the Credit Agreement in any other instance, or (ii) constitute
a waiver of any other Event of Default or other failure by Borrower to perform
in accordance with the Loan Documents or this Agreement, or (iii) prejudice any
right or remedy that the Agent or any Lender may now have or may have in the
future under or in connection with the Credit Agreement or the Loan Documents.
-1-
<PAGE>
3. CONDITIONS TO EFFECTIVENESS.
This Agreement shall become effective as of June 14, 1999 (the "Effective
Date"), only upon:
(a) receipt by the Agent of the following (each of which shall be
in form and substance satisfactory to the Agent and its counsel):
(i) counterparts of this Agreement duly executed on behalf of
the Borrower and the Lenders;
(ii) copies of resolutions of the Board of Directors or other
authorizing documents of the Borrower, authorizing the execution and delivery of
this Agreement; and
(iii) an affirmation of the Guaranty, duly executed on behalf
of the Guarantor;
(b) Borrower shall have deposited with the Agent in one or more
deposit accounts the amounts specified in Section 2 hereof; and
(c) completion of such other matters, and delivery of such other
agreements, documents and certificates as the Agent may reasonably request.
4. REPRESENTATIONS AND WARRANTIES. In order to induce the Lenders to
enter into this Agreement, the Borrower represents and warrants to the Lenders
that the following statements are true, correct and complete as of the effective
date of this Agreement:
(a) CORPORATE POWER AND AUTHORITY. The Borrower has all requisite
corporate power and authority to enter into this Agreement and to carry out the
transactions contemplated by, and perform its obligations under, the Credit
Agreement as amended by this Agreement (the "Amended Agreement"). The
Certificate of Incorporation and Bylaws of the Borrower have not been amended
since the copies previously delivered to the Lenders.
(b) AUTHORIZATION OF AGREEMENTS. The execution and delivery of
this Agreement and the performance by the Borrower of the Amended Agreement have
been duly authorized by all necessary corporate action on the part of the
Borrower.
(c) NO CONFLICT. The execution and delivery by the Borrower of
this Agreement do not and will not contravene (i) any law or any governmental
rule or regulation applicable to the Borrower, except to the extent not
resulting in a Material Adverse Effect, (ii) the Certificate of Incorporation or
Bylaws of the Borrower, (iii) any order, judgment or decree of any court or
other agency of government binding on the Borrower, or (iv) any material
agreement or instrument binding on the Borrower, except to the extent not
resulting in a Material Adverse Effect.
(d) GOVERNMENTAL CONSENTS. The execution and delivery by the
Borrower of this Agreement and the performance by the Borrower of the Amended
Agreement do not and
-2-
<PAGE>
will not require any registration with, consent or approval of, or notice to, or
other action to, with or by, any federal, state or other governmental authority
or regulatory body (except routine reports required pursuant to the Securities
and Exchange Act of 1934, as amended, which reports will be made in the ordinary
course of business).
(e) BINDING OBLIGATION. This Agreement and the Amended Agreement
have been duly executed and delivered by the Borrower and are the binding
obligations of the Borrower, enforceable against the Borrower in accordance with
their respective terms, except in each case as such enforceability may be
limited by bankruptcy, insolvency, reorganization, liquidation, moratorium or
other similar laws and equitable principles relating to or affecting creditors'
rights.
(f) INCORPORATION OF REPRESENTATIONS AND WARRANTIES FROM CREDIT
AGREEMENT. The representations and warranties contained in Section 5.1 of the
Credit Agreement are correct on and as of the effective date of this Agreement
as though made on and as of such date.
(g) ABSENCE OF DEFAULT. No event has occurred and is continuing or
will result from the consummation of the transactions contemplated by this
Agreement that would constitute an Event of Default or a Potential Event of
Default.
5. MISCELLANEOUS.
(a) REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT AND THE OTHER
LOAN DOCUMENTS.
(i) On and after the Effective Date, each reference in the
Credit Agreement to "this Agreement," "hereunder," "hereof," "herein" or words
of like import referring to the Credit Agreement, and each reference in the
other Loan Documents to the "Credit Agreement," "thereunder," "thereof" or words
of like import referring to the Credit Agreement, shall mean and be a reference
to the Amended Agreement.
(ii) Except as specifically amended by this Agreement, the
Credit Agreement and the other Loan Documents shall remain in full force and
effect and are hereby ratified and confirmed.
(iii) The execution, delivery and performance of this Agreement
shall not, except as expressly provided herein, constitute a waiver of any
provision of, or operate as a waiver of any right, power or remedy of the Agent
or Lenders under the Credit Agreement or any of the other Loan Documents.
(b) FEES AND EXPENSES. All costs and expenses of the Agent and
Lenders, including, but not limited to, reasonable attorneys' fees, incurred by
the Agent and Lenders in the preparation and negotiation of this Agreement
constitute costs and expenses in connection with the amendment and restructuring
of the Loan Documents, and as such are payable by the Borrower in accordance
with Section 9.5 of the Credit Agreement.
-3-
<PAGE>
(c) HEADINGS. Section and subsection headings in this Agreement
are included herein for convenience of reference only and shall not constitute a
part of this Agreement for any other purpose or be given any substantive effect.
(d) APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND SHALL
BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF
CALIFORNIA, WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES.
(e) COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by different parties hereto in separate counterparts, each of
which when so executed and delivered shall be deemed an original, but all such
counterparts together shall constitute but one and the same instrument;
signature pages may be detached from multiple separate counterparts and attached
to a single counterpart so that all signature pages are physically attached to
the same document.
[REMAINDER INTENTIONALLY LEFT BLANK]
-4-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized, as of the date
first above written.
BORROWER:
COINSTAR, INC.
By:
----------------------------------
Title:
-------------------------------
AGENT:
IMPERIAL BANK
By:
----------------------------------
Title:
-------------------------------
LENDERS:
IMPERIAL BANK
By:
----------------------------------
Title:
-------------------------------
BANK AUSTRIA CREDITANSTALT
CORPORATE FINANCE, INC.
By:
----------------------------------
Title:
-------------------------------
By:
----------------------------------
Title:
-------------------------------
-5-
<PAGE>
AFFIRMATION OF GUARANTY
The undersigned Guarantor hereby acknowledges and agrees to the terms of
the foregoing Limited Waiver (the "Agreement"), and further acknowledges and
agrees that nothing contained in the Agreement in any way affects the validity
and enforceability of that certain Subsidiary Guaranty (the "Guaranty") dated as
of February 19, 1999, executed by the undersigned Guarantor in favor of Lenders,
the validity and effectiveness of which Guaranty is hereby reaffirmed as of the
Effective Date of the Agreement.
MY SHOPPINGLIST.COM, INC.
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> APR-01-1999 JAN-01-1999
<PERIOD-END> JUN-30-1999 JUN-30-1999
<CASH> 117,249,157 117,249,157
<SECURITIES> 5,821,027 5,821,027
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 124,594,555 124,594,555
<PP&E> 93,343,012 93,343,012
<DEPRECIATION> (34,449,571) (34,449,571)
<TOTAL-ASSETS> 187,215,108 187,215,108
<CURRENT-LIABILITIES> 38,825,393 38,825,393
<BONDS> 0 0
0 0
0 0
<COMMON> 147,055,370 147,055,370
<OTHER-SE> (89,785,203) (89,785,203)
<TOTAL-LIABILITY-AND-EQUITY> 187,215,108 187,215,108
<SALES> 0 0
<TOTAL-REVENUES> 18,257,710 34,049,135
<CGS> 0 0
<TOTAL-COSTS> 19,551,092 37,231,110
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 2,993,367 5,843,981
<INCOME-PRETAX> (4,149,675) (8,684,130)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (4,149,675) (8,684,130)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (4,149,675) (8,684,130)
<EPS-BASIC> (.26) (.56)
<EPS-DILUTED> (.26) (.56)
</TABLE>
