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FILED PURSUANT TO RULE 424(b)(4)
REGISTRATION NO. 333-33233
PROSPECTUS
COINSTAR, INC.
OFFER TO EXCHANGE ITS
13% SENIOR DISCOUNT NOTES DUE OCTOBER 1, 2006
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT FOR ANY AND
ALL OF ITS OUTSTANDING 13% SENIOR DISCOUNT NOTES DUE OCTOBER 1, 2006
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME ON DECEMBER 19, 1997, UNLESS EXTENDED.
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Coinstar, Inc. ("Coinstar" or the "Company") hereby offers, upon the terms
and subject to the conditions set forth in this Prospectus (as the same may be
amended or supplemented from time to time, the "Prospectus") and the
accompanying Letter of Transmittal (the "Letter of Transmittal" and together
with this Prospectus, the "Exchange Offer"), to exchange $1,000 principal amount
of its 13% Senior Discount Notes due October 1, 2006 (the "New Notes") which
have been registered under the Securities Act of 1933, as amended (the
"Securities Act"), pursuant to a registration statement (the "Registration
Statement") of which this Prospectus is a part, for each $1,000 principal amount
of its outstanding 13% Senior Discount Notes due October 1, 2006 (the "Old
Notes," and together with the New Notes, the "Notes"), of which $95 million
principal amount at maturity is outstanding as of the date hereof.
The Company will accept for exchange any and all validly tendered Old Notes
prior to 5:00 P.M., New York City time, on December 19, 1997, unless extended
(the "Expiration Date"). Old Notes may be tendered only in integral multiples of
$1,000. Tenders of Old Notes may be withdrawn at any time prior to 5:00 P.M.,
New York City time, on the Expiration Date. The Exchange Offer is not
conditioned upon any minimum principal amount of Old Notes being tendered for
exchange. However, the Exchange Offer is subject to certain customary
conditions. In the event the Company terminates the Exchange Offer and does not
accept for exchange any Old Notes, the Company will promptly return the Old
Notes to the holders thereof. The Company will not receive any proceeds from the
Exchange Offer. See "The Exchange Offer."
The terms of the New Notes will be identical to the terms of the Old Notes,
in all material respects, except that the New Notes (i) will have been
registered under the Securities Act and therefore will not be subject to certain
restrictions on transfer applicable to the Old Notes and (ii) will not be
entitled to registration or other rights under the Registration Rights Agreement
(as defined below) including the provision in the Registration Rights Agreement
for an increase of .50% per annum of the interest rate thereon upon failure by
the Company to consummate the Exchange Offer. See "Description of the Old
Notes." The New Notes will be entitled to the benefits of the indenture
governing the Old Notes (the "Indenture"). See "Description of New Notes" and
"The Exchange Offer."
CONTINUED ON FOLLOWING PAGE
THIS PROSPECTUS AND THE LETTER OF TRANSMITTAL ARE FIRST BEING MAILED TO HOLDERS
ON NOVEMBER 10, 1997.
SEE "RISK FACTORS" ON PAGE 15 FOR INFORMATION THAT SHOULD BE CONSIDERED
IN CONNECTION WITH THIS OFFERING.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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THE DATE OF THIS PROSPECTUS IS NOVEMBER 4, 1997
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(CONTINUATION OF COVER PAGE)
The New Notes are being offered hereunder in order to satisfy certain
obligations of the Company under the Notes Registration Rights Agreement, dated
as of October 22, 1996 by and between the Company and the Initial Purchaser (as
defined herein) (the "Registration Rights Agreement"), a copy of which has been
filed as an exhibit to the Registration Statement of which this Prospectus is a
part. The Exchange Offer is intended to satisfy the Company's obligations under
the Registration Rights Agreement to register the Old Notes under the Securities
Act. Once the Exchange Offer is consummated, the Company will have no further
obligations to register any of the Old Notes not tendered by the holders of the
Old Notes (the "Holders") for exchange. See "Risk Factors--Consequences to
Non-Tendering Holders of Old Notes."
Old Notes initially purchased by "qualified institutional buyers" (as such
term is defined in Rule 144A under the Securities Act) were initially
represented by one Global Old Note (as defined herein) in fully registered form,
registered in the name of a nominee of The Depository Trust Company ("DTC"), as
depositary. The New Notes exchanged for the Old Notes represented by the Global
Old Note will be represented by a single Global New Note (as defined herein) in
fully registered form, registered in the name of the nominee of DTC. The Global
New Note will be exchangeable for the New Notes in registered form, in
denominations of $1,000 and integral multiples thereof as described herein. The
New Notes in global form will trade in The Depository Trust Company's Same-Day
Funds Settlement System, and secondary market trading activity in such New Notes
will therefore settle in immediately available funds. See "Description of New
Notes--Form, Denomination and Book-Entry Procedures."
The New Notes will accrete at the rate of 13% per annum from the date of
issuance thereof until October 1, 1999. Thereafter, the New Notes will bear
interest at a rate equal to 13% per annum, payable semi-annually in arrears on
October 1 and April 1 of each year, commencing April 1, 2000. The Old Notes will
continue to accrete at the rate of 13% per annum to, but not including, the date
of issuance of the New Notes. Such accretion will become a part of the Accreted
Amount (as defined herein) of the New Notes.
The New Notes will be redeemable at the option of the Company, in whole or
in part, at any time on or after October 1, 2001, at the redemption prices set
forth herein, together with accrued and unpaid interest and Liquidated Damages
(as defined in the Registration Rights Agreement) thereon, if any, to the date
of redemption. At any time prior to October 1, 1999, up to 100% of the aggregate
principal amount of the New Notes originally issued will be redeemable at the
option of the Company from the net proceeds of a Public Equity Offering (as
defined in the Indenture) after which there exists a Public Market (as defined
in the Indenture) within 60 days thereafter, at 118% of the Accreted Value (as
defined in the Indenture) thereof as of the date of redemption, together with
accrued and unpaid Liquidated Damages thereon, if any, to the date of
redemption. Upon the occurrence of a Change of Control (as defined in the
Indenture), each holder of the New Notes may require the Company to repurchase
all or a portion of such holder's New Notes at 101% of the Accreted Value
thereof (if prior to October 1, 1999) plus accrued and unpaid Liquidated Damages
thereon, if any, or (if on or after October 1, 1999) 101% of the principal
amount thereof, plus accrued and unpaid interest and Liquidated Damages thereon,
if any, to the date of repurchase. See "Description of New Notes."
The Company is making the Exchange Offer in reliance on the position of the
Staff of the Division of Corporation Finance of the Securities and Exchange
Commission (the "Commission") as set forth in the Staff's Exxon Capital Holdings
Corp. SEC No-Action Letter (available April 13, 1989), Morgan Stanley & Co.,
Inc. SEC No-Action Letter (available June 5, 1991), Shearman & Sterling SEC
No-Action Letter (available July 7, 1993), and other interpretive letters
addressed to third parties in other transactions. However, the Company has not
sought its own interpretive letter and there can be no assurance that the Staff
of the Division of Corporation Finance of the Commission would make a similar
determination with respect to the Exchange Offer as it has in such interpretive
letters to third parties. Based on these interpretations by the Staff of the
Division of Corporation Finance, and subject to the two immediately
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following sentences, the Company believes that New Notes issued pursuant to this
Exchange Offer in exchange for Old Notes may be offered for resale, resold and
otherwise transferred by a holder thereof (other than a Holder who is a
broker-dealer) without further compliance with the registration and prospectus
delivery requirements of the Securities Act, provided that such New Notes are
acquired in the ordinary course of such Holder's business and that such Holder
is not participating, and has no arrangement or understanding with any person to
participate, in a distribution (within the meaning of the Securities Act) of
such New Notes. However, any Holder of Old Notes who is an "affiliate" of the
Company or who intends to participate in the Exchange Offer for the purpose of
distributing New Notes, or any broker-dealer who purchased Old Notes from the
Company to resell pursuant to Rule 144A under the Securities Act ("Rule 144A")
or any other available exemption under the Securities Act, (a) will not be able
to rely on the interpretations of the staff of the Division of Corporation
Finance of the Commission set forth in the above-mentioned interpretive letters,
(b) will not be permitted or entitled to tender such Old Notes in the Exchange
Offer and (c) must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any sale or other transfer
of such Old Notes unless such sale is made pursuant to an exemption from such
requirements. See "Risk Factors--Consequences to Non-Tendering Holders of Old
Notes." In addition, as described below, if any broker-dealer holds Old Notes
acquired for its own account as a result of market-making or other trading
activities and exchanges such Old Notes for New Notes, then such broker-dealer
must deliver a prospectus meeting the requirements of the Securities Act in
connection with any resales of such New Notes.
Each Holder of Old Notes who wishes to exchange Old Notes for New Notes in
the Exchange Offer will be required to represent that (i) it is not an
"affiliate" of the Company, (ii) any New Notes to be received by it are being
acquired in the ordinary course of its business, (iii) it has no arrangement or
understanding with any person to participate in a distribution (within the
meaning of the Securities Act) of such New Notes, and (iv) if such Holder is not
a broker-dealer, such Holder is not engaged in, and does not intend to engage
in, a distribution (within the meaning of the Securities Act) of such New Notes.
Each broker-dealer that receives New Notes for its own account pursuant to the
Exchange Offer must acknowledge that it acquired the Old Notes for its own
account as a result of market making activities or other trading activities and
must agree that it will deliver a prospectus meeting the requirements of the
Securities Act in connection with any resale of such New Notes. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. Based on the position taken by the Staff of the
Division of Corporation Finance of the Commission in the interpretive letters
referred to above, the Company believes that broker-dealers who acquired Old
Notes for their own accounts, as a result of market making activities or other
trading activities ("Participating Broker-Dealers") may fulfill their prospectus
delivery requirements with respect to the New Notes received upon exchange of
such Old Notes (other than Old Notes which represent an unsold allotment from
the original sale of the Old Notes) with a prospectus meeting the requirements
of the Securities Act, which may be the prospectus prepared for an exchange
offer so long as it contains a description of the plan of distribution with
respect to the resale of such New Notes. Accordingly, this Prospectus, as it may
be amended or supplemented from time to time, may be used by a Participating
Broker-Dealer during the period referred to below in connection with resales of
New Notes received in exchange for Old Notes where such Old Notes were acquired
by such Participating Broker-Dealer for its own account as a result of market
making or other trading activities. Subject to certain provisions set forth in
the Registration Rights Agreement, the Company has agreed that this Prospectus,
as it may be amended or supplemented from time to time, may be used by a
Participating Broker-Dealer in connection with resales of such New Notes for a
period ending 90 days after the Expiration Date (subject to extension under
certain limited circumstances described below) or, if earlier, when all such New
Notes have been disposed of by such Participating Broker-Dealer. See "Plan of
Distribution." Any Participating Broker-Dealer who is an "affiliate" of the
Company may not rely on such interpretive letters and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. See "The Exchange Offer--Resales of New
Notes."
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In that regard, each Participating Broker-Dealer who surrenders Old Notes
pursuant to the Exchange Offer will be deemed to have agreed, by execution of
the Letter of Transmittal, that, upon receipt of notice from the Company of the
occurrence of any event or the discovery of any fact which makes any statement
contained or incorporated by reference in this Prospectus untrue in any material
respect or which causes this Prospectus to omit to state a material fact
necessary in order to make the statements contained or incorporated by reference
herein, in light of the circumstances under which they were made, not misleading
or of the occurrence of certain other events specified in the Registration
Rights Agreement, such Participating Broker-Dealer will suspend the sale of New
Notes pursuant to this Prospectus until the Company has amended or supplemented
this Prospectus to correct such misstatement or omission and has furnished
copies of the amended or supplemented Prospectus to such Participating
Broker-Dealer or the Company has given notice that the sale of the New Notes may
be resumed, as the case may be. If the Company gives such notice to suspend the
sale of the New Notes, it shall extend the 90 day period referred to above
during which Participating Broker-Dealers are entitled to use this Prospectus in
connection with the resale of New Notes by the number of days during the period
from and including the date of the giving of such notice to and including the
date when Participating Broker-Dealers shall have received copies of the amended
or supplemented Prospectus necessary to permit resales of the New Notes or to
and including the date on which the Company has given notice that the sale of
New Notes may be resumed, as the case may be.
The New Notes will be unsecured obligations of the Company, will be
subordinated to all other Senior Debt (as defined in the Indenture) of the
Company and will be effectively subordinated to all indebtedness (including
senior indebtedness and trade credit) of subsidiaries of the Company. As of June
30, 1997 the aggregate amount of Senior Debt of the Company was $4.0 million.
See "Capitalization." The Indenture permits the Company and its subsidiaries to
incur substantial additional indebtedness, including senior indebtedness and
secured indebtedness. The Company currently does not have any subsidiaries.
Any Old Notes not tendered and accepted in the Exchange Offer will remain
outstanding and will be entitled to all the same rights and will be subject to
the same limitations applicable thereto under the Indenture (except for those
rights which terminate upon consummation of the Exchange Offer). Following
consummation of the Exchange Offer, the Holders of Old Notes will continue to be
subject to the existing restrictions upon transfer thereof and the Company will
have no further obligation to such Holders (other than to the Initial Purchaser
under certain limited circumstances) to provide for registration under the
Securities Act of the Old Notes held by them. To the extent that Old Notes are
tendered and accepted in the Exchange Offer, a Holder's ability to sell
untendered Old Notes could be adversely affected. See "Summary--Certain
Consequences of a Failure to Exchange Old Notes."
THIS PROSPECTUS AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT
INFORMATION. HOLDERS OF OLD NOTES ARE URGED TO READ THIS PROSPECTUS AND THE
RELATED LETTER OF TRANSMITTAL CAREFULLY BEFORE DECIDING WHETHER TO TENDER THEIR
OLD NOTES PURSUANT TO THE EXCHANGE OFFER.
Prior to this offering, there has been no public market for the Old Notes or
New Notes. The Company does not intend to list the New Notes on a national
securities exchange or to seek approval for quotation through the Nasdaq
National Market. As the Old Notes were issued and the New Notes are being issued
to a limited number of institutions who typically hold similar securities for
investments, the Company does not expect that an active public market for the
New Notes will develop. In addition, resales by certain Holders of the Old Notes
or the New Notes of a substantial percentage of the aggregate principal amount
of such Notes could constrain the ability of any market maker to develop or
maintain a market for the New Notes. To the extent that a market for the New
Notes should develop, the market value of the New Notes will depend on
prevailing interest rates, the market for similar securities and other factors,
including the financial condition, performance and prospects of the Company.
Such factors might cause the New Notes to trade at a discount from face value.
See "Risk Factors--Absence of Public Market for the Notes." The Company has
agreed to pay the expenses of the Exchange Offer.
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The Company will not receive any cash proceeds from the issuance of the New
Notes offered hereby. No dealer-manager is being used in connection with the
Exchange Offer. See "Use of Proceeds" and "Plan of Distribution."
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Commission. Reports, proxy statements and other information filed by the Company
with the Commission pursuant to the informational requirements of the Exchange
Act may be inspected and copied at the public reference facilities maintained by
the Commission at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549, and at the Commission's Regional Offices in New York
City (Seven World Trade Center, 13th Floor, New York, New York 10048), and
Chicago (Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661). Copies of these materials may be obtained upon written request from the
Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates. The Common Stock of the Company is traded on
the Nasdaq National Market. Reports, proxy statements and other information
concerning the Company may also be inspected at the offices of the Nasdaq
National Market, Nasdaq Operations, 1735 K Street, N.W., Washington, D.C. 20006.
ADDITIONAL INFORMATION
This Prospectus constitutes a part of a registration statement on Form S-4
(together with all amendments thereto, the "Registration Statement") filed by
the Company with the Commission under the Securities Act. This Prospectus, which
forms a part of the Registration Statement, does not contain all the information
set forth in the Registration Statement, certain parts of which have been
omitted in accordance with the rules and regulations of the Commission.
Reference is hereby made to the Registration Statement and related exhibits and
schedules filed therewith for further information with respect to the Company
and the New Notes offered hereby. Statements contained herein concerning the
provisions of any document are not necessarily complete and, in each instance,
reference is made to the copy of such document filed or incorporated by
reference as an exhibit to the Registration Statement or otherwise filed by the
Company with the Commission and each such statement is qualified in its entirety
by such reference. The Registration Statement and the exhibits and schedules
thereto may be inspected and copied at the public reference facilities
maintained by the Commission at the addresses described above. The Commission
maintains a Web site that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. Copies of the Registration Statement may be obtained from the
Commission's internet address at http://www.sec.gov.
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PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING "RISK FACTORS" AND THE FINANCIAL STATEMENTS AND NOTES
THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. THE NEW NOTES OFFERED HEREBY
ARE SUBJECT TO A HIGH DEGREE OF RISK. SEE "RISK FACTORS." THE DISCUSSION IN THIS
PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
DISCUSSED HEREIN. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES
INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS,"
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" AND "BUSINESS" AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS
PROSPECTUS.
THE COMPANY
Coinstar, Inc. develops, owns and operates a network of automated,
self-service coin counting and processing machines that provide consumers with a
convenient means to convert loose coins into cash. The Coinstar units, located
in supermarkets and financial institutions in more than 25 states across the
country, accept and count accumulated loose coins deposited by consumers and
issue vouchers listing the total number, denominations and dollar value of coins
processed less a processing fee charged by the Company, currently 7.5% (prior to
1996 the Company charged a 10% processing fee on pennies and a 5% processing fee
on all other coins.) The vouchers are redeemable by customers at store cashiers
for either credit towards retail purchases or cash, regardless of whether a
purchase is made. The Company believes its service addresses a significant
consumer need for a convenient and reliable coin processing method. The Coinstar
service provides consumers with a means of redeeming accumulated loose coins and
an alternative to manually presorting, counting and wrapping coins typically
required for cash redemption at a bank. Since inception, the Coinstar network
has processed over 9.5 million customer transactions consisting of over 7.5
billion coins worth over $261 million. The Company began commercial deployment
of the network in 1994 and, in 1996, significantly accelerated its plans for
installation of the Coinstar units in various geographic regions. As of June 30,
1997, the Company had an installed base of 2,335 units located in supermarkets
and financial institutions in 33 regional markets across the United States.
THE NEW YORK TIMES has reported that an estimated 288 billion cash
transactions have occurred on an annual basis in the United States. Assuming
that the change generated by each such cash transaction averaged fifty cents,
the annual coin flow resulting from such transactions would have been
approximately $144 billion. To support the flow of coins in the economy, the
United States Mint (the "U.S. Mint") has produced $15 billion in new coins over
the past 25 years. According to the U.S. Mint, the circulating stock of coins
used in cash transactions is approximately $8 billion. The prevalence of coins
used in cash transactions and the lack of a convenient alternative for
converting coins into cash has resulted in the accumulation of coins. Based on
such U.S. Mint data, only $8 billion of the $15 billion in coins produced over
the last 25 years (the useful life of a coin) are regarded as circulating, and
the Company believes there is an estimated $7 billion of non-circulating coins.
The Company believes a significant market opportunity exists for providing a
convenient method of redeeming non-circulating coins and recycling the recurring
coin flow in the United States economy. The actual size of the market
potentially available to the Company, however, is limited by the number of
geographic locations in which it is economically feasible for the Company to
locate units. In addition, many consumers regularly use their loose change in
commercial transactions rather than accumulating it, or may elect other
alternatives for recycling their accumulated coins. In 1996 the Company
processed approximately $115 million of coins. See "Risk Factors."
The Company believes a key competitive advantage is its significant
expertise accumulated over the past five years in designing and manufacturing
the Coinstar units, in developing and supporting a wide-area communications
network capable of receiving and transmitting data to all Coinstar units, and in
building a dedicated field service organization with the ability to rapidly
deploy and service the Coinstar units. The Coinstar unit is a modularly
designed, free-standing machine controlled by an internal computer connected to
the Company's wide-area communications network. The network is critical to
providing high
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availability of the Coinstar units, maintaining a high level of customer service
and managing direct operating costs. The reliability of the Coinstar unit and
the utilization of the communications network, in conjunction with the support
of the Company's regional field service organization, have resulted in median
availability of units in operation of over 98%. In addition, the network is used
to distribute store-specific promotional programs such as electronic offers,
coupons and advertising.
The focus of the Company's growth has been to increase its installed base in
supermarkets in some of the largest designated market areas ("DMAs") in the
country. The Company believes that installation of the Coinstar units in
supermarket chains provides meaningful benefits to its retail distribution
partners, such as offering a new customer service, increasing store traffic,
promoting sales and generating media coverage. The Company has targeted
supermarkets as its initial primary distribution channel for deployment of its
units because of the prevalence of large regional chains, geographic
concentration of stores and recurring consumer traffic, all of which create
economies of scale for the marketing, deployment and operation of the Coinstar
units. The Company estimates that there are 30,000 supermarkets in the United
States, 25,000 of which are located in the 100 largest DMAs targeted by the
Company.
The Company's primary objective is to extend its position as the leading
provider of automated, self-service coin processing services and to develop new
value-added services that can be delivered through its network. Principal
elements of the Company's growth strategy include: (i) increasing penetration of
its installed base in supermarkets in the largest DMAs nationwide; (ii)
developing and implementing new marketing programs and initiatives to promote
consumer awareness and usage of its service; and (iii) entering new distribution
channels for the installation of the Coinstar unit, such as banks, convenience
stores and mass merchants, and, potentially, international distribution
channels. The Company will continue to evaluate new consumer service offerings
that could be developed to capitalize on its ownership and operation of a
networked service and delivery platform in high traffic retail locations. The
modular construction of the Coinstar unit facilitates the potential addition of
peripherals to provide additional services such as targeted electronic
promotions, event ticketing and smart card applications.
RISK FACTORS
The Company was organized in 1991 and began commercial deployment of the
Coinstar units in 1994. The Company has a limited operating history and has
incurred substantial and increasing operating losses since its inception. As of
June 30, 1997, the Company had an accumulated deficit of $44.4 million. An
investment in the New Notes offered hereby involves a high degree of risk,
including the risks associated with the Company's history of substantial losses,
anticipating continuing losses, substantial debt and debt service obligations,
dependence upon the market acceptance of the Company's coin processing services,
management of growth, reliance on third party suppliers and manufacturers and
other risks. Prospective investors should refer to "Risk Factors" set forth
beginning on Page 15.
THE EXCHANGE OFFER
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The Exchange Offer................ $1,000 principal amount of the New Notes in exchange for
each $1,000 principal amount of the Old Notes. As of
June 30, 1997, $95 million in aggregate principal amount
at maturity of Old Notes were outstanding. The Company
will issue the New Notes to Holders on or promptly after
the Expiration Date.
Based on an interpretation by the Staff of the
Commission set forth in the Staff's Exxon Capital
Holdings Corp. SEC No-Action Letter (available April 13,
1989), Morgan Stanley & Co., Inc. SEC No-Action Letter
(available June 5, 1991), Shearman & Sterling SEC
No-Action Letter (available July 7, 1993), and other
no-action letters issued to third parties, the
</TABLE>
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<S> <C>
Company believes that New Notes issued pursuant to the
Exchange Offer in exchange for Old Notes may be offered
for resale, resold and otherwise transferred by Holders
thereof without compliance with the registration and
prospectus delivery provisions of the Securities Act.
However, any Holder who is an "affiliate" of Coinstar or
who intends to participate in the Exchange Offer for the
purpose of distributing the New Notes (i) cannot rely on
the interpretation by the Staff of the Commission set
forth in the above referenced no-action letters, (ii)
cannot tender its Old Notes in the Exchange Offer, and
(iii) must comply with the registration and prospectus
delivery requirements of the Securities Act in
connection with any sale or transfer of the Old Notes,
unless such sale or transfer is made pursuant to an
exemption from such requirements. See "Risk
Factors--Consequences to Non-Tendering Holder of Old
Notes."
Each broker-dealer that receives New Notes for its own
account pursuant to the Exchange Offer must acknowledge
that it will deliver a prospectus in connection with any
resale of such New Notes. The Letter of Transmittal
states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit
that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-
dealer in connection with resales of New Notes received
in exchange for Old Notes where such Old Notes were
acquired by such broker-dealer as a result of market
making activities or other trading activities or other
trading activities and not acquired directly from the
Company. Coinstar has agreed that for a period of 90
days after the Expiration Date it will make this
Prospectus available to any broker-dealer for use in
connection with any such resale. See "Plan of
Distribution."
Expiration Date................... 5:00 p.m., New York City time, on December 19, 1997,
unless the Exchange Offer is extended, in which case the
term "Expiration Date" means the latest date and time to
which the Exchange Offer is extended.
Accretion of the New Notes and the
Old Notes....................... No cash interest will accrue or be payable in respect of
the New Notes prior to October 1, 1999. Thereafter,
interest will accrue at the rate of 13% per annum,
payable semi-annually in arrears on each October 1 and
April 1, commencing April 1, 2000. The Old Notes will
continue to accrete at the rate of 13% per annum to, but
excluding, the issuance date of the New Notes. The Old
Notes accepted for exchange will cease to accrete upon
cancellation of the Old Notes and issuance of the New
Notes. The Accreted Value of the New Notes upon issuance
will equal the Accreted Value of the Old Notes
immediately prior to issuance of the New Notes.
Conditions to the Exchange The Exchange Offer is subject to certain customary
Offer........................... conditions. The conditions are limited and relate in
general to proceedings
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which have been instituted or laws which have been
adopted that might impair the ability of the Company to
proceed with the Exchange Offer. As of November 4, 1997,
none of these events had occurred, and the Company
believes their occurrence to be to be unlikely. If any
such conditions do exist prior to the Expiration Date,
the Company may (i) refuse to accept any Old Notes and
return all previously tendered Old Notes, (ii) extend
the Exchange Offer or (iii) waive such conditions. See
"The Exchange Offer--Conditions."
Procedures for Tendering Old Each Holder of Old Notes wishing to accept the Exchange
Notes........................... Offer must complete, sign and date the Letter of
Transmittal, or a facsimile thereof, in accordance with
the instructions contained herein and therein, and mail
or otherwise deliver such Letter of Transmittal, or such
facsimile, together with such Old Notes to be exchanged
and any other required documentation to The Bank of New
York, as Exchange Agent (the "Exchange Agent"), at the
address set forth herein and therein or effect a tender
of such Old Notes pursuant to the procedures for
book-entry transfer as provided for herein. By executing
the Letter of Transmittal, each Holder will represent to
the Company that, among other things, the New Notes
acquired pursuant to the Exchange Offer are being
obtained in the ordinary course of business of the
person receiving such New Notes, whether or not such
person is the Holder, that neither the Holder nor any
such other person has an arrangement or understanding
with any person to participate in the distribution of
such New Notes and that neither the Holder nor any such
person is an "affiliate", as defined in Rule 405 under
the Securities Act, of the Company. Each broker-dealer
that receives New Notes for its own account in exchange
for Old Notes, where such Old Notes were acquired by
such broker-dealer as a result of market making
activities or other trading activities and not acquired
directly from the Company, must acknowledge that it will
deliver a prospectus in connection with any resale of
such New Notes. See "The Exchange Offer--Procedures" for
"Tendering and Plan of Distribution."
Special Procedures for Beneficial
Owners.......................... Any beneficial owner whose Old Notes are registered in
the name of a broker, dealer, commercial bank, trust
company or other nominee and who wishes to tender such
Old Notes in the Exchange Offer should contact such
registered Holder promptly and instruct such registered
Holder to tender such Old Notes on such beneficial
owner's behalf. If such beneficial owner wishes to
tender on such beneficial owner's own behalf, such owner
must, prior to completing and executing the Letter of
Transmittal and delivering its Old Notes, either make
appropriate arrangements to register ownership of the
Old Notes in such beneficial owner's name or obtain a
properly completed bond power from the registered
Holder. The transfer of registered ownership may take
considerable time and may not be able to be completed
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
prior to the Expiration Date. See "The Exchange Offer--
Procedures for Tendering."
Guaranteed Delivery Procedures.... Holders of Old Notes who wish to tender their Old Notes
and whose Old Notes are not immediately available or who
cannot deliver their Old Notes, the Letter of
Transmittal or any other documents required by the
Letter of Transmittal to the Exchange Agent, or cannot
complete the procedure for book-entry transfer, prior to
the Expiration Date must tender their Old Notes
according to the guaranteed delivery procedures set
forth in "The Exchange Offer--Guaranteed Delivery
Procedures."
Withdrawal Rights................. Tenders may be withdrawn at any time prior to 5:00 p.m.,
New York City time, on the Expiration Date by delivering
a written notice of such withdrawal to the Exchange
Agent in conformity with certain procedures set forth
below under "The Exchange Offer--Withdrawal of Tenders."
Acceptance of Old Notes and
Delivery of New Notes........... The Company will accept for exchange any and all Old
Notes which are properly tendered in the Exchange Offer
prior to 5:00 p.m., New York City time, on the
Expiration Date. The New Notes issued pursuant to the
Exchange Offer will be delivered promptly following the
Expiration Date. Any Old Notes not accepted for exchange
will be returned without expense to the tendering Holder
thereof as promptly as practicable after the expiration
or termination of the Exchange Offer. See "The Exchange
Offer--Terms of the Exchange Offer."
Certain Tax Considerations........ The exchange pursuant to the Exchange Offer will not be
a taxable event for federal income tax purposes. See
"Certain United States Federal Income Tax
Considerations."
Exchange Agent.................... The Bank of New York is serving as Exchange Agent in
connection with the Exchange Offer.
</TABLE>
10
<PAGE>
TERMS OF NEW NOTES
The Exchange Offer applies to up to $95 million aggregate principal amount
at maturity of Coinstar's Old Notes. The New Notes will be obligations of the
Company evidencing the same debt as the Old Notes and will be entitled to the
benefits of the same Indenture. See "Description of New Notes." The form and
terms of the New Notes are the same as the form and terms of the Old Notes in
all material respects except that the New Notes have been registered under the
Securities Act and hence do not include certain rights to registration
thereunder and do not contain transfer restrictions or terms with respect to the
special interest payments applicable to the Old Notes. See "Description of New
Notes."
<TABLE>
<S> <C>
New Notes Offered................. $95 million aggregate principal amount at maturity of
13% Senior Discount Notes due October 1, 2006.
Accretion and Interest Payments... No cash interest will accrue or be payable in respect of
the New Notes prior to October 1, 1999. Thereafter,
interest will accrue at the rate of 13% per annum and
will be payable semi-annually in arrears on each October
1 and April 1, commencing April 1, 2000.
Maturity Date..................... October 1, 2006.
Optional Redemption............... The New Notes will be redeemable, in whole or in part,
at the option of the Company, on or after October 1,
2001, at the redemption prices set forth herein plus
accrued and unpaid interest and Liquidated Damages
thereon, if any, to the date of redemption. At any time
prior to October 1, 1999, the Company may, at its
option, redeem up to 100% of the aggregate principal
amount of the New Notes originally issued at 118% of the
Accreted Value thereof as of the redemption date, plus
accrued and unpaid Liquidated Damages, if any, to the
date of redemption, with the proceeds of a Public Equity
Offering after which there is a Public Market; provided,
however, that such redemption occurs within 60 days of
the date of closing of such Public Equity Offering.
Mandatory Redemption or Sinking
Fund............................ None.
Change of Control................. In the event of a Change of Control, the Company will be
obligated to make an offer to purchase all or a portion
of the New Notes then outstanding at a purchase price of
101% of the Accreted Value thereof (if prior to October
1, 1999) plus accrued and unpaid Liquidated Damages
thereon, if any, or (if on or after October 1, 1999)
101% of the principal amount thereof plus accrued and
unpaid interest and Liquidated Damages thereon, if any,
to the date of repurchase.
Ranking........................... The New Notes will represent general unsecured
obligations of the Company, and will be subordinated to
all other Senior Debt of the Company and will be
effectively subordinated to all indebtedness (including
senior indebtedness and trade credit) of subsidiaries of
the Company.
Certain Covenants................. The Indenture contains certain covenants that, among
other things, limit the ability of the Company and its
subsidiaries to incur debt, issue certain preferred
stock, sell or transfer assets,
</TABLE>
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<TABLE>
<S> <C>
make restricted payments and engage in certain
transactions with affiliates and certain mergers.
Exchange Rights................... Holders of New Notes will not be entitled to any
exchange or registration rights with respect to the New
Notes. Holders of Old Notes are entitled to certain
exchange rights pursuant to the Registration Rights
Agreement. Under the Registration Rights Agreement, the
Company is required to offer to exchange the Old Notes
for new notes having substantially identical terms which
have been registered under the Securities Act. This
Exchange Offer is intended to satisfy such obligation.
Once the Exchange Offer is consummated, the Company will
have no further obligations to register any of the Old
Notes not tendered by the Holders for exchange. See
"Risk Factors--Consequences to Non-Tendering Holders of
Old Notes."
Use of Proceeds................... The Company will not receive any proceeds from the
Exchange Offer.
</TABLE>
CERTAIN CONSEQUENCES OF A FAILURE TO EXCHANGE OLD NOTES
The Old Notes have not been registered under the Securities Act or any state
securities laws and therefore may not be offered, sold or otherwise transferred
except in compliance with the registration requirements of the Securities Act
and any other applicable securities laws, or pursuant to an exemption therefrom
or in a transaction not subject thereto, and in each case in compliance with
certain other conditions and restrictions, including the Company's and the
Trustee's (as defined herein) right in certain cases to require the delivery of
opinions of counsel, certifications and other information prior to any such
transfer. Old Notes which remain outstanding after consummation of the Exchange
Offer will continue to bear a legend reflecting such restrictions on transfer.
In addition, upon consummation of the Exchange Offer, Holders of Old Notes which
remain outstanding will not be entitled to any rights to have such Old Notes
registered under the Securities Act or to any similar rights under the
Registration Rights Agreement (subject to certain limited exceptions applicable
solely to the Initial Purchaser). The Company currently does not intend to
register under the Securities Act any Old Notes which remain outstanding after
consummation of the Exchange Offer (subject to such limited exceptions, if
applicable).
To the extent that Old Notes are tendered and accepted in the Exchange Offer
any trading market for Old Notes which remain outstanding after the Exchange
Offer could be adversely affected.
The New Notes and any Old Notes which remain outstanding after consummation
of the Exchange Offer will vote together as a single class for purposes of
determining whether holders of the requisite percentage in outstanding principal
amount thereof have taken certain actions or exercised certain rights under the
Indenture. See "Description of New Notes."
The Registration Rights Agreement relating to Old Notes provides that, if
the Exchange Offer were not consummated by October 1, 1999, the interest rate
borne by the Old Notes would increase by 0.50% per annum following October 1,
1999, until the Exchange Offer were consummated. See "Description of Old Notes."
Following consummation of the Exchange Offer, neither the Old Notes nor the New
Notes will be entitled to any increase in the interest rate thereon.
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<PAGE>
SUMMARY FINANCIAL INFORMATION AND OTHER DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT DATA)
The following table sets forth summary statement of operations data and
selected other data of the Company for each of the years in the four year period
ended December 31, 1996, for the six months and three months ended June 30, 1997
and 1996 and the balance sheet data at June 30, 1997. The financial information
data were derived from, and should be read in conjunction with, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Financial Statements of the Company and the notes thereto included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS
YEAR ENDED DECEMBER 31, JUNE 30, ENDED JUNE 30,
----------------------------------- ----------------- ----------------
1993 1994 1995 1996 1996 1997 1996 1997
------- ------- ------- -------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue:........................................ $ 15 $ 325 $ 1,063 $ 8,312 $ 2,134 $ 9,289 $ 1,388 $ 5,294
Expenses:
Direct operating.............................. 45 488 1,336 7,258 2,209 7,416 1,321 3,966
Regional sales and marketing.................. 3 86 349 1,505 615 1,602 407 972
Product research and development.............. 1,368 1,648 1,830 3,969 1,423 3,080 762 1,640
Selling, general and administrative........... 402 1,716 2,790 5,351 1,939 5,157 1,067 2,630
Depreciation and amortization................. 40 440 1,117 4,135 1,295 3,843 796 2,158
Loss from operations............................ (1,843) (4,053) (6,359) (13,906) (5,347) (11,809) (2,965) (6,072)
Net loss........................................ $(1,814) $(4,316) $(6,169) $(15,967) $(5,347) $(15,548) $(3,038) $(8,047)
Pro forma net loss per share(1)................. -- -- -- $ (1.49) $ (.51) $ (1.49) $ (0.29) $ (0.77)
Pro forma weighted average shares
outstanding(1)................................ -- -- -- 10,715 10,460 10,460 10,460 10,460
OTHER DATA:
Number of new Coinstar units installed during
the period.................................... 13 31 215 1,238 533 834 364 406
Installed base of Coinstar units at end of
period........................................ 17 48 263 1,501 796 2,335 796 2,335
Number of regional markets...................... 2 4 11 23 18 33 18 33
Dollar value of coins processed................. $ 74 $ 5,245 $17,701 $115,476 $32,998 $123,350 $20,692 $70,626
Capital expenditures............................ 620 2,163 3,823 20,820 9,651 15,392 6,466 7,717
Direct contribution (loss)(2)................... (30) (163) (273) 1,054 (75) 1,873 67 1,328
Direct operating expense per average installed
unit(3)....................................... -- 20,353 11,717 8,610 4,641 3,875 2,205 1,858
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
-----------------------------------------
PRO FORMA AS
ACTUAL PRO FORMA(4) ADJUSTED(5)
---------- ------------- --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments(6)................. $ 39,352 $ 39,352 $ 67,895
Total assets......................................................... 79,103 79,103 107,646
Total debt, including current portion................................ 74,629 74,629 74,629
Mandatorily Redeemable Preferred Stock............................... 24,972 -- --
Total stockholders' equity (deficit)................................. $ (37,474) $ (12,502) $ 16,041
</TABLE>
- ------------------------------
(1) See Note 2 to Audited Financial Statements for an explanation of the
determination of the number of shares used in computing pro forma net loss
per share. Pro forma net loss per share is not presented for the years ended
December 31, 1993 through 1995 due to the lack of comparability.
(2) Direct contribution (loss) is defined as revenue less direct operating
expenses. The Company uses direct contribution (loss) as a measure of
operating performance to assist in understanding its operating results.
Direct contribution (loss) is not a measure of financial performance under
generally accepted accounting principles ("GAAP") and should not be
considered in isolation or an alternative to gross margin, income (loss)
from operations, net income (loss), or any other measure of performance
under GAAP.
(3) Based on monthly averages of units in operation over the applicable period.
Commercial deployment of the units did not commence until 1994; therefore,
information relating to 1993 is not meaningful.
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<PAGE>
(4) Reflects, at the closing of the Company's initial public offering of
3,000,000 shares of Common Stock on July 9, 1997 (the "Initial Public
Offering") the conversion of all outstanding shares of Preferred Stock into
Common Stock and excludes (a) the exercise of certain warrants on a cash
basis to purchase 352,907 shares of Common Stock at an aggregate exercise
price of approximately $1.26 million, which expired on July 9, 1997; and (b)
the issuance of 1,035,715 shares of Common Stock upon the net exercise of
certain warrants, which expired on July 9, 1997. Also excludes the assumed
exercise of certain warrants on a cash basis to purchase 665,000 shares of
Common Stock at an aggregate exercise price of $6,650, which expire within
90 days of July 9, 1997 and warrants to purchase 1,042,981 shares of Common
Stock at a weighted average exercise price of $12.57 per share, which
warrants did not expire upon the closing of the Initial Public Offering or
within 90 days thereafter.
(5) Adjusted to reflect the proceeds of the Company's Initial Public Offering at
an offering price of $10.50 per share after deducting estimated underwriting
discounts and commissions and offering expenses payable by the Company. See
"Use of Proceeds."
(6) Cash, cash equivalents and short-term investments include $11.1 million of
funds in transit, which represent amounts being processed by armored car
carriers or residing in Coinstar units.
RECENT DEVELOPMENTS
On October 28, 1997, the Company announced preliminary results for the three
months ended September 30, 1997. The Company estimated revenue of approximately
$7.8 million as compared to revenue of $2.8 million for the third quarter of
1996. Net loss was approximately $6.7 million or approximately $0.47 per share
as compared to a net loss of $3.5 million or $0.34 per share for the comparable
period of 1996.
For the first nine months of 1997, revenue was approximately $17.1 million
as compared to $5.0 million for the comparable period of 1996. Net loss for the
first nine months of 1997 was estimated to be approximately $22.3 million or
approximately $1.96 per share as compared to a net loss of $8.9 million or $0.85
per share for the same period of the previous year. The Company intends to
announce definitive results for the third quarter on or about November 14, 1997.
14
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE NEW NOTES BEING OFFERED HEREBY INVOLVES A HIGH DEGREE
OF RISK. PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY THE FOLLOWING RISK
FACTORS, IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS,
BEFORE EXCHANGING THE OLD NOTES FOR THE NEW NOTES OFFERED HEREBY. THIS
PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED
IN "RISK FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS" AND "BUSINESS" AS WELL AS THOSE DISCUSSED ELSEWHERE
IN THIS PROSPECTUS.
HISTORY OF SUSTAINED OPERATING LOSSES AND CONTINUATION OF SUCH LOSSES
The Company has incurred substantial and increasing operating losses since
inception in 1991. The Company's net loss for 1995, 1996 and the six months and
three months ended June 30, 1997 was $6.2 million, $16.0 million, $15.5 million
and $8.0 million, respectively. As of June 30, 1997, the Company had an
accumulated deficit of $44.4 million. Operating losses to date have resulted
primarily from expenses incurred in the development, marketing and operation of
the Coinstar units, development and maintenance of the network, administrative
and occupancy expenses at the Company's headquarters, and depreciation and
amortization. The Company expects to continue to incur substantial and
increasing operating losses and negative cash flow from operating and investing
activities as it plans to significantly increase its installed base of Coinstar
units. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
LIMITED OPERATING HISTORY
After several years of development, the Company commenced commercial
deployment of Coinstar units in 1994 and placed approximately 89% of the
installed base as of June 30, 1997 in service during 1996 and the six months
ended June 30, 1997. Prospective investors, therefore, have limited historical
financial information on which to base an evaluation of the Company's
performance. The Company's prospects must be considered in light of the risks,
expenses and difficulties frequently encountered by companies in an early stage
of development, particularly companies in new or rapidly evolving markets. There
can be no assurance that the Company will install a sufficient number of its
Coinstar units or obtain sufficient market acceptance to allow the Company to
achieve or sustain profitability, or generate sufficient cash flow to meet the
Company's capital and operating expenses and debt service obligations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business."
UNCERTAINTY OF FUTURE OPERATING RESULTS
Substantially all of the Company's revenue has been, and the Company
believes will continue to be, derived from the processing fees charged for the
Company's coin processing service. Prior growth rates in the Company's revenue
should not be considered indicative of future operating results. The timing and
amount of future revenues will depend almost entirely on the Company's ability
to obtain new agreements with supermarket chains and other potential retail
distribution partners for the installation of Coinstar units, the successful
deployment and operation of the Company's coin processing network, and customer
utilization of the service. Future operating results will depend upon many
factors, including the Company's success in deploying a substantial number of
additional units, the consumer demand for the Company's coin processing service,
the level of product and price competition, the Company's success in expanding
its national network and managing the growth of such network, the ability of the
Company to develop and market product enhancements, the timing of product
enhancements, activities of and acquisitions by competitors, the ability to hire
additional employees and the timing of such hiring and the ability to control
costs. Fluctuations in the volume and value of coins processed and the rate of
unit installations have caused and may continue to cause material fluctuations
in the Company's operating results, particularly on a
15
<PAGE>
quarterly basis. Quarterly revenue and operating results, therefore, depend on
the volume and mix of coins processed and the rate of unit installations during
the quarter, all of which are difficult to forecast. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business--Sales and Marketing."
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The customer utilization of the Company's coin processing service varies
substantially from unit to unit, making the Company's revenues difficult to
forecast. Customer utilization is affected by the timing and success of
promotions by the Company and its retail distribution partners, age of the
installed unit, adverse weather conditions and other factors, many of which are
not in the Company's control. Based on its limited operating history, the
Company believes that coin processing volumes are affected by seasonality; in
particular the Company believes that on a relative basis coin processing volumes
have been lower in the months of January, February, September and October. There
can be no assurance, however, that such seasonal trends will continue. Any
projections of future seasonality are inherently uncertain due to the Company's
limited operating history, and due to the lack of comparable companies engaged
in the coin processing business. As a result of these and other factors, revenue
for any quarter is subject to significant variation, and the Company believes
that period-to-period comparisons of its results of operations are not
necessarily meaningful and should not be relied upon as indications of future
performance. Because the Company's operating expenses are based on anticipated
revenue trends and because a large percentage of the Company's expenses are
relatively fixed, revenue variability could cause significant variations in
operating results from quarter to quarter and could result in significant
losses. To the extent such expenses precede, or are not subsequently followed
by, increased revenue, the Company's operating results would be materially
adversely affected. Due to all of the foregoing factors, it is likely that in
some future quarter the Company's operating results will be below the
expectations of public market analysts and investors. In such event, the price
of the Company's Common Stock would likely be materially adversely affected.
Fluctuations in operating results may also result in volatility in the price of
the Company's Common Stock. See "Risk Factors--Possible Termination of Retail
Distribution Partner Agreements," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business--Sales and
Marketing."
SUBSTANTIAL LEVERAGE AND ABILITY TO SERVICE DEBT
The Company had outstanding indebtedness as of June 30, 1997 of $74.6
million, which included $70.6 million of the Notes. The Notes will accrete to
$95.0 million by October 1999. The Company must begin paying cash interest on
the Notes in April 2000. Beginning at that time, the Company will have debt
service obligations of over $12.0 million per year until October 2006 when the
principal amount of $95.0 million will be due. The Company's capital
expenditures will increase significantly upon the continued expansion of the
Coinstar network, and the Company expects that its operating cash flow will be
insufficient to finance capital expenditures over the next several years. The
ability of the Company to meet its debt service requirements will depend upon
achieving significant and sustained growth in the Company's cash flow, which
will be affected by its success in implementing its business strategy,
prevailing economic conditions and financial, business and other factors,
certain of which are beyond the Company's control. Accordingly, there can be no
assurance as to whether or when the Company's operations will generate positive
cash flow or become profitable or whether the Company will at any time have
sufficient resources to meet its debt service obligations. If the Company is
unable to generate sufficient cash flow to service its indebtedness, it will
have to reduce or delay planned capital expenditures, sell assets, restructure
or refinance its indebtedness or seek additional equity capital. There can be no
assurance that any of these strategies could be effected on satisfactory terms,
if at all, particularly in light of the Company's high levels of indebtedness.
In addition, the degree to which the Company is leveraged could have significant
consequences, including, but not limited to, the following: (i) the Company's
ability to obtain additional financing in the future for working capital,
capital expenditures, product research and development,
16
<PAGE>
acquisitions, and other general corporate purposes may be materially limited or
impaired, (ii) a substantial portion of the Company's cash flow from operations
may need to be dedicated to the payment of principal and interest on its
indebtedness and therefore not available to finance the Company's business and
(iii) the Company's high degree of leverage may make it more vulnerable to
economic downturns, may limit its ability to withstand competitive pressures and
may reduce its flexibility in responding to changing business and economic
conditions. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
COMPETITION
The Company believes that it is the first company to provide a widespread
network of self-service coin processing machines that provide a convenient,
reliable means for consumers to convert loose coins into cash. The Company has
become aware of two direct competitors that operate self-service coin processing
machines, both of which the Company believes operate an installed base of less
than 50 units in certain regions of the United States. There can be no
assurance, however, that such competitors have not or will not increase their
installed base of units or expand their service nationwide. The Company also
competes indirectly with manufacturers of machines and devices that enable
consumers to count or sort coins themselves. The Company also competes or may
compete directly or indirectly with banks and similar depository institutions
for coin conversion customers. Currently, banks are the primary alternative
available to consumers for converting coins into cash, and they generally do not
charge a fee for accepting rolled coins. As the market for coin processing
develops, banks and other businesses may decide to offer additional coin
processing services, either as a customer service or on a self-service basis,
and compete directly with the Company. Many of these potential competitors have
longer operating histories, greater name recognition, larger customer bases and
significantly greater financial, technical, marketing and public relations
resources than the Company. Such competitors may be able to undertake more
extensive marketing campaigns, adopt more aggressive pricing policies and make
more attractive offers to consumers and businesses. There can be no assurance,
however, that the Company's competitors, or others will not succeed in
developing technologies, products or services that are more effective, less
costly or more widely used than those that have been or are being developed by
the Company or that would render the Company's technologies or products obsolete
or noncompetitive. There can be no assurance that the Company will be able to
compete effectively with current or future competitors or that the competitive
pressures faced by the Company will not have a material adverse effect on the
Company's business, financial condition and results of operations and on its
ability to achieve sufficient cash flow to service its indebtedness. See
"Business--Competition."
DEPENDENCE ON CONTINUED MARKET ACCEPTANCE BY CONSUMERS AND RETAIL DISTRIBUTION
PARTNERS
The Company is substantially dependent on continued market acceptance of its
coin processing service by consumers and its retail distribution partners, which
have been almost exclusively supermarket chains. The self-service coin
processing market is relatively new and evolving; accordingly, it is difficult
to predict the future growth rate and size of this market. There can be no
assurance that the Company will be successful in achieving the large-scale
adoption of its coin processing service. While the Company's existing installed
base of Coinstar units has been well received by both retail distribution
partners and customers to date, there can be no assurance that the operating
results of the installed units will continue to be favorable or past results
will be indicative of future market acceptance of the Company's service. The
Company believes that market acceptance of the Coinstar unit is dependent on the
consumer's perception that the units are convenient, easy to use and reliable.
Even if the Company is successful in promoting awareness of the Coinstar unit
among consumers, there can be no assurance that such consumers will utilize the
Coinstar units in sufficient volume to make the Company profitable. In addition,
market acceptance and ongoing use of the Coinstar service may be adversely
affected by the increasing use of alternatives to coin and currency transactions
such as credit and debit cards, checks, wire transfers, smart cards and other
forms of electronic payment. See "Business--Sales and Marketing."
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<PAGE>
Market acceptance of the Coinstar units is also dependent on the willingness
of potential retail distribution partners to have the units installed in their
stores. The Company believes that market acceptance by potential retail
distribution partners will be dependent on its ability to demonstrate the
utility of the Coinstar unit as a customer service and as a means to provide
other tangible benefits, including increased customer traffic and the promotion
of store sales. There can be no assurance, however, that potential retail
distribution partners will be willing to place Coinstar units in their stores or
that, once installed, Coinstar units will obtain market acceptance from
consumers. Market acceptance and the Company's revenues may also be affected by
the availability and success of coin processing services offered by competitors.
In the event the Company's service does not achieve market acceptance or does so
less rapidly than expected or the Company's contracts with one or more of its
retail distribution partners is terminated, the Company and its results of
operations, including its ability to achieve sufficient cash flow to service its
indebtedness and achieve profitability, will be materially adversely affected.
Moreover, the Company intends to deploy the Coinstar units in banks, convenience
stores and mass merchants and is exploring opportunities for deployment in the
international market. However, the Company has not yet entered such markets and
there can be no assurance that, if entered, deployment in such markets would be
successful. See "Risk Factors--Possible Termination of Retail Distribution
Partner Agreements" and "Business."
POSSIBLE TERMINATION OF RETAIL DISTRIBUTION PARTNER AGREEMENTS
The Company is substantially dependent upon its ability to enter into
agreements with retail distribution partners for the installation of its
Coinstar units. In addition, the Company generally has separate agreements with
each of its retail distribution partners, providing for the Company's exclusive
right to provide coin processing services in their retail locations. These
contracts generally have terms ranging from two to three years and are generally
terminable by either party with advance notice of at least 90 days. In addition,
Coinstar units in service in several supermarket chains account for a
significant portion of the Company's revenue. In the six months ended June 30,
1997, Coinstar units in service in three supermarket chains accounted for
approximately 32.3% of the Company's revenue. The units in service in two of
these chains, Ralphs Grocery Co. ("Ralphs") and The Kroger Co. ("Kroger"),
accounted for approximately 11.0% and 13.0%, respectively, of the Company's
revenue in the six months ended June 30, 1997. The termination of any one or
more of the Company's contracts with its retail distribution partners could have
a material adverse effect on the Company's business, financial condition,
results of operations and on its ability to achieve sufficient cash flow to
service its indebtedness. See "Business--Sales and Marketing."
MANAGEMENT OF GROWTH
The Company has experienced rapid growth and intends to continue to
aggressively expand its operations. The growth in the size and scale of the
Company's business has placed and is expected to continue to place significant
demands on its operational, administrative and financial personnel and operating
systems. Additional planned expansion by the Company may further strain
management and other resources. The Company's ability to manage growth
effectively will depend on its ability to improve its operating systems, to
expand, train and manage its employee base and to develop additional
manufacturing and service capacity. In particular, the Company will be required
to rapidly expand its operating systems and processes in order to support the
projected installations of Coinstar units and the potential addition of
value-added services. Such expansion will require improvements to both hardware
and software and the hiring and training of additional software engineers. In
addition, the Company will be required to establish relationships with
additional third-party service providers. These demands, and others, will
require the addition of new management personnel and the development of
additional expertise by existing management personnel. There can be no assurance
that the Company will be able to effectively manage the expansion of its
operations, or that the Company's systems, procedures or controls will be
adequate to support the Company's operations or that Company management will be
able to achieve and manage the
18
<PAGE>
rapid roll-out currently projected. If the Company is unable to manage growth
effectively, the Company's business, financial condition and results of
operations and its ability to achieve sufficient cash flow to service its
indebtedness will be materially adversely affected. See "Business."
DEPENDENCE ON A SINGLE SERVICE
The Company has and expects for the foreseeable future to derive
substantially all of its revenues from the operation of Coinstar units.
Accordingly, market acceptance of the Company's coin processing service is
critical to the Company's future success. Since there is only a limited existing
market for the Company's coin processing service, there can be no assurance that
an acceptable level of demand will be achieved or sustained. If sufficient
demand for the Company's coin processing service does not develop due to lack of
market acceptance, technological change, competition or other factors, the
Company's business, financial condition and results of operations and its
ability to achieve sufficient cash flow to service its indebtedness will be
materially adversely affected. See "Risk Factors--Dependence on Continued Market
Acceptance By Consumers and Retail Distribution Partners" and "Business--Sales
and Marketing."
EXPOSURE TO COMPONENT SHORTAGES FROM SINGLE SOURCE SUPPLIER
The Company currently purchases the coin counter component of the Coinstar
unit from a single manufacturer, Scan Coin AB, pursuant to an agreement that may
be terminated by either party with six months notice at any time on or after
June 30, 1998. The Company has entered into a non-binding letter of intent with
Scan Coin AB for a new agreement, although no assurance can be given that the
parties will enter into a new agreement. Currently, no other manufacturer
produces a coin counter capable of being used in the Coinstar units without
extensive enhancements and modifications. No assurance can be given that Scan
Coin AB will be able or willing to supply coin counter components to the Company
in the future. The Company believes it would require up to 12 months to source
and make necessary modifications to an alternative coin counter component.
Moreover, it could take several additional months for any such alternative
supplier to meet the Company's required volume levels. Accordingly, any
cessation, slow-down or disruption in the Company's current supply of coin
counter components would have a material adverse effect on the Company's
business, financial condition and results of operations and on its ability to
achieve sufficient cash flow to service its indebtedness. Although the Company
believes alternative suppliers are available, there can be no assurance that the
Company would be able to locate an alternate supplier on a timely or
cost-efficient basis, if at all, and make the necessary modifications and
enhancements to the design of the Coinstar unit to utilize such replacement,
both of which, in the event of their nonoccurrence, would materially impair its
ability to have Coinstar units manufactured. A prolonged inability to obtain
certain components could have a material adverse effect on the Company's
business, financial condition and results of operations and on its ability to
achieve sufficient cash flow to service its indebtedness, particularly as the
Company increases its manufacturing requirements to support its nationwide
deployment. See "Business--Manufacturing and Supply."
RELIANCE ON THIRD-PARTY MANUFACTURER AND SERVICE PROVIDERS
The Company does not conduct manufacturing operations and is dependent and
will continue to be dependent on outside parties for the manufacture of the
Coinstar unit and its key components. While Coinstar intends to significantly
expand its installed base, such expansion may be constrained by the
manufacturing capacity of its third-party manufacturers and suppliers. Although
the Company expects that its current contract manufacturer, SeaMed Corporation
("SeaMed") will be able to produce sufficient units to meet projected demand,
there can be no assurance that SeaMed or other manufacturers will be able to
meet the Company's manufacturing needs in a satisfactory and timely manner. In
the event of an unanticipated increase in demand for Coinstar unit installations
by retail distribution partners, the Company may be unable to meet such demand
due to manufacturing constraints. Although the Company
19
<PAGE>
has a contract with SeaMed, it does not have a long-term obligation to continue
the manufacture of the Coinstar unit or its components. Further, SeaMed is
principally engaged in the manufacture of electronic medical instruments for
medical technology companies. The Company believes that it is SeaMed's only
material non-medical customer. As such, the Company faces an increased risk that
SeaMed may choose to focus exclusively on manufacturing its medical products and
cease making the Company's products. Should SeaMed cease providing services, the
Company would be required to locate and qualify additional suppliers. There can
be no assurance that the Company would be able to locate alternate manufacturers
on a timely basis. The Company's reliance on third-party manufacturers involves
a number of additional risks, including the absence of guaranteed capacity and
reduced control over delivery schedules, quality assurance, production yields
and costs. There can be no assurance that the manufacturing capability of such
third-party manufacturers will successfully address the Company's needs. In the
event the Company is unable to retain such manufacturing on commercially
reasonable terms, its business, financial condition and results of operation and
its ability to achieve sufficient cash flow to service its indebtedness will be
materially adversely affected. See "Business--Manufacturing and Supply."
The Company relies on third-party service providers for substantial support
and service efforts that the Company currently does not provide directly. In
particular, the Company contracts with armored carriers to arrange for the
pick-up, processing and deposit of coins. The Company generally contracts with
one armored carrier to service a particular region. Many of these carriers do
not have long-standing relationships with the Company and these contracts
generally can be terminated by either party with advance notice ranging from 30
to 90 days. In the past, the Company has experienced a sudden disruption in
service from an armored carrier company. The Company does not currently have nor
does it expect to have in the foreseeable future the internal capability to
provide back up service in the event of sudden disruption in service from an
armored carrier company. Any failure by the Company to maintain its existing
relationships or to establish new relationships on a timely basis or on
acceptable terms would have a material adverse effect on the Company's business,
financial condition and results of operations and on its ability to achieve
sufficient cash flow to service its indebtedness. Moreover, as with any business
that handles large volumes of cash, the Company is susceptible to theft,
counterfeit and other forms of fraud, including security breaches of the
Company's computing system that performs important accounting functions. There
can be no assurance that the Company will be successful in developing product
enhancements and new services to thwart such attempts. See "Business--The
Coinstar System."
RISK OF DEFECTS IN OPERATING SYSTEMS
The Company collects financial and operating data and monitors unit
performance through a wide-area communications network connecting each of the
Coinstar units with a central computing system located at the Company's
headquarters. This information is used to track the flow of coins, verify coin
counts and schedule and dispatch unit service. The operation of the Coinstar
units depends on sophisticated software, computing systems and communications
services that may contain undetected errors or are subject to failures. These
errors and failures may arise particularly when new services or service
enhancements are added or when the volume of services provided increases.
Although each unit is designed to store all data collected, helping to ensure
critical data is not lost due to an operating systems failure, the inability of
the Company to collect the data from its units could lead to a delay in
processing coins and crediting the accounts of its distribution partners for
vouchers already redeemed. Further, there can be no assurance that the design of
the operating systems to prevent the loss of data will operate as intended and
any loss of or delay in collecting coin processing data would materially and
adversely effect the Company's operations. In addition, the Company has in the
past experienced limited delays and disruptions resulting from upgrading or
improving its operating systems. Although such disruptions have not had a
material effect on the Company's operations, there can be no assurance that
future upgrades or improvements will not result in delays or disruptions that
would have a material adverse impact on the Company's operations. In particular,
the Company is currently planning some significant improvements in its operating
platform in order to support its projected expansion of the installed base of
Coinstar units and the potential addition
20
<PAGE>
of value-added services. While the Company is taking steps to ensure that the
potential adverse impact of such improvements on the Company's operations is
minimized, there can be no assurance that the platform will be able to handle
the increased volume of services expected from the continued expansion of the
Company's network and the potential addition of value-added services or that the
improvements will occur on a timely basis so as not to disrupt such continued
expansion and potential addition of value-added services. In addition, the
communications network on which the Company relies is not owned by the Company
and is subject to service interruptions. Further, while the Company has taken
significant steps to protect the security of its network, any breach of such
security whether intentional or from a computer virus could have a material
adverse impact on the Company. Any service disruptions, either due to errors or
delays in the Company's software or computing systems or interruptions or
breaches in the communications network, or security breaches of the system,
could have a material adverse affect on the Company's business, financial
condition and results of operations and on its ability to achieve sufficient
cash flow to service its indebtedness. See "Business--The Coinstar System."
DEPENDENCE ON KEY PERSONNEL AND NEED TO HIRE ADDITIONAL PERSONNEL
The Company's performance is substantially dependent on the performance of
its executive officers and key employees and its long term success will depend
on its ability to recruit, retain and motivate highly skilled personnel. Jens H.
Molbak, President and Chief Executive Officer, Rod W. Brooks, Vice President of
Sales and Marketing, Aaron R. Finch, Vice President of Operations, and Daniel A.
Gerrity, Vice President and Chief Technical Officer, have been primarily
responsible for the development and expansion of the Company's business. The
Company recently hired Kirk A. Collamer as Vice President and Chief Financial
Officer. All of the Company's executive officers and employees are employed on
an at-will basis. The loss of the services of any of these executive officers or
other key employees or the inability to attract and retain necessary technical
and managerial personnel could have a material adverse effect upon the Company's
business, financial condition and results of operation and on its ability to
achieve sufficient cash flow to service its indebtedness. Presently, the Company
maintains a "key man" life insurance policy on Mr. Molbak in the amount of $2.0
million. See "Management."
UNCERTAINTY OF PROTECTION OF PATENTS AND PROPRIETARY RIGHTS
The Company's future success depends, in part, on its ability to protect its
intellectual property and maintain the proprietary nature of its technology
through a combination of patents, licenses and other intellectual property
arrangements, without infringing the proprietary rights of third parties. In
October 1996 and April 1997, the Company was issued United States patents
relating to removing debris from coins processed in a self-service environment
and other aspects of self-service coin processing. These patents will expire in
October 2013 and April 2014, respectively. Sufficient debris removal is
important to reducing clogging and malfunctioning. Reducing these problems and
the associated downtime improves unit availability for customer use and reduces
the amount of time that Company or retail partner personnel must spend attending
to the unit, both of which are important features of operating in a self-service
environment. No assurance can be given that any patents from any pending patent
applications or from any future patent applications will be issued, that any of
the Company's patents will be held valid if subsequently challenged or that
others will not claim rights in or ownership of the patents and other
proprietary rights held by the Company. Moreover, there can be no assurance that
any patents issued to the Company will not be challenged, invalidated or
circumvented, or that the rights granted thereunder will provide proprietary
protection to the Company. Despite the Company's efforts to safeguard and
maintain its proprietary rights, there can be no assurance that the Company will
be successful in doing so or that the Company's competitors will not
independently develop or patent technologies that are substantially equivalent
or superior to the Company's technologies. On June 18, 1997, the Company filed
in the United States District Court, Northern District of California against
CoinBank Automated Systems, Inc. ("CoinBank"), one of its competitors, a
complaint for infringement of one of the Company's United States patents (the
"Patent Infringement Claim"). CoinBank responded to the Company by letter
21
<PAGE>
dated June 23, 1997, alleging that the Company failed to conduct a reasonable
investigation before filing the Patent Infringement Claim, the Patent
Infringement Claim is unreasonable and without factual foundation and the Patent
Infringement Claim was filed for an improper purpose. CoinBank has demanded the
Company dismiss such action, and has indicated that if such action is not
dismissed, CoinBank will answer the Patent Infringement Claim on June 26, 1997
and counterclaim for declaration of noninfringement, invalidity and
unenforceability of the subject patent and file a claim for $12 million of
damages based on the tort of intentional interference with prospective economic
advantage. CoinBank further stated that it may file a cross-complaint against
Scan Coin AB for indemnity and breach of warranty of title. On June 27, 1997,
CoinBank answered the Patent Infringement Claim and counterclaimed for
declaration of noninfringement, invalidity and unenforceability of the subject
patent, and filed a claim for breach of warranty against Scan Coin AB. There can
be no assurance that the Company will prevail in such Patent Infringement Claim
or on any claim that might be filed by CoinBank against the Company, or that as
a result of such Patent Infringement Claim, the Company's patent will not be
limited in scope or found to be invalid.
Since patent applications in the United States are not publicly disclosed
until the patent is issued, applications may have been filed by others which, if
issued as patents, could cover the Company's products. The Company is subject to
the risk of claims and litigation alleging infringement of the intellectual
property rights of others. There can be no assurance that others will not assert
infringement or misappropriation claims against the Company in the future based
on patents, copyrights or trade secrets or that such claims will not be
successful. The Company could incur substantial costs in defending itself and
its retail distribution partners against any such claims, regardless of the
merits of such claims. Parties making such claims may be able to obtain
injunctive or other equitable relief which could effectively block the Company's
ability to provide its coin processing service and use the processing equipment
in the United States and abroad, and could result in an award of substantial
damages. In the event of a successful claim of infringement, the Company may
need or be required to obtain one or more licenses from, and/or grant one or
more licenses to, others. There can be no assurance that the Company could
obtain necessary licenses from others at a reasonable cost or at all. The
defense of any lawsuit could result in time-consuming and expensive litigation,
damages, license fees, royalty payments, diversion of the attention of key
personnel and restrictions on or the termination of the Company's ability to
provide its coin processing service and use the processing equipment, any of
which could have a material adverse effect on the Company's business, financial
condition and results of operations and on its ability to achieve sufficient
cash flow to service its indebtedness. The Company also relies on trade secrets
to develop and maintain its competitive position. Although the Company protects
its proprietary technology in part by confidentiality agreements with its
employees, consultants and corporate partners, there can be no assurance that
these agreements will not be breached, that the Company will have adequate
remedies for any breach or that the Company's trade secrets will not otherwise
become known or be discovered independently by its competitors. See
"Business--Proprietary Rights."
RAPID TECHNOLOGICAL CHANGE
The self-service coin processing market is relatively new and evolving. As
such, the Company anticipates that, as the market matures, it will be subject to
technological change, new services and product enhancements, particularly as the
Company expands its service offerings. Accordingly, the Company's success may
depend in part upon its ability to develop product enhancements and new services
that keep pace with continuing changes in technology and consumer preferences
while remaining price competitive. There can be no assurance, however, that the
Company would be successful in developing such product enhancements or new
services, that it will be able to introduce such products or services on a
timely basis or that any such product enhancements or new services will be
successful in the marketplace. The Company's failure to develop technological
improvements or to adapt its products and services to technological change on a
timely basis could, over time, have a material adverse effect on the Company's
22
<PAGE>
business, financial condition and results of operations and on its ability to
achieve sufficient cash flow to service its indebtedness. See "Business--Product
Research and Development."
ABSENCE OF PUBLIC MARKET FOR THE NOTES
The New Notes are being offered to the Holders of the Old Notes. Prior to
this Exchange Offer, there has been no public market for the Old Notes. Prior to
Exchange Offer there are no New Notes. The Company does not intend to apply for
listing of the New Notes on any securities exchange or for quotation through the
Nasdaq National Market. The Initial Purchaser has informed the Company that it
currently intends to make a market for the New Notes. However, the Initial
Purchaser is not obligated to do so and any such market making may be
discontinued at any time without notice. Therefore, no assurance can be given as
to whether an active trading market will develop or be maintained for the New
Notes. If the New Notes are traded after their initial issuance they may trade
at a discount from their initial offering price, depending on prevailing
interest rates, the market for similar securities and other factors, including
the financial condition, performance and prospects of the Company.
CONSEQUENCES TO NON-TENDERING HOLDERS OF OLD NOTES
Upon consummation of the Exchange Offer, the Company will have no further
obligation to register the Old Notes. Thereafter, any Holder of Old Notes who
does not tender its Old Notes in the Exchange Offer, including any Holder which
is an "affiliate" (as that term is defined in Rule 405 of the Securities Act) of
the Company which cannot tender its Old Notes in the Exchange Offer, will
continue to hold restricted securities which may not be offered, sold or
otherwise transferred, pledged or hypothecated except pursuant to Rule 144 and
Rule 144A under the Securities Act or pursuant to any other exemption from
registration under the Securities Act relating to the disposition of securities,
provided that an opinion of counsel is furnished to the Company that such an
exemption is available.
RANKING OF NOTES
The Notes will be unsecured obligations of the Company, will be subordinated
to all other Senior Debt of the Company and will be effectively subordinated to
all indebtedness (including senior indebtedness and trade credit) of
subsidiaries of the Company. As of June 30, 1997 the aggregate amount of Senior
Debt of the Company was $4.0 million. See "Capitalization." The Indenture
permits the Company and its subsidiaries to incur substantial additional
indebtedness, including senior indebtedness and secured indebtedness. The
Company currently does not have any subsidiaries.
The Company and its subsidiaries may incur substantial additional
indebtedness, including senior indebtedness and secured indebtedness. Any
holders of secured indebtedness of the Company would be entitled to payment of
their indebtedness out of the proceeds of their collateral prior to the holders
of any general unsecured obligations of the Company, including the Notes, and
any holders of senior indebtedness of the Company or of subsidiaries of the
Company would generally be entitled to repayment of such indebtedness from the
assets of the Company or of the affected subsidiaries before such assets were
made available for distribution to holders of subordinated obligations of the
Company or to the Company, respectively. In addition, holders of any future
indebtedness of the Company ranking pari passu in right of payment with the
Notes would generally share pro rata in the remaining assets of the Company with
the holders of the Notes. Similarly, in the event of any distribution or payment
of the assets of the Company in any foreclosure, dissolution, winding-up,
liquidation or reorganization, holders of any secured indebtedness will have a
secured prior claim to the assets of the Company that constitute their
collateral and holders of senior or subsidiary indebtedness would be entitled to
prior repayment of their claims from the assets of the Company or of the
relevant subsidiary. In the event of bankruptcy, liquidation or reorganization
of the Company, holders of the Notes will participate ratably with all holders
of unsecured indebtedness of the Company which is deemed to be of the same class
as the Notes, and potentially with all other general creditors of the Company,
based upon the respective amounts owed to each holder or creditor, in
23
<PAGE>
the remaining assets of the Company. In any of the foregoing events, there can
be no assurance that there would be sufficient assets to pay amounts due on the
Notes. See "Description of Old Notes-- Subordination."
In the event that the Company is unable to generate sufficient cash flow and
the Company is otherwise unable to obtain funds necessary to meet required
payments of principal, premium, if any, and interest on its indebtedness,
including the Notes, the Company could be in default under the terms of the
agreements governing such indebtedness, including the Indenture. In the event of
such default, the holders of such indebtedness could elect to declare all of the
funds borrowed thereunder to be due and payable together with accrued and unpaid
interest. If such an acceleration were effected and the Company did not have
sufficient funds to pay the accelerated indebtedness, the holders of such
indebtedness could initiate foreclosure or other enforcement action against the
Company. Any such circumstances would materially adversely affect the Company's
ability to pay principal, premium, if any, and interest on the Notes and the
market value of the Notes.
FRAUDULENT TRANSFER AND PREFERENCE CONSIDERATIONS
Under applicable provisions of the federal bankruptcy law or comparable
provisions of state fraudulent transfer law, if the Company, at the time of
issuance of, or making any payment in respect of, the Notes, (a)(i) was or was
rendered insolvent thereby, was engaged or about to engage in a business or
transaction for which its assets constituted unreasonably small capital, or
intended to incur, or believed that it would incur, debts beyond its ability to
pay such debts as they matured, and (ii) the Company received less than
reasonably equivalent value or fair consideration for such issuance, or (b) the
Company issued the Notes or made any payment thereunder with intent to hinder,
defraud or delay any of its creditors, the obligations of the Company under some
or all of the Notes could be avoided or held to be unenforceable by a court, the
obligations of the Company under the Notes could be subordinated to claims of
other creditors or the holders could be required to return payments already
received. In any of the foregoing cases, there could be no assurance that the
holders would ultimately recover the amounts owing under the Notes. In addition,
under the preference law of the State of New York, if the Company were to issue
the Notes or make any payment in respect thereof in contemplation of insolvency,
the Notes could be avoided or amounts paid to the holders could be required to
be returned.
The measure of insolvency for purposes of the foregoing will vary depending
upon the law applied in any such case. Generally, however, the Company would be
considered insolvent if the sum of its debts, including contingent liabilities,
was greater than all of its assets at a fair valuation or if the present fair
saleable value of its assets was less than the amount that would be required to
pay the probable liability on its existing debts, including contingent
liabilities, as they become absolute and matured.
The Company believes that it will not be insolvent at the time of or as a
result of any of the offerings made hereby, that it will not engage in a
business or transaction for which its assets constitute unreasonably small
capital, and that it did not and does not intend to incur or believe that it
will incur debts beyond its ability to pay such debts as they mature. These
beliefs are based on internal cash flow projections and estimated value of
assets and liabilities. There can be no assurance, however, that a court passing
on such questions would agree with the Company's analysis.
ORIGINAL ISSUE DISCOUNT
The Notes will be issued at a substantial discount from their principal
amount at maturity. Although cash interest will not be payable in respect of the
Notes prior to April 1, 2000, Original Issue Discount (the difference between
the stated redemption price at maturity of the Notes and the issue price of the
Notes) will accrue from the issue date of the Notes and generally will be
includable as interest income in the Note holder's gross income for United
States federal income tax purposes in advance of the cash payments to which the
income is attributable.
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<PAGE>
Furthermore, the Notes will be subject to the high yield discount obligation
rules which will defer and may in part eliminate the Company's ability to deduct
the Original Issue Discount attributable to the Notes. Accordingly, the
Company's after tax cash flow might be less than if the Original Issue Discount
on the Notes was deductible when it accrued. See "Certain Federal Income Tax
Considerations--Notes-- Applicable High Yield Discount Obligations." Similar
results may apply under state tax laws.
If a bankruptcy case were commenced by or against the Company under the
Federal Bankruptcy Code of 1978, as amended (the "Bankruptcy Code"), after the
issuance of the Notes, the claim of a holder is the sum of: (i) the initial
offering price and (ii) that portion of the Original Issue Discount that is not
deemed to constitute "unmatured interest" for purposes of the Bankruptcy Code.
Any Original Issue Discount that was not accrued as of the date of any such
bankruptcy filing would constitute "unmatured interest."
THE COMPANY
The Company's executive offices are located at 1800 114th Avenue SE,
Bellevue, Washington 98004. Its telephone number at that address is (425)
943-8000.
USE OF PROCEEDS
This Exchange Offer is intended to satisfy certain of the Company's
obligations under the Registration Rights Agreement. Coinstar will not receive
any cash proceeds from the issuance of the New Notes offered in the Exchange
Offer. In consideration for issuing the New Notes as contemplated in this
Prospectus, the Company will receive in exchange Old Notes in like principal
amount, the form and terms of which are the same in all material respects as the
form and terms of the New Notes except that the New Notes have been registered
under the Securities Act and hence do not include certain rights to registration
thereunder. The Old Notes surrendered in exchange for New Notes will be retired
and canceled and cannot be reissued. Accordingly, issuance of the New Notes will
not result in any increase in the indebtedness of the Company.
Net proceeds from the sale of the Old Notes (after the deduction of
placement fees and other expenses of the offering of the Old Notes) were
approximately $62.9 million. Such proceeds have been and will be used (i)
predominantly to fund capital expenditures and working capital requirements
incurred in connection with the continued expansion of the Coinstar network,
(ii) for the repayment of certain previously outstanding long-term obligations,
(iii) for product research and development, and deployment of enhancements to
the Coinstar unit and coin processing network and (iv) and for general corporate
purposes. Pending application of the proceeds as described above, the Company
has invested the net proceeds of the issuance of the Old Notes in short-term,
interest-bearing, investment-grade securities.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain any future earnings to finance
the growth and development of its business and therefore does not anticipate
paying any cash dividends in the foreseeable future. The future payment of cash
dividends, if any, is within the discretion of the Board of Directors and will
depend on the future earnings, capital requirements, financial condition and
future prospects of the Company and such other factors as the Board of Directors
may determine. In addition, the Company's Indenture governing the Notes
restricts the Company's ability to pay dividends if at the time of such dividend
or immediately thereafter, the Company is in default under the Indenture or does
not meet certain tests associated with the Company's financial position.
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<PAGE>
CAPITALIZATION
The following table sets forth (i) the actual capitalization of the Company
as of June 30, 1997, (ii) the pro forma capitalization in connection with the
Company's Initial Public Offering after giving effect to the automatic
conversion of all outstanding shares of Preferred Stock into Common Stock, and
(iii) the pro forma capitalization as adjusted to reflect the receipt of the net
proceeds from the sale of Common Stock in the Initial Public Offering at the
Initial Public Offering price of $10.50 per share (after deducting the
underwriting discounts and commissions and estimated offering expenses payable
by the Company). This table excludes the exercise of certain warrants on a cash
basis to purchase 352,907 shares of Common Stock at an aggregate exercise price
of approximately $1.26 million, which expired on July 9, 1997 and the issuance
of 1,035,715 shares of Common Stock upon the net exercise of certain warrants,
which expired on July 9, 1997. This table also excludes the assumed exercise of
certain warrants on a cash basis to purchase 665,000 shares of Common Stock at
an aggregate exercise price of $6,650, which expire within 90 days of July 9,
1997 and warrants to purchase 1,042,981 shares of Common Stock at a weighted
exercise price of $12.57 per share, which did not expire upon the closing of the
Initial Public Offering or within 90 days thereafter. Such warrants may be
exercised for cash or on a cashless basis at the option of the warrant holder.
This table also excludes 921,900 shares of Common Stock issuable upon exercise
of outstanding options granted under the Equity Incentive Plan as of June 30,
1997 at a weighted average exercise price of $5.67 per share and 40,000 shares
of Common Stock issuable upon exercise of outstanding options granted outside
the Equity Incentive Plan as of June 30, 1997 at a weighted average exercise
price of $3.50 per share. This table should be read in conjunction with the
Financial Statements and related Notes thereto appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1997
---------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
---------- -------------------- -----------
(DOLLARS IN
THOUSANDS)
<S> <C> <C> <C>
Cash, cash equivalents and short-term investments(1).............. $ 39,352 $ 39,352 $ 67,895
---------- -------- -----------
---------- -------- -----------
Debt:
13% Senior Subordinated Discount Notes due 2006................. $ 70,618 $ 70,618 $ 70,618
Other long term obligations, including current portion.......... 4,011 4,011 4,011
---------- -------- -----------
Total debt, including current portion........................... 74,629 74,629 74,629
---------- -------- -----------
Mandatory Redeemable Preferred Stock, $.001 par value; 16,000,000
shares authorized; 7,315,795 shares outstanding actual no shares
outstanding pro forma and as adjusted........................... 24,972 -- --
---------- -------- -----------
Stockholders' equity (deficit):
Convertible Preferred Stock, $.001 par value; 16,000,000 shares
authorized; 1,545,281 shares outstanding actual; no shares
outstanding pro forma and as adjusted........................... 4,232 -- --
Common Stock, $.001 par value; 22,000,000 authorized; 984,012
outstanding actual; 9,972,976 shares pro forma; and 12,972,976
shares outstanding as adjusted.................................. 94 29,298 57,841
Contributed capital for warrants.................................. 2,621 2,621 2,621
Accumulated deficit............................................... (44,421) (44,421) (44,421)
---------- -------- -----------
Total stockholders' equity (deficit).............................. (37,474) (12,502) 16,041
---------- -------- -----------
Total capitalization.......................................... $ 62,127 $ 62,127 $ 90,670
---------- -------- -----------
---------- -------- -----------
</TABLE>
- ------------------------
(1) Cash, cash equivalents and short-term investments include $11.1 million of
funds in transit, which represent amounts being processed by armored car
carriers or residing in Coinstar units.
26
<PAGE>
SELECTED FINANCIAL AND OTHER DATA
The following table sets forth selected financial data of the Company as of
and for each of the years in the five year period ended December 31, 1996, as of
and for the six month periods ended June 30, 1996 and 1997 and as of and for the
three month periods ended June 30, 1996 and 1997. The statements of operations
data for each of the years in the three year period ended December 31, 1996 and
the balance sheet data as of December 31, 1995 and 1996 have been derived from
the financial statements of the Company, audited by Deloitte & Touche LLP,
independent auditors, which are included elsewhere in this Prospectus. The
statements of operations data for each of the years in the two year period ended
December 31, 1993 and the balance sheet data as of December 31, 1992, 1993 and
1994 have been derived from audited financial statements of the Company which
are not included in this Prospectus. The statements of operations data for the
six month and three month periods ended June 30, 1996 and 1997 and the balance
sheet data as of June 30, 1997 have been derived from unaudited financial
statements of the Company that include, in the opinion of management, all normal
and recurring adjustments that management considers necessary for a fair
statement of the quarterly results. The operating results for the six months and
three months ended June 30, 1997 are not necessarily indicative of results that
may be expected for the year ending December 31, 1997. The following information
is qualified by reference to, and should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and related Notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE
MONTHS
SIX MONTHS ENDED ENDED
INCEPTION TO YEAR ENDED DECEMBER 31, JUNE 30, JUNE 30,
DECEMBER 31, -------------------------------------------- -------------------- ---------
1992(1) 1993(1) 1994 1995 1996 1996 1997 1996
--------------- ----------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPTIONS DATA:
Revenue....................... $ 8 $ 15 $ 325 $ 1,063 $ 8,312 $ 2,134 $ 9,289 $ 1,388
Expenses:
Direct operating............ 46 45 488 1,336 7,258 2,209 7,416 1,321
Regional sales and
marketing................. -- 3 86 349 1,505 615 1,602 407
Product research and
development............... 383 1,368 1,648 1,830 3,969 1,423 3,080 762
Selling, general and
administrative............ 171 402 1,716 2,790 5,351 1,939 5,157 1,067
Depreciation and
amortization.............. -- 40 440 1,117 4,135 1,295 3,843 796
----- ----------- --------- --------- --------- --------- --------- ---------
Loss from operations............ (592) (1,843) (4,053) (6,359) (13,906) (5,347) (11,809) (2,965)
Other income (expense)
Interest income............... 11 29 34 398 848 255 1,020 95
Interest expense.............. -- -- (297) (208) (2,661) (255) (4,759) (168)
----- ----------- --------- --------- --------- --------- --------- ---------
Net loss before extraordinary
item.......................... (581) (1,814) (4,316) (6,169) (15,719) (5,347) (15,548) (3,038)
Extraordinary item--loss related
to early retirement of debt... -- -- -- -- (248) -- -- --
----- ----------- --------- --------- --------- --------- --------- ---------
Net loss........................ $ (581) $ (1,814) $ (4,316) $ (6,169) $ (15,967) $ (5,347) $ (15,548) $ (3,038)
----- ----------- --------- --------- --------- --------- --------- ---------
----- ----------- --------- --------- --------- --------- --------- ---------
Pro forma net loss per share
before extraordinary
item(2)....................... -- -- -- -- $ (1.47) $ (0.51) $ (1.49) $ (0.29)
Pro forma extraordinary item per
share(2)...................... -- -- -- -- (0.02) -- -- --
--------- --------- --------- ---------
Pro forma net loss per
share(2)...................... -- -- -- -- $ (1.49) $ (0.51) $ (1.49) $ (0.29)
--------- --------- --------- ---------
--------- --------- --------- ---------
Pro forma weighted average
shares outstanding
(000's)(2).................... -- -- -- -- 10,715 10,460 10,460 10,460
OTHER DATA:
Number of new Coinstar units
installed during the period... 4 13 31 215 1,238 533 834 364
Installed base of Coinstar units
at end of the period.......... 4 17 48 263 1,501 796 2,335 796
Number of regional markets...... 2 4 11 23 18 33 18
Dollar value of coins
processed..................... -- $ 74 $ 5,245 $ 17,701 $ 115,476 $ 32,998 $ 123,350 $ 20,692
Capital expenditures............ 8 620 2,163 3,823 20,820 9,651 15,392 6,466
Direct contribution (loss)(3)... (38) (30) (613) (273) 1,054 (75) 1,873 67
Direct operating expense per
average installed unit(4)..... -- -- 20,353 11,717 8,610 4,641 3,875 2,205
<CAPTION>
1997
---------
<S> <C>
STATEMENTS OF OPTIONS DATA:
Revenue....................... $ 5,294
Expenses:
Direct operating............ 3,966
Regional sales and
marketing................. 972
Product research and
development............... 1,640
Selling, general and
administrative............ 2,630
Depreciation and
amortization.............. 2,158
---------
Loss from operations............ (6,072)
Other income (expense)
Interest income............... 440
Interest expense.............. (2,415)
---------
Net loss before extraordinary
item.......................... (8,047)
Extraordinary item--loss related
to early retirement of debt... --
---------
Net loss........................ $ (8,047)
---------
---------
Pro forma net loss per share
before extraordinary
item(2)....................... $ (0.77)
Pro forma extraordinary item per
share(2)...................... --
---------
Pro forma net loss per
share(2)...................... $ (0.77)
---------
---------
Pro forma weighted average
shares outstanding
(000's)(2).................... 10,460
OTHER DATA:
Number of new Coinstar units
installed during the period... 406
Installed base of Coinstar units
at end of the period.......... 2,335
Number of regional markets...... 33
Dollar value of coins
processed..................... $ 70,626
Capital expenditures............ 7,717
Direct contribution (loss)(3)... 1,328
Direct operating expense per
average installed unit(4)..... 1,858
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------- JUNE 30,
1992 1993 1994 1995 1996 1997
--------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments(5)........ $ 46 $ 1,417 $ 1,343 $ 14,120 $ 56,310 $ 39,352
Total assets................................................ 80 2,090 3,913 19,601 82,531 79,103
Total debt, including current portion....................... 4 -- 4,660 1,658 70,065 74,629
Mandatorily Redeemable Preferred Stock...................... -- -- -- 23,548 24,972 24,972
Paid in capital............................................. 657 4,239 4,512 5,409 6,871 6,947
Total stockholders' equity (deficit)........................ $ 76 $ 1,844 $ (2,224) $ (7,471) $ (21,976) (37,474)
</TABLE>
- ------------------------------
(1) Commercial deployment of the units did not commence until 1994; therefore,
certain information relating to 1992 and 1993 is not meaningful.
(2) See Note 2 to Audited Financial Statements for an explanation of the
determination of the number of shares used in computing pro forma net loss
per share. Pro forma net loss per share is not presented for the years ended
December 31, 1992 through 1995 due to the lack of comparability.
(3) Direct contribution (loss) is defined as revenue less direct operating
expenses. The Company uses direct contribution (loss) as a measure of
operating performance to assist in understanding its operating results.
Direct contribution (loss) is not a measure of financial performance under
GAAP and should not be considered in isolation or an alternative to gross
margin, income (loss) from operations, net income (loss), or any other
measure of performance under GAAP.
(4) Based on monthly averages of units in operation over the applicable period.
(5) Cash, cash equivalents and short-term investments include funds in transit,
which represent amounts being processed by armored car carriers or residing
in Coinstar units, of $767,000, $5.5 million and $11.1 million at December
31, 1995 and 1996, and June 30, 1997, respectively. Funds in transit prior
to such dates are negligible.
RECENT DEVELOPMENTS
On October 28, 1997, the Company announced preliminary results for the three
months ended September 30, 1997. The Company estimated revenue of approximately
$7.8 million as compared to revenue of $2.8 million for the third quarter of
1996. Net loss was approximately $6.7 million or approximately $0.47 per share
as compared to a net loss of $3.5 million or $0.34 per share for the comparable
period of 1996.
For the first nine months of 1997, revenue was approximately $17.1 million
as compared to $5.0 million for the comparable period of 1996. Net loss for the
first nine months of 1997 was estimated to be approximately $22.3 million or
approximately $1.96 per share as compared to a net loss of $8.9 million or $0.85
per share for the same period of the previous year. The Company intends to
announce definitive results for the third quarter on or about November 14, 1997.
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
FINANCIAL STATEMENTS AND RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS
PROSPECTUS. EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE
DISCUSSION IN THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES, SUCH AS THE COMPANY'S PLANS, OBJECTIVES,
EXPECTATIONS AND INTENTIONS. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS
THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED
TO, THOSE DISCUSSED BELOW, IN "RISK FACTORS," "BUSINESS" AND ELSEWHERE IN THIS
PROSPECTUS.
OVERVIEW
The Company develops, owns and operates a network of automated, self-service
coin counting and processing machines that provides consumers with a convenient
means to convert loose coins into cash. The Company began field testing of a
prototype unit in 1992 and commercial installation of units in supermarkets in
1994. The Company has increased its store installation base every year and as of
June 30, 1997 had an installed base of 2,335 units located in supermarkets and
financial institutions in 33 regional markets across the United States. In 1996,
the Company significantly accelerated its plans for installation of the Coinstar
units in various geographic regions.
Beginning in 1995, the Company has devoted significant resources to building
a sales and marketing organization, adding administrative personnel and
developing the network systems and infrastructure to support the rapid growth of
its installed base of units. The cost of this expansion and the significant
depreciation expense of its installed network have resulted in significant
operating losses to date and an accumulated stockholders' deficit of $44.4
million as of June 30, 1997. The continued rapid expansion of its installed base
is expected to result in continued increases in the number of employees,
marketing and field service personnel expenses in new regions and general and
administrative expenses related to the ongoing development of information
systems to support future growth. Consequently, the Company expects to incur
increasing operating losses in the future. To date, the Company has funded its
operating losses and capital expenditure requirements through the private sale
of equity and in October 1996, the sale of the Notes for net proceeds of $62.9
million. In connection with the debt financing in October 1996, the Company
began to prepare for accelerated future growth of its installed base by
increasing expenditures on its field service organization, upgrading its systems
engineering capabilities and developing and testing new marketing and promotion
programs designed to increase coin processing volumes.
The Company currently derives substantially all its revenues from coin
processing services generated by its installed base of Coinstar units located in
supermarket chains in more than 25 states across the country. The Company
generates revenues based on a processing fee, currently 7.5%, charged on the
total dollar amount of coins processed in a transaction. Prior to 1996 the
Company's processing fee was 10% on pennies and 5% on all other coins. Beginning
in the first quarter of 1996 the Company began charging a flat 7.5% fee on
selected units and converted all units to this new fee structure by the end of
the second quarter of 1996. Coin processing fee revenue is recognized at the
time the customers' coins are counted by the Coinstar unit. Overall revenue
growth is dependent on both the rate of new installations and the growth in coin
processing volumes of its installed base. The Company's experience to date is
that coin processing volumes per unit have generally increased with the length
of time the unit is in operation. The Company believes that coin processing
volumes per unit may also be affected by other factors such as public relations,
advertising and other activities that promote awareness of the units, as well as
the amount of consumer traffic in the stores in which the units are located and
seasonality. Given the Company's limited operating history, there can be no
assurance, however, that unit volumes will continue to increase as a function of
the time the unit is in operation, or that unit volumes will be affected by such
other factors. The significant increase in the Company's installed base in 1996
and the first quarter of 1997 resulted in a reduction in average age of all
units in operation and consequently contributed to a lower average revenue
29
<PAGE>
per unit. The average age of all units in operation increased slightly during
the second quarter of 1997 and contributed to a nominal increase in the average
revenue per unit. The Company expects that as it continues to aggressively
expand installations relative to the size of its installed base, the average
revenue per unit may decrease even as the per unit dollar volume of mature units
increases.
Direct operating expenses are comprised of the regional expenses associated
with Coinstar unit operations and support and consist primarily of coin pickup
and processing, field operations support and related expenses, and retail
operations support. Coin pickup and processing costs, which represent a major
portion of direct operating expenses, vary based on the level of total coin
processing volume and the density of the units within a region. The Company
believes that while coin pickup and processing costs are variable based on units
in service and coin volume generated, economies related to these direct expense
components can be achieved through increasing the density of units in operation
in regional markets. Field service operations and related expenses vary
depending on the number of geographic regions in which Coinstar units are
located and the density of the units within a region. Regional sales and
marketing expenses are comprised of ongoing marketing, advertising and public
relations efforts in existing market regions and startup marketing expenses
incurred to launch the Coinstar service in new regional markets. Product
research and development expense consists of the development costs of the
Coinstar unit software, network applications, Coinstar unit sustaining
engineering and new product development. Selling, general and administrative
expenses are comprised of management compensation, administrative support for
field operations, the customer service center, sales and marketing support,
systems and engineering support, corporate services, and accounting, human
resources and occupancy expenses. Depreciation and amortization consists
primarily of depreciation charges on Coinstar units and, to a lesser extent,
depreciation on furniture and fixtures and computer equipment and amortization
of intangibles.
The Company expects to continue to evaluate new marketing and promotional
programs to increase the breadth and rate of customer utilization of its service
and to engage in systems and product research and development. The Company
intends to continue to invest in sales and marketing and product research and
development, which is expected to negatively impact its operating results. The
Company believes that its future revenue growth, operating margin gains and
profitability will be dependent upon the penetration of its installed base with
retail distribution partners in existing markets, expansion and penetration of
installations in new market regions and successful ongoing marketing and
promotional activities to sustain the growth in unit coin volume over time.
Given the Company's limited operating history, unpredictability of the timing of
installations with retail distribution partners and the resulting revenues, and
the continued market acceptance of the Company's service by consumers and retail
distribution partners, the Company's operating results for any quarter are
subject to significant variation, and the Company believes that period-to-period
comparisons of its results of operations are not necessarily meaningful and
should not be relied upon as indications of future performance. See "Risk
Factors--History of Sustained Operating Losses and Continuation of Such Losses,"
"Risk Factors--Limited Operating History," "Risk Factors--Uncertainty of Future
Operating Results," "Risk Factors--Fluctuations in Quarterly Operating Results,"
"Risk Factors-- Dependence on Continued Market Acceptance By Consumers and
Retail Distribution Partners," "Risk Factors--Possible Termination of Retail
Distribution Partner Agreements," and "Business--Sales and Marketing."
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997 AND 1996
REVENUE
Revenue increased to $5.3 million in the three months ending June 30, 1997
from $1.4 million in the comparable 1996 period. The increase was due
principally to the increase in the number of Coinstar units in service during
the three month period and the increase in the volume of coins processed by the
units in service during this period. The installed base of Coinstar units
increased to 2,335 as of June 30, 1997 from
30
<PAGE>
796 units as of June 30, 1996. During the second quarter of 1997, 406 units were
installed compared to 364 for the same period in 1996. The dollar value of coins
processed in the second quarter of 1997 increased to $70,626 million compared to
$20,692 million in the comparable 1996 period.
DIRECT OPERATING EXPENSES
Direct operating expenses increased to $4.0 million in the three months
ending June 30, 1997 from $1.3 million in the comparable 1996 period. The
increase in direct operating expenses was primarily attributable to increased
coin pickup and processing costs as a result of the increased dollar volumes
processed by the network and the increase in field service personnel expenses
associated with the hiring and training of new field service personnel to
support the Company's accelerated growth and its expansion into 15 new regions
as of June 30, 1996. Direct operating expense as a percentage of revenue
decreased to 74.9% for the three months ending June 30, 1996 from 95.2% in the
comparable 1996 period. The Company anticipates that direct operating expense
will continue to increase as the number of installed units increases. However,
direct operating expenses as a percentage of revenue are anticipated to decrease
as (i) coin pickup and processing cost economies from regional densities are
realized and (ii) field engineering expenses decrease as a percentage of revenue
as the Company increases its density in its existing markets.
REGIONAL SALES AND MARKETING
Regional sales and marketing expense increased to $1.0 million in the three
months ending June 30, 1997 from $400,000 in the comparable 1996 period. The
increase in regional marketing expense was the result of an increased level of
advertising, cooperative promotion with its retail distribution partners and
public relation efforts focused in the new regions installed in the second
quarter of 1997 and the initial incurrence of ongoing marketing expenses in the
existing markets. The Company expects sales and marketing expenses to continue
to increase as the Company expands the installed base of units and enters new
regional markets.
PRODUCT RESEARCH AND DEVELOPMENT
Product research and development expenses increased to $1.6 million in the
three months ending June 30, 1997 from $800,000 in the comparable 1996 period.
The principal component of such expenses was personnel compensation and the
period-to-period increase was due largely to higher staffing levels required for
the improvement of existing and development of new Coinstar unit software,
hardware, network applications and development costs related to new service
offerings. The Company expects to continue to increase its product research and
development expenditures during 1997 as it continues to add personnel in
connection with operating systems improvements and the potential addition of
value-added services. A portion of the product research and development expenses
may be capitalized in the future.
SELLING, GENERAL, AND ADMINISTRATIVE
Selling, general, and administrative expense increased to $2.6 million in
the three months ending June 30, 1997 from $1.1 million in the comparable 1996
period. The principal component of such expenses was personnel compensation and
the period-to-period increase reflects an investment in higher staffing levels
to support the Company's rapid growth and expansion. The Company expects selling
general and administrative expenses to continue to increase in 1997 as the
Company continues to add staff.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased to $2.2 million in the three
months ending June 30, 1997 from $800,000 in the comparable 1996 period. The
increase was primarily due to the increase in the installed base of Coinstar
units during these periods. The Company expects depreciation and amortization
31
<PAGE>
expense to increase significantly over the next several years as a result of
expected increases in the installation of Coinstar units.
INTEREST INCOME AND EXPENSE
Interest income increased to $400,000 in the three months ending June 30,
1997 from $100,000 in the comparable 1996 period. The increase in interest
income is attributed to higher invested cash balances resulting from net
proceeds received from the sale of Notes in October 1996.
Interest expense increased to $2.4 million in the three months ending June
30, 1997 from $200,000 in the comparable 1996 period. The increase was due to
the accretion of the Notes. No cash interest payments are due on the Notes until
April 2000.
NET LOSS
Net Loss increased to $8.0 million in the three months ending June 30, 1997
from $3.0 million in the comparable 1996 period. The increase in the net loss
primarily was due to the fact that selling, general, and administrative
expenses, product research and development expenses, and depreciation and
amortization increased during the same period at a disproportionately higher
rate that the Company's direct contribution margin. This was the result of the
Company's decision to build infrastructure necessary to support the rapid growth
of its installed base of units. In the near term, the Company expects to
continue to add infrastructure to support expected increases in its installed
base, and as a result expects to incur increasing net losses. In the longer
term, the Company expects that it will not be required to add as much
infrastructure to support its installed base and as a result expects to achieve
profitability as its direct contribution margin from its larger base of
installed units grows proportionately faster than its operating expenses. There
can be no assurance, however, that the Company will install a sufficient number
of units or obtain sufficient market acceptance to allow the Company to achieve
or sustain profitability. See "Risk Factors--Dependence on Continued Market
Acceptance By Consumers and Retail Distribution Partners."
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
REVENUE
Revenue increased to $9.3 million in the first six months of 1997 from $2.1
in the comparable 1996 period. The increase was due principally to the increase
in the number of Coinstar units in service during the 1997 period and the
increase in the volume of coins processed by the units in service during this
period. The installed base of Coinstar units increased to 2,335 as of June 30,
1997 from 796 units as of June 30, 1996. The dollar value of coins processed
increased to $123.4 million during the 1997 period from $33.0 million in the
comparable 1996 period.
DIRECT OPERATING EXPENSES
Direct operating expenses increased to $7.4 million in the first six months
of 1997 from $2.2 in the comparable 1996 period. The increase in direct
operating expenses was primarily attributable to increased coin pickup and
processing costs as a result of the increased dollar volumes processed by the
network and the increase in field service personnel expenses associated with the
hiring and training of new field service personnel to support the Company's
accelerated growth and its expansion into 15 new regional markets as of June 30,
1996. Direct operating expenses as a percentage of revenue decreased to 79.9% in
the 1997 period from 103.5% in the 1996 period. The Company anticipates that
direct operating expenses will continue to increase as the number of installed
units increases. However, direct operating expenses as a percentage of revenue
are anticipated to decrease as (i) coin pickup and processing cost economies
from regional densities are realized and (ii) field engineering expenses
decrease as a percentage of revenue as the Company increases its density in its
existing markets.
32
<PAGE>
REGIONAL SALES AND MARKETING
Regional sales and marketing expenses increased to $1.6 million in the first
six months of 1997 from $600,000 in the comparable 1996 period. The increase in
regional marketing expense was the result of an increased level of advertising,
cooperative promotion with its retail distribution partners and public relations
efforts focused in the new regions installed during the 1997 period and the
initial incurrence of ongoing marketing expenses in existing markets. The
Company expects that the components of sales and marketing expenses in the
future will include ongoing marketing expenses in existing markets and startup
marketing expenses in new regions entered. The Company expects sales and
marketing expenses to continue to increase as the Company expands the installed
base of units and enters new regional markets.
PRODUCT RESEARCH AND DEVELOPMENT
Product research and development expenses increased to $3.1 million in the
first six months of 1997 from $1.4 million in the comparable 1996 period. The
principal component of such expenses was personnel compensation and the
period-to-period increase was due largely to higher staffing levels required for
the improvement of existing and development of new Coinstar unit software,
hardware, network applications and development costs related to new service
offerings. The Company expects to increase its product research and development
expenditures during 1997 as it continues to add personnel in connection with
operating systems improvements and the potential addition of value-added
services. A portion of the product research and development expenses may be
capitalized in the future.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expense increased to $5.2 million in the
first six months of 1997 from $1.9 million in the comparable 1996 period. The
principal component of such expenses was personnel compensation and the
period-to-period increase primarily reflects an investment in higher staffing
levels during the second half of 1996 and first six months of 1997 to support
the Company's rapid growth and expansion. The Company expects selling, general
and administrative expenses to continue to increase in 1997 as the Company
continues to add staff.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased to $3.8 million in the first
six months of 1997 from $1.3 million in the comparable 1996 period. The increase
was primarily due to the increase in the installed base of Coinstar units during
these periods. The Company expects depreciation and amortization expense to
increase significantly over the next several years as a result of expected
increases in the installation of Coinstar units.
INTEREST INCOME AND EXPENSE
Prior to October 1996, the Company funded its liquidity needs primarily from
the issuance of equity securities. In October 1996, the Company issued a total
of $95 million aggregate principal amount at maturity of the Notes and certain
related warrants. Accordingly, the Company has incurred significant non-cash
interest expense from the amortization of the original issue discount and
deferred financing fees on such debt.
Interest income increased to $1.0 million in the first six months of 1997
from $300,000 in the comparable 1996 period. The increase in interest income is
attributable to higher invested cash balances resulting from net proceeds of
$62.9 million received from the sale of the Notes in October 1996.
Interest expense increased to $4.8 million in first six months of 1997 from
$300,000 in the comparable 1996 period as a result of the sale of the Notes. The
increase was due to the accretion of the Notes. No cash interest payments are
due on the Notes until April 2000.
33
<PAGE>
NET LOSS
Net loss increased to $15.5 million in the first six months of 1997 from
$5.3 million in the comparable 1996 period. The increase in net loss primarily
was due to the fact that selling, general and administrative expenses, product,
research and development expenses, and depreciation and amortization increased
during the same period at a disproportionately higher rate than the Company's
direct contribution margin. This was the result of the Company's decision to
build the infrastructure necessary to support the rapid growth of its installed
base of units. In the near term, the Company expects to continue to add
infrastructure to support expected increases in its installed base, and as a
result expects to incur increasing net losses. In the longer term, the Company
expects that it will not be required to add as much infrastructure to support
its installed base and as a result expects to achieve profitability as its
direct contribution margin from its significantly larger base of installed units
grows proportionately faster than its operating expenses. There can be no
assurance, however, that the Company will install a sufficient number of units
or obtain sufficient market acceptance to allow the Company to achieve or
sustain profitability. See "Risk Factors--Dependence on Continued Market
Acceptance By Consumers and Retail Distribution Partners."
YEARS ENDED DECEMBER 31, 1996 AND 1995
REVENUE
Revenue increased to $8.3 million in 1996 from $1.1 million in 1995. The
increase was due principally to the increase in the number of Coinstar units
placed in service during 1996 and the increase in the volume of coins processed
by the units in service during that year. The installed base of Coinstar units
increased to 1,501 at the end of 1996 from 263 at the end of 1995. The dollar
value of coins processed increased to $115.5 million during 1996 from $17.7
million in 1995.
DIRECT OPERATING EXPENSES
Direct operating expenses increased to $7.3 million in 1996 from $1.3
million in 1995. The increase in direct operating expenses was primarily
attributable to increased coin pickup and processing costs as a result of the
increased dollar volumes processed by the network and the increase in field
service personnel expenses associated with the hiring and training of new field
service personnel to support the Company's accelerated growth and its expansion
into 12 new regional markets in 1996. Direct operating expenses as a percentage
of revenue decreased to 87% in 1996 from 126% in 1995.
REGIONAL SALES AND MARKETING
Regional sales and marketing expenses increased to $1.5 million in 1996 from
$349,000 in 1995. The increase in regional marketing expense was the result of
an increased level of advertising, cooperative promotion with its retail
distribution partners and public relations efforts focused in the new regions
installed during 1996. Substantially all of the Company's sales and marketing
expenses in 1996 were attributable to startup marketing activities as the
Company increased its installed base to 23 regions at the end of 1996 from 11
regions in 1995.
PRODUCT RESEARCH AND DEVELOPMENT
Product research and development expenses increased to $4.0 million in 1996
from $1.8 million in 1995 due largely to increased staffing levels required for
the improvement of existing and development of new Coinstar unit software,
hardware, network applications and development costs related to new service
offerings. The Company expects to increase its product research and development
expenditures in 1997 as it continues to add personnel in connection with
operating systems improvements and the potential addition of value-added
services. A portion of the product research and development expenses may be
capitalized in the future.
34
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased to $5.4 million in
1996 from $2.8 million in 1995. The increase primarily reflects an investment in
higher staffing levels during the second half of 1996 to support the Company's
rapid growth and expansion.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased to $4.1 million in 1996 from
$1.1 million in 1995. The increase was primarily due to the increase in the
installed base of Coinstar units during these years.
INTEREST INCOME AND EXPENSE
Interest income increased to $848,000 in 1996 from $398,000 in 1995. The
increase in interest income is attributable to higher invested cash balances
resulting from net proceeds of $62.9 million received from the sale of the Notes
in October 1996.
Interest expense increased to $2.7 million in 1996 from $208,000 in 1995 as
a result of the sale of the Notes in October 1996 and the accretion of such
Notes since the original issue date to year end.
NET LOSS
Net loss increased to $16.0 million in 1996 from $6.2 million in 1995. The
increase in net loss primarily was due to disproportionately higher increases in
operating expenses and interest expense as compared to increases in the
Company's direct contribution margin. This was the result of the Company adding
infrastructure during the year to support an expected increase in the number of
installed units.
YEARS ENDED DECEMBER 31, 1995 AND 1994
REVENUE
Revenue increased to $1.1 million in 1995 from $325,000 in 1994. The
increase was due principally to the increase in the number of Coinstar units
placed in service during 1995 and the increase in the volume of coins processed
by the units in service during that year. The installed base of Coinstar units
increased to 263 at the end of 1995 from 48 at the end of 1994. The dollar value
of coins processed increased to $17.7 million during 1995 from $5.2 million in
1994.
DIRECT OPERATING EXPENSES
Direct operating expenses increased to $1.3 million in 1995 from $488,000 in
1994. The increase in direct operating expenses was primarily attributable to
increased coin pickup and processing costs as a result of the increased dollar
volumes processed by the network and the overall growth of the number of units
in service. The increase was also attributable to higher field service personnel
expenses associated with the hiring and training of new field service personnel
to support the Company's accelerated growth and its expansion into seven new
regional markets in 1995. Operating expenses as a percentage of revenue
decreased to 126% in 1995 from 150% in 1994.
REGIONAL SALES AND MARKETING
Regional sales and marketing expenses increased to $349,000 in 1995 from
$86,000 in 1994. The increase in regional marketing expense was the result of an
increased level of advertising, cooperative promotion with its retail
distribution partners and public relations efforts focused in the new startup
regions installed during 1995. Substantially all of the Company's sales and
marketing expenses in 1995 were attributable to startup marketing activities as
the Company increased its installed base to 11 regions at the end of 1995 from
four regions in 1994.
35
<PAGE>
PRODUCT RESEARCH AND DEVELOPMENT
Product research and development expenses increased to $1.8 million in 1995
from $1.6 million in 1994 due largely to the costs related to the improvement of
existing and development of new Coinstar unit software, hardware, network
applications and development costs related to new service offerings.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased to $2.8 million in
1995 from $1.7 million in 1994. The increase primarily reflects an investment in
higher staffing levels to support the Company's rapid growth and expansion.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased to $1.1 million in 1995 from
$439,000 in 1994. The increase was primarily due to the increase in the
installed base of Coinstar units during these years.
INTEREST INCOME AND EXPENSE
Interest income increased to $398,000 in 1995 from $34,000 in 1994. The
increase in interest income is attributable to higher invested cash balances
resulting from the proceeds received from private debt and equity financings.
Interest expense decreased to $208,000 in 1995 from $297,000 in 1994
primarily as a result of a lower average level of borrowings during 1995.
NET LOSS
Net loss increased to $6.2 million in 1995 from $4.3 million in 1994. The
increase in net loss was the result of operating expenses increasing at a higher
amount than the Company's increase in revenue during the period.
INCOME TAXES
At December 31, 1996 and 1995, the Company had net deferred tax assets of
approximately $9.9 million and $4.4 million, respectively, resulting primarily
from net operating loss and credit carryforwards available to offset future
income and tax obligations, respectively. The extent to which the loss
carryforwards can be used to offset future taxable income will be limited
because of the ownership changes within any three-year period as provided in the
Tax Reform Act of 1986. The Initial Public Offering may trigger such a
limitation as a result of which the annual usage will be limited by the market
value of the Company at the closing of the offering multiplied by the then
current long-term tax exempt interest rate. Such federal carryforwards expire
through 2011. Based upon the Company's history of operating losses and
expiration dates of the loss carryforwards, the Company has recorded a valuation
allowance to the full extent of its net deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
Since inception and prior to its Initial Public Offering in July 1997, the
Company has funded its operations primarily through the private sale of equity
securities, equipment lease financing, bank borrowings and the sale of the
Notes. As of June 30, 1997, the Company had cash and cash equivalents of $16.3
million, short-term investments of $23.1 million and working capital of $22.7
million. Cash and cash equivalents include $11.1 million of funds in transit,
which represent amounts being processed by armored car carriers or residing in
Coinstar units. Net cash used by operating activities was $1.3 million for the
six months ended June 30, 1997 and net cash used by operating activities was
$400,000 for the six months ended June 30, 1996. Net cash used by operating
activities was $3.4 million, $4.5 million, $2.6 million for
36
<PAGE>
1996, 1995 and 1994, respectively. The principal use of cash for all periods was
to fund net operating losses incurred, partially offset by depreciation and
other non-cash charges, and in 1996 and the six months ended June 30, 1997 by an
increase in accrued liabilities.
Net cash used by investing activities during the six month period ended June
30, 1997 was $6.1 million and $9.8 million for the comparable 1996 period.
Capital expenditures for such periods were $15.4 million and $9.7 million,
respectively. Net cash used by investing activities was $53.2 million, $3.9
million and $2.2 million in 1996, 1995 and 1994, respectively. Capital
expenditures for such years were $20.8 million, $3.8 million and $2.2 million,
respectively. The majority of capital expenditures consist of the purchase of
Coinstar units. The installed cost of the Coinstar unit decreased over time to
approximately $13,500 in 1996 from approximately $22,200 in 1993. The Company
expects the cost of the unit to continue to decrease in 1997. In 1996, $32.2
million of the Company's investing activities were for the purchase of
short-term investments. At the end of 1996, the Company's purchase commitments
for 1997 totaled $8.7 million.
Net cash used by financing activities for the six month period ended June
30, 1997 was $200,000 and net cash provided by financing activities for the six
month period ended June 30, 1996 was $3.3 million. Net cash provided by
financing activities was $66.3 million, $21.2 million and $4.7 million in 1996,
1995 and 1994, respectively. For 1996, financing activities consisted primarily
of the sale of the Notes. For 1995, financing activities consisted primarily of
proceeds from the sale of Preferred Stock. For 1994, financing activities
consisted primarily of borrowings under short-term debt obligations which were
subsequently converted into Preferred Stock.
During 1995, the Company entered into a loan agreement which allowed for
maximum borrowings of $2.0 million to be drawn under specific notes and secured
by certain equipment of the Company. The Company drew down approximately $2.0
million under five separate notes between November 1995 and February 1996. The
effective annual interest rate on this loan was 17.5%, and the loan was due in
monthly installments. The Company repaid this note in December 1996. In
connection with this loan, the Company issued 49,231 detachable warrants to
purchase shares of Series C Preferred Stock at an exercise price of $3.25. Upon
the closing of the Initial Public Offering, such warrants automatically
converted into warrants to purchase an equivalent number of shares of Common
Stock.
In January 1996, the Company entered into a loan agreement which allows for
maximum borrowings of $3.0 million to be drawn under specific notes secured by
certain equipment of the Company. During 1996, the Company drew the entire $3.0
million. The effective annual interest rate on this loan is 16.6% and the loan
is due in monthly installments that will be paid through October 1999. In
connection with this loan, the Company issued detachable warrants to purchase
93,750 shares of its Series D Preferred Stock at an exercise price of $4.00.
Upon the closing of the Initial Public Offering, such warrants automatically
converted into warrants to purchase an equivalent number of shares of Common
Stock.
In August 1996, the Company entered into a $7.0 million term loan facility
and a $250,000 line of credit. The facility was secured by certain Coinstar
units and all remaining corporate assets, excluding specific equipment currently
under lease or purchase money security interest. The Company drew approximately
$4.5 million on this loan during 1996. The term loan bore interest at the rate
of prime plus 3.5% and was payable on December 31, 2000. The line of credit bore
interest at the rate of prime plus 3.0% and expired on August 12, 1997. The
Company paid off this loan in December 1996. In connection with this loan, the
Company issued detachable warrants to purchase 51,176 shares of its Series D
Preferred Stock at an exercise price of $4.25. Upon the closing of the Initial
Public Offering, such warrants automatically converted into warrants to purchase
an equivalent number of shares of Common Stock.
In October 1996, the Company issued and sold a total of $95.0 million in
aggregate principal amount at maturity of the Notes due 2006, and warrants to
purchase an aggregate of 665,000 shares of Common Stock at a nominal exercise
price for proceeds, net of issuance costs, of $62.9 million. Although interest
is not payable prior to April 1, 2000, the carrying amount of such indebtedness
accretes as the original issue
37
<PAGE>
discount is amortized through maturity in October 2006 and the Company's
interest expense includes such accretion. Cash interest on the Notes will accrue
and be payable semi-annually in arrears at the rate of 13.0% per annum, on
October 1 and April 1. No principal payments on the Notes are due prior to
maturity in 2006. The Notes are redeemable at the option of the Company in whole
or in part within 60 days of the consummation of a Public Equity Offering for an
amount equal to 118% of the accreted value as of the date of redemption, plus
accrued and unpaid interest and Liquidated Damages, if any. Otherwise the Notes
are redeemable after October 1, 2001 at declining redemption prices to maturity.
The Indenture governing the Notes contains certain covenants that, among other
restrictions, limit the Company's ability to pay dividends or make other
restricted payments, engage in transactions with affiliates, incur additional
indebtedness, effect asset dispositions or merge or sell substantially all its
assets.
In July 1997, the Company completed its Initial Public Offering of 3,000,000
shares of Common Stock at a purchase price of $10.50 per share for net proceeds
of approximately $28.5 million. The net proceeds received by the Company will be
used (i) predominantly to fund capital expenditures and working capital in
connection with the continued expansion of the Coinstar network, (ii) for
product research and development, and deployment of enhancements to the Coinstar
unit and the coin processing network and (iii) for general corporate purposes.
The Company believes existing cash equivalents and short-term investments
will be sufficient to fund its cash requirements and capital expenditure needs
for the continued expansion of the Coinstar network at the recent installation
rate for at least the next twelve months. The extent of additional financing
needed will depend on the success of the Company's business. If the Company
significantly increases installations beyond planned levels or if unit coin
processing volumes generated are lower than historical levels, the Company may
seek additional external financing to fund its cash needs. The Company's future
capital requirements will depend on a number of factors, including the timing
and number of unit installations, the type and scope of service enhancements,
and the level of market acceptance of the Company's service. In addition,
beginning in April 2000, the Company will have debt service obligations under
the Notes that were issued in October 1996 of over $12 million per year until
October 2006, at which time the principal amount of the Notes ($95.0 million)
will be due.
QUARTERLY FINANCIAL RESULTS
The following table sets forth selected unaudited quarterly financial
information and operating data for the last five quarters. This information has
been prepared on the same basis as the Company's Financial Statements and
includes, in the opinion of management, all normal and recurring adjustments
38
<PAGE>
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>
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1996 1996 1996 1997 1997
--------- ------------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue........................................... $ 1,388 $ 2,830 $ 3,349 $ 3,995 $ 5,294
Expenses:
Direct operating................................ 1,321 2,110 2,940 3,450 3,966
Regional sales and marketing.................... 407 396 494 630 972
Product research and development................ 762 1,014 1,533 1,441 1,640
Selling, general and administrative............. 1,067 1,425 1,987 2,528 2,630
Depreciation and amortization................... 796 1,098 1,741 1,684 2,158
Loss from operations.............................. $ (2,965) $ (3,213) $ (5,346) $ (5,738) (6,072)
OTHER DATA:
Number of New Coinstar units installed during the
period.......................................... 364 413 292 428 406
Installed base of Coinstar units at end of
period.......................................... 796 1,209 1,501 1,929 2,335
Number of regional markets........................ 18 22 23 27 33
Dollar value of coins processed................... $ 20,692 $ 37,637 $ 44,841 $ 52,724 $ 70,626
Direct contribution (loss)(1)..................... 67 720 409 545 1,328
Direct operating expense per average installed
unit(2)......................................... 2,205 2,055 2,112 2,037 1,858
</TABLE>
- ------------------------
(1) Direct contribution (loss) is defined as revenue less direct operating
expenses. The Company uses direct contribution (loss) as a measure of
operating performance to assist in understanding its operating results.
Direct contribution (loss) is not a measure of financial performance under
GAAP and should not be considered in isolation or an alternative to gross
margin, income (loss) from operations, net income (loss), or any other
measure of performance under GAAP.
(2) Based on monthly averages of units in operation over the applicable period.
Based on its limited operating history, the Company believes that coin
processing volumes have been affected by seasonality; in particular the Company
believes that on a relative basis coin processing volumes are lower in the
months of January, February, September and October. There can be no assurance,
however, that such seasonal trends will continue. Any projections of future
seasonality are inherently uncertain due to the Company's limited operating
history, and due to the lack of comparable companies engaged in the coin
processing business. The Company's revenue growth in the third and fourth
quarters of 1996 reflect the acceleration of Coinstar unit installations
beginning in the second quarter of that year and higher coin volumes generated
by its older units in service, offset in part by the seasonally lower coin
processing volume of its installed base. In addition to the seasonal impact of
such fourth quarter revenues, direct contribution in that fourth quarter
reflects higher direct operating expenses as a percentage of revenue and higher
field service expenses from the anticipated entry into new regional markets.
Higher coin pickup and processing costs were attributable principally to
seasonally lower volumes and a semi-fixed pickup schedule largely in effect
during the period. The Company experienced improved pickup efficiencies in the
quarters ended March 31, 1997 and June 30, 1997 and continues to take measures
to optimize such efficiencies.
In addition to fluctuations in revenue resulting from factors affecting
customer usage, timing of unit installations will result in significant
fluctuations in quarterly results. The rate of installations does not follow a
regular pattern, as it depends principally on installation schedules determined
by agreements
39
<PAGE>
between the Company and its retail distribution partners, variable length of
partner trial periods and the planned coordination of multiple partner
installations in a given geographic region.
Increasing quarterly losses from operations during the periods presented
were the result of higher direct operating expenses associated with the
significant increase in the Company's installed base, higher depreciation and
amortization expense from the expansion of the installed base and the
significantly higher level of systems infrastructure and management personnel to
support the Company's accelerated growth. The Company expects to continue to
incur substantial and increasing quarterly operating losses from operations as
it plans to significantly increase its installed base of Coinstar units.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standard ("SFAS") No. 128, EARNINGS PER
SHARE, was recently issued and is effective for the Company's fiscal year ending
December 31, 1997. This statement requires a change in the presentation of
earnings per share. Early adoption of this statement is not permitted.
Management believes that the impact of the adoption of this statement on the
financial statements, taken as a whole, will not be material.
SFAS No. 130, REPORTING COMPREHENSIVE INCOME, and SFAS No. 131, DISCLOSURE
ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, were also issued and
are effective for the Company's year ending December 31, 1998. The Company is
currently evaluating the effects of these standards, however, management
believes the impact of adoption will not be material to the financial
statements, taken as a whole.
40
<PAGE>
BUSINESS
SUMMARY
The Company develops, owns and operates a network of automated, self-service
coin counting and processing machines that provide consumers with a convenient
means to convert loose coins into cash. The Coinstar units, located in
supermarkets and financial institutions in more than 25 states across the
country, accept and count accumulated loose coins deposited by consumers and
issue vouchers listing the total number, denominations and dollar value of coins
processed less a processing fee charged by the Company, currently 7.5% (prior to
1996 the Company charged a 10% processing fee on pennies and a 5% processing fee
on all other coins.) The vouchers are redeemable by customers at store cashiers
for either credit towards retail purchases or cash, regardless of whether a
purchase is made. The Company believes its service addresses a significant
consumer need for a convenient and reliable coin processing method. The Coinstar
service provides consumers with a means of redeeming accumulated loose coins and
an alternative to manually presorting, counting and wrapping coins typically
required for cash redemption at a bank. Since inception, the network has
processed over 9.5 million customer transactions consisting of over 7.5 billion
coins worth over $261 million. The Company began commercial deployment of the
Coinstar network in 1994 and, in 1996, significantly accelerated its plans for
installation of the Coinstar units in various geographic regions. As of June 30,
1997, the Company had an installed base of 2,335 units located in supermarkets
and financial institutions in 33 regional markets across the United States.
The Company believes a key competitive advantage is its significant
expertise accumulated over the past five years in designing and manufacturing
the Coinstar units, in developing and supporting a wide-area communications
network capable of receiving and transmitting data to all Coinstar units, and in
building a dedicated field service organization with the ability to rapidly
deploy and service the Coinstar units. The Coinstar unit is a modularly
designed, free-standing machine controlled by an internal computer connected to
the Company's wide-area communications network. The network is critical to
providing high availability of the Coinstar units, maintaining a high level of
customer service and managing direct operating costs. The reliability of the
Coinstar unit and the utilization of the communications network, in conjunction
with the support of the Company's regional field service organization, have
resulted in median availability of units in operation of over 98%. In addition,
the network is used to distribute store-specific promotional programs such as
electronic offers, coupons and advertising.
The Company's primary objective is to extend its position as the leading
provider of automated, self-service coin processing services and to develop new
value-added services that can be delivered through its network. Principal
elements of the Company's growth strategy include: (i) increasing penetration of
its installed base in supermarkets in the largest DMAs nationwide; (ii)
developing and implementing new marketing programs and initiatives to promote
consumer awareness and usage of its service; and (iii) entering new distribution
channels for the installation of the Coinstar unit, such as banks, convenience
stores and mass merchants, and, potentially, international distribution
channels. The Company will continue to evaluate new consumer service offerings
that could be developed to capitalize on its ownership and operation of a
networked service and delivery platform in high traffic retail locations. The
modular construction of the Coinstar unit facilitates the potential addition of
peripherals to provide additional services such as targeted electronic
promotions, event ticketing and smart card applications.
THE RECURRING FLOW OF COINS IN THE ECONOMY
THE NEW YORK TIMES has reported that an estimated 288 billion cash
transactions have occurred on an annual basis in the United States. Assuming
that the change generated by each such cash transaction averaged fifty cents,
the annual coin flow resulting from such transactions would have been
approximately $144 billion. Based on the current population in the United
States, the average person handles approximately $600 in coins each year. To
support this flow of coins in the economy, the U.S. Mint has produced $15
billion in new coins over the past 25 years. According to the U.S. Mint, the
circulating stock of coins used in cash transactions is approximately $8
billion, which the Company estimates would have to turn over
41
<PAGE>
approximately 18 times a year to support a coin flow of $144 billion. The
prevalence of coins in cash transactions and the lack of a convenient
alternative for converting coins into cash has resulted in the accumulation of
coins. Based on the U.S. Mint data above, only $8 billion of the $15 billion in
coins produced over the last 25 years (the useful life of a coin) are regarded
as circulating, and the Company believes there is an estimated $7 billion of
non-circulating coins. New coins are made to replace those that fall out of
circulation and to support the increasing size of the economy. In 1996 alone,
the U.S. Mint produced over 19 billion new coins worth approximately $1 billion.
The Company believes a significant market opportunity exists for providing a
convenient method of redeeming non-circulating coins and recycling the recurring
coin flow in the United States economy. The actual size of the market of
recyclable coins potentially available to the Company, however, is limited by
the number of geographic locations in which it is economically feasible for the
Company to locate units. In addition, many consumers regularly use their loose
change in commercial transactions rather than accumulating it, or may elect
other alternatives for recycling their accumulated coins. In 1996 the Company
processed approximately $115 million of coins. See "Risk Factors."
The Company believes there is no widely available technology to quickly,
accurately and reliably sort and count odd volumes of coins in a self-service
environment. Traditionally, banks and other depository institutions have been
the primary means by which consumers could convert coins into cash, but they
typically have provided the service only to their depositors and generally only
after the coins have been pre-sorted, counted and wrapped in paper rolls by the
consumer, an inefficient and labor-intensive process. The lack of an efficient,
hassle-free alternative for consumers to convert coins into cash presents the
Company with a significant opportunity to capitalize on redeeming
non-circulating coins as well as recycling coins on a regular basis.
[CHART SHOWING ESTIMATED ANNUAL FLOW OF CONSUMER COINS IN THE U.S. ECONOMY,
DESIGNATING (1) THE ESTIMATED ANNUAL COIN FLOW IN THE U.S. ECONOMY OF $144
BILLION AND PER PERSON OF $600, (2) THE ESTIMATED TOTAL OF COINS OUT OF
CIRCULATION OF $7 BILLION, (3) THE AMOUNT OF COINS PROCESSED BY THE COMPANY
IN 1996 OF $115 MILLION, AND (4) THE AMOUNT OF COIN PRODUCTION BY THE U.S.
MINT IN 1996 OF $1 BILLION AND FROM 1972-1996 OF $15 BILLION. THE ESTIMATED
ANNUAL COIN FLOW INFORMATION REFERS TO A FOOTNOTE STATING "THE NEW YORK
TIMES HAS REPORTED THAT AN ESTIMATED 288 BILLION CASH TRANSACTIONS HAVE
OCCURRED ON AN ANNUAL BASIS IN THE UNITED STATES. ASSUMING THAT THE CHANGE
GENERATED BY EACH SUCH TRANSACTION AVERAGED FIFTY CENTS, THE ANNUAL COIN
FLOW RESULTING FROM SUCH TRANSACTIONS WOULD HAVE BEEN APPROXIMATELY $144
BILLION. BASED ON THE CURRENT POPULATION IN THE UNITED STATES, THE AVERAGE
PERSON HANDLES APPROXIMATELY $600 IN COINS EACH YEAR." COINS OUT OF
CIRCULATION INFORMATION REFERS TO A FOOTNOTE STATING "THE U.S. TREASURY
ESTIMATES THAT THE CUMULATIVE COIN PRODUCTION IN THE UNITED STATES HAS
TOTALED APPROXIMATELY $23 BILLION. THE U.S. MINT ESTIMATES THAT A COIN HAS A
USEABLE LIFE OF APPROXIMATELY 25 YEARS. FOR THE PURPOSES OF CALCULATING
THESE FIGURES, THE COMPANY DOES NOT INCLUDE COINS OLDER THAN 25 YEARS. BASED
ON THE U.S. MINT DATA, ONLY $8 BILLION OF THE $15 BILLION IN COINS PRODUCED
IN THE LAST 25 YEARS ARE REGARDED AS CIRCULATING, AND THE COMPANY BELIEVES
THAT THERE IS AN ESTIMATED $7 BILLION IN NON-CIRCULATING COINS. INCLUDING
COIN PRODUCTION PRIOR TO 1972, THE TOTAL DOLLAR VOLUME OF COINS OUT OF
CIRCULATION WOULD BE APPROXIMATELY $15 BILLION."]
42
<PAGE>
THE COINSTAR SOLUTION
The Company has designed, developed and is commercially deploying, in scale,
what the Company believes to be the first and only widespread network of
automated, self-service coin counting and processing machines. The Company
believes its service addresses a significant consumer need for a convenient and
reliable coin processing method. The Coinstar service provides consumers with a
means of redeeming accumulated loose coins and an alternative to manually
presorting, counting and wrapping coins typically required for cash redemption
at a bank or other depository institution. The Company believes a key
competitive advantage is its significant expertise accumulated over the past
five years in designing and manufacturing the Coinstar units, in developing and
supporting a wide-area communications network capable of receiving and
transmitting data to all Coinstar units, and in building a dedicated field
service organization with the ability to rapidly deploy and service the Coinstar
units.
Consumers take their accumulated loose coins to a supermarket or other
retail distribution channel, process them in a Coinstar unit and receive a
voucher. The voucher lists the total number, denominations and dollar value of
coins processed less a processing fee charged by the Company, currently 7.5%
(prior to 1996 the Company charged a 10% processing fee on pennies and a 5%
processing fee on all other coins). The voucher is redeemable by the customer at
the store cashier for either credit towards retail purchases or cash, regardless
of whether a purchase is made.
The key elements of the Coinstar system are:
- COINSTAR UNIT. The Coinstar unit is an automated, self-service coin
processing machine that incorporates certain hardware, electronics, and
software components in a free-standing unit. The unit is highly accurate,
durable, easy to use and service, and capable of processing up to 600
coins per minute. The Company's proprietary advances relating to certain
aspects of coin processing enable the Coinstar unit to handle moisture,
dirt, lint and other debris with infrequent clogging or malfunctioning,
important features for operating in a self-service environment. Each unit
is controlled by an internal computer that runs a multi-tasking operating
system and is connected to the Company's wide-area communications network.
The unit's flexible modular design, developed after extensive field
testing, supports new applications developed by the Company, systems
upgrades and expansion to address evolving customer needs.
- NETWORK. The Coinstar units have been designed to operate as part of a
two-way, wide-area communications network. The network is designed to
allow the Coinstar units to transmit key financial data and operating
statistics to headquarters on a daily basis. This information allows the
Company to accurately track unit coin flows and operating performance,
enabling the Company to efficiently schedule coin pickups, provide unit
service and perform essential accounting and reporting functions. In
addition, the network enables the Company to configure the units remotely
with a variety of operational data, store specific advertising, on-screen
promotions, coupons and future enhancements to the Coinstar unit.
- REGIONAL FIELD SERVICE ORGANIZATION. The Company has built a regional
field service organization with the primary goal of providing highly
responsive service to its retail distribution partners. The field service
organization is responsible for installing units, performing preventative
maintenance and repairs, and ensuring efficient collection and handling of
coins.
The reliability of the Coinstar unit and the utilization of the
communications network, in conjunction with the support of the Company's
regional field service organization, have resulted in median availability of
units in operation of over 98%.
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<PAGE>
The Company's Coinstar units, first test marketed in 1993, were in operation
in 52 supermarket chains and financial institutions in 33 market regions across
the United States as of June 30, 1997. The following table sets forth key data
which highlight the Company's growth:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR-ENDED DECEMBER 31, JUNE 30,
--------------------------------------------- ---------------------
1993 1994 1995 1996 1996 1997
----- --------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Installed base of Coinstar units at end of
period........................................... 17 48 263 1,501 796 2,335
Number of regional markets......................... 2 4 11 23 18 33
Number of full time employees...................... 15 35 56 160 90 245
Number of coins processed (in millions)............ 2 147 461 3,407 944 3,569
Dollar value of coins processed (in thousands)..... $ 74 $ 5,245 $ 17,701 $ 115,476 $ 32,998 $ 123,350
</TABLE>
BUSINESS STRATEGY
The Company's primary objective is to extend its position as the leading
provider of automated, self-service coin processing services and to develop new
value-added services that can be delivered through its network. Principal
elements of the Company's growth strategy include the following:
INCREASE UNIT PENETRATION IN SUPERMARKETS IN LEADING MARKETS
The focus of the Company's growth has been to increase its installed base in
supermarkets in some of the largest DMAs in the country. The Company believes
that installation of Coinstar units in supermarket chains provides meaningful
benefits to its retail distribution partners, such as offering a new customer
service, increasing store traffic, promoting sales and generating media
coverage. The Company has targeted supermarkets as its initial primary
distribution channel for deployment of its units because of the prevalence of
large regional chains, geographic concentration of stores and recurring consumer
traffic, all of which create economies of scale for the marketing, deployment
and operation of the Coinstar units. The Company estimates that there are
approximately 30,000 supermarkets in the United States, 25,000 of which are
located in the 100 largest DMAs targeted by the Company.
INCREASE COIN VOLUME
The Company believes that increasing the volume of coins processed by each
unit is dependent on generating greater consumer awareness of the service. The
Company is increasing public relations initiatives associated with new market
launches, developing additional cooperative advertising programs with its retail
distribution partners and increasing its field marketing activities.
Additionally, in May 1997 the Company began a pilot program in the western
region of the State of Washington that provides consumers with a means for
making tax-deductible cash donations to participating non-profit organizations
of their choice through the Coinstar unit.
ENTER NEW DISTRIBUTION CHANNELS
BANKS AND OTHER DEPOSITORY INSTITUTIONS. The Company believes that it could
provide banks and other depository institutions with an economical way to handle
their in-branch coin processing needs. Traditionally, banks and other depository
institutions have been the primary means by which consumers could convert coins
into cash, but they typically have provided the service only to their depositors
and generally only after the coins have been pre-sorted, counted and wrapped in
paper rolls by the consumer, an inefficient and labor-intensive process.
However, many banks and other depository institutions would rather not spend the
resources required for coin deposit services and are making it increasingly
difficult for consumers to convert coins into cash at the teller window. The
Company believes it can provide these
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banks and depository institutions with a turnkey program that requires no
capital investment and that offers a new customer service. This program could
result in a significant reduction in teller time and associated coin handling
costs, and a potential new source of consumer and vendor deposits. The first
pilot program with a regional bank was deployed in May 1997.
CONVENIENCE STORES AND MASS MERCHANTS. The Company believes that, like
supermarkets, convenience stores and other mass merchants represent a viable
retail distribution channel for its service, offering a large market of
potential consumers, a convenient location for multiple consumer visits and
opportunities for large-scale deployments. Accordingly, the benefits offered to
these potential retail distribution partners for placing a Coinstar unit on
their premises are similar to those realized by supermarkets.
INTERNATIONAL MARKET. A number of potential retail distribution partners in
foreign countries have expressed interest in international expansion of the
Coinstar network. The Company believes that its network and software technology
could be adapted to meet the requirements of several foreign coin sets.
DEVELOP NEW VALUE-ADDED SERVICES FOR DELIVERY THROUGH THE NETWORK
The Company will continue to evaluate new consumer service offerings that
could be developed to capitalize on its ownership and operation of a networked
computerized service and delivery platform in high traffic retail locations. The
Coinstar unit is designed with an internal computer, high-speed two-way
communications system, color monitor, printer, keypad and speaker, which give
the Company the flexibility to upgrade its current services offerings and to
expand to new applications. The modular construction of the Coinstar unit also
facilitates the potential addition of other peripherals, such as card readers,
scanners, and touch screens, which could enable the Company to provide
additional services such as point of sale links, smart card applications,
frequent shopper program links, electronic promotions, coupons, advertising and
event ticketing, such as movies and concerts. The Company believes that such
additional services may increase the value of a transaction to a customer and
promote usage of the Coinstar unit. Although the Company frequently evaluates
the relative risks and merits of introducing new value-added services, the
Company has not made a determination to add any of the value-added services
described above and does not have any current plans to incorporate such
additional services.
SALES AND MARKETING
The Company's current sales and marketing efforts are focused on expanding
the Coinstar network within the United States and generating higher coin volumes
for each Coinstar unit. The Company's retail distribution partner marketing
strategy is to significantly increase its penetration with existing retail
distribution partners as well as to establish relationships with new retail
distribution partners in the 100 largest DMAs. The Company's consumer marketing
strategy highlights the core benefits to consumers, which the Company believes
are convenience and increased disposable income, to help build market awareness
and increase consumer usage.
MARKETING TO RETAIL DISTRIBUTION PARTNERS
The Company's retail development group is responsible for increasing the
installed base of Coinstar units within retail chains in the 100 largest DMAs.
Since the Coinstar service combines many aspects of the marketing, advertising,
accounting and operations of potential retail distribution partners, sales calls
can be made at the corporate, regional and store level of retail chains in each
DMA. Entry and expansion within a chain is frequently accomplished through a two
stage process, whereby a chain places a limited number of Coinstar units in its
stores for an evaluation period, after which it decides whether to commit to
chain-wide expansion. When marketing to supermarkets, the Company highlights the
following key benefits of its service:
- ENHANCES CUSTOMER SERVICE. Supermarket retailing is a highly competitive
business with low margin, high volume unit economics that demands tight
expense control. As a result, supermarkets
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continuously pursue cost savings initiatives and customer service
opportunities to encourage shopper loyalty and attract new shoppers. The
Coinstar unit enables supermarkets to provide a convenient service to
their customers using minimal store space, while incurring virtually no
additional cost.
- INCREASES STORE TRAFFIC. The Company believes that installation of the
Coinstar unit helps to increase store traffic. A market study conducted in
1995 by Griggs & Anderson Research, an independent market research firm
hired by the Company, indicated that 33% of the Coinstar unit users were
not in the store in which they normally shop. A survey conducted in 1996
by Northwest Research Group indicated that 87% of the respondents stated
that they would visit another store to use the Coinstar unit if it were
not installed in the store they regularly visit.
- PROMOTES SALES. The Company believes that installation of the Coinstar
unit can promote sales for its retail distribution partners by putting new
disposable income in shoppers' hands while they are in the store. Coinstar
customers are more likely to make a purchase in the store because they
generally must redeem their vouchers at a check-out counter. The Company's
market study indicated that 77% of customers spent some or all of their
voucher in the store and, on average, customers who spent at least a
portion of their voucher estimated that they spent 70% of their voucher in
the store. Moreover, the study indicated that, of the Coinstar users who
were not in the store in which they usually shop, 79% made purchases in
that store. This first opportunity at new "found" money provides
supermarkets with an increased opportunity of generating incremental
sales.
- GENERATES MEDIA COVERAGE. In order to increase awareness of the Coinstar
unit and the supermarkets in which they are located, the Company usually
launches a public relations effort in a new region or for a new
supermarket partner, including coverage by the mass media, in-store
merchandising, demonstrations and co-operative advertising.
The following table presents the Company's historical unit growth and
geographical expansion over the last four years and as of June 30, 1997. As of
June 30, 1997, the Company's network of Coinstar units was operating in 52
supermarket chains and financial institutions located in 24 states.
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UNIT EXPANSION BY STATE
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------ JUNE 30,
STATE 1993 1994 1995 1996 1997
- ------------------------------------------------------- ----- ----- ----- --------- -----------
<S> <C> <C> <C> <C> <C>
California............................................. 17 30 112 491 529
Washington............................................. 18 55 93 110
North Carolina......................................... 32 70 100
Virginia............................................... 24 37 37
New York............................................... 19 153 228
New Jersey............................................. 13 98 197
Ohio................................................... 6 83 166
South Carolina......................................... 2 3 28
Texas.................................................. 135 197
Pennsylvania........................................... 98 144
Indiana................................................ 58 84
Massachusetts.......................................... 54 54
Arizona................................................ 51 75
Georgia................................................ 33 101
Colorado............................................... 31 52
Delaware............................................... 7 14
Kentucky............................................... 5 8
Vermont................................................ 1 2
Michigan............................................... 69
Utah................................................... 23
Illinois............................................... 13
Nevada................................................. 38
Tennessee.............................................. 44
Louisiana.............................................. 22
-- --
--- --------- -----
Total installed units.................................. 17 48 263 1,501 2,335
-- --
-- --
--- --------- -----
--- --------- -----
</TABLE>
The Company estimates that there are approximately 30,000 supermarkets in
the United States. The following table sets forth, as of June 30, 1997 for each
supermarket chain and financial institution, the number of Coinstar units
installed, the total number of stores and branches in operation and the
penetration of the Company's installed base.
47
<PAGE>
<TABLE>
<CAPTION>
UNITS TOTAL
CHAIN INSTALLED STORES(1) PENETRATION
- ------------------------------------------------------- ----------- ------------- -------------
<S> <C> <C> <C>
Abco Markets........................................... 24 53 45%
Acme Market............................................ 3 183 1
Acme................................................... 19 19 100
A & P.................................................. 64 427 15
Bel Air................................................ 15 17 88
Bi-Lo.................................................. 32 261 12
Cala Foods............................................. 20 29 69
Clemens Markets........................................ 3 17 19
Dominick's Finer Foods................................. 13 86 15
Drexel Hill Foods...................................... 1 1 100
Fifth Third Bank....................................... 4 411 *
Fleming Foods.......................................... 17 87 19
Food 4 Less............................................ 75 77 97
Food Lion.............................................. 1 1,105 *
Seaway Food Town....................................... 23 43 53
Food Mark.............................................. 3 7 43
Garrett Foods.......................................... 1 1 100
Gerland's.............................................. 20 20 100
Giant Eagle............................................ 98 104 94
Giant.................................................. 2 173 1
Grand Union............................................ 35 224 15
Haggen(2).............................................. 13 17 76
Harris Teeter.......................................... 85 136 62
Hughes Family Markets.................................. 56 57 98
K.V. Mart.............................................. 19 19 100
King Kullen............................................ 43 47 91
Kroger(3).............................................. 502 1,372 36
L&R Food............................................... 1 less than 10 N/A
Larry's Markets........................................ 5 6 83
Lucky Stores........................................... 39 436 9
Marsh Supermarkets..................................... 58 86 67
Mega Foods............................................. 1 less than 10 N/A
MidFirst Credit Union.................................. 1 less than 10 N/A
Olson's................................................ 1 1 100
Pak-n-Sav.............................................. 1 17 6
Pathmark Stores........................................ 128 144 89
Price Chopper.......................................... 39 93 42
Quality Food Centers(4)................................ 89 89 100
Raley's................................................ 44 70 63
Ralph's................................................ 252 265 95
Randall's.............................................. 68 71 95
Safeway................................................ 5 836 *
Save Mart.............................................. 22 92 24
Schwegmann Giant Supermarkets.......................... 22 26 84
Shop-Rite.............................................. 66 168 39
Smith's(5)............................................. 88 150 58
Star Market............................................ 50 51 98
Stater................................................. 5 110 4
Super Fresh............................................ 42 113 37
Tom Thumb.............................................. 48 51 94
Twin County Grocers (Foodtown)......................... 19 22 86
Waldbaum's............................................. 50 90 55
----- ------------- ---
Total................................................ 2,335 7,983 29%
----- ------------- ---
----- ------------- ---
</TABLE>
- ------------------------
*less than 1%
(1) Source: Company estimates and Trade Dimensions.
(2) Includes Top Foods, a division of Haggen.
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(3) Includes King Soopers Stores, a division of Kroger.
(4) Includes Stock Market Foods, a division of QFC.
(5) Includes Smitty's, a division of Smith's.
Generally, the Company enters into separate agreements with each of its
retail distribution partners, providing for the Company's exclusive right to
provide coin processing services in their retail locations. These contracts
generally have terms ranging from two to three years and are generally
terminable by either party with advance notice of at least 90 days. The Company
and the retail distribution partner may also agree to certain marketing
arrangements, such as promotional and public relations activities and
advertising. In addition, Coinstar units in service in several supermarket
chains account for a significant portion of the Company's revenue. In the six
months ended June 30, 1997, Coinstar units in service in three supermarket
chains accounted for approximately 32.3% of the Company's revenue. The units in
service in two of these chains, Ralphs and Kroger, accounted for approximately
11.0% and 13%, respectively, of the Company's revenue in the six months ended
June 30, 1997. The termination of any one or more of the Company's contracts
with its retail distribution partners could have a material adverse effect on
the Company's business, financial condition and results of operations and on its
ability to achieve sufficient cash flow to service its indebtedness. See "Risk
Factors--Fluctuations in Quarterly Operating Results" and "Risk
Factors--Possible Termination of Retail Distribution Partner Agreements."
MARKETING TO CONSUMERS
Since the Company offers a new consumer service, an important element of its
marketing strategy is to increase overall consumer awareness of the benefits of
the service. Independent market research conducted in a sample of installed
regions in October 1996 indicates that a majority of the consumers questioned
were unaware of the Coinstar service. To promote consumer awareness, the Company
is implementing an aggressive awareness-building campaign that it believes will
further increase dollar volumes processed by the Coinstar units.
The Coinstar unit has been designed to be prominently branded, highly
identifiable, easily recognized and capable of self promotion to consumers. The
Coinstar unit is generally located near the primary entrance areas of
supermarkets and in clear view of the check-out counters or service centers. The
Company is continually developing additional techniques such as the use of sound
and animation that, when added to the Coinstar unit, are intended to attract
consumers and stimulate awareness and trial.
The Company markets to its supermarket partners' existing customer base by
communicating through advertising media already used by such supermarket
partners, such as cooperative newspaper advertisements and direct mail
circulars, window signs, bag stuffers or printed bags, shelf talkers, in-store
demonstrations and other merchandising aids.
The Company also promotes the Coinstar unit to consumers in general by media
which include the use of free-standing newspaper advertisements, billboards,
radio and television commercials, targeted mailings and door-hangers. The
Company plans to continue to capitalize on its promotional opportunities as it
enters new markets and expands into existing markets with new or existing retail
distribution partners. The Company has generally found local, regional and
national press to be receptive to the Coinstar service and willing to devote
space and/or air time to communicate the Company's message.
The Company is also developing other programs designed to increase the
breadth and volume of consumer usage. In May 1997, the Company began a pilot
philanthropic service program in the western region of the State of Washington
that the Company believes provides non-profit organizations with a highly
cost-effective means of raising money. The new program enables non-profit
organizations to be designated by the customer as recipients of the dollar value
of coins processed by the Coinstar unit. This program provides consumers with a
simple means for making tax-deductible donations. Instead of receiving a voucher
to be redeemed at the retail distribution partner's check-out counter, the
consumer receives a printed receipt evidencing the value of their donation. The
Company has modified the
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<PAGE>
functionality of the Coinstar unit so that consumers can designate the full
value of their processed coins to a participating organization. The Company and
the participating organizations will conduct joint promotional marketing for the
new service. The organizations pay the Company a fee based on the amount of
money raised through this new service that is significantly less, in general,
than the amount these organizations would otherwise spend to raise funds. See
"Risk Factors--Dependence on Continued Market Acceptance by Consumers and Retail
Distribution Partners."
THE COINSTAR SYSTEM
The Coinstar system consists of a robust unit, a two-way, wide-area
communications network capable of receiving and transmitting data to and from
all units and a dedicated field service organization. The reliability of the
Coinstar unit and the utilization of the communications network, in conjunction
with the support of the Company's regional field service organization, have
resulted in median availability of units in operation of over 98%.
COINSTAR UNIT
The Coinstar unit is comprised of a coin input and cleaning process, a coin
counter that is designed to be jam-resistant, coin collection bins, a computer,
a thermal printer, an input keypad, an internal phone and a color monitor. The
Coinstar unit is highly accurate, durable, easy to use and service, and capable
of processing up to 600 coins per minute. The counter detects foreign coins,
slugs, debris and damaged coins and directs the coins processed to collection
trolleys located inside the Coinstar unit. The Company's proprietary advances
relating to certain aspects of coin processing enable the Coinstar unit to
handle moisture, dirt, lint, and other debris with infrequent clogging or
malfunctioning, important features for operating in a self-service environment.
In October 1996 and April 1997, the Company was issued United States patents
relating to removing debris from coins processed in a self-service environment
and other aspects of self-service coin processing. These patents will expire in
October 2013 and April 2014, respectively. Sufficient debris removal is
important to reducing clogging and malfunctioning. Reducing these problems and
the associated downtime improves unit availability for customer use and reduces
the amount of time that Company or retail partner personnel must spend attending
to the unit, both of which are important features of operating in a self-service
environment.
The Coinstar unit is controlled by an internal computer that runs a
multi-tasking operating system. In addition to controlling and coordinating
Coinstar unit functions, the computer electronically records nearly all aspects
of the unit's operation. The unit electronically logs extensive transaction
information such as a unique transaction number, the dollar amount, time and
duration of each transaction, the numbers of each type of coin processed and the
number of rejected coins. Aggregate log information is transmitted daily over
the Company's wide-area communications network to the Company's headquarters for
analysis and backup.
The Coinstar unit is also equipped with a telephone handset that enables
supermarket personnel to connect directly to the Coinstar Customer Service
Center via a toll free number, providing store personnel direct support in the
event assistance is required.
NETWORK SYSTEM AND TECHNOLOGY
The Company believes that the availability of current performance,
configuration, and financial data through the wide-area communications network
is critical to providing high availability of the Coinstar units, maintaining a
high level of customer service, and managing direct operating costs. The Company
also believes the establishment and development of the network functions are a
significant barrier to entry for competitors. The Company believes that the
following benefits resulting from the network and
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<PAGE>
associated features enable the Company to provide a higher level of service at a
lower cost than a traditional reactive, dispatch-oriented service organization:
- DOWNLOADABLE SOFTWARE PROGRAMS AND SYSTEMS ENHANCEMENTS. The two-way
network permits headquarters to send information to each Coinstar unit,
customized to the unit's location, including new graphics, animations,
sounds and voucher designs. This capability permits the Company to promote
the use of the service through store-specific advertising, on-screen
promotions, special offers, sweepstakes and coupons. In addition, the
network is used to download new versions of application and operating
system software from headquarters to the units in the field, and effect
other configuration changes electronically, avoiding on-site visits by
Company personnel.
- UNIT OPERATING PERFORMANCE REPORTING. Each Coinstar unit generates daily
performance and operating reports that are transmitted over the network to
headquarters for consolidation and then electronically distributed via the
network to the responsible field service employee. In addition, the
Coinstar unit provides specific service information to the responsible
field employee by directly paging the employee with current operating
information based on a series of predetermined performance criteria. The
Company's personnel use this unit performance information to make
proactive decisions to service each Coinstar unit in advance, such as
determining when a preventative maintenance is required or identifying the
specific maintenance or repairs needed.
- ENHANCEMENT OF FIELD SERVICE PRODUCTIVITY. Performance and operating
reports generated by the network are also used to better utilize field
service and armored carrier personnel. As part of the daily performance
and operating reports sent over the network, each Coinstar unit reports
its fill status and predicts, based on a number of factors, when it will
become full. This information is used by the Company to manage the
efficiency of armored carrier pickups and reduce downtime resulting from
full Coinstar units.
- FINANCIAL REPORTING AND RECONCILIATION. The network allows Coinstar units
to transmit key financial data and operating statistics to headquarters on
a daily basis. The financial and accounting information generated by the
Coinstar units is cross-checked at the Company's headquarters with bank
records and armored carrier processing data logged into the network to
ensure the accuracy, speed and control of each deposit. The Company also
balances the coin counts verified by armored carriers against the coin
counts declared by the Coinstar unit on a bin-by-bin basis, all of which
information is available from the network. In addition, retail
distribution partners receive weekly automated facsimile reports generated
by the network detailing information such as transaction volumes and
deposits made for each store.
- AUTOMATED TRACKING OF COIN COLLECTION, PROCESSING AND DEPOSITS. The
Company is expanding the Company's wide-area communications network to
provide information to, and gather information from, each of the Company's
armored carrier partners by deploying a proprietary automatic receipt
tracking system ("ARTS"). The addition of ARTS to the Coinstar network
enables the Company to track each deposit to the respective bank accounts
of the retail distribution partners and the Company.
The wide-area and local area networks at the Company's headquarters are
coupled securely using sophisticated modern networking equipment. These
scaleable networks are integrated using standard tcp/ip networking protocols
over a 100 Mbps backbone which features automatic segmentation and secure
subnets via firewall and intelligent ethernet switch technology. Headquarters
components of the network operate on widely available personal computers with
advanced reliability features including RAID-5 storage, multi-processor
configurations and clustering. The Company has built an extensive and secure
intranet on top of this physical infrastructure using standard client/server
tools provided by leading industry vendors. The client/server applications
leverage both traditional high performance relational database management
systems technology as well as novel, more flexible, discussion-oriented database
technology. Certain data processing activities occur at the Coinstar unit during
off-peak hours, distributing
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<PAGE>
the processing load from headquarters and allowing the network of Coinstar units
to grow faster than the corresponding headquarters system capacities. In the
event of a network failure, however, availability of the Coinstar units and
related field service would be negatively impacted until such failure was
repaired, and a continued failure for a sustained period could have a material
adverse effect on the Company's business, financial condition and results of
operations and on the Company's ability to achieve sufficient cash flow to
service its indebtedness. See "Risk Factors--Risks of Defects in Operating
Systems."
REGIONAL FIELD SERVICE ORGANIZATION
The Company has assembled a regional field service organization comprised of
approximately 145 field service personnel and supporting employees with the
primary goal of providing highly responsive service to its retail distribution
partners. The field service organization is responsible for performing
preventative maintenance and repairs and ensuring the efficient collection and
handling of coins.
FIELD SERVICE PERSONNEL. In all markets in which the Company operates, the
field service employee is the Company's primary direct contact with consumers
and retail distribution partners. Every member of the field service team is
connected to the wide-area communications network. Each Coinstar unit generates
daily performance and operating reports which are transmitted over the network
to headquarters for consolidation and then electronically distributed via the
network to the responsible field service employee. In addition, the Coinstar
unit provides specific service information to the responsible field service
employee by directly paging such employee with current operating information
based on a series of predetermined performance criteria. If a site visit is
required, the field service employee responds on location, often before store
personnel at the site become aware of a problem. Such current operating
information is intended to allow Coinstar personnel to use this unit performance
information to make proactive decisions when maintaining the network of Coinstar
units. The most common problems, however, involve simple coin jams, most of
which can be readily fixed by the store manager. More difficult problems are
handled by Coinstar field service personnel.
ARMORED CARRIERS. The Company contracts with armored carrier companies to
handle the transportation and processing of coins deposited in Coinstar units.
The armored carriers are part of the traditional money handling infrastructure
and secure liability and loss insurance to protect the value of the coins
handled by them. The use of these contracted resources facilitates Coinstar's
growth and security with minimal investment in facilities and equipment when
entering new markets. The armored carrier service typically includes removing
the coin trolleys, tagging them for deposit, cleaning of the Coinstar unit,
transporting the coins for processing at the armored carrier's facilities, and
depositing the coins to the Company's local depository for subsequent transfer
to the respective bank accounts of the retail distribution partners and the
Company. The frequency of coin collections by armored carriers is determined by
machine usage and are monitored through the network. By leveraging its wide-area
communications network capabilities with its armored carrier service partners
through ARTS, the Company can efficiently monitor every step of the coin
collection and deposit process and manage the variable costs of pickups.
Generally, the Company contracts with one armored carrier to service a
particular region. Many of these carriers do not have long-standing
relationships with the Company and these contracts generally can be terminated
by either party with advance notice ranging from 30 to 90 days. In the past, the
Company has experienced a sudden disruption in service from an armored carrier
company. The Company does not currently have nor does it expect to have in the
foreseeable future the internal capability to provide back up service in the
event of sudden disruption in service from an armored carrier company. Any
failure by the Company to maintain its existing relationships or to establish
new relationships on a timely basis or on acceptable terms would have a material
adverse effect on the Company's business, financial condition and results of
operations and on the Company's ability to achieve sufficient cash flow to
service its indebtedness. See "Risk Factors--Reliance on Third Party
Manufacturer and Service Providers."
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INSTALLATION PERSONNEL. The ability to quickly and reliably perform
large-scale installations of Coinstar units with minimum impact on store
operations is important to building a nationwide network. Each installation is
managed by an individual account manager. For a typical installation, a sales
operations representative visits the store prior to the delivery of the Coinstar
unit to coordinate with the store manager regarding the location of the Coinstar
unit within the store and to review site requirements. Site requirements are
generally limited to a 110 volt outlet and a telephone line. On the day of
delivery, a Coinstar field service employee unpacks, levels and calibrates the
unit and conducts a training and orientation session for store personnel.
PRODUCT RESEARCH AND DEVELOPMENT
The Company has increased its product research and development efforts over
the past several years and expects to continue to spend a significant portion of
its resources on these activities for the foreseeable future. The Company spent
approximately $1.6 million, $1.8 million, and $4.0 million for technology and
product research and development in 1994, 1995, and 1996, respectively. The
Company presently employs approximately 40 software engineers, information
technology specialists and other professional staff in these efforts and
contracts with a number of specialized outside consultants for additional
services. The main focus of the Company's product research and development
efforts includes improvements to the operating systems and enhancements to the
network to support both the continued expansion of the network and the potential
addition of value-added services. See "Risk Factors--Rapid Technological
Change."
MANUFACTURING AND SUPPLY
The Company's manufacturing strategy is to utilize leading manufacturers to
produce Coinstar units at a reasonable cost. The Company believes that using
contract manufacturers has several advantages including decreasing capital
investment in plant and equipment and working capital, the ability to leverage
contract manufacturers' purchasing relationships for lower material costs,
minimal fixed costs of maintaining unused manufacturing capacity, greater
capacity flexibility and the ability to utilize suppliers' broad technical and
process expertise. Currently, the Coinstar units are assembled under contract
with a contract manufacturer in Redmond, Washington, which utilizes several
subsuppliers to provide components and subassemblies. Each Coinstar unit is
manufactured to the Company's proprietary designs and specifications, and all
designs, documentation, tooling, specialized fixtures and test equipment are
owned by the Company. Each unit is inspected and tested for quality by Company
personnel prior to shipment.
The Company does not conduct manufacturing operations and is dependent and
will continue to be dependent on outside parties for the manufacture of the
Coinstar unit and its key components. While Coinstar intends to significantly
expand its installed base, such expansion may be constrained by the
manufacturing capacity of its third party manufacturers and suppliers. Although
the Company expects that its current contract manufacturer, SeaMed, will be able
to produce sufficient units to meet projected demand, there can be no assurance
that SeaMed or other manufacturers will be able to meet the Company's
manufacturing needs in a satisfactory and timely manner. In the event of an
unanticipated increase in demand for Coinstar unit installations by retail
distribution partners, the Company may be unable to meet such demand due to
manufacturing constraints. Although the Company has a contract with SeaMed, it
does not have a long-term obligation to continue the manufacture of the Coinstar
unit or its components. Further, SeaMed is principally engaged in the
manufacture of electronic medical instruments for medical technology companies.
The Company believes that it is SeaMed's only material non-medical customer. As
such, the Company faces an increased risk that SeaMed may choose to focus
exclusively on manufacturing its medical products and cease making the Company's
products. Should SeaMed cease providing services, the Company would be required
to locate and qualify additional suppliers. There can be no assurance that the
Company would be able to locate alternate manufacturers on a timely basis. See
"Risk Factors--Reliance on Third-Party Manufacturers and Service Providers."
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The Company currently purchases the coin counter component of the Coinstar
unit from a single manufacturer, Scan Coin AB, pursuant to an agreement that may
be terminated by either party with six months notice at any time on or after
June 30, 1998. The Company has entered into a non-binding letter of intent with
Scan Coin AB for a new agreement, although no assurance can be given that the
parties will enter into a new agreement. Currently, no other manufacturer
produces a coin counter capable of being used in the Coinstar units without
extensive enhancements and modifications. No assurance can be given that Scan
Coin AB will be able or willing to supply coin counter components to the Company
in the future. The Company believes that it would require up to 12 months to
source and make necessary modifications to an alternative coin counter
component. Moreover, it could take several additional months for any such
alternative supplier to meet the Company's required volume levels. Accordingly,
any cessation, slow-down or disruption in the Company's current supply of coin
counter components would have a material adverse effect on the Company's
business, financial condition and results of operations and on its ability to
achieve sufficient cash flow to service its indebtedness. Although the Company
believes alternative suppliers are available, there can be no assurance that the
Company would be able to locate an alternate supplier on a timely or cost
efficient basis, if at all, and make the necessary modifications and
enhancements to the design of the Coinstar unit to utilize such replacement,
both of which, in the event of their nonoccurrence, would materially impair its
ability to have Coinstar units manufactured. A prolonged inability to obtain
certain components could have a material adverse effect on the Company's
business, financial condition and results of operations and on its ability to
achieve sufficient cash flow to service its indebtedness, particularly as the
Company increases its manufacturing requirements to support its nationwide
deployment. See "Risk Factors--Exposure to Component Shortages from Single
Source Supplier."
PROPRIETARY RIGHTS
The technology necessary to quickly, accurately and reliably identify, count
and process coins is complex. The Company purchases the coin counter component
of the Coinstar unit on an OEM basis from a third party. The Company has made
several technological advances relating to self-service coin processing that are
important to the successful operation of the Coinstar unit in a self-service
environment. These advancements are implemented both mechanically and through
the Company's software. These technologies enable the Coinstar unit to handle
moisture, dust, lint, dirt, paper, paper clips, and other debris with infrequent
clogging or malfunctioning. In October 1996 and April 1997, the Company was
issued United States patents relating to removing debris from coins processed in
a self-service environment and other aspects of self-service coin processing.
These patents will expire in October 2013 and April 2014, respectively.
Sufficient debris removal is important to reduce clogging and malfunctioning.
Reducing these problems and the associated downtime improves the unit
availability for customer use and reduces the amount of time that Company or
retail partner personnel must spend attending to the unit, both of which are
important features of operating in a self-service environment. The Coinstar unit
also has a unique printed circuit board which contains a non-volatile memory for
data storage purposes. This board stores records of transactions and other
significant events which can be recovered in the event of a main CPU or hard
disk failure. This board also supports downloadable code to facilitate software
modification.
No assurance can be given that any patents will be issued from any pending
patent applications or from any future patent applications will be issued, that
any of the Company's patents will be held valid if subsequently challenged or
that others will not claim rights in or ownership of the patents and other
proprietary rights held by the Company. Moreover, there can be no assurance that
any patents issued to the Company will not be challenged, invalidated or
circumvented, or that the rights granted thereunder will provide proprietary
protection to the Company. Despite the Company's efforts to safeguard and
maintain its proprietary rights, there can be no assurance that the Company will
be successful in doing so or that the Company's competitors will not
independently develop or patent technologies that are substantially equivalent
or superior to the Company's technologies. On June 18, 1997, the Company filed
in the United States District Court, Northern District of California against
CoinBank, one of its competitors, the Patent Infringement Claim. CoinBank
responded to the Company by letter dated June 23, 1997,
54
<PAGE>
alleging that the Company failed to conduct a reasonable investigation before
filing the Patent Infringement Claim, the Patent Infringement Claim is
unreasonable and without factual foundation and the Patent Infringement Claim
was filed for an improper purpose. CoinBank has demanded the Company dismiss
such action, and has indicated that if such action is not dismissed, CoinBank
will answer the Patent Infringement Claim on June 26, 1997 and counterclaim for
declaration of noninfringement, invalidity and unenforceability of the subject
patent and file a claim for $12 million of damages based on the tort of
intentional interference with prospective economic advantage. CoinBank further
stated that it may file a cross-complaint against Scan Coin AB for indemnity and
breach of warranty of title. On June 27, 1997, CoinBank answered the Patent
Infringement Claim and counterclaimed for declaration of noninfringement,
invalidity and unenforceability of the subject patent, and filed a claim for
breach of warranty against Scan Coin AB. There can be no assurance that the
Company will prevail in such Patent Infringement Claim or on any claim that
might be filed by CoinBank against the Company, or that as a result of such
Patent Infringement Claim, the Company's patent will not be limited in scope or
found to be invalid. See "Risk Factors--Uncertainty of Protection of Patents and
Proprietary Rights."
COMPETITION
The Company believes that it is the first company to provide a widespread
network of self-service coin processing machines that provides a convenient,
reliable means for consumers to convert loose coins into cash. The Company has
become aware of two direct competitors that operate self-service coin processing
machines, both of which the Company believes operate an installed base of less
than 50 units in certain regions of the United States. There can be no
assurance, however, that such competitors have not increased or will not
increase their installed base of units or expand their service nationwide. The
Company also competes indirectly with manufacturers of machines and devices that
enable consumers to count or sort coins themselves. The Company also competes or
may compete directly or indirectly with banks and similar depository
institutions for coin conversion customers. Currently, banks are the primary
alternative available to consumers for converting coins into cash, and they
generally do not charge a fee for accepting rolled coins. As the market for coin
processing develops, banks or other businesses may decide to offer additional
coin processing services, either as a customer service or on a self-service
basis, and compete directly with the Company. Many of these potential
competitors have longer operating histories, greater name recognition, larger
customer bases and significantly greater financial, technical, marketing and
public relations resources than the Company. Such competitors may be able to
undertake more extensive marketing campaigns, adopt more aggressive pricing
policies and make more attractive offers to consumers and businesses. There can
be no assurance that the Company will be able to compete effectively with
current or future competitors or that the competitive pressures faced by the
Company will not have a material adverse effect on the Company's business,
financial condition and results of operations and the Company's ability to
achieve sufficient cash flow to service its indebtedness.
The Company believes its proprietary and patented advances relating to
self-service coin processing, its ability to collect and analyze operating and
financial statistics from Coinstar units through its wide-area communications
network, its installed base of units in supermarkets nationwide and its
dedicated regional field service organization are its principal competitive
strengths. There can be no assurance, however, that the Company's competitors,
or others, will not succeed in developing technologies, products or services
that are more effective, less costly or more widely used than those that have
been or are being developed by the Company or that would render the Company's
technologies or products obsolete or not competitive. See "Risk
Factors--Competition."
EMPLOYEES
As of June 30, 1997, the Company had 265 employees, including 20 part-time
field service employees. The Company has separate internal departments,
including sales and marketing, operations, technology
55
<PAGE>
systems and engineering, and finance and administration. No employee is
represented by a union, and the Company has not experienced a work stoppage. The
Company believes its employee relations are good.
PROPERTIES
The Company's headquarters occupies a 46,070 square foot facility in
Bellevue, Washington. The Company operates under a lease which expires in August
2004. The Company also occupies a 10,196 square foot building in Bellevue,
Washington under a lease which expires in March 2002. The Company believes this
space is adequate for its current needs and that it will be able to renew its
leases and obtain additional space, if necessary.
LITIGATION
The Company is not a party to any material legal proceedings other than
those associated with the Patent Infringement Claim. See "Business--Proprietary
Rights."
56
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND SENIOR MANAGEMENT
The executive officers, directors and senior management of the Company, and
their ages as of June 30, 1997 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ --- -------------------------------------------------
<S> <C> <C>
Jens H. Molbak................ 35 President, Chief Executive Officer and Director
Rod W. Brooks................. 44 Vice President of Sales and Marketing
Kirk A. Collamer.............. 44 Vice President and Chief Financial Officer
Aaron R. Finch................ 38 Vice President of Operations
Daniel A. Gerrity............. 36 Vice President and Chief Technical Officer
George H. Clute(1)............ 47 Director
Larry A. Hodges(2)............ 48 Director
David E. Stitt(1)(2).......... 50 Director
Ronald A. Weinstein(1)(2)..... 56 Director
SENIOR MANAGEMENT
Kirk W. Beach................. 43 Director, Software Engineering
William W. Booth.............. 41 Director, Retail Development
Bruce Coonan.................. 50 Director, Consumer Value Marketing
Michael L. Doran.............. 47 Director, Information Systems
Steven M. Geiger.............. 39 Director, Accounting, Controller
Jessaca A. Jacobson........... 34 Director, Sales Operations
Dennis J. Johnson............. 46 Director, Marketing and Sales Promotion
Carol Lewis................... 47 National Director, Philanthropic Services
Timothy J. Manion............. 39 Director, Operations Strategy and Planning
Thomas B. Owen, Jr............ 49 Director, Commercial Services
Marion E. Mehrer.............. 40 Director, Corporate Services
Michael W. Parks.............. 50 Director, Field Operations
Marlane L. Wolf............... 52 National Director, Financial Services Program
</TABLE>
- ------------------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
EXECUTIVE OFFICERS AND DIRECTORS
JENS H. MOLBAK, the Company's President, Chief Executive Officer and a
director, founded the Company in 1990. Prior to that he served two years as an
analyst at Morgan Stanley & Co., Inc., an investment bank. Mr. Molbak earned his
M.B.A. from Stanford University Graduate School of Business and his B.A. in
Psychobiology with distinction in the major from Yale University.
ROD W. BROOKS, the Company's Vice President of Sales and Marketing, joined
the Company in July 1995. From June 1993 until July 1995, he was the Vice
President of Marketing, Consumer Product Division at Novell, Inc., a computer
networking company. From June 1989 until March 1993, Mr. Brooks served as the
Senior Vice President, Marketing and Merchandising for Egghead, Inc., a software
retailer ("Egghead"). Mr. Brooks has also held Vice President, Marketing
positions at Northern Automotive, Inc. and Quality Food Centers ("QFC"). Mr.
Brooks obtained his B.A. in Communications from Washington State University in
1975.
KIRK A. COLLAMER, the Company's Vice President and Chief Financial Officer,
joined the Company in February 1997. From March 1995 until February 1997, Mr.
Collamer served as the Chief Financial Officer
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<PAGE>
of Muzak Limited Partnership, a business music services provider. From April
1988 to March 1995, he served in various capacities at Ameritech Corporation, a
telecommunications company, including serving as Vice President, Finance and
Controller and Vice President and Chief Financial Officer of two subsidiaries.
Prior to that he served in various finance positions at Brown-Forman Corp./Jack
Daniel Distillery, a producer of distilled spirits, and Aladdin Industries,
Inc., a marketer of consumer products. He has been a Certified Public Accountant
since 1974 and was previously employed by the public accounting firm of Arthur
Andersen & Co. from 1974 until 1978. Mr. Collamer received his M.B.A. from
Vanderbilt University and his B.A. in Accounting from Michigan State University.
AARON R. FINCH, the Company's Vice President of Operations, joined the
Company in February 1993. Prior to joining the Company, Mr. Finch worked in the
Investment Evaluation Department at Weyerhaeuser Co., a forest products company,
from 1990 until February 1993. He obtained his M.B.A. from Stanford University
Graduate School of Business and his B.S. in Natural Resource Management from
Colorado State University.
DANIEL A. GERRITY, the Company's Vice President and Chief Technical Officer,
joined the Company in November 1993 after serving on the Company's Advisory
Board since 1990. Prior to joining the Company, Mr. Gerrity was an engineering
manager for Slate Corporation, an application software company, from 1990 until
November 1993. Mr. Gerrity earned his M.B.A. from Stanford University Graduate
School of Business, his M.S. in Computer Systems from Stanford University and
his B.S. in Electrical Engineering from Stanford University.
GEORGE H. CLUTE has been a director of the Company since 1995. Mr. Clute, a
founding general partner of Rainier Venture Partners and Olympic Venture
Partners, has been a general partner of those venture capital funds since 1982.
Mr. Clute serves on the boards of Nth Degree Software Corp., Inc., a privately
held software development company, Sequel Technology Corp., a privately held
internet software development company, the Western Association of Venture
Capitalists and the Washington Software & Digital Media Alliance. He also sits
on the Executive Industry Board for the Fred Hutchinson Cancer Research Center.
He earned his M.B.A. and A.B. from the University of California, Los Angeles.
LARRY A. HODGES has been a director of the Company since December 1995. Mr.
Hodges has served as the President and Chief Executive Officer of Mrs. Field's
Cookies, a retail cookie/bakery chain, since April 1994. Prior to that Mr.
Hodges was hired in 1992 by Prudential Insurance Company ("Prudential") to
manage a distressed asset of Prudential, Food Barn Stores, Inc., a supermarket
chain ("Food Barn"). In 1993, Food Barn filed for bankruptcy protection in
federal court and was subsequently sold. Prior to that, Mr. Hodges served in
various capacities at American Stores Company, a food and drug retailer, for 25
years, including serving as President of two subsidiaries. Mr. Hodges earned his
B.A. from California State University, San Bernardino. Mr. Hodges also serves as
a director of Ameristar Casinos, Inc., a casino gaming company.
DAVID E. STITT has been a director of the Company since 1995. Since 1986, he
has been an employee of Vencap, Inc. (formerly, Vencap Equities Alberta Ltd.), a
venture capital firm, most recently as a Vice President. Mr. Stitt represents
Vencap, Inc. on several private company boards of directors in which such firm
has an investment interest. Mr. Stitt also serves on the board of Applied
Microsystems Corporation, an embedded systems tools company. Previously for
seven years, he was Vice President of Sales and Marketing for Westmills Carpet
Ltd., a regional carpet manufacturer located in western Canada.
RONALD A. WEINSTEIN has been a director of the Company since 1992. From 1984
to July 1991, he was a principal of Sloan Capital Companies, a private
investment firm. From February 1989 until April 1991, Mr. Weinstein served as
Executive Vice President of Merchandising at Egghead. Mr. Weinstein serves as
Chairman of B&B Auto Parts, Inc., an auto parts supplier and is a director of
QFC.
The Company intends to name two additional non-employee directors following
the Initial Public Offering.
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<PAGE>
SENIOR MANAGEMENT
KIRK W. BEACH, the Company's Director of Software Engineering, joined the
Company in October 1996. From April 1996 until October 1996, he served as Vice
President, MIS of Health Resource Publishing Company (a Catalina Marketing
Corporation company) where he developed corporate strategies for the network and
systems. Prior to that, Mr. Beach was the Senior Director of Store Systems for
Catalina Marketing Corporation from January 1989 until October 1996.
WILLIAM W. BOOTH, the Company's Director of Retail Development, joined the
Company in April 1995. From April 1992 until March 1995 he served as the Senior
Director, Retail Marketing Services for Catalina Marketing Corporation, a
consumer marketing company. From July 1989 until March 1992 he served as Senior
Accountant Executive at Citicorp POS Information Services. Prior to that he held
account management and analyst positions at Datachecker Systems, Inc. and Sweda
International, Inc. Mr. Booth earned his B.A. in Economics/Business
Administration from Washington and Jefferson College.
BRUCE COONAN, the Company's Director of Consumer Value Marketing, joined the
Company in September 1995. From 1989 until September 1995, he operated an
independent consulting firm specializing in business planning, market
development and executive searches. Prior to that he held management positions
in marketing, sales promotion and sales with Colgate-Palmolive Co.,
Kimberly-Clark Corp. and Ralston Purina Co. He also served as Vice President of
Catalina Marketing Corporation from January 1984 to August 1988. Mr. Coonan
received his Master of International Management from the American Graduate
School of International Management and his B.A. from Stanford University.
MICHAEL L. DORAN, the Company's Director of Information Systems, joined the
Company in August 1996. From June 1989 to August 1996, Mr. Doran served as
Senior Manager, Application Services for Snohomish Public Utility District where
he directed automation planning and application development. Prior to that, he
opened and managed the Oregon office of Fiserv, Inc., a national service bureau
providing computer services to financial institutions and, while at US Bancorp,
Inc., he managed the bank's automated teller machines and debit card automation
projects. He earned his B.S. in Business Administration from Oregon State
University.
STEVEN M. GEIGER, the Company's Director of Accounting, Controller, joined
the Company in June 1996. From January 1991 until June 1996 he served as
Corporate Controller and the Director of Financial Planning and Assistant
Treasurer for MIDCOM Communications Inc., a communications services company. Mr.
Geiger is a Certified Public Accountant, a Certified Management Accountant and a
Certified Cash Manager. Mr. Geiger received his B.S. in Finance from the
University of Washington.
JESSACA A. JACOBSON, the Company's Director of Sales Operations, joined the
Company in April 1996. From June 1994 until April 1996, Ms. Jacobson operated an
independent consulting company specializing in business planning, operations
development, and marketing support catering to the specialty coffee industry in
both domestic and international markets. Prior to that, she held various
positions in retail operations with The Coffee Connection, Inc., a Boston based
specialty coffee retailer, from October of 1985 until June of 1994, serving as
the Director of Retail Operations for that organization from February 1989 until
June of 1994. Ms. Jacobson earned her B.A. degree in English from Occidental
College.
DENNIS J. JOHNSON, the Company's Director of Marketing and Sales Promotion,
joined the Company in April 1996. From 1985 until April 1996, he held various
positions in marketing and sales with Oberto Sausage Company, a snack food
company, serving most recently as Vice President of Corporate Marketing. Prior
to that Mr. Johnson served as a director of Alpac Corp., a beverage distributor,
as Division Sales Development Manager and District Manager for PepsiCo, Inc. and
as a sales representative and account manager for General Foods Corporation. Mr.
Johnson earned a B.S. in Business and a B.S. in Political Science from the
University of Oregon.
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<PAGE>
CAROL LEWIS, the Company's National Director, Philanthropic Services, joined
the Company in September 1996. From February 1994 until July 1995, she served as
Executive Director of Pacific Northwest Ballet, a professional ballet company.
Prior to that she served as Senior Vice President of Administration for Egghead.
Ms. Lewis' prior experience includes six years as Deputy Mayor of the City of
Seattle and work as a television news reporter for several Northwest stations.
She has a Masters in Public Policy from the JFK School of Government at Harvard
University and a B.A. from Stanford University.
TIMOTHY J. MANION, the Company's Director, Operations Strategy and Planning,
joined the Company in November 1996. Prior to joining the Company, Mr. Manion
held various management positions with Federal Express Corporation, an overnight
shipping company, from 1978 until November 1995. Mr. Manion earned a B.A. from
the University of Michigan in 1981.
MARION E. MEHRER, the Company's Director of Corporate Services, joined the
Company in August 1993. From May 1989 until August 1993, she served as Business
Manager and Controller for Fruhling, Inc., a construction company. Prior to
that, she spent six years at Microsoft Corporation in charge of corporate
services and operations in the International Division. Ms. Mehrer received her
D.P.M. degree from the Illinois College of Podiatric Medicine and her B.S. in
Environmental Health, School of Public Health from the University of Washington.
THOMAS B. OWEN, JR., the Company's Director of Commercial Services, joined
the Company in June 1997. From March 1996 until May 1997, he served as Director
of Operations & Finance for Edmark Corporation, a developer of educational
software for children. Prior to that, he held various manufacturing, operations,
and finance positions with firms in the computer hardware and software industry,
including Quebecor Integrated Media, Egghead Software, and Hewlett Packard Co.
Mr. Owen earned his M.B.A. from Stanford University Graduate School of Business
and his B.A. in English from Tufts University.
MICHAEL W. PARKS, the Company's Director of Field Operations, joined the
Company in April 1994. From September 1993 to April 1994, Mr. Parks served as
President of Seriphus Group, a consulting company he founded. From 1969 until
August 1993, he served as Vice President at Seafirst Bank where he helped
develop and operate their debit card program and automated teller machine
systems. Mr. Parks is a graduate of the Post-Graduate Level Banking Program at
Pacific Coast Banking School at the University of Washington and holds a B.A.
from Central Washington University.
MARLANE L. WOLF, the Company's National Director, Financial Services
Program, joined the Company in February 1997. From May 1993 until February 1997,
she worked for Bank of America and their Seafirst division as Vice President,
Marketing Director of Seafirst. Prior to that, she was an Executive Vice
President and Senior Manager at Pacific First Bank where she managed Marketing,
Human Resources, Corporate Affairs, Training and Office Services. Her background
also includes marketing management, product development and business development
positions at Pillsbury Co. and Beatrice Foods Inc. Ms. Wolf completed a custom
marketing management program at the J.L. Kellogg Graduate School of Northwestern
University. She earned a B.A. from the University of Minnesota where she also
did graduate work.
FINANCIAL ADVISOR
ACORN VENTURES, INC. (RUFUS W. LUMRY). Acorn Ventures, Inc. ("Acorn"), of
which Mr. Lumry is a majority owner and employee, is a financial advisor of the
Company. Acorn was selected by the Board of Directors to serve as financial
advisor to the Company. In that role, Acorn assists in defining the Company's
business strategy, identifying and meeting with sources of financing and
assisting the Company in structuring and negotiating such financings. The
Company entered into a consulting agreement with Acorn setting forth the
services to be provided and indemnifying Acorn for certain actions, events or
proceedings related to such consulting relationship. Acorn does not receive any
compensation for its services, but is reimbursed for reasonable out-of-pocket
expenses in connection with services rendered.
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<PAGE>
Mr. Lumry was one of the original founders of McCaw Cellular Communications,
Inc. ("McCaw") and from 1982 to 1990, served as its Chief Financial Officer.
Prior to his retirement in 1990, he served as a director of McCaw since its
organization and as a director of LIN Broadcasting, Inc., a partially owned
subsidiary of McCaw. Mr. Lumry received an A.B. in Economics from Harvard
College in 1969 and a M.B.A. from The Harvard Graduate School of Business
Administration in 1974.
DIRECTORS' COMPENSATION
The Company's directors do not currently receive any cash compensation for
service on the Board or any committee thereof, but directors may be reimbursed
for certain expenses in connection with attendance at Board and committee
meetings.
In February 1997, each of the Company's non-employee directors, Messrs.
Clute, Hodges, Stitt and Weinstein, was granted an option to purchase 10,000
shares of Common Stock at an exercise price of $10.00 per share under the Equity
Incentive Plan. Upon the completion of the Initial Public Offering, non-employee
directors will not be eligible to participate in the Equity Incentive Plan, but
will be eligible to receive options under the Directors' Plan. See "Equity
Incentive Plans."
COMMITTEES
The Audit Committee consists of Mr. Clute, Mr. Stitt and Mr. Weinstein. The
Audit Committee makes recommendations to the Board of Directors regarding the
selection of independent auditors, reviews the results and scope of the audit
and other services provided by the Company's independent auditors and reviews
and evaluates the Company's audit and control functions.
The Compensation Committee consists of Mr. Hodges, Mr. Stitt and Mr.
Weinstein. The Compensation Committee makes recommendations regarding the
Company's equity incentive plans and makes decisions concerning salaries and
incentive compensation for employees and consultants of the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No interlocking relationship exists between the Company's Board of Directors
or Compensation Committee and the board of directors or compensation committee
of any other party, nor has any such relationship existed in the past. Mr.
Weinstein is a stockholder of the Company and has entered into financing
arrangements with the Company from time to time.
EXECUTIVE COMPENSATION
The following table sets forth the compensation earned by the Company's
Chief Executive Officer and the four other most highly compensated executive
officers (collectively, the "Named Executive Officers")
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whose salary and bonus for the fiscal year ended December 31, 1996 were in
excess of $100,000 for services rendered in all capacities to the Company for
that fiscal year:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION(1) -------------------
SECURITIES
----------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY ($) BONUS ($) OPTIONS (#) COMPENSATIONS ($)
- ------------------------------------------------- ---------- ----------- ------------------- -----------------------
<S> <C> <C> <C> <C>
Jens H. Molbak................................... $ 97,081 -- 25,000 --
President, Chief Executive Officer and Director
Rod W. Brooks.................................... 153,730 -- 25,000 --
Vice President of Sales and Marketing
Aaron R. Finch................................... 100,636 -- 15,000 --
Vice President of Operations
Daniel A. Gerrity................................ 126,219 $ 15,000 30,000 --
Vice President and Chief Technical Officer
Warren M. Gordon(2).............................. 100,636 -- 15,000 --
Vice President of Finance
</TABLE>
- ------------------------
(1) In accordance with the rules of the Securities and Exchange Commission (the
"Commission"), the compensation described in this table does not include
medical, group life insurance or other benefits received by the Named
Executive Officers which are available generally to all salaried employees
of the Company and certain perquisites and other personal benefits received
by the Named Executive Officers which do not exceed the lesser of $50,000 or
10% of any such officer's salary and bonus disclosed in this table.
(2) In February 1997, Mr. Gordon resigned from his position as the Company's
Chief Financial Officer and served as the Company's Vice President--Finance
until April 1997 when he began a one year leave of absence.
EQUITY INCENTIVE PLANS
1997 EQUITY INCENTIVE PLAN. In March 1997, the Board of Directors adopted
the Company's 1997 Equity Incentive Plan (the "Equity Incentive Plan"). The
Equity Incentive Plan is an amendment and restatement of the Company's 1992
Stock Option Plan, as amended. The Company has reserved a total of 2,900,000
shares of Common Stock for issuance under the Equity Incentive Plan. The Equity
Incentive Plan provides for grants of incentive stock options within the meaning
of Section 422 of the Internal Revenue Code, as amended (the "Code"), to
employees (including officers and employee directors) and nonstatutory stock
options, restricted stock purchase awards and stock bonuses to employees
(including officers and employee directors) and consultants of the Company. The
Company's Board of Directors has delegated administration of the Equity
Incentive Plan to the Compensation Committee. The Compensation Committee
membership is intended to satisfy the provisions of Rule 16b-3 promulgated under
the Securities Exchange Act of 1934, as amended, and Code Section 162(m), in
each case to the extent applicable. The Committee has the authority, subject to
the terms of the Equity Incentive Plan, to determine the recipients and types of
awards to be granted, the terms of the awards granted, including the exercise
price, number of shares subject to the award the exercisability thereof, and the
form of consideration payable upon exercise.
The terms of stock options granted under the Equity Incentive Plan generally
may not exceed 10 years. The exercise price of options granted under the Equity
Incentive Plan is determined by the Board of
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Directors, provided that, in the case of an incentive stock option, the exercise
price cannot be less than 100% of the fair market value of the Common Stock on
the date of grant and, in the case of a nonstatutory stock option, the exercise
price cannot be less than 85% of the fair market value of the Common Stock on
the date of grant. The exercise price of options under the Equity Incentive Plan
granted to any person who at the time of grant owns stock possessing more than
10% of the total combined voting power of all classes of stock must be at least
110% of the fair market value of such stock on the date of grant and the terms
of these options cannot exceed five years. The aggregate fair market value,
determined at the time of grant, of the shares of Common Stock with respect to
which incentive stock options are exercisable for the first time by an optionee
during any calendar year (under all such plans of the Company and its
affiliates) may not exceed $100,000. No optionee shall be eligible for option
grants under the Equity Incentive Plan covering more than 1,000,000 shares at
such time as Section 162(m) of the Code becomes applicable to the Plan.
Options granted under the Equity Incentive Plan vest at the rate specified
in the option agreement. No option may be transferred by the optionee other than
by will or the laws of descent or distribution or, for a nonstatutory option,
pursuant to a qualified domestic relations order, provided that an optionee may
designate a beneficiary who may exercise the option following the optionee's
death, and, provided further, that the Compensation Committee may grant a
nonstatutory stock option that is transferable. An optionee whose relationship
with the Company or any affiliate ceases for any reason (other than by death or
disability) generally may exercise options in the three month period following
such cessation (unless such options terminate or expire sooner or later by their
terms). Options under the Equity Incentive Plan may be exercised for up to
twelve months after an optionee's relationship with the Company and its
affiliates ceases due to disability and for up to twelve months after an
optionee's relationship with the Company and its affiliates ceases due to death
(unless such options expire sooner or later by their terms).
Shares subject to options which have expired or otherwise terminated without
having been exercised in full become available for the grant of options under
the Equity Incentive Plan. Furthermore, the Board of Directors may offer to
exchange new options for existing options, with the shares subject to the
existing options again becoming available for grant under the Equity Incentive
Plan. In the event of a decline in the value of the Company's Common Stock, the
Board of Directors has the authority to offer optionees the opportunity to
replace outstanding higher priced options with new lower priced options.
Restricted stock purchase awards granted under the Equity Incentive Plan may
be granted pursuant to a repurchase option in favor of the Company in accordance
with a service vesting schedule determined by the Board. The purchase price of
such awards will be at least 85% of the fair market value of the Common Stock on
the date of grant. Stock bonuses may be awarded in consideration for past
services without a purchase payment.
Upon certain changes in control of the Company, all outstanding awards under
the Equity Incentive Plan shall either be continued, assumed or substituted by
the surviving entity. If the surviving entity determines not to continue, assume
or substitute such awards, then the time during which such options may be
exercised shall be accelerated and the awards shall be terminated if not
exercised prior to such event.
As of June 30, 1997, 257,787 shares of Common Stock had been issued upon the
exercise of options granted under the Equity Incentive Plan, options to purchase
921,900 shares of Common Stock at a weighted average exercise price of $5.67 per
share were outstanding and 1,720,313 shares remained available for future option
grants. The Equity Incentive Plan will terminate in March 2007, unless
terminated sooner by the Board of Directors.
1997 EMPLOYEE STOCK PURCHASE PLAN. In March 1997, the Company's Board of
Directors adopted the Purchase Plan covering an aggregate of 200,000 shares of
Common Stock. The Purchase Plan is intended to qualify as an employee stock
purchase plan within the meaning of Section 423 of the Internal Revenue Code.
Under the Purchase Plan, the Board of Directors may authorize participation by
eligible employees,
63
<PAGE>
including officers, in periodic offerings following the adoption of the Purchase
Plan. The offering period for any offering may be no more than 27 months. The
Board has currently authorized an initial offering beginning with the
effectiveness of the Initial Public Offering and ending July 31, 1999.
Employees are eligible to participate if they are employed by the Company,
or an affiliate of the Company designated by the Board of Directors, provided
that under the currently authorized offerings an employee's customary employment
is for at least 20 hours per week and five months per calendar year. Employees
who participate in an offering can have up to 15% of their earnings withheld
pursuant to the Purchase Plan. The amount withheld will then be used to purchase
shares of the Common Stock on specified dates determined by the Board of
Directors and applied, on specified dates determined by the Board of Directors,
to the purchase of shares of Common Stock. Under the currently authorized
offerings, the purchase dates are each January 31 and July 31. The price of
Common Stock purchased under the Purchase Plan will be equal to 85% of the lower
of the fair market value of the Common Stock on the commencement date of each
offering period or the relevant purchase date. Employees may end their
participation in the offering at any time during the offering and participation
ends automatically on termination of employment with the Company or, under the
currently authorized offerings, when the employee elects to enroll in another
offering.
In the event of certain changes in control, the Board of Directors has
discretion to provide that each right to purchase Common Stock will be assumed
or an equivalent right substituted by the successor corporation, or the Board
may shorten the offering period and provide for all sums collected by payroll
deductions to be applied to purchase stock immediately prior to such merger or
other transaction. The Board has the authority to amend or terminate the
Purchase Plan, subject to the limitation that no such action may adversely
affect any outstanding rights to purchase Common Stock.
1997 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN. In March 1997, the
Company's Board of Directors adopted the Directors' Plan to provide for the
automatic grant of options to purchase shares of Common Stock to non-employee
directors of the Company. The Directors' Plan is administered by the Board,
unless the Board delegates administration to a committee of disinterested
directors.
The maximum number of shares of Common Stock that may be issued pursuant to
options granted under the Directors' Plan is 100,000. Pursuant to the terms of
the Directors' Plan, each person serving as a director of the Company who is not
an employee of the Company (a "Non-Employee Director") shall upon the date such
person first becomes a Non-Employee Director after the effectiveness of the
Initial Public Offering of the Company's Common Stock automatically be granted
an option to purchase 10,000 shares of Common Stock. In addition, on the date of
each annual meeting of stockholders following the effectiveness of the Initial
Public Offering each Non-Employee Director automatically will be granted an
option to purchase 5,000 shares of Common Stock (pro-rated for Non-Employee
Directors with less than a full year's tenure).
Options granted under the Directors' Plan will vest immediately. The
exercise price of options under the Directors' Plan must equal or exceed the
fair market value of the Common Stock on the date of grant. No options granted
under the Directors' Plan may be exercised after the expiration of ten years
from the date it was granted. Options granted under the Directors' Plan are
generally non-transferable except pursuant to a domestic relations order in
beneficiary descriptions. Unless otherwise terminated by the Board of Directors,
the Directors' Plan automatically terminates in March 2007. As of the date
hereof, no options have been granted under the Directors' Plan.
64
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth each grant of stock options made during the
fiscal year ended December 31, 1996 to each of the Named Executive Officers:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------------------------- POTENTIAL REALIZABLE VALUE AT
NUMBER OF ASSUMED ANNUAL RATES OF STOCK
SECURITIES PERCENTAGE OF PRICE APPRECIATION FOR OPTION
UNDERLYING TOTAL OPTIONS EXERCISE MARKET TERM($)(4)
OPTIONS GRANTED IN FISCAL PRICE PRICE EXPIRATION -------------------------------
NAME GRANTED(1) 1996 (%)(2) ($/SH) ($/SH)(3) DATE 0% 5% 10%
- ---------------------- ------------- ----------------- ----------- ----------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Jens H. Molbak........ 25,000 9.8 $ 0.70 $ 10.50 4/30/2006 $ 245,000 $ 389,724 $ 601,461
Rod W. Brooks......... 25,000 9.8 0.70 10.50 4/30/2006 245,000 389,724 601,461
Aaron R. Finch........ 15,000 5.9 0.70 10.50 4/30/2006 147,000 233,834 360,877
Daniel A. Gerrity..... 30,000 11.8 0.70 10.50 4/30/2006 294,000 467,668 721,754
Warren M. Gordon(5)... 15,000 5.9 0.70 10.50 4/30/2006 147,000 233,834 360,877
</TABLE>
- ------------------------------
(1) Options generally become exercisable at a rate of 50% on the second
anniversary of the vesting commencement date and 2.083% each month
thereafter and have a term of 10 years. Options may be exercised prior to
vesting, subject to the Company's right to repurchase in the event service
is terminated.
(2) Based on an aggregate of 254,850 shares subject to options granted to
employees of the Company in the fiscal year ended December 31, 1996,
including the Named Executive Officers.
(3) Based on the Initial Public Offering price of $10.50 per share. The
potential realizable value is calculated based on the term of the option at
the time of grant (10 years). Stock price appreciation of 0%, 5% and 10% is
assumed pursuant to rules promulgated by the Securities and Exchange
Commission and does not represent the Company's prediction of its stock
price performance.
(4) The potential realizable value is calculated by assuming that the Initial
Public Offering price of $10.50 per share appreciates at the indicated rate
for the entire term of the option and that the option is exercised at the
exercise price and sold on the last day of its term at the appreciated
price.
(5) In February 1997, Mr. Gordon resigned from his position as the Company's
Chief Financial Officer and served as the Company's Vice President--Finance
until April 1997 when he began a one year leave of absence.
AGGREGATE OPTIONS EXERCISED IN 1996 AND YEAR-END OPTION VALUES
The following table sets forth for each of the Named Executive Officers the
shares acquired and the value realized on each exercise of stock options during
the year ended December 31, 1996 and the number and value of securities
underlying unexercised options held by the Named Executive Officers at December
31, 1996:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED OPTIONS AT VALUE OF UNEXERCISED
IN-THE-MONEY OPTIONS AT
SHARES DECEMBER 31, 1996 (#) DECEMBER 31, 1996($)(2)
ACQUIRED ON VALUE ---------------------------------- --------------------------------
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE(1) EXERCISABLE UNEXERCISABLE
- ---------------------------- ------------- ------------- ----------- --------------------- ----------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Jens H. Molbak.............. -- -- 25,000 -- $ 245,000 --
Rod W. Brooks............... -- -- 100,000 -- 1,002,500 --
Aaron R. Finch.............. -- -- 96,500 -- 975,400 --
Daniel A. Gerrity........... -- -- 90,000 -- 901,875 --
Warren M. Gordon(3)......... 13,500 $ 5,400 61,500 -- 617,175 --
</TABLE>
- ------------------------------
(1) Options are immediately exercisable; however, the shares purchasable under
such options are subject to repurchase by the Company at the original
exercise price paid per share upon the optionee's cessation of service prior
to the vesting of such shares.
(2) Based on the difference between the Initial Public Offering price of $10.50
per share and the exercise price.
(3) In February 1997, Mr. Gordon resigned from his position as the Company's
Chief Financial Officer and served as the Company's Vice President--Finance
until April 1997 when he began a one year leave of absence.
65
<PAGE>
401(K) PLAN
As of July 1995, the Board adopted a tax-qualified employee savings and
retirement plan (the "401(k) Plan") covering the Company's employees. Pursuant
to the 401(k) Plan, eligible employees may elect to reduce their current
compensation by up to the lesser of 15% of their annual compensation or the
statutorily prescribed annual limit ($9,500 in 1997) and have the amount of such
reduction contributed to the 401(k) Plan. The 401(k) Plan provides for
additional matching contributions to the 401(k) Plan by the Company in an amount
determined by the Company. The trustees under the 401(k) Plan, at the direction
of each participant, invest the assets of the 401(k) Plan in designated
investment options. The 401(k) Plan is intended to qualify under Section 401 of
the Code, so that contributions to the 401(k) Plan, and income earned on the
401(k) Plan contributions, are not taxable until withdrawn, and so that the
contributions by the Company will be deductible when made.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Bylaws provide that the Company will indemnify its directors
and executive officers and may indemnify its other officers, employees and other
agents to the fullest extent permitted by Delaware law. The Company is also
empowered under its Bylaws to enter into indemnification contracts with its
directors and officers and to purchase insurance on behalf of any person it is
required or permitted to indemnify. Pursuant to this provision, the Company has
entered into indemnity agreements with each of its directors and executive
officers.
In addition, the Company's Certificate of Incorporation provides that, to
the fullest extent permitted by Delaware law, the Company's directors will not
be liable for monetary damages for breach of the directors' fiduciary duty of
care to the Company and its stockholders. This provision in the Certificate of
Incorporation does not eliminate the duty of care, and in appropriate
circumstances equitable remedies such as an injunction or other forms of
non-monetary relief would remain available under Delaware law. Each director
will continue to be subject to liability for breach of the director's duty of
loyalty to the Company, for acts or omissions not in good faith or involving
intentional misconduct, for knowing violations of law, for any transaction from
which the director derived an improper personal benefit, for improper
transactions between the director and the Company and for improper distributions
to stockholders and loans to directors and officers. This provision also does
not affect a director's responsibilities under any other laws, such as the
federal securities laws or state or federal environmental laws.
There is no pending litigation or proceeding involving a director or officer
of the Company as to which indemnification is being sought, nor is the Company
aware of any pending or threatened litigation that may result in claims for
indemnification by any director or officer.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since the Company's inception in February 1991, the Company issued, in
private placement transactions, shares of its Preferred Stock as follows: (i)
649,775 shares of Series A Preferred Stock at $1.00 per share in March and
November 1992, (ii) 895,506 shares of Series B Preferred Stock at $4.00 per
share along with warrants to purchase 43,752 shares of Series B Preferred Stock
for $4.00 per share in June and September 1993, (iii) 4,567,016 shares of Series
C Preferred Stock at $3.25 per share along with warrants to purchase 1,419,369
shares of Series C Preferred Stock for $3.00 to $4.00 per share in February
1995, (iv) 2,500,000 shares of Series D Preferred Stock for $4.00 per share
along with warrants to purchase 705,891 shares of Series D Preferred Stock for
$4.25 per share in December 1995, and (v) 100,000 shares of Series E-1 Preferred
Stock for $6.00 per share along with warrants to purchase 350,000 shares of
Series E-2 Preferred Stock for $0.60 per share and warrants to purchase 550,000
shares of Series E-3 Preferred Stock for $0.388636 per share in August 1996. The
warrants provide that the purchase price paid for each warrant be credited
toward the exercise price for that warrant, resulting in effective exercise
prices for the warrants to purchase the Series E-2 Preferred Stock and Series
E-3 Preferred Stock of $11.40 and $15.61136 per share, respectively. The
following table sets forth the shares of Preferred Stock purchased by each of
the Company's directors, executive officers and key employees, five percent
stockholders and their respective affiliates:
<TABLE>
<CAPTION>
SERIES B SERIES C SERIES D SERIES E
SERIES A PREFERRED PREFERRED PREFERRED PREFERRED
PREFERRED STOCK AND STOCK AND STOCK AND STOCK AND
INVESTOR STOCK WARRANTS WARRANTS WARRANTS WARRANTS
- ------------------------------------------------------ ----------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Benaroya Capital Company, L.L.C....................... -- -- -- 1,154,118 --
Vencap, Inc.(1)....................................... -- -- 900,000 192,353 --
CIBC Woody Gundy Ventures, Inc........................ -- -- 800,001 265,087 --
Eos Partners SBIC, L.P................................ -- -- 700,001 160,294 --
Entities affiliated with Olympic Venture Partners III,
L.P.(2)............................................. -- -- 630,000 168,309 --
Roanoke Investors, L.P................................ -- -- 400,000 256,471 --
Acorn Ventures, Inc................................... -- -- -- -- 1,000,000
Rod W. Brooks(3)...................................... -- -- -- 8,015 --
Aaron R. Finch(4)..................................... -- 50,000 -- 9,618 --
Ronald Weinstein(5)................................... 60,000 53,907 100,178 36,833 --
</TABLE>
- ------------------------
(1) Mr. Stitt, a director of the Company, is an officer of Vencap, Inc. Mr.
Stitt disclaims beneficial ownership of such shares except to the extent of
his pro rata ownership interest therein.
(2) Mr. Clute, a director of the Company, is a general partner of the general
partner of the entities affiliated with Olympic Venture Partners III, L.P.
Mr. Clute disclaims beneficial ownership of such shares except to the extent
of his pro rata ownership interest therein.
(3) Mr. Brooks is the Vice President of Sales and Marketing of the Company.
(4) Mr. Finch is the Vice President of Operations of the Company.
(5) Mr. Weinstein is a director of the Company. Includes shares beneficially
owned by the Weinstein Family Partnership, of which Mr. Weinstein is a
general partner.
In January 1994, the Board of Directors granted to each of Gary Hudson,
Stephen Sander and Ronald Weinstein an option to purchase 10,000 shares of the
Company's Series B Preferred Stock and granted to Victor Alhadeff an option to
purchase 5,000 shares of the Company's Series B Preferred Stock. Each such
option has an exercise price of $4.00 per share and was fully vested on the date
of grant. At that time, such individuals were members of the Company's Board of
Directors.
As of December 31, 1996, the Company had approximately 116 Coinstar units
installed in QFC, including Hughes Markets, Inc. its subsidiary ("QFC-Hughes")
grocery stores. During 1996, the Coinstar units installed in QFC-Hughes were
responsible for approximately 14.9% of the Company's revenue. Mr. Weinstein, a
director of the Company, is also a director of QFC.
The Company believes that the foregoing transactions were on terms no less
favorable to the Company than could be obtained from unaffiliated third parties.
67
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of June 30, 1997 for (i)
each stockholder who is known by the Company to own beneficially more than five
percent of the Company's Common Stock, (ii) each Named Executive Officer, (iii)
each director, and (iv) all current directors and executive officers of the
Company as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY PERCENTAGE OF SHARES
BENEFICIAL OWNER OWNED BENEFICIALLY OWNED(1)(2)
- ---------------------------------------------------------------------- ----------------- -------------------------
<S> <C> <C>
Benaroya Capital Company, L.L.C.(3) .................................. 1,154,118 7.4%
1001 Fourth Avenue, Suite 4700
Seattle, WA 98154
Vencap, Inc.(4) ...................................................... 1,092,353 7.0
1980 Manulife Place
10180-101 Street
Edmonton, Alberta T5J3S4
CIBC Wood Gundy Ventures, Inc.(5) .................................... 1,065,088 6.8
425 Lexington Avenue, 2nd Floor
New York, NY 10017
Acorn Ventures, Inc.(6) .............................................. 1,000,000 6.0
11400 SE 6th Street, Suite 120
Bellevue, WA 98004
Eos Partners SBIC, L.P.(7) ........................................... 860,295 5.5
320 Park Avenue
New York, NY 10022
Entities affiliated with Olympic Venture Partners(8) ................. 798,309 5.1
2420 Carillon Point
Kirkland, WA 98033
Roanoke Investors' Limited Partnership ............................... 656,471 4.2
1111 Third Avenue, Suite 2220
Seattle, WA 98101
Jens H. Molbak(9)..................................................... 701,225 4.5
Rod W. Brooks(10)..................................................... 108,015 *
Kirk A. Collamer...................................................... 0 0
Aaron R. Finch(11).................................................... 163,261 1.0
Daniel A. Gerrity(12)................................................. 90,000 *
George H. Clute(13)................................................... 808,309 5.2
Larry A. Hodges(14)................................................... 15,940 *
David E. Stitt(15).................................................... 1,102,353 7.0
Ronald A. Weinstein(16)............................................... 258,380 1.6
All directors and executive officers as a group
(9 persons) (17).................................................... 3,247,483 20.4%
----------------- ---
</TABLE>
- ------------------------
* Represents beneficial ownership of less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage of ownership of that
person, shares of Common Stock subject to options or warrants held by that
person that are currently exercisable or exercisable within 60 days of June
30, 1997 are deemed outstanding. Such shares, however, are not deemed
outstanding for the purpose of computing the percentage ownership of any
other person (unless such shares are otherwise assumed to be outstanding).
Except as indicated by footnote, and subject to community property laws
where applicable, the persons
68
<PAGE>
named in the table above have sole voting and investment power with respect
to all shares of Common Stock shown as beneficially owned by them.
Percentage of beneficial ownership is based on 15,666,396 shares of Common
Stock outstanding after completion of the Initial Public Offering and
assumes the cash exercise of warrants to purchase 2,693,420 shares of Common
Stock effective upon the completion of the Initial Public Offering or within
90 days thereafter.
(2) Certain of the principal stockholders, including Benaroya Capital Company,
L.L.C., Vancap, Inc., CIBC Wood Gundy Ventures, Inc., Acorn Ventures, Inc.,
Eos Partners SBIC, L.P., entities affiliated with Olympic Venture Partners,
Roanoke Investors' Limited Partnership and Jens H. Molbak, purchased 355,238
shares in the aggregate of the Common Stock offered in the Initial Public
Offering, and accordingly, such stockholders' beneficial ownership increased
after the Initial Public Offering.
(3) Includes 254,118 shares that may be acquired upon the exercise of a certain
warrant issued in connection with a prior Preferred Stock financing, which
expired upon the completion of the Initial Public Offering.
(4) Includes 250,045 shares that may be acquired upon the exercise of certain
warrants issued in connection with a prior Preferred Stock financing, which
expired upon the completion of the Initial Public Offering. Mr. Stitt, a
director of the Company, is a Vice President of Vencap, Inc. (formerly,
Vencap Equities Alberta Ltd.) Mr. Stitt disclaims beneficial ownership of
the shares except to the extent of his pro rata ownership therein.
(5) Includes 242,984 shares that may be acquired upon the exercise of certain
warrants issued in connection with a prior Preferred Stock financing, which
expired upon the completion of the Initial Public Offering.
(6) Includes 900,000 shares that may be acquired upon the exercise of certain
warrants issued in connection with a prior Preferred Stock financing. Fifty
percent (50%) of the shares issued upon the exercise of such warrants are
subject to a repurchase option in favor of the Company in the event that the
Company has not attained a specified valuation on certain dates.
(7) Includes 196,833 shares that may be acquired upon the exercise of certain
warrants issued in connection with a prior Preferred Stock financing, which
expired upon the completion of the Initial Public Offering.
(8) Includes 760,294 shares beneficially owned by Olympic Venture Partners III,
L.P. ("OVP III"), of which 173,756 shares may be acquired upon the exercise
of certain warrants issued in connection with a prior Preferred Stock
financing, which expired upon the completion of the Initial Public Offering.
Also includes 38,015 shares beneficially owned by OVP III Entrepreneurs
Fund, an affiliate of OVP III, of which 8,688 shares may be acquired upon
the exercise of certain warrants issued in connection with a prior Preferred
Stock financing, which expired upon the completion of the Initial Public
Offering. Mr. Clute, a director of the Company, is a general partner of the
General Partner of OVP III and OVP III Entrepreneurs Fund. Mr. Clute
disclaims beneficial ownership of the shares except to the extent of his pro
rata ownership therein.
(9) Includes 25,000 shares issuable upon the exercise of options exercisable
within 60 days of June 30, 1997, but such shares are subject to repurchase
by the Company through April 2000. Also includes 75,000 shares held by Mt.
Shuksan Investments LLC ("Shuksan") and 73,000 shares held by Penny Partners
L.P. ("Penny"). Mr. Molbak shares voting and investment power over the
shares held by Shuksan and Penny and disclaims beneficial ownership of such
shares except to the extent of his ownership interest therein.
(10) Includes 80,000 shares issuable upon the exercise of options exercisable
within 60 days of June 30, 1997, but such shares are subject to repurchase
by the Company through April 2000. Also includes
69
<PAGE>
1,765 shares issuable upon the exercise of a warrant which expired upon the
completion of the Initial Public Offering.
(11) Includes 16,250 shares issuable upon the exercise of options exercisable
within 60 days of June 30, 1997, but such shares are subject to repurchase
by the Company through April 2000. Also includes 16,404 shares issuable upon
the exercise of warrants which expired upon the completion of the Initial
Public Offering.
(12) Includes 66,000 shares issuable upon the exercise of options exercisable
within 60 days of June 30, 1997, but such shares are subject to repurchase
by the Company through April 2000.
(13) Includes 760,294 shares beneficially owned by OVP III, of which 173,756
shares may be acquired upon the exercise of certain warrants issued in
connection with a prior Preferred Stock financing, which expired upon the
completion of the Initial Public Offering. Also includes 38,015 shares
beneficially owned by OVP III Entrepreneurs Fund, an affiliate of OVP III,
of which 8,688 shares may be acquired upon the exercise of certain warrants
issued in connection with a prior Preferred Stock financing, which expired
upon the completion of the Initial Public Offering. Mr. Clute, a director of
the Company, is a general partner of the General Partner of OVP III and OVP
III Entrepreneurs Fund. Mr. Clute disclaims beneficial ownership of the
shares except to the extent of his pro rata ownership therein. Also includes
10,000 shares issuable upon the exercise of options exercisable within 60
days of June 30, 1997.
(14) Includes 15,940 shares issuable upon the exercise of options exercisable
within 60 days of June 30, 1997.
(15) Includes 250,045 shares that may be acquired upon the exercise of certain
warrants issued in connection with a prior Preferred Stock financing, which
expired upon the completion of the Initial Public Offering. Mr. Stitt, a
director of the Company, is a Vice President of Vencap, Inc. Mr. Stitt
disclaims beneficial ownership of the shares except to the extent of his pro
rata ownership therein. Also includes 10,000 shares issuable upon the
exercise of options exercisable within 60 days of June 30, 1997.
(16) Includes 90,400 shares beneficially owned by the Weinstein Family
Partnership, of which 14,132 shares may be acquired upon the exercise of
certain warrants issued in connection with prior Preferred Stock financings,
which expired upon the completion of the Initial Public Offering. Mr.
Weinstein is a general partner of the Weinstein Family Partnership. Also
includes 20,395 shares that may be acquired upon the exercise of certain
warrants issued in connection with prior Preferred Stock financings, which
expired upon the completion of the Initial Public Offering and shares
issuable upon the exercise of options.
(17) Includes 244,618 shares subject to stock options exercisable within 60 days
of June 30, 1997 and 311,429 shares that may be acquired upon the exercise
of certain warrants issued in connection with prior Preferred Stock
financings, which expired upon the completion of the Initial Public
Offering.
70
<PAGE>
THE EXCHANGE OFFER
PURPOSES OF THE EXCHANGE OFFER
The Old Notes were sold by the Company on October 22, 1996, to Smith Barney
Inc. (the "Initial Purchaser"), who subsequently resold the Old Notes to
"qualified institutional buyers" (as defined in Rule 144A under the Securities
Act) and institutional "accredited investors" (within the meaning of Rule
501(a)(1), (2), (3) or (7) under the Securities Act). In connection with the
sale of the Old Notes, the Company agreed to use its reasonable best efforts to
cause to become effective within the time periods respectively specified in the
Registration Rights Agreement or earliest to occur of (i) an initial public
offering, (ii) October 1, 1999, or (iii) the consummation of any offering of
securities after giving effect to which the Company is subject to the reporting
requirements of the Exchange Act, a registration statement with respect to the
Exchange Offer. However, in the event that (i) any change in applicable law or
applicable interpretations of the staff of the Commission does not permit the
Company to effect the Exchange Offer or (ii) if for any other reason the
Exchange Offer is not consummated within 135 days after August 8, 1996, (iii)
any Holder of Old Notes notifies the Company that, for certain specified
reasons, such Holder is precluded from participating in the Exchange Offer, or
(iv) any Holder who participates in the Exchange Offer does not receive New
Notes which can be sold without restriction under federal and state securities
laws, the Company has agreed to use its reasonable best efforts to cause to
become effective a shelf registration statement (the "Shelf Registration
Statement") with respect to the resale of the Old Notes and to keep the Shelf
Registration Statement effective for 24 months from the Effectiveness Date (as
defined in the Registration Rights Agreement).
The Exchange Offer is being made by Coinstar to satisfy its obligations
pursuant to the Registration Rights Agreement. Once the Exchange Offer is
consummated, Coinstar will have no further obligation to register any of the Old
Notes not tendered by the Holders for exchange. See "Risk Factors--Consequences
to Non-Tendering Holders of Old Notes." A copy of the Registration Rights
Agreement has been filed as an exhibit to the Registration Statement of which
this Prospectus is a part.
Based on an interpretation by the staff of the Commission set forth in the
Staff's Exxon Capital Holdings Corp. SEC No-Action Letter (available April 13,
1989), Morgan Stanley & Co., Inc. SEC No-Action Letter (available June 5, 1991),
Shearman & Sterling SEC No-Action Letter (available July 7, 1993), and other
no-action letters issued to third parties, the Company believes that New Notes
issued pursuant to the Exchange Offer in exchange for Old Notes may be offered
for resale, resold and otherwise transferred by Holders thereof without
compliance with the registration and prospectus delivery provisions of the
Securities Act. However, any Holder who is an "affiliate" of the Company or who
intends to participate in the Exchange Offer for the purpose of distributing the
New Notes (i) cannot rely on the interpretation by the staff of the Commission
set forth in the above referenced no-action letters, (ii) cannot tender its Old
Notes in the Exchange Offer, and (iii) must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
sale or transfer of the Old Notes, unless such sale or transfer is made pursuant
to an exemption from such requirements. See "Risk Factors-- Consequences to
Non-Tendering Holders of Old Notes."
In addition, each broker-dealer that receives New Notes for its own account
in exchange for Old Notes, where such Old Notes were acquired by such
broker-dealer as a result of market making activities or other trading
activities and not acquired directly from the Company, must acknowledge that it
will deliver a prospectus in connection with any resale of such New Notes. See
"Plan of Distribution."
Except as aforesaid, this Prospectus may not be used for an offer to resell,
resale or other transfer of New Notes.
71
<PAGE>
TERMS OF THE EXCHANGE OFFER
GENERAL
Upon the terms and subject to the conditions of the Exchange Offer set forth
in this Prospectus and in the Letter of Transmittal, the Company will accept any
and all Old Notes validly tendered and not withdrawn prior to 5:00 p.m., New
York City time, on the Expiration Date. The Company will issue $1,000 principal
amount of New Notes in exchange for each $1,000 principal amount of outstanding
Old Notes accepted in the Exchange Offer. Holders may tender some or all of
their Old Notes pursuant to the Exchange Offer; provided, that Old Notes may be
tendered only in integral multiples of $1,000.
As of July 31, 1996, there was $95 million of aggregate principal amount at
maturity of the Old Notes outstanding and one registered Holder of Old Notes.
This Prospectus, together with the Letter of Transmittal, is being sent to such
registered Holder as of November 10, 1997.
In connection with the issuance of the Old Notes, the Company arranged for
the Old Notes to be issued and transferable in book-entry form through the
facilities of DTC, acting as depositary. The New Notes will be issued and
transferable in book-entry form through DTC. See "The Exchange Offer--Book-Entry
Transfer."
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering Holders
of Old Notes for the purpose of receiving the New Notes from the Company.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Old Notes will be returned,
without expense, to the tendering Holder thereof as promptly as practicable
after the Expiration Date.
Holders of Old Notes who tender in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. The Company will pay the expenses, other than
certain applicable taxes, of the Exchange Offer. See "The Exchange Offer--Fees
and Expenses."
NEITHER THE BOARD OF DIRECTORS OF THE COMPANY NOR THE COMPANY MAKES ANY
RECOMMENDATION TO HOLDERS OF OLD NOTES AS TO WHETHER TO TENDER OR REFRAIN FROM
TENDERING ALL OR ANY PORTION OF THEIR OLD NOTES PURSUANT TO THE EXCHANGE OFFER.
IN ADDITION, NO ONE HAS BEEN AUTHORIZED TO MAKE ANY SUCH RECOMMENDATION. HOLDERS
OF OLD NOTES MUST MAKE THEIR OWN DECISION WHETHER TO TENDER PURSUANT TO THE
EXCHANGE OFFER AND, IF SO, THE AGGREGATE AMOUNT OF OLD NOTES TO TENDER AFTER
READING THIS PROSPECTUS AND THE LETTER OF TRANSMITTAL AND CONSULTING WITH THEIR
ADVISERS, IF ANY, BASED ON THEIR OWN FINANCIAL POSITION AND REQUIREMENTS.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean December 19, 1997, unless the Company
in its sole discretion, extends the Exchange Offer, in which case the term
"Expiration Date" shall mean the latest date to which the Exchange Offer is
extended.
In order to extend the Expiration Date, the Company will notify the Exchange
Agent and the record Holders of Old Notes of any extension by oral or written
notice, each prior to 9:00 a.m., New York City time, on the business day prior
to the previously scheduled expiration date. Such notice may state that the
Company is extending the Exchange Offer for a specified period of time or on a
daily basis until 5:00 p.m., New York City time, on the date on which a
specified percentage of Old Notes are tendered.
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The Company reserves the right to delay accepting any Old Notes, to extend
the Exchange Offer, to amend the Exchange Offer or to terminate the Exchange
Offer and not accept Old Notes not previously accepted if any of the conditions
set forth herein under "The Exchange Offer--Conditions" shall have occurred and
shall not have been waived by the Company by giving oral or written notice of
such delay, extension, amendment or termination to the Exchange Agent. Any such
delay in acceptance, extension, amendment or termination will be followed as
promptly as practicable by oral or written notice thereof. If the Exchange Offer
is amended in a manner determined by the Company to constitute a material
change, the Company will promptly disclose such amendment in a manner reasonably
calculated to inform the Holders of such amendment and the Company will extend
the Exchange Offer for a period of five to ten business days, depending upon the
significance of the amendment and the manner of disclosure to Holders of the Old
Notes, if the Exchange Offer would otherwise expire during such five to ten
business day period.
Without limiting the manner in which the Company may choose to make public
announcement of any extension, amendment or termination of the Exchange Offer,
the Company shall have no obligation to publish, advertise, or otherwise
communicate any such public announcement, other than by making a timely release
to the Dow Jones News Service.
ACCRETION OF THE NEW NOTES AND THE OLD NOTES; INTEREST
The Old Notes will continue to accrete in principal amount through (but not
including) the date of issuance of the New Notes. From and after the date of
issuance of the New Notes, the New Notes shall accrete at the rate of 13% per
annum, but no cash interest will accrue or be payable in respect of the New
Notes prior to October 1, 1999. Thereafter, the New Notes will bear interest at
a rate equal to 13% per annum. Interest on the New Notes will be payable
semi-annually in arrears on October 1 and April 1 of each year, commencing on
April 1, 2000.
PROCEDURES FOR TENDERING
To tender in the Exchange Offer, a Holder must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by Instruction 2 of the Letter of Transmittal, and mail
or otherwise deliver such Letter of Transmittal or such facsimile, together with
the Old Notes and any other required documents, to the Exchange Agent prior to
5:00 p.m., New York City time, on the Expiration Date.
The tender by a Holder will constitute an agreement between such Holder and
the Company in accordance with the terms and subject to the conditions set forth
herein and in the Letter of Transmittal.
Delivery of all documents must be made to the Exchange Agent at its address
set forth below. Holders may also request their respective brokers, dealers,
commercial banks, trust companies or nominees to effect the above transactions
for such Holders.
THE METHOD OF DELIVERY OF CERTIFICATES, THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS, IS AT THE OPTION AND SOLE RISK OF THE TENDERING
HOLDER, AND DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE
EXCHANGE AGENT. IF DELIVERY IS BY MAIL, REGISTERED MAIL, RETURN RECEIPT
REQUESTED, PROPERLY INSURED, OR AN OVERNIGHT DELIVERY SERVICE IS RECOMMENDED. IN
ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO INSURE TIMELY DELIVERY.
Only a Holder of Old Notes may tender such Old Notes in the Exchange Offer.
The term "Holder" with respect to the Exchange Offer means any person in whose
name Old Notes are registered on the books of the Company or any other person
who has obtained a properly completed bond power from the registered Holder.
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Any beneficial holder whose Old Notes are registered in the name of its
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact such registered Holder promptly and instruct such
registered Holder to consent and/or tender on its behalf. If such beneficial
Holder wishes to tender on its own behalf, such beneficial Holder must, prior to
completing and executing the Letter of Transmittal and delivering its Old Notes,
either make appropriate arrangements to register ownership of the Old Notes in
such Holder's name or obtain a properly completed bond power from the registered
Holder. The transfer of record ownership may take considerable time.
Signatures on a Letter of Transmittal or notice of withdrawal, as the case
may be, must be guaranteed by an Eligible Institution (as defined below) unless
the Old Notes tendered pursuant thereto are tendered (i) by a registered Holder
who has not completed the box entitled "Special Payment Instructions" or
"Special Delivery Instructions" on the Letter of Transmittal or (ii) for the
account of an Eligible Institution. In the event that signatures on a Letter of
Transmittal or a notice of withdrawal, as the case may be, are required to be
guaranteed, such guarantee must be by a member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
or a commercial bank or trust company having an office or correspondent in the
U.S. (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the registered
Holder of any Old Notes listed therein, such Old Notes must be endorsed or
accompanied by appropriate bond powers signed as the name of the registered
Holder or Holders appears on the Old Notes.
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing and, unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of tendered Old Notes and withdrawal of tendered Old
Notes will be determined by the Company in its sole discretion, which
determination will be final and binding. The Company reserves the absolute right
to reject any and all Old Notes not properly tendered or any Old Notes the
Company's acceptance of which would, in the opinion of counsel for the Company,
be unlawful. The Company also reserves the right to waive any defects,
irregularities or conditions of tender as to particular Old Notes. The Company's
interpretation of the terms and conditions of the Exchange Offer (including the
instructions in the Letter of Transmittal) will be final and binding on all
parties. Unless waived, any defects or irregularities in connection with tenders
of Old Notes must be cured within such time as the Company shall determine.
Neither the Company, the Exchange Agent nor any other person shall be under any
duty to give notification of defects or irregularities with respect to tenders
of Old Notes, nor shall any of them incur any liability for failure to give such
notification. Tenders of Old Notes will not be deemed to have been made until
such irregularities have been cured or waived. Any Old Notes received by the
Exchange Agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the Exchange
Agent to the tendering Holders of Old Notes, unless otherwise provided in the
Letter of Transmittal, as soon as practicable following the Expiration Date.
In addition, the Company reserves the right in its sole discretion to
purchase or make offers for any Old Notes that remain outstanding subsequent to
the Expiration Date or, as set forth under "The Exchange Offer-Conditions," to
terminate the Exchange Offer and, to the extent permitted by applicable law,
purchase Old Notes in the open market, in privately negotiated transactions or
otherwise. The terms of any such purchases or offers could differ from the terms
of the Exchange Offer.
By tendering, each Holder will represent to the Company that, among other
things, the New Notes acquired pursuant to the Exchange Offer are being obtained
in the ordinary course of such Holder's business, that such Holder has no
arrangement with any person to participate in the distribution of such New
Notes, and that such Holder is not an "affiliate," as defined under Rule 405 of
the Securities Act, of
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the Company. If the Holder is a broker-dealer that will receive New Notes for
its own account in exchange for Old Notes that were acquired as a result of
market making activities or other trading activities and not acquired directly
from the Company, such Holder by tendering will acknowledge that it will deliver
a prospectus in connection with any resale of such New Notes. See "Plan of
Distribution."
BOOK-ENTRY TRANSFER
The Company understands that the Exchange Agent will make a request promptly
after the date of this Prospectus to establish an account with respect to the
Old Notes at DTC for the purpose of facilitating the Exchange Offer, and subject
to the establishment thereof, any financial institution that is a participant in
DTC's system may make book-entry delivery of Old Notes by causing DTC to
transfer such Old Notes into the Exchange Agent's account with respect to the
Old Notes in accordance with DTC's Automated Tender Offer Program ("ATOP")
procedures for such book-entry transfers. Although delivery of the Old Notes may
be effected through book-entry transfer into the Exchange Agent's account at
DTC, the exchange for Old Notes so tendered will only be made after timely
confirmation (a "Book-Entry Confirmation") of such book-entry transfer of the
Old Notes into the Exchange Agent's account, and timely receipt by the Exchange
Agent of an Agent's Message (as defined herein) and any other documents required
by the Letter of Transmittal. The term "Agent's Message" means a message,
transmitted by DTC and received by the Exchange Agent and forming part of the
Book-Entry Confirmation, which states that DTC has received express
acknowledgment from a participant tendering Old Notes that such participant has
received and agrees to be bound by the terms of the Letter of Transmittal, and
that such agreement may be enforced against such participant.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available, or (ii) who cannot deliver their Old Notes, the Letter of
Transmittal or any other required documents to the Exchange Agent prior to the
Expiration Date, may effect a tender if:
(a) The tender is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the Holder of the Old Notes, the
certificate number or numbers of such Old Notes and the principal amount of
Old Notes tendered, stating that the tender is being made thereby and
guaranteeing that, within five New York Stock Exchange trading days after
the Expiration Date, the Letter of Transmittal (or facsimile thereof)
together with the certificate(s) representing the Old Notes to be tendered
in proper form for transfer (or a confirmation of a book-entry transfer into
the Exchange Agent's account at DTC of Old Notes delivered electronically)
and any other documents required by the Letter of Transmittal will be
deposited by the Eligible Institution with the Exchange Agent; and
(c) Such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all tendered
Old Notes in proper form for transfer (or confirmation of a book-entry
transfer into the Exchange Agent's account at DTC of Old Notes delivered
electronically) and all other documents required by the Letter of
Transmittal are received by the Exchange Agent within five New York Stock
Exchange trading days after the Expiration Date.
Upon request of the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to Holders who wish to tender their Old Notes according to the guaranteed
delivery procedures set forth above.
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WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date. To
withdraw a tender of Old Notes in the Exchange Offer, a written or facsimile
transmission notice of withdrawal must be received by the Exchange Agent at its
address set forth herein prior to 5:00 p.m., New York City time, on the
Expiration Date. Any such notice of withdrawal must (i) specify the name of the
person having deposited the Old Notes to be withdrawn (the "Depositor"), (ii)
identify the Old Notes to be withdrawn (including the certificate number or
numbers and principal amount of such Old Notes), (iii) be signed by the Holder
in the same manner as the original signature on the Letter of Transmittal by
which such Old Notes were tendered (including any required signature guarantees)
or be accompanied by documents of transfer sufficient to have the Trustee with
respect to the Old Notes register the transfer of such Old Notes into the name
of the person withdrawing the tender, and (iv) specify the name in which any
such Old Notes are to be registered, if different from that of the Depositor.
All questions as to the validity, form and eligibility (including time of
receipt) of such notices will be determined by the Company, whose determination
shall be final and binding on all parties. Any Old Notes so withdrawn will be
deemed not to have been validly tendered for purposes of the Exchange Offer and
no New Notes will be issued with respect thereto unless the Old Notes so
withdrawn are validly retendered. Any Old Notes which have been tendered but
which are not accepted for payment will be returned to the Holder thereof
without cost to such Holder as soon as practicable after withdrawal, rejection
of tender or termination of the Exchange Offer. Properly withdrawn Old Notes may
be retendered by following one of the procedures, described above under "The
Exchange Offer--Procedures for Tendering" at any time prior to the Expiration
Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company will not
be required to accept for exchange, or exchange New Notes for, any Old Notes not
theretofore accepted for exchange, and may terminate or amend the Exchange Offer
as provided herein before the acceptance of such Old Notes, if any of the
following conditions exist:
(a) the Exchange Offer, or the making of any exchange by a Holder,
violates applicable law or any applicable interpretation of the Commission;
(b) any action or proceeding instituted or threatened in any court or by
or before any governmental agency with respect to the Exchange Offer which,
in the sole judgment of the Company, might impair the ability of the Company
to proceed with the Exchange Offer;
(c) there shall have been adopted or enacted any law, statute, rule or
regulation which, in the sole judgment of the Company, might materially
impair the ability of the Company to proceed with the Exchange Offer;
(d) a banking moratorium shall have been declared by U.S. federal or
California or New York state authorities which, in the Company's judgment,
would reasonably be expected to impair the ability of the Company to proceed
with the Exchange Offer;
(e) trading on the New York Stock Exchange or generally in the U.S.
over-the-counter market shall have been suspended by order of the Commission
or any other governmental authority which, in the Company's judgment, would
reasonably be expected to impair the ability of the Company to proceed with
the Exchange Offer; or
(f) a stop order shall have been issued by the Commission or any state
securities authority suspending the effectiveness of the Registration
Statement or proceedings shall have been initiated or, to the knowledge of
the Company, threatened for that purpose.
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If any such conditions exist, the Company may (i) refuse to accept any Old
Notes and return all tendered Old Notes to exchanging Holders, (ii) extend the
Exchange Offer and retain all Old Notes tendered prior to the expiration of the
Exchange Offer, subject, however, to the rights of Holders to withdraw such Old
Notes (see "The Exchange Offer--Withdrawal of Tenders") or (iii) waive certain
of such conditions with respect to the Exchange Offer and accept all properly
tendered Old Notes which have not been withdrawn or revoked. If such waiver
constitutes a material change to the Exchange Offer, the Company will promptly
disclose such waiver in a manner reasonably calculated to inform Holders of Old
Notes of such waiver.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any such
condition or may be waived by the Company in whole or in part at any time and
from time to time in its sole discretion. The failure by the Company at any time
to exercise any of the foregoing rights shall not be deemed a waiver of any such
right and each such right shall be deemed an ongoing right which may be asserted
at any time and from time to time.
In addition to the foregoing conditions, (i) if, because of any change in
applicable law or applicable interpretations thereof by the Commission, the
Company is not permitted to effect the Exchange Offer or (ii) if for any other
reason the Exchange Offer is not consummated within 135 days of August 8, 1997,
or (iii) any Holder of Old Notes notifies the Company that, for certain
specified reasons, such Holder is precluded from participating in the Exchange
Offer or (iv) any Holder who participates in the Exchange Offer does not receive
New Notes which can be sold without restrictions under federal and state
securities laws, then the Company shall file a Shelf Registration Statement and
use its reasonable best efforts to keep the Shelf Registration Statement
effective for 24 months from the Effectiveness Date. Thereafter, the Company's
obligation to consummate the Exchange Offer shall be terminated.
EXCHANGE AGENT
The Bank of New York has been appointed as Exchange Agent for the Exchange
Offer. Letters of Transmittal and Notices of Guaranteed Delivery should be
directed to the Exchange Agent addressed as follows:
<TABLE>
<S> <C>
BY REGISTERED OR CERTIFIED MAIL: BY OVERNIGHT COURIER:
Attention: Denise Robinson Attention: Denise Robinson
Reorganization Section Reorganization Section
The Bank of New York The Bank of New York
101 Barclay Street, 7E 101 Barclay Street, Ground Level
New York, NY 10286 Corporate Trust Services Window
New York, NY 10286
BY HAND: BY FACSIMILE:
Attention: Denise Robinson (212) 815-6339
Reorganization Section Attention: Denise Robinson
The Bank of New York Reorganization Section
101 Barclay Street, Ground Level
Corporate Trust Services Window Confirm by telephone:
New York, NY 10286 (212) 815-2791
</TABLE>
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FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telephone or in person by officers and regular
employees of the Company and its affiliates.
The Company will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith. The
Company may also pay brokerage houses and other custodians, nominees and
fiduciaries the reasonable out-of-pocket expenses incurred by them in forwarding
copies of this Prospectus and related documents to the beneficial owners of the
Old Notes, and in handling or forwarding tenders for exchange.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company, are estimated in the aggregate to be approximately
$175,000, and include fees and expenses of the Exchange Agent and the Trustee
under the Indenture and accounting and legal fees.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, certificates
representing New Notes or Old Notes for principal amounts not tendered or
accepted for exchange are to be delivered to, or are to be registered or issued
in the name of, any person other than the registered Holder of the Old Notes
tendered, or if tendered Old Notes are registered in the name of any person
other than the person signing the Letter of Transmittal, or if a transfer tax is
imposed for any reason other than the exchange of Old Notes pursuant to the
Exchange Offer, then the amount of any such transfer taxes (whether imposed on
the registered holder or any other persons) will be payable by the tendering
Holder. If satisfactory evidence of payment of such taxes or exception therefrom
is not submitted with the Letter of Transmittal, the amount of such transfer
taxes will be billed directly to such tendering Holder.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old Notes,
which is face value as reflected in the Company's accounting records on the date
of the Exchange Offer. Accordingly, no gain or loss for accounting purposes will
be recognized upon consummation of the Exchange Offer. The issuance costs
incurred in connection with the Exchange Offer will be capitalized and amortized
over the term of the New Notes.
DESCRIPTION OF OLD NOTES
The Old Notes were issued under an indenture dated as of October 1, 1996
(the "Indenture"), by and between the Company and The Bank of New York, as
trustee (the "Trustee"). A copy of the form of Indenture is available from the
Company upon request. The following summaries of certain provisions of the Old
Notes and the Indenture do not purport to be complete and are subject to, and
are qualified in their entirety by reference to, all the provisions of the Old
Notes and the Indenture, including the definitions therein of certain terms
which are not otherwise defined in this Prospectus. Wherever particular
provisions or defined terms of the Indenture (or of the form of Old Note which
is a part thereof) are referred to, such provisions or defined terms are
incorporated herein by reference. As used in this "Description of Old Notes,"
the "Company" refers to Coinstar, Inc.
GENERAL
The Old Notes are unsecured obligations of the Company and are subordinated
to all other Senior Debt of the Company and are to be effectively subordinated
to all indebtedness (including senior indebtedness and trade credit) of
subsidiaries of the Company. The Old Notes are limited to $95,000,000
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aggregate principal amount at maturity, were issued in fully registered form
only in denominations of $1,000 or any integral multiple thereof and were
scheduled to mature on October 1, 2006.
Interest on the Old Notes neither accrues nor is payable prior to October 1,
1999. Thereafter, interest would accrue at 13% per annum and would be payable
semi-annually in arrears on each October 1 and April 1, commencing April 1,
2000. Interest would be computed on the basis of a 360-day year composed of
twelve 30-day months.
OPTIONAL REDEMPTION BY THE COMPANY
The Indenture provides that Old Notes are not redeemable at the option of
the Company prior to October 1, 2001. At any time on or after that date the Old
Notes could be redeemed at the Company's option on at least 30 but not more than
60 days' notice, in whole at any time or in part from time to time, at the
following respective prices (expressed in percentages of the principal amount),
together with accrued and unpaid interest and Liquidated Damages thereon, if
any, through the date of redemption, during the 12-month period beginning
October 1 of the years indicated:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- --------------------------------------------------------------------------------- -----------
<S> <C>
2001............................................................................. 108.000%
2002............................................................................. 105.333
2003............................................................................. 102.667
2004 and thereafter.............................................................. 100.000
</TABLE>
OPTIONAL REDEMPTION UPON PUBLIC EQUITY OFFERING
The Indenture provides that, in the event that the Company consummates a
Public Equity Offering after which there is a Public Market, the Company may, at
its option, redeem at any time prior to October 1, 1999, from the proceeds of
such Public Equity Offering received by the Company, up to 100% of the aggregate
principal amount of the of the Old Notes originally issued at a redemption price
equal to 118% of the Accreted Value thereof plus accrued and unpaid Liquidated
Damages, if any, to the date of redemption; provided, however, that such
redemption occurs within 60 days of the date of the closing of such Public
Equity Offering.
REDEMPTION OR REPURCHASE AT THE OPTION OF THE HOLDERS
CHANGE OF CONTROL
The Indenture provides that upon the occurrence of a Change of Control, the
Company is required to offer to repurchase (the "Change of Control Offer") all
or a portion of each Holder's Old Notes at a purchase price equal to 101% of the
Accreted Value thereof on the date of purchase (if prior to October 1, 1999), or
(if on or after October 1, 1999) 101% of the aggregate principal amount thereof,
plus accrued and unpaid interest and Liquidated Damages thereon, if any, to the
date of repurchase.
On the Change of Control Payment Date, the Company shall, to the extent
lawful, (i) accept for payment Old Notes or portions thereof properly tendered
pursuant to the Change of Control Offer, (ii) deposit with the paying agent an
amount equal to the Change in Control Payment in respect of all Old Notes or
portions thereof so accepted, and (iii) deliver or cause to be delivered to the
Trustee Old Notes so accepted together with an Officers' Certificate stating the
aggregate principal amount of Old Notes or portions thereof being tendered to
the Company.
Any amounts remaining after the purchase of Old Notes pursuant to a Change
of Control Offer shall be returned by the Trustee to the Company.
The definition of "Change of Control" includes a disposition of all or
substantially all of the assets of the Company. With respect to the disposition
of assets, the phrase "all or substantially all" as used in the
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Indenture (including as set forth under "The Exchange Offer--Certain
Covenants--Merger, Consolidation and Sale of Assets" below) varies according to
the facts and circumstances of the subject transaction, has no clearly
established meaning under New York law (which is the choice of law under the
Indenture) and is subject to judicial interpretation. Accordingly, in certain
circumstances there may be a degree of uncertainty in ascertaining whether a
particular transaction would involve a disposition of "all or substantially all"
of the assets of a Person, and therefore it may be unclear as to whether a
Change of Control has occurred and whether the Company is required to make a
Change of Control Offer.
None of the provisions relating to a repurchase upon a Change of Control are
waivable by the Board of Directors of the Company. The Company could, in the
future, enter into certain transactions, including certain recapitalizations of
the Company, that would not constitute a Change of Control with respect to the
Change of Control repurchase feature of the Old Notes, but would increase the
amount of Indebtedness outstanding at such time. If a Change of Control were to
occur, there can be no assurance that the Company would have sufficient funds to
pay the repurchase price for all Old Notes that the Company is required to
repurchase. In the event that the Company were required to repurchase
outstanding Old Notes pursuant to a Change of Control Offer, the Company expects
that it would need to seek third-party financing to the extent it does not have
available funds to meet its repurchase obligations. However, there can be no
assurance that the Company would be able to obtain such financing.
If an offer is made to repurchase the Old Notes pursuant to a Change of
Control Offer, the Company will comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
and regulations in connection with the repurchase of the Old Notes in connection
with a Change of Control and, to the extent that the provisions of such
securities laws or regulations conflict with the "Change of Control" provisions
of the Indenture, the Company shall comply with the applicable securities laws
and regulations and shall not be deemed to have breached its obligations under
the "Change of Control" provisions of the Indenture by virtue thereof.
ASSET SALES
The Indenture provides that the Company shall not, and shall not permit any
Restricted Subsidiary to: (i) sell, lease, convey or otherwise dispose of any
assets (including, without limitation, by way of a sale and leaseback or similar
arrangement) other than in the ordinary course of business, provided that the
sale, lease, conveyance or other disposition of all or substantially all of the
assets of the Company and its Restricted Subsidiaries taken as a whole shall be
governed by the provisions of Indenture governing Changes of Control or
successors by way of a merger, consolidation or sale of assets and not by this
provision; or (ii) issue or sell Equity Interests of any of the Company's
Subsidiaries, in the case of either clause (i) or (ii), whether in a single
transaction or a series of related transactions (a) that have a fair market
value in excess of $1 million or (b) for aggregate net proceeds in excess of $1
million (each of the foregoing an "ASSET SALE"), unless (x) the Company or such
Restricted Subsidiary, as the case may be, receives consideration at the time of
such Asset Sale at least equal to the fair market value (as evidenced by a
resolution of the Company's Board of Directors set forth in an Officers'
Certificate delivered to the Trustee) of the assets, or other property or Equity
Interests issued or sold or otherwise disposed of in the Asset Sale; and (y) at
least 100% in the case of a sale of accounts (except for a sale of past-due
accounts for collection), and 75% in the case of a sale of other assets, of such
consideration is in the form of cash or Cash Equivalents or any combination
thereof. Notwithstanding the foregoing, any Restricted Payment or Permitted
Investment that is permitted by provisions of the Indenture governing Restricted
Payments shall not be deemed to be an Asset Sale. Notwithstanding the foregoing,
the consideration received by the Company or any Restricted Subsidiary in
respect of any transaction which would constitute an Asset Sale but for the fact
that the fair market value of the property of which disposition is made, or the
amount of aggregate net proceeds yielded thereby, is less than $1 million,
shall, unless such transaction is permitted as a Restricted Payment or Permitted
Investment under provisions of the Indenture governing Restricted Payments,
equal to at least the fair market value of such property.
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Within 270 days after any Asset Sale, the Company or such Subsidiary shall
apply the Net Proceeds from such Asset Sale, to (a) reinvest in the business of
the Company (or any Restricted Subsidiary of the Company) that the Company was
engaged in on the date of this Indenture or (b) permanently reduce borrowings
and commitments under Indebtedness permitted to be incurred pursuant to "The
Exchange Offer--Certain Covenants--Limitation on Indebtedness and Issuance of
Disqualified Capital Stock." Pending the final application of any such Net
Proceeds, the Company may temporarily invest such Net Proceeds in any manner not
prohibited by this Indenture. Any Net Proceeds from an Asset Sale not applied or
invested as provided in the first sentence of this paragraph will be deemed to
constitute "EXCESS PROCEEDS."
Within five Business Days after any date that the aggregate amount of Excess
Proceeds exceeds $5 million (an "ASSET SALE OFFER TRIGGER DATE"), the Company
shall commence an Asset Sale Offer pursuant to Section 3.09 of the Indenture to
purchase the maximum principal amount of Notes that may be purchased out of the
Excess Proceeds at an offer price in cash in an amount equal to (if prior to the
Full Accretion Date) 100% of the Accreted Value thereof on the date of
repurchase, plus accrued and unpaid Liquidated Damages thereon, if any, or (if
on or after the Full Accretion Date) 100% of the principal amount thereof, plus
accrued and unpaid interest and Liquidated Damages thereon, if any, to the date
of repurchase, in each case in accordance with the procedures set forth in
Section 3.09 hereof. To the extent that the aggregate amount of Notes tendered
pursuant to an Asset Sale Offer is less than the Excess Proceeds, the Company
(or such Subsidiary) may use the remaining Excess Proceeds for any purpose not
prohibited by the Indenture. Upon completion of such offer to purchase, the
amount of Excess Proceeds shall be deemed to be reset at zero.
SELECTION AND NOTICE
If less than all of the Old Notes are to be redeemed at any time, selection
of Old Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which the
Old Notes are listed or, if the Old Notes are not so listed, by lot or by such
other method as the Trustee deems fair and appropriate; provided, that no Old
Notes with a principal amount of $1,000 or less shall be redeemed in part.
Notice of redemption shall be mailed by first class mail at least 30 but not
more than 60 days before the redemption date to each Holder of Old Notes to be
redeemed at its registered address. If any Old Note is to be redeemed in part
only, the notice of redemption that relates to such Old Note shall state the
portion of the principal amount thereof to be redeemed. An Old Note in principal
amount equal to the unredeemed portion thereof will be issued in the name of the
holder thereof upon cancellation of the original Old Note. On and after the
redemption date, interest will cease to accrue on Old Notes or portions thereof
called for redemption.
CERTAIN COVENANTS
RESTRICTED PAYMENTS
The Indenture provides that, the Company shall not, and shall not cause or
permit any Restricted Subsidiary to, directly or indirectly, (i) declare or pay
any dividend or make any other payment or distribution (other than dividends or
distributions payable solely in shares of Capital Stock (other than Disqualified
Capital Stock) on shares of the Company's Capital Stock to holders of such
Capital Stock, (ii) purchase, redeem or otherwise acquire or retire for value
any Capital Stock of the Company, (iii) make any principal payment on, or
purchase, defease, redeem, or otherwise acquire or retire for value any
Indebtedness of the Company that is subordinate in right of payment to the Old
Notes, or (iv) make any Investment (other than Permitted Investments) (each of
the foregoing prohibited actions set forth in clauses (i), (ii), (iii) and (iv)
being referred to as a "Restricted Payment"), if at the time of such proposed
Restricted Payment or immediately after giving effect thereto, (a) a Default or
an Event of Default has occurred and is continuing or would result therefrom, or
(b) the Company is not, or would not be, able to incur at least $1.00 of
additional Indebtedness under the Debt to Cash Flow Ratio test, or (c) the
aggregate
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amount of Restricted Payments made subsequent to the Issue Date (excluding
Restricted Payments permitted by clauses (w) and (x) below) exceeds or would
exceed the sum of: (1) the difference between (A) the cumulative Consolidated
EBITDA of the Company as of the date of such Restricted Payment since the Issue
Date, minus (B) the product of 1.75 times cumulative Consolidated Interest
Expense of the Company as of the date of such Restricted Payment since the Issue
Date, PLUS (2) 100% of the aggregate net proceeds received by the Company from
sales of Capital Stock of the Company since the Issue Date (other than net
proceeds from the sale of Disqualified Capital Stock and net proceeds invested
pursuant to clause (viii) of the definition of "Permitted Investments" contained
in the Indenture and net proceeds with respect to which Indebtedness has been
issued pursuant to clause (x) of "The Exchange Offer--Certain
Covenants--Limitation on Indebtedness and Issuance of Disqualified Capital
Stock"). The Company shall not, and shall not cause or permit any of its
Restricted Subsidiaries to, directly or indirectly, declare or pay any dividend
or make any other payment or distribution(s) on any shares of the Company's
Preferred Equity (other than dividends or distributions payable solely in shares
of Preferred Equity of the same series (other than Disqualified Capital Stock)
prior to October 1, 1999.
Notwithstanding the foregoing, the Indenture provides that the provisions
set forth in the immediately preceding paragraph shall not prohibit: (u) the
payment of any dividend within 60 days of the date of declaration of such
dividend, if at said date of declaration such payment would have complied with
the provisions of the Indenture; (v) dividends and distributions made by any
Wholly Owned Subsidiary of the Company or a Restricted Subsidiary, (w) the
redemption, repurchase, retirement or other acquisition of any Equity Interests
of the Company in exchange for, or out of the proceeds of the substantially
concurrent sale (other than to a Subsidiary of the Company) of, or the
substantially concurrent conversion of, other Equity Interests of the Company
(other than Disqualified Capital Stock), (x) the defeasance, redemption or
repurchase of subordinated Indebtedness with the net cash proceeds from an
incurrence of Permitted Refinancing Indebtedness or the substantially concurrent
sale (other than to a Subsidiary of the Company) of Equity Interests of the
Company (other than Disqualified Capital Stock); PROVIDED, HOWEVER, that the
amount of any such net cash proceeds that are utilized for any redemption,
repurchase, retirement or defeasance pursuant to clauses (w) or (x) above shall
be excluded from clause (c)(2) above, (y) the repurchase, redemption or other
acquisition or retirement for value of any Capital Stock of the Company or any
Subsidiary of the Company held by any employee, consultant or other service
provider of the Company; PROVIDED that the aggregate price paid for all such
Capital Stock shall not exceed $1 million, and (z) with respect to any
Restricted Subsidiary organized as a partnership or limited liability company or
similar organization, distributions in respect of partners' or members' income
tax liability or such distributions as may be required by law in an amount not
to exceed $1 million; PROVIDED, HOWEVER, in each case, that no Default or Event
of Default shall have occurred and be continuing at the time of such Restricted
Payment pursuant to any of the above clauses (u) though (z) and would not result
therefrom.
The amount of all Restricted Payments (other than cash) shall be the fair
market value (evidenced by a resolution of the Board of Directors set forth in
an Officers' Certificate delivered to the Trustee) on the date of the Restricted
Payment of the asset(s) proposed to be transferred by the Company or such
Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment.
Not later than the date of making any Restricted Payment, the Company shall
deliver to the Trustee an Officers' Certificate stating that such Restricted
Payment is permitted and setting forth the basis upon which the calculations
required by the first paragraph of this section were computed, which
calculations may be based upon the Company's most recently available financial
statements.
LIMITATION ON INDEBTEDNESS AND ISSUANCE OF DISQUALIFIED CAPITAL STOCK
The Indenture provides that the Company shall not directly or indirectly,
create, incur, issue, assume, guarantee or otherwise become directly or
indirectly liable, contingently or otherwise, with respect to (collectively,
"INCUR"), any Indebtedness (including Acquired Debt), or issue any Disqualified
Capital Stock, and the Company shall not cause or permit any of its Restricted
Subsidiaries to incur any
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Indebtedness or issue any shares of Preferred Equity; PROVIDED, HOWEVER, that
the Company may incur Indebtedness (including Acquired Debt) and the Company may
issue Disqualified Capital Stock if: (i) no Default or Event of Default shall
have occurred and be continuing; and (ii) immediately after giving pro forma
effect to such proposed incurrence and the receipt and application of the net
proceeds therefrom, the Company's Debt to Cash Flow Ratio would not exceed (a)
7.0 to 1.0 from the Issue Date until the Full Accretion Date, and (b) 5.0 to 1.0
thereafter. The foregoing limitation shall not apply to (i) the Notes; (ii)
Indebtedness of the Company outstanding on the Issue Date; (iii) Indebtedness
incurred by the Company or its Restricted Subsidiaries to finance the purchase
of Coinstar units; provided, however, that (a) the aggregate principal amount of
such Indebtedness does not exceed 100% of the fair market value (on the date of
such incurrence) of the Coinstar units acquired, plus marketing costs incurred
within 120 days after the initial regional marketing launch for the designated
marketing area in which such Coinstar units are installed, provided that such
marketing costs shall not exceed $2,500 for each Coinstar unit installed, and
(b) the Company has budgeted the proceeds of the Offering in accordance with the
"Use of Proceeds" section of the Offering Memorandum and as projected and
described in Exhibit A to the Offering Memorandum; (iv) Indebtedness incurred by
the Company for working capital purposes pursuant to a revolving credit facility
in an aggregate principal amount that, when taken together with the principal
amount of all other Indebtedness incurred pursuant to this clause (iv) and then
outstanding, does not exceed $10 million; (v) Indebtedness of the Company's
Restricted Subsidiaries to the Company or to any Wholly Owned Restricted
Subsidiary of the Company; (vi) additional Indebtedness incurred by the Company
or its Restricted Subsidiaries to the extent that the aggregate principal amount
or accreted value thereof, as applicable (measured as of the date of issuance),
does not exceed $10 million at any one time outstanding; (vii) Permitted
Refinancing Indebtedness; (viii) Hedging Obligations entered into by the Company
not as speculative investments but as hedging transactions designed to protect
the Company against fluctuations in interest rates in connection with Permitted
Indebtedness; (ix) Indebtedness of the Company or a Restricted Subsidiary under
any Currency Agreements; provided that (a) such Currency Agreements relate to
Indebtedness otherwise permitted under this Indenture or the purchase of
Coinstar units by the Company or a Restricted Subsidiary in the ordinary course
of business and (b) such Currency Agreements do not increase the Indebtedness or
other obligations of the Company or a Restricted Subsidiary outstanding other
than as a result of fluctuations in foreign currency exchange rates or by reason
of fees, indemnities and compensation payable thereunder; and (x) additional
indebtedness equal to the aggregate amount of net cash proceeds received from
the sale of Capital Stock other than Disqualified Capital Stock since the Issue
Date (provided that the net proceeds from such sales of Capital Stock will be
excluded from the clause (c)(ii) of the first paragraph of "The Exchange
Offer--Certain Covenants--Restricted Payments" and the basket created by clause
(viii) of the definition of Permitted Investments).
ASSET MAINTENANCE TEST.
The Indenture provides that, notwithstanding any other provision of the
Indenture, the Company shall not (i) effect any sale, lease, transfer or other
disposition of any of its property or assets to a Subsidiary or (ii) make any
Permitted Investment (except (a) the initial $10 million permitted by clause
(viii) of the definition thereof and (b) an aggregate of $1 million for
Investments in Restricted Subsidiaries solely for the creation and maintenance
thereof) or (iii) make any Restricted Payment (except a Restricted Payment
permitted by clauses (u)-(z) of the second paragraph of "The Exchange
Offer--Certain Covenants-- Restricted Payments"), if, as a result thereof or
immediately upon giving effect thereto, Total Gross Assets
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would be less than the amounts set forth below during the twelve-month period
commencing January 1 of each year set forth below:
<TABLE>
<CAPTION>
TOTAL GROSS
YEAR ASSETS
- --------------------------------------------------------------------------- -----------------
<S> <C>
1996....................................................................... $ 60.0 million
1997....................................................................... 60.0 million
1998....................................................................... 70.0 million
1999....................................................................... 92.5 million
2000 and thereafter........................................................ 100.0 million
</TABLE>
In the event the Company redeems or repurchases, or effects a Legal
Defeasance or Covenant Defeasance with respect to, less than 100% of the Old
Notes, the amounts set forth under the caption "Total Gross Assets" above shall
be reduced by multiplying each such amount by a fraction the denominator of
which shall be the then outstanding aggregate Accreted Value (if prior to
October 1, 1999) or principal amount (if on or after October 1, 1999) of the Old
Notes and the numerator of which shall be the Accreted Value (if prior to
October 1, 1999) or principal amount (if on or after October 1, 1999) of the
Notes so redeemed, repurchased or defeased.
Within 30 days after the consummation by the Company of any transaction of a
type described in any of clause (i), (ii) or (iii) above, the Company shall
deliver, or cause to be delivered, to the Trustee, an Offficers' Certificate
stating that such transaction complies with this section and that all conditions
precedent in the Indenture relating to such transaction has been complied with.
LIMITATION ON TRANSACTIONS WITH AFFILIATES
The Indenture provides that the Company shall not, and shall not permit any
of its Restricted Subsidiaries to, directly or indirectly, conduct any business
or enter into or suffer to exist any transaction or series of transactions
(including the purchase, sale, transfer, lease or exchange of any Property or
the rendering of any service) with or for the benefit of any Affiliate (each, an
"AFFILIATE TRANSACTION") other than any Affiliate Transaction that is on terms
that are fair and reasonable and no less favorable to the Company or such
Restricted Subsidiary than those that might reasonably have been obtained at
such time in a comparable transaction or series of related transactions on an
arms-length basis from a Person that is not such an Affiliate; provided,
however, that any Affiliate Transaction involving aggregate consideration of $1
million or more shall require approval by a majority of the disinterested
members of the Company's Board of Directors; and provided, further, that any
Affiliate Transaction involving aggregate consideration of $10 million or more
in the event that a Public Equity Offering shall have been consummated or $5
million or more prior to the consummation of a Public Equity Offering, shall
require a fairness opinion from an accounting, appraisal or investment banking
firm of national standing. Notwithstanding the foregoing, transactions between
or among any combination of the Company and its Restricted Subsidiaries will not
be deemed Affiliate Transactions, and any transaction among any combination of
the Company and its Restricted Subsidiaries, on one hand, and any one or more
Unrestricted Subsidiaries on the other hand, shall not be deemed an Affiliate
Transaction if it is on terms that are fair and reasonable to the Company or any
such Restricted Subsidiary and would be permitted under "The Exchange
Offer--Certain Covenants--Restricted Payments."
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
The Indenture provides that the Company shall not, and shall not permit any
of its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any encumbrance or restriction on
the ability of any Restricted Subsidiary to: (i)(a) pay dividends or make any
other distributions to the Company or any of its Restricted Subsidiaries (1) on
its Capital Stock or (2) with respect to any other interest or participation in,
or measured by, its profits, or (b) pay any Indebtedness
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owed to the Company or any of its Restricted Subsidiaries; (ii) make loans or
advances to the Company or to any of its Restricted Subsidiaries; or (iii)
transfer any of its property or assets to the Company or to any of its
Restricted Subsidiaries, except for such encumbrances or restrictions existing
under or by reason of (a) Indebtedness as in effect on the Issue Date, (b) the
Indenture and the Old Notes, (c) applicable law, (d) any Indebtedness permitted
by the terms of the Indenture to be incurred, PROVIDED that the restrictions
contained in the agreements governing such other Indebtedness are no more
restrictive than those contained in Exhibit C to the Indenture, (e) customary
provisions in leases or purchase-money or installment sales financings permitted
hereunder and entered into in the ordinary course of business and consistent
with past practices, restricting the transfer, assignment or disposition of the
assets so financed, assets directly related thereto (such as related insurance),
proceeds, products and replacements thereof and accessions thereto, but not
otherwise imposing restrictions on any transfers of properties or assets to the
Company or any of its Restricted Subsidiaries, and not imposing restrictions of
the kinds contemplated by clauses (i) or (ii) above, in each case, more
restrictive than those set forth in Exhibit C to the Indenture, or (f) Permitted
Refinancing Debt, PROVIDED that the restrictions contained in the agreements
governing such Permitted Refinancing Debt are no more restrictive than those
contained in the agreements governing the Indebtedness being refinanced.
DESIGNATION OF RESTRICTED AND UNRESTRICTED SUBSIDIARIES
The Indenture provides as follows:
The Board of Directors of the Company may designate any Unrestricted
Subsidiary to be a Restricted Subsidiary at any time; provided, however, that
immediately after giving effect to such designation on a pro forma basis as if
the same had occurred at the beginning of the most recently ended full fiscal
quarter of the Company for which consolidated financial statements are
available, (i) the Company would be permitted to incur at least $1.00 of
additional Indebtedness under the Debt to Cash Flow Ratio test and (ii) an
Officers' Certificate with respect to such designation is delivered to the
Trustee within 75 days after the end of the fiscal quarter of the Company in
which such designation is made (or, in the case of a designation made during the
last fiscal quarter of the Company's fiscal year, within 120 days after the end
of such fiscal year), which Officers' Certificate states the effective date of
such designation; and PROVIDED, FURTHER, that such designation shall be deemed
to be an incurrence of Indebtedness by a Restricted Subsidiary of the Company of
any outstanding Indebtedness of such Unrestricted Subsidiary and such
designation shall only be permitted if no Default or Event of Default would be
in existence following such designation.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default; PROVIDED,
HOWEVER, that immediately after giving effect to such designation on a pro forma
basis, the Company would be in compliance with "The Exchange Offer-- Certain
Covenants--Restricted Payments." For purposes of making such determination, all
outstanding Investments by the Company and its Restricted Subsidiaries (except
to the extent repaid in cash or in the form in which such Investment was
originally made) in the Subsidiary so designated, whether made before or after
the Issue Date, shall be deemed to be Restricted Payments at the time of such
designation and shall reduce the amount available for Restricted Payments. All
such outstanding Investments shall be deemed to constitute Investments in an
amount equal to the greatest of (i) the net book value of such Investments at
the time of such designation, (ii) the fair market value of such Investments at
the time of such designation and (iii) the original fair market value of such
Investments at the time they were made. Such designation shall only be permitted
if such Restricted Payment would be permitted at such time and if such
Restricted Subsidiary otherwise meets the definition of an Unrestricted
Subsidiary.
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NO SENIOR SUBORDINATED DEBT
The Indenture provides that notwithstanding the provisions of "The Exchange
Offer--Certain Covenants--Limitation of Indebtedness and Issuance of
Disqualified Capital Stock," the Company shall not incur any Indebtedness that
is subordinate or junior in right of payment to any Senior Debt and senior in
any respect in right of payment to the Old Notes.
MERGER, CONSOLIDATION AND SALE OF ASSETS
The Indenture provides as follows:
The Company shall not consolidate with or merge with or into any Person
(whether or not the Company is the surviving Person) or sell, assign, transfer,
lease, convey or otherwise dispose of all or substantially all of its properties
or assets (whether as an entirety or substantially as an entirety in a
transaction or a series of related transactions) to any Person or adopt a Plan
of Liquidation unless: (i) either (a) the Company will be the surviving or
continuing corporation (the "SURVIVING PERSON") or (b) the Surviving Person (if
other than the Company) formed by or surviving any such consolidation or merger
or to which such sale, assignment, transfer, lease, conveyance or other
disposition shall expressly assume, by supplemental indenture, executed and
delivered to the Trustee and in form satisfactory to the Trustee, all of the
obligations of the Company under the Old Notes, the Indenture and the
Registration Rights Agreement, and the obligations under the Old Notes, the
Indenture, and the Registration Rights Agreement remain in full force and
effect, (ii) immediately after giving effect to such transaction and the
assumption contemplated above, the Company or such Surviving Person shall have a
Debt to Cash Flow Ratio equal to or less than the Debt to Cash Flow Ratio of the
Company immediately preceding the transaction; (iii) immediately after giving
effect to such transaction, no Default or Event of Default shall have occurred
or be continuing; and (iv) immediately after giving effect to such transaction,
the Surviving Person shall continue to operate the business of the Company that
was the principal business of the Company immediately preceding such
transaction.
In connection with any consolidation, merger or transfer contemplated by
this provision, the Company shall deliver, or cause to be delivered, to the
Trustee, in form and substance reasonably satisfactory to the Trustee, an
Officers' Certificate and an Opinion of Counsel, each stating that such
consolidation, merger or transfer and the supplemental indenture in respect
thereto comply with this provision and that all conditions precedent in this
Indenture provided for relating to such transaction or transactions have been
complied with.
REPORTS
The Indenture provides that, whether or not required by the rules and
regulations of the SEC, so long as any Old Notes are outstanding, the Company
shall furnish to the Trustee and to all Holders of Old Notes once the Company
becomes subject to the reporting requirements of the Exchange Act, all quarterly
and annual financial information that would be required to be contained in a
filing with the SEC on Forms 10-Q and 10-K if the Company were required to file
such forms (without exhibits unless requested), including a "Management's
Discussion and Analysis of Financial Condition and Results of Operations" that
describes the financial condition and results of operations of the Company and
its Restricted Subsidiaries and, with respect to the annual information only, a
report thereon by the Company's certified independent accountants. In addition,
whether or not required by the rules and regulations of the SEC, the Company
shall file a copy of all such information and reports with the SEC for public
availability (unless the SEC will not accept such a filing) and shall promptly
make such information available to all securities analysts and prospective
investors upon request. The Company shall at all times comply with TIA '314(a).
For so long as any Transfer Restricted Securities remain outstanding, the
Company shall furnish to all Holders and prospective purchasers of the Old Notes
designated by the Holders of Transfer Restricted
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Securities, promptly upon their request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act.
Delivery of such reports, information and documents to the Trustee is for
informational purposes only and the Trustee's receipt of such shall not
constitute constructive notice of any information contained therein or
determinable from information contained therein, including the Company's
compliance with any of the covenants hereunder (as to which the Trustee is
entitled to rely exclusively on Officers' Certificates).
EVENTS OF DEFAULT AND REMEDIES
EVENTS OF DEFAULT
The Indenture provides that an Event of Default shall occur upon the
happening of any of the following:
(a)(i) the Company defaults in the payment when due of interest or
Liquidated Damages on any Note on any day and such default continues for a
period of 30 days or more after the same becomes due and payable;
(b) the Company defaults in the payment when due of principal or
Accreted Value of any Note, when such principal or Accreted Value becomes
due and payable, at maturity, upon redemption (including in connection with
an offer to purchase), pursuant to an Asset Sale Offer, a Change of Control
Offer or otherwise;
(c) the Company defaults in the observance or performance of any other
covenant, representation, warranty or agreement contained in this Indenture
or the Notes, which default continues for a period of 45 days after the
Company receives written notice specifying the default (and requiring that
such default be remedied) from the Trustee or from the Holders of not less
than 25% in Accreted Value (if prior to the Full Accretion Date) or
aggregate principal amount (if on or after the Full Accretion Date) of the
Notes then outstanding;
(d) a default occurs under any mortgage, indenture or instrument under
which there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by the Company or any Material Restricted
Subsidiary (or the payment of which is guaranteed by the Company or any
Material Restricted Subsidiary), whether such Indebtedness or guarantee now
exists, or is created after the Issue Date, which default results in the
acceleration of such Indebtedness prior to its express maturity and the
principal amount of any such Indebtedness, together with the principal
amount of any other such Indebtedness the maturity of which has been so
accelerated, aggregates $5 million or more;
(e) one or more judgments are entered by a court or courts of competent
jurisdiction against the Company or any of its Material Restricted
Subsidiaries and such judgment or judgments remain undischarged, or unstayed
or unsatisfied for a period of 60 consecutive days, where such judgment or
judgments are for the payment of money in an aggregate amount in excess of
$5 million (in excess of applicable insurance coverage with respect to which
the Company's insurer has acknowledged coverage in writing);
(f) the Company or any of its Restricted Subsidiaries pursuant to or
within the meaning of Bankruptcy Law:
(i) commences a voluntary case,
(ii) consents to the entry of an order for relief against it in an
involuntary case,
(iii) consents to the appointment of a Bankruptcy Custodian of such
Person or for all or substantially all of its property,
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(iv) makes a general assignment for the benefit of its creditors, or
(v) generally is not paying its debts as they become due;
(g) a court of competent jurisdiction enters an order or decree under
any Bankruptcy Law that:
(i) is for relief against the Company or any of its Material
Restricted Subsidiaries in an involuntary case;
(ii) appoints a Bankruptcy Custodian of the Company or any of its
Material Restricted Subsidiaries for all or substantially all of the
property of the Company or any of its Material Restricted Subsidiaries;
or
(iii) orders the liquidation of the Company or any of its Material
Restricted Subsidiaries; and the order or decree remains unstayed and in
effect for 60 consecutive days; or
(h) any holder of at least $5 million in aggregate principal amount of
Indebtedness of the Company or any Material Restricted Subsidiary shall
commence judicial proceedings to foreclose upon assets of the Company or any
Material Restricted Subsidiary having an aggregate fair market value,
individually or in the aggregate, of at least $5 million or shall have
exercised any right under applicable law or applicable security documents to
take ownership of any such assets in lieu of foreclosure.
If any Event of Default (other than an Event of Default specified in clause
(f) or (g) above with respect to the Company, any Material Restricted Subsidiary
or any group of Material Restricted Subsidiaries that, taken as a whole, would
constitute a Material Restricted Subsidiary) occurs and is continuing, the
Trustee or the Holders of at least 25% in principal amount of the then
outstanding Notes may declare all the Notes to be due and payable immediately.
Upon any such declaration, the Notes shall become due and payable immediately.
Notwithstanding the foregoing, if an Event of Default specified in clause (f) or
(g) above occurs with respect to the Company, any Material Restricted Subsidiary
or any group of Material Restricted Subsidiaries that, taken as a whole, would
constitute a Material Restricted Subsidiary), all outstanding Notes shall be due
and payable immediately without further action or notice. The Holders of a
majority in aggregate principal amount of the then outstanding Notes by written
notice to the Trustee may on behalf of all of the Holders rescind an
acceleration and its consequences if the rescission would not conflict with any
judgment or decree and if all existing Events of Default (except nonpayment of
any principal, interest or premium that has become due solely because of the
acceleration) have been cured or waived.
If an Event of Default occurs on or after October 1, 2001 by reason of any
willful action (or inaction) taken (or not taken) by or on behalf of the Company
with the intention of avoiding payment of the premium that the Company would
have had to pay if the Company then had elected to redeem the Notes pursuant to
the optional redemption provisions of the Indenture, then, upon acceleration of
the Notes, an equivalent premium shall also become and be immediately due and
payable, to the extent permitted by law, anything in this Indenture or in the
Notes to the contrary notwithstanding. If an Event of Default occurs prior to
October 1, 2001 by reason of any willful action (or inaction) taken (or not
taken) by or on behalf of the Company with the intention of avoiding the
prohibition on redemption of the Notes prior to such date, then, upon
acceleration of the Notes, an additional premium shall also become and be
immediately due and payable in an amount, for each of the years beginning on
October 1 of the years set
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forth below, as set forth below (expressed as a percentage of the Accreted Value
to the date of payment that would otherwise be due but for the provisions of
this sentence):
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---------------------------------------------------------------------------------- -----------
<S> <C>
1997.............................................................................. 113.000%
1998.............................................................................. 111.750%
1999.............................................................................. 110.500%
2000.............................................................................. 109.250%
2001.............................................................................. 108.000%
</TABLE>
Holders of not less than a majority in aggregate Accreted Value (if prior to
the Full Accretion Date) or principal amount (if on or after the Full Accretion
Date) of the then outstanding Notes by notice to the Trustee may on behalf of
the Holders of all of the Notes waive an existing Default or Event of Default
and its consequences hereunder, except a continuing Default or Event of Default
in the payment of the principal of, premium and Liquidated Damages, if any, or
interest on the Notes (including in connection with an offer to purchase).
The Holders of the Old Notes may not enforce the Indenture or the Old Notes
except as provided in the Indenture and under the TIA. Subject to the provisions
of the Indenture relating to the duties of the Trustee, the Trustee is under no
obligation to exercise any of its rights or powers under the Indenture at the
request, order or direction of any of the Holders, unless such Holders have
offered to the Trustee reasonable indemnity. Subject to all provisions of the
Indenture and applicable law, the Holders of a majority in aggregate Accreted
Value (if prior to the full Accretion Date) or aggregate principal amount (if on
or after the Full Accretion Date) of the then outstanding Old Notes may direct
the time, method and place of conducting any proceeding for exercising any
remedy available to the Trustee or exercising any trust or power conferred on
the Trustee. The Trustee may withhold from Holders notice of any continuing
Default or Event of Default (except a Default or Event of Default in the payment
of principal of or premium, if any, or interest) on the Old Notes if it
determines that withholding notice is in their interest.
Under the Indenture, the Company is required to provide an Officers'
Certificate to the Trustee promptly upon any such officer obtaining knowledge of
any Default or Event of Default (provided that such officers shall provide such
certification at least annually whether or not they know of any Default or Event
of Default) that has occurred and, if applicable, describe such Default or Event
of Default and the status thereof.
DEFEASANCE
The Company may, at the option of its Board of Directors evidenced by a
resolution set forth in an Officers' Certificate, at any time, elect to have
either Legal Defeasance or Covenant Defeasance be applied to all outstanding Old
Notes upon compliance with the conditions set forth below.
Upon the Company's exercise of the option applicable to Legal Defeasance,
the Company shall, subject to the satisfaction of the conditions set forth
below, be deemed to have been discharged from its obligations with respect to
all outstanding Notes on the date the conditions set forth below are satisfied
(hereinafter, "Legal Defeasance"). For this purpose, Legal Defeasance means that
the Company shall be deemed to have paid and discharged the entire Indebtedness
represented by the outstanding Notes, which shall thereafter be deemed to be
"outstanding" only for the purposes of Section 8.05 of the Indenture and the
other Sections of the Indenture referred to in (i)-(iv) below, and to have
satisfied all of its other obligations under such Old Notes and the Indenture
(and the Trustee, on demand of and at the expense of the Company, shall execute
proper instruments acknowledging the same), except for the following provisions,
which shall survive until otherwise terminated or discharged hereunder: (i) the
rights of Holders of outstanding Old Notes to receive solely from the trust fund
described in Section 8.04 of the Indenture, and as more fully set forth in such
Section, payments in respect of the principal of, premium, if
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any, and interest (including Liquidated Damages) on such Notes when such
payments are due; (ii) the Company's obligations with respect to such Old Notes
under Article 2 and Section 4.02 of the Indenture; (iii) the rights, powers,
trusts, duties and immunities of the Trustee hereunder and the Company's
obligations in connection therewith; and (iv) to the Legal Defeasance Article
Eight of the Indenture. Subject to compliance with such Article 8, the Company
may exercise its option to Legal Defeasance notwithstanding the prior exercise
of its option to Covenant Defeasance.
Upon the Company's exercise of the option applicable to Covenant Defeasance,
the Company shall, subject to the satisfaction of the conditions set forth
below, be released from its obligations under the covenants contained in
Sections 4.07, 4.08, 4.09, 4.10, 4.11 and 4.13 of the Indenture with respect to
the outstanding Notes on and after the date the conditions set forth below are
satisfied (hereinafter, "Covenant Defeasance"), and the Notes shall thereafter
be deemed not "outstanding" for the purposes of any direction, waiver, consent
or declaration or act of Holders (and the consequences of any thereof) in
connection with such covenants, but shall continue to be deemed "outstanding"
for all other purposes hereunder (it being understood that such Old Notes shall
not be deemed outstanding for accounting purposes). For this purpose, Covenant
Defeasance means that, with respect to the outstanding Old Notes, the Company
may omit to comply with and shall have no liability in respect of any term,
condition or limitation set forth in any such covenant, whether directly or
indirectly, by reason of any reference elsewhere herein to any such covenant or
by reason of any reference in any such covenant to any other provision herein or
in any other document and such omission to comply shall not constitute a Default
or an Event of Default under Section 6.01 of the Indenture, but, except as
specified above, the remainder of this Indenture and such Old Notes shall be
unaffected thereby. In addition, upon the Company's exercise of the option
applicable to Covenant Defeasance, subject to the satisfaction of the conditions
set forth below, sections (c) through (e) and section (h) of "The Exchange
Offer--Events of Default and Remedies-- Events of Default shall not constitute
Events of Default.
The following shall be the conditions to the application of either Legal
Defeasance or Covenant Defeasance to the outstanding Old Notes:
In order to exercise either Legal Defeasance or Covenant Defeasance:
(a) the Company must irrevocably deposit with the Trustee, in trust, for the
benefit of the Holders, cash in United States dollars, non-callable Government
Securities, or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants,
to pay the principal of, premium and Liquidated Damages, if any, and interest on
the outstanding Old Notes on the stated date for payment thereof or on the
applicable redemption date, as the case may be;
(b) in the case of an election to Legal Defeasance, the Company shall have
delivered to the Trustee an Opinion of Counsel in the United States reasonably
acceptable to the Trustee confirming that (A) the Company has received from, or
there has been published by, the Internal Revenue Service a ruling or (B) since
the date of the Indenture, there has been a change in the applicable federal
income tax law, in either case to the effect that, and based thereon such
Opinion of Counsel shall confirm that, the Holders of the outstanding Old Notes
will not recognize income, gain or loss for federal income tax purposes as a
result of such Legal Defeasance and will be subject to federal income tax on the
same amounts, in the same manner and at the same times as would have been the
case if such Legal Defeasance had not occurred;
(c) in the case of an election to Covenant Defeasance, the Company shall
have delivered to the Trustee an Opinion of Counsel in the United States
reasonably acceptable to the Trustee confirming that the Holders of the
outstanding Notes will not recognize income, gain or loss for federal income tax
purposes as a result of such Covenant Defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such Covenant Defeasance had not occurred;
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(d) no Default or Event of Default shall have occurred and be continuing on
the date of such deposit (other than a Default or Event of Default resulting
from the incurrence of Indebtedness all or a portion of the proceeds of which
will be used to defease the Notes pursuant to Article Eight of the Indenture
concurrently with such incurrence); provided, however, that the benefits of any
Covenant Defeasance or Legal Defeasance shall immediately and automatically
cease if any Event of Default under section (f) or (g) of "The Exchange
Offer--Events of Default and Remedies--Events of Default" shall have occurred,
at any time in the period ending on the 91st day after the date of deposit;
(e) such Legal Defeasance or Covenant Defeasance shall not result in a
breach or violation of, or constitute a default under, any material agreement or
instrument (other than the Indenture) to which the Company or any of its
Restricted Subsidiaries is a party or by which the Company or any of its
Restricted Subsidiaries is bound;
(f) the Company shall have delivered to the Trustee an Opinion of Counsel to
the effect that, as of the date such opinion: after the 91st day following the
deposit (assuming that no Holder of any Old Notes would be considered an insider
of the Company under applicable Bankruptcy Law), the rights of the Holders will
not be adversely affected in any proceeding under applicable Bankruptcy Law by
reason of such Covenant Defeasance or Legal Defeasance (by comparison to the
rights such Holders would have had such Covenant Defeasance or Legal Defeasance
not been effected);
(g) the Company shall have delivered to the Trustee an Officers' Certificate
stating that the deposit was not made by it with the intent of preferring the
Holders of Notes over any other creditors of the Company or with the intent of
defeating, hindering, delaying or defrauding its creditors or others; and
(h) the Company shall have delivered to the Trustee an Officers' Certificate
and an Opinion of Counsel, each stating that all conditions precedent provided
for or relating to the Legal Defeasance or the Covenant Defeasance have been
complied with.
MODIFICATION OF THE INDENTURE
The Indenture provides that the Company and the Trustee may amend or
supplement the Indenture or the Old Notes without notice to or consent of any
Holder: (i) to cure any ambiguity, defect or inconsistency; (ii) to provide for
uncertificated Old Notes in addition to or in place of certificated Old Notes;
(iii) to comply with requirements of the Securities and Exchange Commission in
order to effect or maintain the qualification of the Indenture under the TIA;
(iv) to make any change that would provide any additional benefits or rights to
the Holders or that does not adversely affect the legal rights hereunder of any
Holder; (v) to provide for the assumption of the Company's obligations to the
Holder of the Old Notes in case of a merger or consolidation pursuant to "The
Exchange Offer--Certain Covenants--Merger, Consolidation or Sale of Assets."
In addition, subject to certain exceptions, the Company and the Trustee may
amend or supplement the Indenture or the Old Notes with the consent of the
Holders of at least a majority in principal amount of the Notes then outstanding
(including, without limitation, consents obtained in connection with a tender
offer or exchange offer for the Old Notes) and, subject to Sections 6.04 and
6.07 the Indenture, any existing Default or Event of Default (other than a
Default or Event of Default in the payment of the principal of, premium, if any,
or interest on the Notes, except a payment default resulting from an
acceleration that has been rescinded) or compliance with any provision of this
Indenture or the Notes may be waived with the consent of the Holders of a
majority in principal amount of the then outstanding Notes (including consents
obtained in connection with a tender offer or exchange offer for the Notes).
Upon the request of the Company accompanied by a resolution of its Board of
Directors authorizing the execution of any such amended or supplemental
Indenture, and upon the filing with the Trustee of evidence satisfactory to the
Trustee of the consent of the Holders of Notes as aforesaid, and upon receipt by
the Trustee of certain documents, the Trustee shall join with the Company in the
execution of such
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amended or supplemental Indenture unless such amended or supplemental Indenture
affects the Trustee's own rights, duties or immunities under this Indenture or
otherwise, in which case the Trustee may in its discretion, but shall not be
obligated to, enter into such amended or supplemental Indenture.
It shall not be necessary for the consent of the Holders of Notes to approve
the particular form of any proposed amendment or waiver, but it shall be
sufficient if such consent approves the substance thereof.
After an amendment, supplement or waiver becomes effective, the Company
shall mail to the Holders of Notes affected thereby a notice briefly describing
the amendment, supplement or waiver. Any failure of the Company to mail such
notice, or any defect therein, shall not, however, in any way impair or affect
the validity of any such amended or supplemental Indenture or waiver. Subject to
Sections 6.04 and 6.07 of the Indenture, the Holders of a majority in aggregate
principal amount of the Old Notes then outstanding may waive compliance in a
particular instance by the Company with any provision of this Indenture or the
Old Notes. However, without the consent of each Holder affected, an amendment or
waiver may not (with respect to any Old Notes held by a non-consenting Holder):
(a) reduce the principal amount of Old Notes whose Holders must consent
to an amendment, supplement or waiver;
(b) reduce the principal of or change the fixed maturity of any Old
Notes or alter any provision that, directly or indirectly, affects the
redemption price, redemption date or the Accreted Value (if prior to the
Full Accretion Date) or principal amount (if on or after the Full Accretion
Date) of the Old Notes;
(c) reduce the rate of or change the time for payment of interest,
including default interest, on any Old Note;
(d) waive a Default or Event of Default in the payment of principal of
or premium, if any, or interest on the Old Notes (except a rescission of
acceleration of the Old Notes by the Holders of at least a majority in
aggregate principal amount of the then outstanding Old Notes and a waiver of
the payment default that resulted from such acceleration);
(e) make any Old Note payable in any currency other than that stated in
the Old Notes;
(f) make any change in the provisions of this Indenture relating to
waivers of past Defaults or the rights of Holders of Notes to receive
payments of principal of or premium, if any, or interest on the Notes (or,
if applicable, Accreted Value);
(g) waive a redemption payment with respect to any Old Note (other than
a payment required by "The Exchange Offer--Redemption or Repurchase at
Option of the Holders--Asset Sales" or "The Exchange Offer--Redemption or
Repurchase at Option of the Holders--Change of Control;" or
(h) make any change in the foregoing amendment and waiver provisions.
Notwithstanding the foregoing, no amendment of the Indenture shall adversely
affect the rights of any holder of Senior Debt under the subordination
provisions of the Indenture without the consent of such holder. Every amendment,
waiver or supplement of the Indenture or the Old Notes shall comply with the TIA
as then in effect.
SUBORDINATION
The Company agrees, and each Holder by accepting a Note agrees, that the
Indebtedness evidenced by the Old Note is subordinated in right of payment, to
the extent and in the manner provided to the prior payment in full of all Senior
Debt (whether outstanding on the date hereof or hereafter created, incurred,
assumed or guaranteed), and that the subordination is for the benefit of the
holders of Senior Debt. A distribution may consist of cash, securities or other
property, by set-off or otherwise.
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Upon any distribution to creditors of the Company in a liquidation or
dissolution of the Company or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Company or its property, in
an assignment for the benefit of creditors or any marshalling of the Company's
assets and liabilities:
(a) holders of Senior Debt shall be entitled to receive payment in full
of all Obligations due in respect of such Senior Debt (including interest
after the commencement of any such proceeding at the rate specified in the
applicable Senior Debt) before Holders shall be entitled to receive any
payment with respect to the Old Notes (except that Holders may receive (i)
securities that are subordinated to at least the same extent as the Old
Notes to (A) Senior Debt and (B) any securities issued in exchange for
Senior Debt and (ii) payments and other distributions made from any
defeasance trust created pursuant to the Indenture); and
(b) until all Obligations with respect to Senior Debt (as provided in
subsection (a) above) are paid in full, any distribution to which Holders
would be entitled but for these provisions shall be made to holders of
Senior Debt (except that Holders may receive securities that are
subordinated to at least the same extent as the Old Notes to (i) Senior Debt
and (ii) any securities issued in exchange for Senior Debt), as their
interests may appear.
The Company may not make any payment or distribution to the Trustee or any
Holder in respect of Obligations with respect to the Old Notes and may not
acquire from the Trustee or any Holder any Old Notes for cash or property (other
than (i) securities that are subordinated to at least the same extent as the Old
Notes to (A) Senior Debt and (B) any securities issued in exchange for Senior
Debt and (ii) payments and other distributions made from any defeasance trust
created pursuant to the Indenture) until all principal and other Obligations
with respect to the Senior Debt have been paid in full if:
(a) a default in the payment of any principal or other Obligations with
respect to Designated Senior Debt occurs and is continuing beyond any
applicable grace period in the agreement, indenture or other document
governing such Designated Senior Debt; or
(b) a default, other than a payment default, on Designated Senior Debt
occurs and is continuing that then permits holders of the Designated Senior
Debt to accelerate its maturity and the Trustee receives a notice of the
default (a "Payment Blockage Notice") from a Person who may give it pursuant
to Section 10.11 of the Indenture. If the Trustee receives any such Payment
Blockage Notice, no subsequent Payment Blockage Notice shall be effective
for purposes of this Section unless and until (i) at least 360 days shall
have elapsed since the effectiveness of the immediately prior Payment
Blockage Notice and (ii) all scheduled payments of principal, premium, if
any, and interest on the Old Notes that have come due have been paid in full
in cash. No nonpayment default that existed or was continuing on the date of
delivery of any Payment Blockage Notice to the Trustee shall be, or be made,
the basis for a subsequent Payment Blockage Notice.
The Company may and shall resume payments on and distributions in respect of
the Old Notes and may acquire them upon the earlier of:
(1) the date upon which the default is cured or waived, or
(2) 179 days have passed after notice is received if the maturity of
such Designated Senior Debt has not been accelerated,
if Article 10 of the Indenture otherwise permits the payment, distribution or
acquisition at the time of such payment or acquisition.
If payment of the Notes is accelerated because of an Event of Default, the
Company shall promptly notify holders of Senior Debt of the acceleration.
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The Company shall give prompt written notice to the Trustee of any fact
known to the Company that would prohibit the making of any payment to or by the
Trustee in respect of the Old Notes. Failure to give such notice shall not
affect the subordination of the Old Notes or Senior Debt. Notwithstanding these
provisions or any other provision of the Indenture, the Trustee shall not be
charged with knowledge of the existence of any facts that would prohibit the
making of any payment to or by the Trustee in respect of the Old Notes, unless
and until the Trustee shall have received a Payment Blockage Notice; and, prior
to the receipt of any Payment Blockage Notice, the Trustee, subject to the
provisions of Section 7.01 of the Indenture, shall be entitled in all respects
to assume that no such facts exist; PROVIDED, HOWEVER, that if a Responsible
Officer of the Trustee shall not have received, at least three Business Days
prior to the date upon which by the terms hereof any such money may become
payable for any purpose (including, without limitation, the payment of the
principal amount, issue price, accrued original issue discount, redemption
price, purchase price, Change of Control Offer Purchase Price or interest, if
any, as the case may be, in respect of any Note), a Payment Blockage Notice,
then, anything herein contained to the contrary notwithstanding, the Trustee
shall have full power and authority to receive such money and to apply the same
to the purpose for which such money was received and shall not be affected by
any notice to the contrary that may be received by it within three Business Days
prior to such date.
Subject to the provisions of Section 7.01 of the Indenture, the Trustee
shall be entitled to rely on the delivery to it of a written notice by a Person
representing himself to be a holder of Senior Debt (or a trustee or agent on
behalf of such holder), or a Representative of any of the foregoing, to
establish that such notice has been given by a holder of Senior Debt (or a
trustee or agent on behalf of any such holder). In the event that the Trustee
determines in good faith that further evidence is required with respect to the
right of any Person as a holder of Senior Debt to participate in any payment or
distribution, the Trustee may request such Person to furnish evidence to the
reasonable satisfaction of the Trustee as to the amount of Senior Debt held by
such Person, the extent of which such Person is entitled to participate in such
or distribution of any other facts pertinent to the rights of such Person, and
if such evidence is not furnished, the Trustee may defer any payment which it
may be required to make for the benefit of such Person pursuant to the terms of
this Indenture pending judicial determination as to the rights of such Person to
receive such payment.
In the event that the Trustee or any Holder receives any payment of any
Obligations with respect to the Old Notes at a time when the Trustee or such
Holder, as applicable, has received a Payment Blockage Notice or otherwise has
actual knowledge that such payment is prohibited, such payment shall be held by
the Trustee or such Holder, in trust for the benefit of, and shall be paid
forthwith over and delivered, upon written request, to, the holders of Senior
Debt as their interests may appear or their Representative under the indenture
or other agreement (if any) pursuant to which Senior Debt may have been issued,
as their respective interests may appear, for application to the payment of all
Obligations with respect to Senior Debt remaining unpaid to the extent necessary
to pay such Obligations in full in accordance with their terms, after giving
effect to any concurrent payment or distribution to or for the holders of Senior
Debt.
With respect to the holders of Senior Debt, the Trustee undertakes to
perform only such obligations on the part of the Trustee as are specifically set
forth, and no implied covenants or obligations with respect to the holders of
Senior Debt shall be read into this Indenture against the Trustee. The Trustee
shall not be deemed to owe any fiduciary duty to the holders of Senior Debt, and
shall not be liable to any such holders if the Trustee shall pay over or
distribute to or on behalf of Holders or the Company or any other Person money
or assets to which any holders of Senior Debt shall be entitled, except if such
payment is made as a result of the willful misconduct or gross negligence of the
Trustee.
The Company shall promptly notify the Trustee and the Paying Agent of any
facts known to the Company that would cause a payment of any Obligations with
respect to the Notes to violate these provisions, but failure to give such
notice shall not affect the subordination of the Notes to the Senior Debt.
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After all Senior Debt is paid in full and until the Notes are paid in full,
Holders shall be subrogated (equally and ratably with all other Indebtedness
pari passu with the Old Notes) to the rights of holders of Senior Debt to
receive distributions applicable to Senior Debt to the extent that distributions
otherwise payable to the Holders have been applied to the payment of Senior
Debt. A distribution made to holders of Senior Debt that otherwise would have
been made to Holders is not, as between the Company and Holders, a payment by
the Company on the Old Notes.
Nothing in this Indenture shall:
(1) impair, as between the Company and Holders, the obligation of the
Company, which is absolute and unconditional, to pay principal of and
interest on the Old Notes in accordance with their terms;
(2) affect the relative rights of Holders and creditors of the Company
other than their rights in relation to holders of Senior Debt; or
(3) prevent the Trustee or any Holder from exercising its available
remedies upon a Default or Event of Default, subject to the rights of
holders and owners of Senior Debt to receive distributions and payments
otherwise payable to Holders.
If the Company fails because of these provisions to pay principal of or
interest on an Old Note on the due date, the failure is still a Default or Event
of Default.
No right of any holder of Senior Debt to enforce the subordination of the
Indebtedness evidenced by the Old Note shall be impaired by any act or failure
to act by the Company or any Holder or by the failure of the Company or any
Holder to comply with this Indenture.
GOVERNING LAW
The Indenture provides that it and the Old Notes will be governed by, and
construed in accordance with, the internal laws of the State of New York. Each
of the parties to the Indenture irrevocably and unconditionally: (i) submits
itself and its property in any legal action or proceeding relating to the
Indenture, the Old Notes and the Notes Registration Rights Agreement, or for
recognition and enforcement of any judgment in respect thereof, to the
non-exclusive jurisdiction of the courts of the State of New York and the courts
of the United States of America for the Southern District of New York, and
appellate courts thereof, and consents and agrees to such action or proceeding
being brought in such courts; and (ii) waives any objection that it may now or
hereafter have to the venue of any such action or proceeding in any such court
or that such action or proceeding was brought in any inconvenient court and
agrees not to plead or claim the same.
THE TRUSTEE
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set forth
in the Indenture. During the existence of an Event of Default, the Trustee will
exercise such rights and powers vested in it by the Indenture, and use the same
degree of care and skill in its exercise as a prudent man would exercise or use
under the circumstances in the conduct of his own affairs.
The Indenture and the provisions of the TIA contain certain limitations on
the rights of the Trustee, should it become a creditor of the Company, to obtain
payments of claims in certain cases or to realize on certain property received
in respect of any such claim as security or otherwise. Subject to the TIA, the
Trustee will be permitted to engage in other transactions with the Company or
its Subsidiaries; provided, however, that if the Trustee acquires any
conflicting interest as described in the TIA, it must eliminate such conflict or
resign.
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CERTAIN DEFINITIONS
"ACCRETED VALUE" means, with respect to any Note, as of any date of
determination prior to the Full Accretion Date, the sum of (i) the initial
offering price of such Note and (ii) the portion of the excess of the principal
amount of each Note over such initial offering price that shall have been
accreted thereon through such date, such amount to be so accreted on a daily
basis at the rate of 13% per annum of the initial offering price of such Note,
compounded semi-annually on each October 1 and April 1 from the Issue Date of
the Notes through the date of determination; PROVIDED that on and after the Full
Accretion Date, the Accreted Value shall be equal to the principal amount of
such Note.
"ACQUIRED DEBT" means, with respect to any specified Person: (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or becomes a Restricted Subsidiary of such specified Person,
including, without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Restricted Subsidiary of such specified Person; and (ii) Indebtedness
encumbering any asset acquired by such specified Person.
"AFFILIATE" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "CONTROL"
(including, with correlative meanings, the terms "CONTROLLING," "CONTROLLED BY"
and "UNDER COMMON CONTROL WITH"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; PROVIDED that
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to be control and, PROVIDED, FURTHER, that the Principal shall be
deemed an Affiliate of the Company so long as the Principal directly or
indirectly owns at least 3% of the Equity Interests of the Company and Mr. Rufus
Lumry and any Person of which at least 5% of the Equity Interests of such Person
is directly or indirectly owned by Mr. Lumry or any Affiliate of Mr. Lumry shall
be deemed an affiliate of the Company so long as Mr. Lumry or any affiliate of
Mr. Lumry is a member of the Board of Directors of the Company or directly or
indirectly owns at least 3% of the Equity Interests of the Company.
"BANKRUPTCY CUSTODIAN" means any receiver, trustee, assignee, liquidator or
similar officer under any Bankruptcy Law.
"BANKRUPTCY LAW" means Title 11, U.S. Code or any similar federal or state
law, as amended from time to time, and applicable to the relevant case,
providing for the relief of debtors.
"CAPITAL LEASE OBLIGATION" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet of the lessee in
accordance with GAAP.
"CAPITAL STOCK" means: (i) in the case of a corporation, corporate stock;
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock; (iii) in the case of a partnership or limited liability
company, partnership interests (whether general or limited) or other membership
interests; and (iv) any other interest or participation that confers on a Person
the right to receive a share of the profits and losses of, or distributions of
assets of (other than any such distributions in respect of Indebtedness), the
issuing Person.
"CASH EQUIVALENTS" means: (i) United States dollars; (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof having maturities of not more than twelve
months from the date of acquisition; (iii) certificates of deposit and
eurodollar time deposits with maturities of twelve months or less from the date
of acquisition, bankers' acceptances with maturities not exceeding twelve months
and overnight bank deposits, in each case with any domestic commercial bank
having combined capital and surplus in excess of $500 million and a Thomson Bank
Watch Rating of "B" or better; (iv) repurchase obligations with a term of not
more than seven days for underlying securities of the types described in clauses
(ii) and (iii) above entered into with
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any financial institution meeting the qualifications specified in clause (iii)
above; (v) commercial paper having a rating of at least P-1 from Moody's or a
rating of at least A-1 from Standard & Poor's; and (vi) mutual funds and money
market accounts investing 100% of the funds under management in instruments of
the types described in clauses (i) through (v) above and, in each case, maturing
within twelve months after the date of acquisition by the Company thereof.
"CHANGE OF CONTROL" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of the Company and its Subsidiaries taken as a
whole to any "PERSON" or "GROUP" (within the meanings of Sections 13(d)(3) and
14(d)(2), respectively, of the Exchange Act) other than (y) the holders of the
Company's Capital Stock as of the date of this Indenture, or (z) the Principal
or any Related Party, (ii) the adoption of a plan relating to the liquidation or
dissolution of the Company and (iii) the consummation of any transaction
(including any merger or consolidation) the result of which is that any
"PERSON"or "GROUP" (as defined above), other than (y) the holders of the
Company's Capital Stock as of the date of this Indenture, or (z) the Principal
and any Related Party, becomes the "BENEFICIAL OWNER" (as such term is defined
in Rules 13(d)-3 and 13(d)-5 of the Exchange Act) directly or indirectly, of
more than 50% of the Voting Stock of the Company or (iv) during any consecutive
two-year period, individuals who at the beginning of such period constituted the
Board of Directors of the Company (together with any new directors whose
election to such Board of Directors or whose nomination for election by the
stockholders of the Company was approved by a vote of a majority of the
directors of the Company then still in office who were either directors at the
beginning of such period or whose election or nomination for election was
previously so approved) cease for any reason to constitute a majority of the
Board of Directors of the Company then in office.
"CODE" means the Internal Revenue Code of 1986, as amended.
"CONSOLIDATED ANNUALIZED EBITDA" means, with respect to any Person, such
Person's Consolidated EBITDA for the most recently completed full fiscal quarter
for which internal financial statements are available ending not more than 135
days prior to the transaction or event giving rise to the need to calculate
Consolidated Annualized EBITDA, multiplied by four.
"CONSOLIDATED EBITDA" means, with respect to any Person for any period, the
sum (without duplication) of (i) Consolidated Net Income of such Person for such
period; plus, (ii) to the extent that any of the following shall have been
included in determining such Consolidated Net Income, (A) an amount equal to any
extraordinary loss plus any net loss realized in connection with an Asset Sale
(to the extent such losses were deducted in computing such Consolidated Net
Income), (B) all income taxes for such Person and its Restricted Subsidiaries
paid or accrued in accordance with GAAP for such period (other than income taxes
attributable to extraordinary, unusual or nonrecurring gains or losses or taxes
attributable to sales or distributions of assets outside the ordinary course of
business), (C) Consolidated Interest Expense of such Person and its Restricted
Subsidiaries for such period and (D) depreciation, amortization (including
amortization of goodwill and other intangibles but excluding amortization of
prepaid cash expenses that were paid in a prior period); less (iii)(A) all
non-cash items of such Person or any of its Restricted Subsidiaries increasing
such Consolidated Net Income for such period and (B) all cash payments during
such period relating to non-cash items that were added back in determining
Consolidated EBITDA in any prior period.
"CONSOLIDATED INTEREST EXPENSE" means, with respect to any Person, for any
period, the sum of: (i) the amount of interest in respect of Indebtedness
(including amortization of original issue discount, fees payable in connection
with financings, including commitment, availability and similar fees, and
amortization of debt issuance costs, capitalized interest, non-cash interest
payments on any Indebtedness and the interest portion of any deferred payment
obligation and after taking into account the effect of elections made under, and
the net costs associated with, any Interest Rate Agreement, however denominated,
with respect to such Indebtedness); (ii) the amount of Redeemable Dividends of
such Person; (iii) the amount
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of Preferred Equity dividends in respect of all Preferred Equity of Restricted
Subsidiaries held by Persons other than the referent Person or a Restricted
Subsidiary thereof, commissions, discounts and other fees and charges owed with
respect to letters of credit and bankers' acceptance financing; and (iv) the
interest component of rentals in respect of any Capital Lease Obligation, in
each case, that was paid, accrued or scheduled to be paid or accrued by such
Person during such period, determined on a consolidated basis in accordance with
GAAP. For purposes of this definition, interest on a Capital Lease Obligation
will be deemed to accrue at an interest rate reasonably determined by the
referent Person to be the rate of interest implicit in such Capital Lease
Obligation in accordance with GAAP consistently applied.
"CONSOLIDATED NET INCOME" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
provided that (i) the Net Income (but not loss) of any Person that is not a
Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid in cash to the referent Person or a Wholly Owned Restricted
Subsidiary thereof, (ii) the Net Income of any Restricted Subsidiary shall be
excluded to the extent that the declaration or payment of dividends or similar
distributions by that Restricted Subsidiary of that Net Income is not at the
date of determination permitted without any prior governmental approval (that
has not been obtained) or, directly or indirectly, by operation of the terms of
its charter or any agreement, instrument, judgment, decree, order, statute, rule
or governmental regulation applicable to that Restricted Subsidiary or its
stockholders, (iii) the Net Income of any Person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition shall
be excluded, and (iv) the cumulative effect of a change in accounting principles
shall be excluded.
"CONSOLIDATED TOTAL INDEBTEDNESS" means the sum (without duplication) of (i)
the total amount of Indebtedness and the aggregate liquidation value of all
Disqualified Capital Stock of such Person plus all Indebtedness and the
aggregate liquidation value of all Preferred Equity of its Restricted
Subsidiaries, all as shown on a consolidated balance sheet of such Person, plus
(ii) the total amount of Indebtedness shown on the balance sheet of the primary
obligor on such Indebtedness, to the extent that such Indebtedness has been
guaranteed by such Person or one of its Restricted Subsidiaries. The
Indebtedness of the Company and its Restricted Subsidiaries shall not include
any Indebtedness of Unrestricted Subsidiaries so long as such Indebtedness is
Non-Recourse Debt.
"CURRENCY AGREEMENT" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company or any of its Subsidiaries against fluctuation in the values of the
currencies of the countries (other than the United States) in which the Company
does business.
"DEBT TO CASH FLOW RATIO" means, as to any Person, for any period of
determination, the ratio of (i) the Consolidated Total Indebtedness of such
Person as of the date of calculation to (ii) the Consolidated Annualized EBITDA
of such Person.
"DEFAULT" means any event that is, or with the passage of time or the giving
of notice or both would be, an Event of Default.
"DESIGNATED SENIOR DEBT" means Senior Debt of the Company that is permitted
under section (iv) of "The Exchange Offer--Certain Covenants--Limitation on
Indebtedness and Issuance of Disqualified Capital Stock" and that has been
designated by the Company as "DESIGNATED SENIOR DEBT."
"DISQUALIFIED CAPITAL STOCK" means any Capital Stock to the extent that, by
its terms (or by the terms of any security into which it is convertible or for
which it is exchangeable), or upon the happening of any event, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
redeemable at the option of the Holder thereof, in whole or in part, on or prior
to the Stated Maturity of the Notes.
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"EQUITY INTERESTS" means, collectively, Capital Stock and all warrants,
options or other rights to acquire Capital Stock (but excluding any debt
security that is convertible into, or exchangeable for, Capital Stock).
"FAIR MARKET VALUE" means, with respect to any asset or property, the sale
value that would be obtained in an arm's-length transaction between an informed
and willing seller under no compulsion to sell and a willing buyer under no
compulsion to buy.
"FULL ACCRETION DATE" means October 1, 1999.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect from time to time.
"GOVERNMENT SECURITIES" means direct obligations of, or obligations fully
guaranteed by, the United States of America for the payment of which guarantee
or obligations the full faith and credit of the United States is pledged.
"GUARANTEE" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"HEDGING OBLIGATIONS" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates.
"HOLDER" means a Person in whose name a Note is registered.
"INDEBTEDNESS" means (without duplication), with respect to any Person, any
indebtedness, secured or unsecured, contingent or otherwise, that is for
borrowed money (whether or not the recourse of the lender is to the whole of the
assets of such Person or only to a portion thereof), or evidenced by bonds,
notes, debentures or similar instruments or representing the balance deferred
and unpaid of the purchase price of any property (excluding any such balance
that constitutes an accrued expense or trade payable) if and to the extent any
of the foregoing indebtedness would appear as a liability upon a balance sheet
of such Person prepared in accordance with GAAP, and shall also include, to the
extent not otherwise included: (i) any Capital Lease Obligations; (ii)
Indebtedness of any other Person secured by a Lien to which the property or
assets owned or held by the referent Person is subject, whether or not the
obligation or obligations secured thereby shall have been assumed (the amount of
such Indebtedness being deemed to be the lesser of the value of such property or
assets or the amount of the Indebtedness so secured); (iii) Guarantees by such
Person of Indebtedness of any other Person; (iv) the aggregate liquidation
preference of any Disqualified Capital Stock; (v) all obligations of such Person
in respect of letters of credit, bankers' acceptance or other similar
instruments or credit transactions (including reimbursement obligations with
respect thereto); and (vi) any Hedging Obligation of such Person applicable to
any of the foregoing. In no event shall "Indebtedness" be deemed to include
trade credit or credit on open account for which payment is not overdue by more
than 60 days or endorsements for deposit in the ordinary course of business.
"INVESTMENTS" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including Guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP.
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"ISSUE DATE" means the date on which the Notes are initially issued.
"LIEN" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the nature
thereof, any option or other agreement to sell or give a security interest in
and any filing of or agreement to give any financing statement under the Uniform
Commercial Code (or equivalent statutes) of any jurisdiction), but excluding any
such filings in respect of operating leases or similar notice or precautionary
filings relating to transactions or arrangements that do not give rise to
Indebtedness.
"LIQUIDATED DAMAGES" means all liquidated damages then owing pursuant to the
Registration Rights Agreement.
"MATERIAL RESTRICTED SUBSIDIARY" means any Restricted Subsidiary that would
be a "SIGNIFICANT SUBSIDIARY" as defined in Article 1, Rule 1-02 of Regulation
S-X, promulgated pursuant to the Securities Act, as such Regulation is in effect
on the date of this Indenture.
"MOODY'S" means Moody's Investors Service, Inc. and any successor to the
rating agency business thereof.
"NET INCOME" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of Preferred Equity dividends, excluding, however, any extraordinary
gain (or loss), together with any related provision for taxes on such
extraordinary gain (or loss).
"NET PROCEEDS" means the aggregate cash proceeds received by the Company or
any of its Subsidiaries in respect of any Asset Sale (including, without
limitation, any cash received upon the sale or other disposition of any non-cash
consideration received in any Asset Sale), net of the direct costs relating to
such Asset Sale (including, without limitation, sales commissions and legal,
accounting and investment banking fees) and any relocation expenses incurred as
a result thereof, taxes paid or payable as a result thereof (after taking into
account any available tax credits or deductions and any tax sharing
arrangements), amounts required to be applied to the repayment of Indebtedness
secured by a Lien on the asset or assets that were the subject of such Asset
Sale and any reserve for adjustment in respect of the sale price of such asset
or assets established in accordance with GAAP.
"NON-RECOURSE DEBT" means Indebtedness (i) as to which neither the Company
nor any of its Restricted Subsidiaries (a) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Indebtedness), (b) is directly or indirectly liable (as a guarantor or
otherwise) or (c) constitutes the lender; and (ii) as to which the lenders have
been notified in writing that they will not have any recourse to the stock or
assets of the Company or any of its Restricted Subsidiaries.
"OBLIGATIONS" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"OFFERING" means the Offering of the Notes by the Company.
"OFFERING MEMORANDUM" means the Offering Memorandum of the Company, dated
October 22, 1996, with respect to the Notes.
"OFFICERS' CERTIFICATE" means a certificate signed by two Officers, at least
one of whom shall be the principal executive officer, principal accounting
officer or principal financial officer of the Company that meets the
requirements of Section 11.05 of the Indenture.
"OPINION OF COUNSEL" means an opinion from legal counsel who is reasonably
acceptable to the Trustee, that meets the requirements of Section 11.05 of the
Indenture. The counsel may be an employee of or counsel to the Company or the
Trustee.
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"PERMITTED INVESTMENTS" means any of the following: (i) Investments in cash
and Cash Equivalents; (ii) Investments by the Company or by any Restricted
Subsidiary in any Person that is or will become immediately after such
Investment a Restricted Subsidiary; (iii) any Investments in the Company or in a
wholly owned Restricted Subsidiary of the Company; (iv) Investments existing on
the Issue Date; (v) accounts receivable created or acquired in the ordinary
course of business of the Company or any Restricted Subsidiary and on ordinary
business terms; (vi) Investments arising from transactions by the Company or any
Restricted Subsidiaries with trade creditors or customers in the ordinary course
of business; (vii) Investments made as the result of non-cash consideration
received from an Asset Sale; and (viii) additional Investments in Unrestricted
Subsidiaries, joint ventures or similar business entities not exceeding $10
million plus the net proceeds received by the Company from issuance of Capital
Stock since the Issue Date (other than from the issuance of Disqualified Capital
Stock).
"PERMITTED REFINANCING DEBT" means any Indebtedness of the Company or any of
its Restricted Subsidiaries issued in exchange for, or the net proceeds of which
are used to extend, refinance, renew, replace, defease or refund other
Indebtedness of the Company or any of its Restricted Subsidiaries; provided
that: (i) the principal amount (or accreted value, if applicable) of such
Permitted Refinancing Debt does not exceed the principal amount (or accreted
value, if applicable) of the Indebtedness so extended, refinanced, renewed,
replaced, defeased or refunded (plus the amount of reasonable expenses incurred
in connection therewith); (ii) such Permitted Refinancing Debt has a period
until its final maturity date no shorter than the final maturity date of, and
has a Weighted Average Life to Maturity no shorter than the Weighted Average
Life to Maturity of, the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded; (iii) if the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded is subordinated in right of
payment to the Notes, such Permitted Refinancing Debt has a final maturity date
on or later than the final maturity date of, and is subordinated in right of
payment to, such Notes on terms at least as favorable to the Holders of such
Notes as those contained in the documentation governing the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded; and (iv) such
Indebtedness is incurred either by the Company or the Restricted Subsidiary that
was the obligor on the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded.
"PERSON" means any individual, corporation, company (including limited
liability company), partnership, joint venture, association, joint-stock
company, trust, unincorporated organization or government or any agency or
political subdivision thereof (including any subdivision or ongoing business of
any such entity or substantially all of the assets of any such entity,
subdivision or business).
"PREFERRED EQUITY" means any Capital Stock of a Person, however designated,
that entitles the holder thereof to a preference with respect to dividends,
distributions or liquidation proceeds of such Person over the holders of other
Capital Stock issued by such Person.
"PRINCIPAL" means Mr. Jens H. Molbak.
"PROPERTY" means, with respect to any Person, any interest of such Person in
any kind of property or asset, whether real, personal or mixed, or tangible or
intangible, including, without limitation, Capital Stock in any other Person
(but excluding Capital Stock or other securities issued by such Person).
"PUBLIC EQUITY OFFERING" means the consummation of an offering of Equity
Interests (other than Disqualified Capital Stock) by the Company to the public
pursuant to a registration statement filed with the SEC, the aggregate gross
proceeds of which exceed $25 million.
"PUBLIC MARKET" means the condition that exists at any time after a Public
Equity Offering has been consummated and at least 20% of the Company's Capital
Stock (i) has been distributed pursuant to an effective registration statement
under the Securities Act or (ii) is saleable pursuant to Rule 144 promulgated
under the Securities Act.
"RELATED PARTY" means, with respect to any Principal, (i) any controlling
stockholder, 80% (or more) owned Subsidiary, or spouse or immediate family
member (in the case of an individual) of such Principal
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or (ii) any trust, corporation, partnership or other entity, the beneficiaries,
stockholders, partners, owners or Persons beneficially holding an 80% or more
controlling interest of which consist of such Principal and/ or such other
Persons referred to in the immediately preceding clause (i).
"RESPONSIBLE OFFICER," when used with respect to the Trustee, means any
officer within the corporate trust department of the Trustee (or any successor
group of the Trustee) or any other officer of the Trustee customarily performing
functions similar to those performed by any of the above designated officers and
also means, with respect to a particular corporate trust matter, any other
officer to whom such matter is referred because of his knowledge of and
familiarity with the particular subject.
"RESTRICTED SUBSIDIARY" means any Subsidiary of the Company that is not
designated to be an Unrestricted Subsidiary.
"SEC" means the Securities and Exchange Commission.
"SENIOR DEBT" means any Indebtedness that is permitted to be incurred by the
Company pursuant to the Indenture unless the instrument under which such
Indebtedness is incurred expressly provides that it is on a parity with or
subordinated in right of payment to the Notes. Notwithstanding anything to the
contrary in the foregoing, Senior Debt shall not include (x) any Indebtedness of
the Company to any of its Subsidiaries or other Affiliates, (y) any obligations
incurred for the purchase of goods or materials or for services obtained in the
ordinary course of business, which obligations do not constitute Indebtedness,
and (z) any Indebtedness that is incurred in violation of this Indenture.
"STANDARD AND POOR'S" means Standard and Poor's Rating Group, a division of
McGraw Hill Inc., and any successor to the rating agency business thereof.
"STATED MATURITY" means October 1, 2006.
"SUBSIDIARY," with respect to any Person, means (i) any corporation, a
majority of whose voting stock (defined as any class or classes of capital stock
having voting power under ordinary circumstances to elect a majority of the
Board of Directors) is owned, directly or indirectly, by the Company, by one or
more of its Subsidiaries, or by the Company and one or more of its Subsidiaries
and (ii) any other Person (other than a corporation) in which the Company, one
or more of its Subsidiaries, or the Company and one or more Subsidiaries,
directly or indirectly, has at least a majority ownership interest entitled to
vote in the election of directors, managers or trustees thereof. As of the Issue
Date, the Company as no Subsidiaries.
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C. Section77aaa-77bbbb)
as in effect on the date on which this Indenture is qualified under the TIA,
except as provided in Section 9.03 hereof.
"TOTAL GROSS ASSETS" means, as of any date of determination, the total
assets of the Company plus total accumulated depreciation on Coinstar units,
computer and information systems and office equipment, less (i) all goodwill,
trade names, patents and any other intangibles and (ii) any assets of, or Equity
Interests in, any Subsidiary of the Company or any Investment in any other
Person, all as would be set forth on a balance sheet of the Company on an
unconsolidated basis as of such date of determination in accordance with GAAP;
provided, however, that Total Gross Assets shall not include (x) for any date of
determination prior to January 1, 1999, any of the Company's Coinstar units
which the Company acquired, or any capital expenditure invested in Coinstar
units expended or incurred, more than five years prior to the date of
determination; (y) for any date of determination from and after January 1, 1999,
any of the Company's Coinstar units that the Company acquired, or any capital
expenditure invested in Coinstar units expended or incurred, more than seven
years prior to the date of determination; and (z) any Coinstar unit (or any
portion of the revenue from any such unit) that has been (1) pledged or
encumbered to secure obligations of any Person other than the Company or (2)
leased, assigned or is otherwise subject to a transaction such that as a result
of such lease, assignment or other transaction any other Person shall be
entitled on a non-contingent basis to receive directly all or a portion of the
revenue generated by such Coinstar unit.
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"TRUSTEE" means the party named as such above until a successor replaces it
in accordance with the applicable provisions of this Indenture and thereafter
means the successor serving hereunder.
"UNRESTRICTED SUBSIDIARY" means any Subsidiary of the Company that is
designated by the Board of Directors as an Unrestricted Subsidiary pursuant to a
resolution of the Board of Directors, but only to the extent that such
Subsidiary: (i) has no Indebtedness other than Non-Recourse Debt; (ii) is not
party to any agreement, contract, arrangement or understanding with the Company
or any Restricted Subsidiary of the Company unless the terms of any such
agreement, contract, arrangement or understanding comply with the provisions of
Section 4.11 of the Indenture; (iii) is a Person with respect to which neither
the Company nor any of its Restricted Subsidiaries has any direct or indirect
obligation (a) to subscribe for additional Equity Interests or (b) to maintain
or preserve such Person's financial condition or to cause such Person to achieve
any specified levels of operating results; (iv) has not Guaranteed or otherwise
directly or indirectly provided credit support for any Indebtedness of the
Company or any of its Restricted Subsidiaries; and (v) in the case of a
Subsidiary that is a corporation, such Subsidiary has at least one director on
its board of directors that is not a director or Executive Officer of the
Company or any of its Restricted Subsidiaries. Any such designation by the Board
of Directors shall be evidenced to the Trustee by filing with the Trustee a
certified copy of the resolution of the Board of Directors giving effect to such
designation and an Officers' Certificate certifying that such designation
complied with the foregoing conditions and was permitted by Section 4.15 of the
Indenture. If, at any time, any Unrestricted Subsidiary would fail to meet the
foregoing requirements as an Unrestricted Subsidiary, it shall thereafter be
deemed a Restricted Subsidiary for all purposes of this Indenture, including
that any Indebtedness of such Subsidiary shall be deemed to be incurred by a
Restricted Subsidiary of the Company as of such date (and, if such Indebtedness
is not permitted to be incurred as of such date under Section 4.09 of the
Indenture, the Company shall be in default of such Section).
"VOTING STOCK" means, with respect to any specified Person, Capital Stock
with voting power, under ordinary circumstances and without regard to the
occurrence of any contingency, to elect the directors or other managers or
trustees of such Person.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
DESCRIPTION OF NEW NOTES
The terms of the New Notes will be identical in all material respects to
those of the Old Notes, except that (i) the Old Notes have not been registered
under the Securities Act, are subject to certain restrictions on transfer and
are entitled to certain registration rights under the Registration Rights
Agreement (which rights will terminate upon consummation of the Exchange Offer,
except to the extent that the Initial Purchaser may have certain registration
rights under limited circumstances) and (ii) the Old Notes provide for an
increase in the interest rate thereon pursuant to the Registration Rights
Agreement. In that regard, the Old Notes provide that, in the event that the
Exchange Offer is not consummated or a shelf registration statement (the "Shelf
Registration Statement") with respect to the resale of the Old Notes is not
declared effective on or prior to October 1, 1999, the interest rate on the Old
Notes will increase by 0.50% per annum following October 1, 1999; provided,
however, that if the Company requests Holders of Old Notes to provide certain
information called for by the Registration Rights Agreement for inclusion in any
such Shelf Registration Statement, then the Old Notes owned by Holders who do
not deliver such information to the Company or who do not provide comments on
the Shelf Registration Statement when required pursuant to the Registration
Rights Agreement will not be entitled to any such increase in the interest rate
pursuant to the Registration Rights Agreement. The New Notes are not entitled to
any such
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increase in the interest rate thereon. Holders of Old Notes should review the
information set forth under "Summary--Certain Consequences of a Failure to
Exchange Old Notes" and "Summary--Terms of New Notes."
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following summary describes certain U.S. Federal income tax
considerations to holders of the New Notes who are subject to U.S. net income
tax with respect to the New Notes ("U.S. persons") and who will hold the New
Notes as capital assets. There can be no assurance that the U.S. Internal
Revenue Service (the "IRS") will take a similar view of the purchase, ownership
or disposition of the New Notes. This discussion is based upon the provisions of
the Internal Revenue Code of 1986, as amended, and regulations, rulings and
judicial decisions now in effect, all of which are subject to change. It does
not include any description of the tax laws of any state, local or foreign
governments or any estate or gift tax considerations that may be applicable to
the New Notes or holders thereof, it does not discuss all aspects of U.S.
Federal income taxation that may be relevant to a particular investor in light
of its particular investment circumstances or to certain types of investors
subject to special treatment under the U.S. Federal income tax laws (for
example, dealers in securities or currencies, S corporations, life insurance
companies, tax-exempt organizations, taxpayers subject to the alternative
minimum tax and non-U.S. persons) and also does not discuss the treatment of New
Notes held as a hedge against currency risks or as part of a straddle with other
investments or as part of a "synthetic security" or other integrated investment
(including a "conversion transaction") comprised of a New Note and one or more
other investments, or situations in which the functional currency of the holders
is not the U.S. dollar.
Holders of Old Notes contemplating acceptance of the Exchange Offer should
consult their own tax advisors with respect to their particular circumstances
and with respect to the effects of state, local or foreign tax laws to which
they may be subject.
EXCHANGE OF NOTES
The exchange of the Old Notes for the New Notes should not be a taxable
event to Holders for federal income tax purposes. The exchange of the Old Notes
for the New Notes pursuant to the Exchange Offer should not be treated as an
"exchange" for federal income tax purposes because the New Notes should not be
considered to differ materially in kind or extent from the Old Notes. If,
however, the exchange of the Old Notes for the New Notes were treated as an
exchange for federal income tax purposes, such exchange should constitute a
recapitalization for federal income tax purposes. Accordingly, a holder should
have the same adjusted basis and holding period in the New Notes as it had in
the Old Notes immediately before the exchange.
ORIGINAL ISSUE DISCOUNT
The New Notes will be issued with a deep original issue discount, and each
Holder will be required to include in its gross income original issue discount
income as described below.
Original issue discount on each New Note will equal the excess of the stated
redemption price at maturity of the New Note over the Holder's adjusted tax
basis in the New Note. A Holder of a New Note must include original issue
discount in income as ordinary interest income as it accrues on the basis of a
constant yield to maturity. Generally, original issue discount must be included
in income in advance of the receipt of cash representing such income.
In general, a Holder's adjusted tax basis in the New Note will equal the
Holder's adjusted basis for the Holder's Old Note increased by any original
issue discount or market discount previously included in income by such Holder
with respect to such New Note and decreased by any payments received thereon.
The stated redemption price at maturity will include all payments required to be
made on the New Notes,
104
<PAGE>
as the case may be, whether denominated as principal or interest (other than
payments subject to remote or incidental contingencies).
The Holder of a New Note must include in gross income, for all days during
its taxable year in which it holds such New Note, the sum of the "daily
portions" of original issue discount. The "daily portions" are determined by
allocating to each day in an "accrual period" (generally the period between
interest payments or compounding dates) a PRO RATA portion of the original issue
discount that accrued during such accrual period. The amount of original issue
discount that will accrue during an accrual period is the product of the
"adjusted issue price" of the New Note at the beginning of the accrual period
and its yield to maturity (determined on the basis of compounding at the end of
each accrual period and properly adjusted for the length of the particular
accrual period). The adjusted issue price of a New Note is the sum of the issue
price of the Old Note exchanged for the New Note plus prior accruals of original
issue discount, reduced by the total payments made with respect to such New Note
and Old Note in all prior periods and on the first day of the current accrual
period. Each payment on a New Note will be treated as a payment of original
issue discount to the extent that original issue discount has accrued as of the
date such payment is due and has not been allocated to prior payments, and any
excess will be treated as a payment of principal.
ELECTION TO TREAT ALL INTEREST AS ORIGINAL ISSUE DISCOUNT
A Holder may elect to treat all "interest" on any New Note as original issue
discount and calculate the amount includable in gross income under the method
described above. For this purpose, "interest" includes stated and unstated
interest, original issue discount, acquisition discount, market discount and DE
MINIMIS market discount, as adjusted by any acquisition premium.
ACQUISITION PREMIUM
A Holder that purchases a New Note at a purchase price greater than the
adjusted issue price will be considered to have purchased the New Note at an
"acquisition premium" equal to such excess. A Holder will reduce the original
issue discount otherwise includable for each accrual period by an amount equal
to the product of (i) the amount of such original issue discount otherwise
includable for such period, and (ii) a fraction, the numerator of which is the
acquisition premium and the denominator of which is the excess of the amounts
payable on the New Note after the purchase date over the adjusted issue price.
MARKET DISCOUNT
A Holder that purchases a New Note at a purchase price less than the
adjusted issue price will be considered to have purchased the New Note at a
"market discount" equal to such difference. Market discount, however, will be
considered to be zero if less than 0.25% of the stated redemption price at
maturity of a Note multiplied by the number of complete years to maturity
remaining after the date of its purchase.
Any principal payment or gain realized by a Holder on disposition or
retirement of a New Note will be treated as ordinary income to the extent that
there is accrued market discount on the New Note. Unless a Holder elects to
accrue under a constant-interest method, accrued market discount is the total
market discount multiplied by a fraction, the numerator of which is the number
of days the Holder has held the obligation and the denominator of which is the
number of days from the date the Holder acquired the obligation until its
maturity. A Holder may be required to defer a portion of its interest deductions
for the taxable year attributable to any indebtedness incurred or continued to
purchase or carry a New Note purchased with market discount. Any such deferred
interest expenses would not exceed the market discount that accrues during such
taxable year and is, in general, allowed as a deduction not later than the year
in which such market discount is includable in income. If the Holder elects to
include market discount
105
<PAGE>
in income currently as it accrues on all market discount instruments acquired by
the Holder in that taxable year or thereafter, the interest deferral rule
described above will not apply.
SALE, EXCHANGE OR RETIREMENT OF THE NOTES
Upon the sale, exchange or retirement of a New Note, the Holder generally
will recognize gain or loss equal to the difference between the amount realized
on the sale, exchange or retirement (which does not include any amount
attributable to accrued but unpaid interest) and the Holder's adjusted tax basis
in the New Note.
Gain or loss realized on the sale, exchange or retirement of a New Note will
be capital (subject to the market discount rules, discussed above). The
deductibility of capital losses is subject to limitations. A Holder's capital
gain holding period for a New Note will generally include the period of time
such Holder held the Old Note exchanged for the New Note. In the case of
individuals, capital gain will be long-term if the New Note has been held for
more than eighteen months (and taxed at a maximum rate of 20%), will be mid-term
capital gain if held for more than one year but not more than eighteen months
(and taxed at a maximum rate of 28%) and otherwise will be short-term (and taxed
at ordinary income rates).
BACKUP WITHHOLDING
A holder of a New Note may be subject to backup withholding at the rate of
31% with respect to interest paid on the New Note and proceeds from the sale,
exchange, redemption or retirement of the New Note, unless such holder (a) is a
corporation or comes within certain other exempt categories and, when required,
demonstrates that fact or (b) provides a correct taxpayer identification number,
certifies as to no loss of exemption from backup withholding and otherwise
complies with applicable requirements of the backup withholding rules. A holder
of a New Note who does not provide the Company with its correct taxpayer
identification number may be subject to penalties imposed by the IRS.
A holder of a New Note who is not a U.S. person will generally be exempt
from backup withholding and information reporting requirements, but may be
required to comply with certification and identification procedures in order to
obtain an exemption from backup withholding and information reporting.
Any amount paid as backup withholding will be creditable against the
holder's U.S. Federal income tax liability.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account in connection
with the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by Participating
Broker-Dealers during the period referred to below in connection with resales of
the New Notes received in exchange for Old Notes if such Old Notes were acquired
by such Participating Broker-Dealers for their own accounts as a result of
market making activities or other trading activities. The Company has agreed
that this Prospectus, as it may be amended or supplemented from time to time,
may be used by a Participating Broker-Dealer in connection with resales of such
New Notes for a period ending 90 days after the Expiration Date (subject to
extension under certain limited circumstances described herein) or, if earlier,
when all such New Notes have been disposed of by such Participating
Broker-Dealer. See "The Exchange Offer--Terms of the Exchange Offer."
The Company will not receive any cash proceeds from the issuance of the New
Notes offered hereby. New Notes received by broker-dealers for their own
accounts in connection with the Exchange Offer may be sold from time to time in
one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the New Notes or a combination
of such methods of resale, at market prices prevailing at the time of resale, at
prices related to such prevailing market prices or at
106
<PAGE>
negotiated prices. Any such resale may be made directly to purchasers or to or
through brokers or dealers who may receive compensation in the form of
commissions or concessions from any such broker-dealer and/or the purchasers of
any such New Notes. Any broker-dealer that resells New Notes that were received
by it for its own account in connection with the Exchange Offer and any broker
or dealer that participates in a distribution of such New Notes may be deemed to
be an "underwriter" within the meaning of the Securities Act, and any profit on
any such resale of New Notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the Securities
Act. The Letter of Transmittal states that by acknowledging that it will deliver
and by delivering a prospectus, a broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities Act.
LEGAL MATTERS
The validity of the New Notes offered hereby will be passed upon for the
Company by Cooley Godward LLP, Menlo Park, California. Certain partners and
associates of Cooley Godward LLP beneficially own approximately 35,020 shares of
the Company's Common Stock.
EXPERTS
The financial statements of Coinstar, Inc. as of December 31, 1996 and 1995,
and for each of the years in the three year period ended December 31, 1996
included in this Prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein and are
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
107
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Interim Financial Statements (Unaudited):
Balance Sheets as of June 30, 1997 and December 31, 1996................................................... F-2
Statements of Operations for the Three and Six Months Ended June 30, 1997 and 1996......................... F-3
Statement of Stockholders' Equity (Deficit) for the Six Months Ended June 30, 1997......................... F-4
Statements of Cash Flows for the Six Months Ended June 30, 1997 and 1996................................... F-5
Notes to Financial Statements for the Three and Six Months Ended June 30, 1997 and 1996.................... F-6
Audited Financial Statements:
Independent Auditors' Report............................................................................... F-8
Balance Sheets as of December 31, 1996 and 1995............................................................ F-9
Statements of Operations for the Years Ended December 31, 1996, 1995 and 1994.............................. F-10
Statements of Stockholders' Equity (Deficit)
for the Years Ended December 31, 1996, 1995 and 1994..................................................... F-11
Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994.............................. F-12
Notes to Financial Statements for the Years Ended December 31, 1996, 1995 and 1994......................... F-13
</TABLE>
F-1
<PAGE>
COINSTAR, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
DECEMBER 31, -------------------------
1996 1997
------------ ----------- 1997
------------
(PRO FORMA)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................................ 23,867,763 16,271,057 16,271,057
Short-term investments available for sale................................ 32,441,912 23,080,853 23,080,853
Prepaid expenses and other current assets................................ 865,000 1,837,032 1,837,032
------------ ----------- ------------
Total current assets................................................... 57,174,675 41,188,942 41,188,942
PROPERTY AND EQUIPMENT, net................................................ 22,459,254 34,568,664 34,568,664
------------ ----------- ------------
OTHER ASSETS............................................................... 2,897,177 3,345,379 3,345,379
------------ ----------- ------------
TOTAL.................................................................. 82,531,106 79,102,985 79,102,985
------------ ----------- ------------
------------ ----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable......................................................... 1,779,702 2,843,092 2,843,092
Accrued liabilities...................................................... 7,690,288 14,132,412 14,132,412
Current portion of long-term debt and capital lease obligations.......... 910,535 1,546,649 1,546,649
------------ ----------- ------------
Total current liabilities.............................................. 10,380,525 18,522,153 18,522,153
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS............................... 69,154,936 73,082,574 73,082,574
------------ ----------- ------------
MANDATORILY REDEEMABLE PREFERRED STOCK..................................... 24,972,084 24,972,084 --
COMMITMENTS AND CONTINGENCIES:
TOTAL STOCKHOLDERS' EQUITY (DEFICIT)....................................... (21,976,439) (37,473,826) (12,501,742)
------------ ----------- ------------
TOTAL................................................................ 82,531,106 79,102,985 79,102,985
------------ ----------- ------------
------------ ----------- ------------
</TABLE>
See notes to financial statements
F-2
<PAGE>
COINSTAR, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, THREE MONTHS ENDED JUNE 30,
----------------------------- ----------------------------
1996 1997 1996 1997
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUE............................................. $ 2,133,643 $ 9,288,582 $ 1,387,982 $ 5,293,558
EXPENSES:
Direct operating.................................. 2,208,420 7,415,653 1,320,530 3,965,509
Regional sales and marketing...................... 614,756 1,601,824 406,602 971,916
Product research and development.................. 1,422,337 3,080,297 761,797 1,639,655
Selling, general, and administrative.............. 1,939,614 5,157,287 1,068,012 2,629,624
Depreciation and amortization..................... 1,294,977 3,842,538 795,793 2,158,210
------------- -------------- ------------- -------------
Loss from operations.............................. (5,346,461) (11,809,017) (2,964,752) (6,071,356)
OTHER INCOME (EXPENSE):
Interest income................................... 254,553 1,019,707 94,592 439,669
Interest expense.................................. (254,936) (4,758,676) (167,573) (2,414,608)
------------- -------------- ------------- -------------
NET LOSS............................................ $ (5,346,844) $ (15,547,986) $ (3,037,733) $ (8,046,295)
------------- -------------- ------------- -------------
------------- -------------- ------------- -------------
UNAUDITED PRO FORMA INFORMATION (Note 1):
Pro forma net loss per share........................ $ (0.51) $ (1.49) $ (0.29) $ (0.77)
------------- -------------- ------------- -------------
Pro forma weighted average shares outstanding..... 10,459,883 10,459,883 10,459,883 10,459,883
------------- -------------- ------------- -------------
------------- -------------- ------------- -------------
</TABLE>
See notes to financial statements.
F-3
<PAGE>
COINSTAR, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
SERIES A SERIES B
COMMON STOCK PREFERRED STOCK PREFERRED STOCK CONTRIBUTED
-------------------- -------------------- --------------------- CAPITAL FOR ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT WARRANTS DEFICIT
--------- --------- --------- --------- --------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31,
1996.................... 793,059 $ 18,396 649,775 $ 649,775 895,506 $3,582,034 $2,621,160 $(28,847,804)
Exercise of stock
options................. 190,953 75,331 -- -- -- -- -- --
Unrealized loss on short-
term investments
available for sale...... -- -- -- -- -- -- -- (24,732)
Net loss.................. -- -- -- -- -- -- -- (15,547,986)
BALANCE, June 30, 1997.... 984,012 $ 93,727 649,775 $ 649,775 895,506 $3,582,034 $2,621,160 $(44,420,522)
--------- --------- --------- --------- --------- ---------- ----------- ------------
--------- --------- --------- --------- --------- ---------- ----------- ------------
<CAPTION>
TOTAL
------------
<S> <C>
BALANCE, December 31,
1996.................... $(21,976,439)
Exercise of stock
options................. 75,331
Unrealized loss on short-
term investments
available for sale...... (24,732)
Net loss.................. (15,547,986)
BALANCE, June 30, 1997.... $(37,473,826)
------------
------------
</TABLE>
See notes to financial statements.
F-4
<PAGE>
COINSTAR, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
------------------------------
JUNE 30, 1996 JUNE 30, 1997
-------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss........................................................................ $ (5,346,844) $ (15,547,986)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization................................................. 1,294,185 3,842,538
Debt discount amortization.................................................... 7,558 4,445,130
Accrued investment income..................................................... 21,195 60,091
Cash provided (used) by changes in operating assets and liabilities:
Prepaid expenses and other current assets................................... $ (131,146) $ (972,033)
Other assets................................................................ 9,034 (586,555)
Accounts payable............................................................ 966,662 1,063,389
Accrued liabilities......................................................... 2,781,247 6,442,123
-------------- --------------
Net cash provided (used) by operating activities................................ $ (398,109) $ (1,253,303)
INVESTING ACTIVITIES:
Purchase of short-term investments.............................................. -- $ (11,916,020)
Sale of short-term investments.................................................. -- 21,192,254
Purchase of fixed assets........................................................ $ (9,651,190) (15,392,219)
Payment of security deposit..................................................... (134,072) --
-------------- --------------
Net cash used by investing activities........................................... $ (9,785,262) $ (6,115,985)
FINANCING ACTIVITIES:
Repayment of equipment loans.................................................... $ (392,566) $ (302,749)
Proceeds from long-term debt.................................................... 3,547,823 --
Proceeds from Series D Warrants exercised....................................... 128,148 --
Proceeds from exercise of stock options......................................... 63,520 75,331
-------------- --------------
Net cash provided (used) by financing activities................................ $ 3,346,925 $ (227,418)
-------------- --------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................................. $ (6,836,446) $ (7,596,706)
CASH AND CASH EQUIVALENTS:
Beginning of period............................................................. $ 14,119,532 $ 23,867,763
-------------- --------------
End of period................................................................... $ 7,283,086 $ 16,271,057
-------------- --------------
-------------- --------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest........................................ $ 252,131 $ 344,395
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
Purchase of equipment financed by capital lease obligation...................... $ 140,792 $ 421,376
</TABLE>
See notes to financial statements.
F-5
<PAGE>
COINSTAR, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS
ENDED JUNE 30, 1996 AND 1997
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FINANCIAL STATEMENT PREPARATION: The financial statements as of and for the
three and six months ended June 30, 1997 and 1996 are unaudited, but in the
opinion of management include all adjustments (consisting of normal recurring
adjustments) necessary to present fairly the financial position and results of
operations and cash flows for the periods presented.
These statements have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission (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 rules and regulations. These financial statements should be
read in conjunction with management's discussion and analysis and with the
Company's audited financial statements and the accompanying notes for the years
ended December 31, 1996, 1995 and 1994. The results of operations for the three
and six months ended June 30, 1997, are not necessarily indicative of the
results to be expected for the entire year.
UNAUDITED PRO FORMA BALANCE SHEET: The accompanying pro forma balance sheet
as of June 30, 1997, which is unaudited, is presented as if the conversion of
preferred stock into common stock occurred on such date, and excludes warrants
to purchase 2,693,420 shares of common stock at a weighted average exercise
price of $2.96 per share which expire upon the July 9, 1997 closing of the
Company's initial public offering or 90 days thereafter. Such warrants may be
exercised for cash or on a cashless basis at the option of the warrant holder.
UNAUDITED PRO FORMA NET LOSS PER SHARE: Pro forma net loss per share is
based on the weighted average number of shares outstanding during the period
after consideration of the dilutive effect, if any, of options and warrants
issued and outstanding, and after giving pro forma effect to the conversion of
the Company's outstanding preferred stock, as described above, as if such
conversion had occurred at the beginning of the periods presented. Pursuant to
rules of the Securities Exchange Commission, all common stock warrants, and
options issued by the Company at a price less than the initial public offering
price during the 12 months preceding the closing date (using the treasury stock
method until shares are issued) have been included in the calculation of common
and common equivalent shares outstanding for the periods presented, regardless
of their dilutive effect.
RECLASSIFICATIONS: Certain reclassifications have been made to the 1996
financial statements to conform to the presentation used in 1997.
NEW ACCOUNTING PRONOUNCEMENTS: Statement of Financial Accounting Standards
(SFAS) No. 128, "EARNINGS PER SHARE," was recently issued and is effective for
the Company's fiscal year ending December 31, 1997. This Statement requires a
change in the presentation of earnings per share. Early adoption of this
statement is not permitted. Management believes that the impact of the adoption
of this Statement on the financial statements, taken as a whole, will not be
material.
SFAS No. 130, "REPORTING COMPREHENSIVE INCOME" and SFAS No. 131,
"DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION," were also
recently issued and are effective for the Company's year ending December 31,
1998. The Company is currently evaluating the effects of these Standards,
however, management believes the impact of adoption will not be material to the
financial statements, taken as a whole.
F-6
<PAGE>
COINSTAR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: INITIAL PUBLIC OFFERING
In July 1997, the Company completed its Initial Public Offering of 3,000,000
shares of Common Stock at a purchase price of $10.50 per share for net proceeds
of approximately $28.5 million (including approximately $1.0 million of
estimated expenses.) The net proceeds received by the Company will be used (i)
predominantly to fund capital expenditures and working capital in connection
with the continued expansion of the Coinstar network, (ii) for product research
and development, and deployment of enhancements to the Coinstar unit and the
coin processing network and (iii) for general corporate purposes.
Upon the July 9, 1997 closing of the offering, the preferred stock
outstanding at June 30, 1997 was converted into common stock and certain common
and preferred stock warrants are expected to be exercised.
NOTE 3: EXCHANGE OFFER
On October 22, 1996, the Company completed a private placement offering of
95,000 units, each of which consisted of a $1,000 principal amount of 13% senior
subordinated discount notes, due at maturity in 2006, and warrants to purchase
seven shares of common stock of the Company, at an exercise price of $.01 per
warrant share, subject to adjustment under certain circumstances.
Pursuant to a related Registration Rights Agreement between the Company and
the initial purchaser of the notes, the Company was required to agree to offer
to exchange the notes (not registered under the Securities Act) for otherwise
substantially identical notes registered under the Securities Act (the "Exchange
Act"). The Registration Rights Agreement also identified certain events,
including the Company's initial public offering, that require the Company to
consummate such Exchange Offer.
F-7
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Coinstar, Inc.
Bellevue, Washington
We have audited the accompanying balance sheets of Coinstar, Inc. (the
"Company") as of December 31, 1995 and 1996, and the related statements of
operations, stockholders' equity (deficit), and cash flows for each of the three
years in the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 1995 and 1996,
and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
/s/ DELOITTE & TOUCHE LLP
Seattle, Washington
February 14, 1997
(May 28, 1997, as to Notes 1 and 9
and June 27, 1997 as to Notes 2 and 11)
F-8
<PAGE>
COINSTAR, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1996
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................................ $14,119,532 $23,867,763
Short-term investments available for sale............................................ -- 32,441,912
Prepaid expenses and other current assets............................................ 251,516 865,000
----------- -----------
Total current assets............................................................. 14,371,048 57,174,675
PROPERTY AND EQUIPMENT:
Coinstar units....................................................................... 6,200,246 24,843,112
Computers............................................................................ 396,131 1,653,768
Office furniture and equipment....................................................... 135,242 413,317
Leasehold improvements............................................................... -- 29,953
Coinstar components.................................................................. -- 840,167
----------- -----------
6,731,619 27,780,317
Accumulated depreciation............................................................. (1,582,842) (5,321,063)
----------- -----------
5,148,777 22,459,254
OTHER ASSETS, net of accumulated amortization of $16,680, $78,497 and $147,672......... 81,044 2,897,177
----------- -----------
TOTAL............................................................................ $19,600,869 $82,531,106
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable..................................................................... $ 910,674 $ 1,779,702
Accrued liabilities.................................................................. 955,910 7,690,288
Current portion of long-term debt and capital lease obligations...................... 593,208 910,535
----------- -----------
Total current liabilities........................................................ 2,459,792 10,380,525
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, less current portion and net of
unamortized discounts of $29,322, $28,831,550 and $26,661,797........................ 1,064,308 69,154,936
----------- -----------
Total liabilities................................................................ 3,524,100 79,535,461
MANDATORY REDEEMABLE PREFERRED STOCK:
Preferred stock, $.001 par value--Authorized, 16,000,000 shares: Series
C--Designated, 6,100,000 shares; issued and outstanding, 4,567,016, 4,659,324 and
4,659,324 shares (preferred in liquidation, $15,142,803), pro forma none
outstanding........................................................................ 14,094,787 14,509,472
Series D--Designated, 3,500,000 shares; issued and outstanding 2,500,000, 2,556,471
and 2,556,471 shares (preference in liquidation, $10,225,884), pro forma none
outstanding....................................................................... 9,452,977 9,862,612
Series E-1--Designated, issued, and outstanding, 100,000 shares (preference in
liquidation, $600,000), pro forma none outstanding................................ -- 600,000
Series E-2--Designated, 350,000 shares; none issued and outstanding................ -- --
Series E-3--Designated, 550,000 shares; none issued and outstanding................ -- --
----------- -----------
Total mandatorily redeemable preferred stock..................................... 23,547,764 24,972,084
COMMITMENTS AND CONTINGENCIES (Notes 5, 6 and 11)
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.001 par value--Authorized, 16,000,000 shares Series A--Designated,
issued, and outstanding, 649,775 shares (preference in liquidation, $649,775), pro
forma none outstanding............................................................. 649,775 649,775
Series B--Designated, 974,258 shares; issued and outstanding, 895,506 shares
(preference in liquidation, $3,582,034), pro forma none outstanding................ 3,582,034 3,582,034
Common stock, $.001 par value--Authorized, 22,000,000 shares; issued and outstanding,
779,559, 793,059 and 984,012 shares; pro forma, 9,972,976 shares................... 14,346 18,396
Contributed capital for warrants..................................................... 1,163,319 2,621,160
Accumulated deficit.................................................................. (12,880,469) (28,847,804)
----------- -----------
Total stockholders' equity (deficit)............................................. (7,470,995) (21,976,439)
----------- -----------
TOTAL.......................................................................... $19,600,869 $82,531,106
----------- -----------
----------- -----------
</TABLE>
See notes to financial statements
F-9
<PAGE>
COINSTAR, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1994 1995 1996
------------- ------------- --------------
<S> <C> <C> <C>
REVENUE............................................................. $ 324,810 $ 1,062,865 $ 8,312,080
EXPENSES:
Direct operating.................................................. 488,467 1,335,721 7,258,406
Regional sales and marketing...................................... 85,691 349,131 1,504,633
Product research and development.................................. 1,647,923 1,830,153 3,969,185
Selling, general, and administrative.............................. 1,716,407 2,789,538 5,351,476
Depreciation and amortization..................................... 439,378 1,117,655 4,133,904
------------- ------------- --------------
Loss from operations.............................................. (4,053,056) (6,359,333) (13,905,524)
OTHER INCOME (EXPENSE):
Interest income................................................... 34,364 398,305 848,194
Interest expense.................................................. (297,758) (207,687) (2,661,374)
------------- ------------- --------------
Net loss before extraordinary item.............................. (4,316,450) (6,168,715) (15,718,704)
EXTRAORDINARY ITEM--
Loss related to early retirement of debt.......................... -- -- 248,631
------------- ------------- --------------
NET LOSS............................................................ $ (4,316,450) $ (6,168,715) $ (15,967,335)
------------- ------------- --------------
------------- ------------- --------------
UNAUDITED PRO FORMA INFORMATION (Note 2):
Pro forma net loss per share before extraordinary item............ $ (1.47)
Pro forma extraordinary item per share............................ (0.02)
--------------
Pro forma net loss per share...................................... $ (1.49)
--------------
--------------
Pro forma weighted average shares outstanding..................... 10,714,705
--------------
--------------
</TABLE>
See notes to financial statements.
F-10
<PAGE>
COINSTAR, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
SERIES A SERIES B
COMMON STOCK PREFERRED STOCK PREFERRED STOCK CONTRIBUTED
---------------------- -------------------- -------------------- CAPITAL FOR ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT WARRANTS DEFICIT
--------- ----------- --------- --------- --------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1994...... 726,225 $ 7,262 649,775 $ 649,775 895,506 $3,582,034 $ -- $(2,395,304)
Contributed capital for
warrants.................... -- -- -- -- -- -- 272,678 --
Net loss...................... -- -- -- -- -- -- -- (4,316,450)
--------- ----------- --------- --------- --------- --------- ----------- ------------
BALANCE, December 31, 1994.... 726,225 7,262 649,775 649,775 895,506 3,582,034 272,678 (6,711,754)
Exercise of stock options..... 53,334 7,084 -- -- -- -- -- --
Contributed capital for
warrants.................... -- -- -- -- -- -- 890,641 --
Net Loss...................... -- -- -- -- -- -- -- (6,168,715)
--------- ----------- --------- --------- --------- --------- ----------- ------------
BALANCE, December 31, 1995.... 779,559 14,346 649,775 649,775 895,506 3,582,034 1,163,319 (12,880,469)
Exercise of stock options..... 13,500 4,050 -- -- -- -- -- --
Exercise of Series C Preferred
stock warrants.............. -- -- -- -- -- -- (45,453) --
Exercise of Series D Preferred
stock warrants.............. -- -- -- -- -- -- (34,329) --
Contributed capital for
warrants.................... -- -- -- -- -- -- 1,537,623 --
Net Loss...................... -- -- -- -- -- -- -- (15,967,335)
--------- ----------- --------- --------- --------- --------- ----------- ------------
BALANCE, December 31, 1996.... 793,059 $ 18,396 649,775 $ 649,775 895,506 $3,582,034 $2,621,160 ($28,847,804)
Exercise of stock options..... 190,953 75,331 -- -- -- -- -- --
Unrealized loss on short-term
investments available for
sale........................ -- -- -- -- -- -- -- (46,228)
Net loss...................... -- -- -- -- -- -- -- (7,501,691)
--------- ----------- --------- --------- --------- --------- ----------- ------------
BALANCE, March 31, 1997....... 984,012 $ 93,727 649,775 $ 649,775 895,506 $3,582,034 $2,621,160 ($36,395,723)
--------- ----------- --------- --------- --------- --------- ----------- ------------
--------- ----------- --------- --------- --------- --------- ----------- ------------
<CAPTION>
TOTAL
-----------
<S> <C>
BALANCE, January 1, 1994...... $ 1,843,767
Contributed capital for
warrants.................... 272,678
Net loss...................... (4,316,450)
-----------
BALANCE, December 31, 1994.... (2,200,005)
Exercise of stock options..... 7,084
Contributed capital for
warrants.................... 890,641
Net Loss...................... (6,168,715)
-----------
BALANCE, December 31, 1995.... (7,470,995)
Exercise of stock options..... 4,050
Exercise of Series C Preferred
stock warrants.............. (45,453)
Exercise of Series D Preferred
stock warrants.............. (34,329)
Contributed capital for
warrants.................... 1,537,623
Net Loss...................... (15,967,335)
-----------
BALANCE, December 31, 1996.... $(21,976,439)
Exercise of stock options..... 75,331
Unrealized loss on short-term
investments available for
sale........................ (46,228)
Net loss...................... (7,501,691)
-----------
BALANCE, March 31, 1997....... $(29,449,027)
-----------
-----------
</TABLE>
See notes to financial statements.
F-11
<PAGE>
COINSTAR, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1994 1995 1996
------------- ------------- --------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss......................................................... $ (4,316,450) $ (6,168,715) $ (15,967,335)
Adjusted to reconcile net loss to net cash used by operating
activities:
Depreciation and amortization.................................. 439,378 1,117,655 4,133,904
Debt discount amortization..................................... 211,757 88,545 1,819,457
Accrued investment income...................................... -- -- (263,063)
Cash provided (used) by changes in operating assets and
liabilities:
Prepaid expenses and other current assets.................... (167,365) (28,956) (613,494)
Other assets................................................. (31,384) (867) (64,803)
Accounts payable............................................. 916,637 (205,791) 869,029
Accrued liabilities.......................................... 314,445 670,839 6,734,378
------------- ------------- --------------
Net cash provided(used) by operating activities.................. (2,632,982) (4,527,290) (3,351,917)
INVESTING ACTIVITIES:
Purchase of short-term investments............................... -- -- (32,245,346)
Sale of short-term investments................................... -- -- --
Purchase of fixed assets......................................... (2,162,585) (3,823,307) (20,819,556)
Payment of security deposit...................................... -- (33,975) (98,791)
------------- ------------- --------------
Net cash used by investing activities............................ (2,162,585) (3,857,282) (53,163,693)
FINANCING ACTIVITIES:
Borrowings under short-term debt agreements...................... 4,448,424 100,000 --
Payments on short-term debt...................................... -- (460,000) --
Payments on long-term debt....................................... -- -- (6,462,640)
Borrowings under long-term debt obligations, net of financing
costs.......................................................... -- 1,549,055 69,840,270
Proceeds from sale of Series C Preferred stock................... -- 9,621,737 369,232
Proceeds from sale of Series D Preferred stock................... -- 9,452,977 375,306
Proceeds from sale of Series E Preferred stock................... -- -- 600,000
Proceeds from exercise of stock options.......................... -- 7,084 4,050
Contributed capital for warrants................................. 272,678 890,641 1,537,623
------------- ------------- --------------
Net cash provided (used) by financing activities................. 4,721,102 21,161,494 66,263,841
------------- ------------- --------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................... (74,465) 12,776,922 9,748,231
CASH AND CASH EQUIVALENTS:
Beginning of period.............................................. 1,417,075 1,342,610 14,119,532
------------- ------------- --------------
End of period.................................................... $ 1,342,610 $ 14,119,532 $ 23,867,763
------------- ------------- --------------
------------- ------------- --------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest......................... -- $ 119,142 $ 832,061
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
Conversion of debt and accrued interest to Series C Preferred
stock.......................................................... -- 4,473,050 --
Purchase of equipment financed by capital lease obligation....... -- 117,267 553,065
</TABLE>
See notes to financial statements.
F-12
<PAGE>
COINSTAR, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1: ORGANIZATION AND BUSINESS
GENERAL: Coinstar, Inc. (the "Company") develops, owns and operates a
network of automated, self-service coin counting and processing machines that
provide consumers with a convenient means to convert loose coins into cash. The
Company has increased its store installation base every year since inception,
and as of December 31, 1996, had an installed base of 1,501 units located in
supermarkets in 18 states.
INITIAL PUBLIC OFFERING: On March 28, 1997, the Company's Board of
Directors authorized the filing of a registration statement for the initial
underwritten public offering of its common stock. Upon the closing of the
offering, the presently outstanding preferred stock will convert into common
stock and certain common and preferred stock warrants are expected to be
exercised.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS: The Company considers all highly liquid
securities purchased with a maturity of three months or less to be cash
equivalents. Cash and cash equivalents includes funds in transit, which
represent amounts being processed by armored car carriers or residing in
Coinstar units, of $767,000 and $5.5 million at December 31, 1995 and 1996,
respectively.
SECURITIES AVAILABLE FOR SALE: The Company's investments are all classified
as available for sale and are stated at fair value in accordance with Statement
of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain
Investments in Debt and Equity Securities. This statement specifies that
available for sale securities are reported at fair value with changes in
unrealized gains and losses recorded directly to stockholders' equity. All of
the Company's investments have maturities of one year or less. Unrealized gains
or losses at December 31, 1996, were insignificant, and there were no realized
gains or losses on investments in 1996. Fair value is based upon quoted market
prices.
PROPERTY AND EQUIPMENT: Property and equipment are depreciated using the
following methods and useful lives:
<TABLE>
<CAPTION>
TYPE OF ASSET METHOD USEFUL LIFE
- --------------------------------------------------- -------------------------- ------------
<S> <C> <C>
Coinstar units purchased prior to January 1, 1996 150% declining balance 60 months
Coinstar units purchased subsequent to January 1,
1996 Straight-line 60 months
Installation costs for Coinstar units Straight-line 36 months
Furniture and equipment Straight-line 60 months
Computer equipment Straight-line 36 months
</TABLE>
In order to achieve volume discounts, the Company prepurchases certain
components of the Coinstar units. When a component is placed into service, the
cost is transferred to the appropriate Coinstar equipment account and
depreciated accordingly.
OTHER ASSETS: Other assets include deferred financing fees for the issuance
of the Company's 13% senior subordinated discount notes (the "Notes") and
amounts capitalized relating to organizational and patent costs. Such amounts
are amortized on a straight- line basis over ten and five years, respectively.
F-13
<PAGE>
COINSTAR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LONG-LIVED ASSETS: The Company periodically reviews long-lived assets,
including identified intangible assets, for impairment to determine whether any
events or circumstances indicate that the carrying amount of the assets may not
be recoverable. Such review includes estimating expected future cash flows.
During 1996, the Company discontinued its preprinted coupon distribution
business line. As a result, a provision for additional depreciation in the
amount of $329,096 was made to write down the recorded value of coupon
dispensing components of the Coinstar units, which are no longer being used in
operations, to their estimated fair value.
REVENUE RECOGNITION: Coin processing fees are recognized at the time the
customers' coins are counted by the Coinstar unit. Units in service with two
retail distribution partners accounted for approximately 14.9% and 12.7%,
respectively, of the Company's 1996 revenue. One member of the Company's Board
of Directors also serves on the Board of Directors of one of these retail
distribution partners.
FAIR VALUE OF FINANCIAL INSTRUMENTS: Financial instruments of the Company
for which the recorded amount approximates the fair value include cash
equivalents, short-term investments available for sale, accounts payable and
long-term debt. The interest rates on the loans and the Notes approximate
current market rates for such debt instruments with similar terms and
maturities.
STOCK-BASED COMPENSATION: The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees.
SFAS No. 123, Accounting for Stock-Based Compensation, has been adopted by the
Company for disclosure of certain additional information related to its stock
option plan.
USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS: Certain reclassifications have been made to the 1994 and
1995 financial statements to conform to the presentation used in 1996.
UNAUDITED PRO FORMA NET LOSS PER SHARE: Pro forma net loss per share is
based on the weighted average number of shares outstanding during the period
after consideration of the dilutive effect, if any, of options and warrants
issued and outstanding, and after giving pro forma effect to the conversion of
the Company's outstanding preferred stock, as described above, as if such
conversion had occurred at the beginning of the periods presented. Pursuant to
rules of the Securities and Exchange Commission, all common stock, warrants, and
options issued by the Company at a price less than the estimated initial public
offering price during the 12 months preceding the offering date (using the
treasury stock method until shares are issued) have been included in the
calculation of common and common equivalent shares outstanding for the periods
presented, regardless of their dilutive effect. Unaudited pro forma net loss per
share for the years ended December 31, 1994 and 1995 are not presented due to
the lack of comparability.
NEW ACCOUNTING PRONOUNCEMENT: Statement of Financial Accounting Standard
(SFAS) No. 128, Earnings per Share, was recently issued and is effective for the
Company's fiscal year ending December 31, 1997. This Statement requires a change
in the presentation of earnings per share. Early adoption of this
F-14
<PAGE>
COINSTAR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Statement is not permitted. Management believes that the impact of the adoption
of this Statement on the financial statements, taken as a whole, will not be
material.
NOTE 3: ACCRUED LIABILITIES
Accrued liabilities consisted of the following at the respective dates:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1996
---------- ------------
<S> <C> <C>
Funds in transit.................................................... $ 766,666 $ 5,490,260
Accrued liabilities to service contract providers................... -- 661,449
Accrued liabilities to manufacturers................................ -- 502,500
Other............................................................... 189,244 1,036,079
---------- ------------
$ 955,910 $ 7,690,288
---------- ------------
---------- ------------
</TABLE>
NOTE 4: LONG-TERM DEBT
Long-term debt, including current portion, consisted of the following at
December 31, 1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
------------ -------------
<S> <C> <C>
Senior subordinated discount notes, net of unamortized discount
of $28,783,847................................................. $ -- $ 66,216,153
Equipment loans, net of unamortized discount of $29,322 and
$47,703........................................................ 1,165,834 2,994,998
------------ -------------
1,165,834 69,211,151
Less current portion............................................. 552,773 553,500
------------ -------------
Long-term debt................................................... $ 613,061 $ 68,657,651
------------ -------------
------------ -------------
</TABLE>
BRIDGE LOANS: During 1994, the Company obtained unsecured bridge financing
to meet its working capital requirements for aggregate proceeds of $4,806,381.
These loans and accrued interest were either converted to Series C Preferred
stock or repaid on February 15, 1995. In connection with the bridge loans, the
Company also issued 460,504 detachable warrants to purchase shares of Series C
Preferred stock at exercise prices ranging from $3.00 to $4.00 to certain
holders of bridge loans. Certain of these bridge loans were from officers and
stockholders of the Company.
EQUIPMENT LOANS: During 1995, the Company entered into a loan agreement
which allowed for maximum borrowings of $2,000,000 to be drawn under specific
notes and was secured by certain Coinstar equipment. The Company executed three
such notes during 1995 for a total of $1,363,200. Two additional notes were
executed in 1996 for $603,750. All such notes had an effective annual interest
rate of 17.5% and were due in monthly installments through February 1999. The
notes were paid in full in the fourth quarter of 1996. In connection with these
notes, the Company issued 49,231 detachable warrants to purchase shares of
Series C Preferred stock at an exercise price of $3.25.
In January 1996, the Company entered into a loan agreement which allows for
maximum borrowings of $3,000,000 under specific notes secured by certain
Coinstar equipment. During the first six months of
F-15
<PAGE>
COINSTAR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4: LONG-TERM DEBT (CONTINUED)
1996, the Company drew the entire $3,000,000. This loan has an effective annual
interest rate of 16.6% and is due in monthly installments through October 1999.
In connection with this loan, the Company issued 93,750 detachable warrants to
purchase shares of Series D Preferred stock at an exercise price of $4.00.
In August 1996, the Company entered into an agreement with a commercial bank
which provides for a term loan allowing for maximum borrowings of $7,000,000 and
an operating line of credit allowing for maximum borrowings of $250,000. The
Company drew $4,473,306 on the term loan and repaid such amount in full during
1996. In connection with the agreement described above, the Company issued
51,176 detachable warrants to purchase shares of Series D Preferred stock at an
exercise price of $4.25 per share. The values of the warrants issued in
connection with the equipment loans described above are recorded as contributed
capital and represent discounts which are being amortized over the terms of such
loans. Such loans are secured by certain intangible assets of the Company.
EARLY RETIREMENT OF DEBT: In December 1996, the Company repaid an aggregate
of $5,838,050 in equipment loans prior to scheduled maturity. As a result of the
early repayment, the Company recognized an extraordinary loss of $248,631, which
included early termination penalties of $200,763 and write-off of related
discounts of $47,868.
SENIOR SUBORDINATED DISCOUNT NOTES: On October 22, 1996, the Company
completed a private placement offering of 95,000 units, each of which consisted
of a $1,000 principal amount of 13% senior subordinated discount notes, due at
maturity in 2006, and warrants to purchase seven shares of common stock of the
Company, at an exercise price of $.01 per warrant share, subject to adjustment
under certain circumstances. Imputed interest on the discount notes, as
represented by the original issue discount of $29,413,154, accrues until October
1999, at which time interest is payable in semi-annual installments through
maturity. If the Company does not complete an initial public offering with
proceeds of at least $25,000,000 before October 22, 1998, the holders are
entitled to additional warrants to purchase 285,000 shares of common stock.
The Notes are not redeemable at the option of the Company prior to October
1, 2001, other than from the proceeds of a public equity offering. The Notes are
redeemable at the option of the Company, in whole or in part, at any time on and
after October 1, 2001, at specified redemption prices for the relevant year of
redemption, plus accrued and unpaid interest to the date of redemption.
In the event of a change of control (as defined), each holder of the Notes
has the option to require the Company to repurchase such holder notes at 101% of
the accreted value thereof on the date of repurchase plus liquidated damages.
The Notes are subordinate in rank to all existing and future senior indebtedness
of the Company. The Indenture pursuant to which the Notes were issued contains
certain covenants that, among other things, limit the ability of the Company to
make dividend payments, make investments, repurchase outstanding shares of
stock, prepay other debt obligations, incur additional indebtedness, effect
asset dispositions, engage in sale and leaseback transactions, consolidate,
merge or sell all or substantially all of the Company's assets, engage in
transactions with affiliates, or effect certain transactions by its restricted
subsidiaries.
The Notes were recorded net of discount of $30,410,654, and the warrants
issued in connection with these notes were recorded as $997,500 of contributed
capital, each as determined by the relative fair values of the Notes and the
warrants as of the closing date. In addition, the Company has recorded deferred
financing fees related to the Notes of $2,714,354, which are being amortized
over the term of the Notes.
F-16
<PAGE>
COINSTAR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4: LONG-TERM DEBT (CONTINUED)
The discount attributable to the value of the warrants of $997,500 is also being
amortized over the term of the Notes.
PRINCIPAL PAYMENTS: Scheduled principal payments on long-term debt for the
next five years ending December 31, are as follows:
<TABLE>
<S> <C>
1997................................................... $ 553,500
1998................................................... 1,032,710
1999................................................... 1,456,491
2000................................................... --
2001................................................... --
Thereafter............................................. 95,000,000
----------
98,042,701
Less unamortized discount.............................. 28,832,550
----------
$69,211,151
</TABLE>
NOTE 5: COMMITMENTS
LEASE COMMITMENTS: The Company leases its current office space under an
operating lease which expires October 1997. In February 1997, the Company
entered into two lease agreements for additional office space commencing April
1, 1997, and September 1, 1997, and expiring on March 31, 2002, and August 31,
2004, respectively. The agreements require the Company to pay a portion of
operating costs and require monthly payments of $17,843 and $84,462,
respectively, which escalate annually based on a stated schedule.
The Company has entered into capital lease agreements to finance the
acquisition of certain Coinstar equipment and computer equipment. Title to such
assets is retained by the Company. These capital leases have terms of 36 months
at imputed interest rates which range from 18.6% to 24.9%. Assets under capital
lease obligations aggregated $1,178,937, net of $639,059 accumulated
amortization, at December 31, 1996.
F-17
<PAGE>
COINSTAR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5: COMMITMENTS (CONTINUED)
A summary of the Company's minimum lease obligations as of December 31,
1996, and the two lease agreements for additional office space signed in
February 1997, are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASE LEASE
------------ ------------
<S> <C> <C>
1997.............................................................. $ 499,809 $ 818,376
1998.............................................................. 391,673 1,240,050
1999.............................................................. 180,267 1,244,261
2000.............................................................. -- 1,272,393
2001.............................................................. -- 1,300,520
Thereafter........................................................ -- 3,014,786
------------ ------------
Total minimum lease commitments................................... 1,071,749 $ 8,890,386
------------
------------
Less amounts representing interest................................ 217,429
------------
Present value of lease obligations................................ 854,320
Less current portion.............................................. 357,035
Long-term portion................................................. $ 497,285
------------
------------
</TABLE>
Rental expense was $146,433, $298,931, and $359,842 for the years ended
December 31, 1994, 1995, and 1996, respectively.
SERVICE PROVIDERS: As of December 31, 1996, the Company had outstanding
service contracts with several service providers. These contracts generally
cover a one- to two-year period and have cancellation clauses ranging from 30 to
60 days.
PURCHASE COMMITMENTS: The Company has entered into certain purchase
agreements with suppliers of Coinstar units which require aggregate purchases in
the amount of $8,733,586 in 1997.
CONCENTRATION OF SUPPLIERS: The Company currently buys a significant
component of the Coinstar unit from a single supplier. Although there are a
limited number of suppliers for the component, management believes that other
suppliers could provide similar equipment which would require certain
modifications. Accordingly, a change in suppliers could cause a delay in
manufacturing and a possible slow-down of growth, which could materially
adversely affect future operating results.
NOTE 6: MANDATORILY REDEEMABLE PREFERRED STOCK
In conjunction with the issuances of Series C, D, and E Preferred stock, the
Company has provided for redemption features solely at the option of the holders
of such series of stock. These features require that the Company shall, at a
time no sooner than 2007 and provided the holders of more than 50% of the then
outstanding shares of Series C, D and E Preferred stock request in writing,
redeem the shares of Series C, D and E Preferred stock held by all holders
requesting such redemption at a price of $3.25, $4.00, and $6.00 per share,
respectively, plus an additional amount equal to 10% of such price for each year
held. Payments are due in 12 equal quarterly installments. No accretion of the
preferred return has been recorded based on management's determination of the
low probability of redemption at the present time due to the Company's
contemplated underwritten initial public offering of common stock and the
automatic conversion of all preferred stock into common stock upon the closing
of such offering.
F-18
<PAGE>
COINSTAR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6: MANDATORILY REDEEMABLE PREFERRED STOCK (CONTINUED)
In February 1995, the Company issued 3,190,693 shares of Series C Preferred
stock and warrants to purchase 954,344 additional shares of Series C Preferred
stock at exercise prices ranging from $3.00 to $4.00 per share, for an aggregate
issue price of $3.25 per share. The proceeds received from this issue, net of
issuance costs of $300,000, were $9,621,737 for the shares and $448,015 for the
warrants. In addition, holders of certain bridge loans converted their
outstanding principal and accrued interest to Series C Preferred stock at a rate
of one share per $3.25 of debt, resulting in the issuance of an additional
1,376,323 shares.
In December 1995, the Company issued 2,500,000 shares of Series D Preferred
stock and 705,891 warrants to purchase shares of Series D Preferred stock at an
exercise price of $4.25 per share, for an aggregate issue price of $4.00 per
share. The proceeds received from this issue were $9,452,977 for the shares and
$411,719 for the warrants.
In August 1996, the Company issued 100,000 shares of Series E-1 Preferred
stock for $6.00 per share; warrants to purchase 350,000 shares of Series E-2
Preferred stock, with an exercise price of $11.40 per share, for $0.60 per
warrant; and warrants to purchase 550,000 shares of Series E-3 Preferred stock,
with an exercise price of $15.61 per share, for $0.39 per warrant. The Company
has the right to repurchase such warrants if certain events, including
additional capital financings, do not take place as outlined in the Series E
Preferred Stock and Warrant Purchase Agreement.
In December 1996, the Company issued 92,308 shares of Series C Preferred
stock at a price of $4.00 per share and 56,471 shares of Series D Preferred
stock at a price of $4.25 per share as a result of the exercise of certain
warrants.
All warrants have been recorded at their fair market values as contributed
capital, at their date of issuance.
Holders of Series C, D, E-1, E-2 and E-3 Preferred shares are entitled to
noncumulative cash dividends at an annual rate of $.325, $.40, $.60, $1.20, and
$1.60 per share, respectively, when and as declared by the Board of Directors.
Such holders are entitled to such dividends in preference to all other classes
of stock. No dividends have been declared or paid as of December 31, 1996.
In the event of liquidation of the Company, the holder of each share of
Preferred stock is entitled to receive, out of the assets of the Company
available for distribution to stockholders, a liquidation preference before any
distribution of assets to the holders of common stock. Holders of Series D and
E-1 have liquidation preference over any other preferred and common stockholders
at $4.00 and $6.00 per share, respectively. Holders of Series C have liquidation
preference over Series A and B Preferred stockholders and common stockholders at
$3.25 per share.
Pursuant to the terms of the Series C, D and E Preferred stock agreements,
all shares of Preferred stock will convert to common stock at the closing of a
firm commitment underwritten public offering at a minimum price of $9.75 per
share and at least $10,000,000 in gross proceeds. Shares may also be converted
upon written notice given by the holder. Such shares are convertible into shares
of the Company's common stock on a one-for-one basis.
Holders of Series C, D and E Preferred stock are also entitled to special
voting rights with regard to the Company's equity transactions as outlined in
the Company's Articles of Incorporation.
F-19
<PAGE>
COINSTAR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7: STOCKHOLDERS' EQUITY
Holders of Series A and B Preferred shares are entitled to noncumulative
cash dividends at an annual rate of $.10 and $.40, per share, respectively, when
and as declared by the Board of Directors. Holders of Series A and B are
entitled to such dividends in preference to the common stockholders. No
dividends have been declared or paid as of December 31, 1996.
In the event of liquidation of the Company, the holder of each share of
Series A and B Preferred stock is entitled to receive, out of the assets of the
Company available for distribution to stockholders, a liquidation preference
before any distribution of assets to the holders of common stock at the
liquidation price of $1.00 and $4.00 per share, respectively.
Pursuant to the terms of the Series A and B Preferred stock agreements, all
shares of Preferred stock will convert to common stock at the closing of a firm
commitment underwritten public offering at a minimum price of $9.75 per share
and at least $10,000,000 in gross proceeds. Shares may also be converted upon
written notice given by the holder. Series A shares are convertible into shares
of the Company's common stock on a one-for-one basis, and Series B shares are
convertible at 1.142857 shares of common stock for each share of preferred stock
being converted.
In connection with various financing transactions, the Company issued
warrants which entitle the holders to purchase shares of the Company's common
stock and Series B, C, D, E-2, and E-3 Preferred stock. A summary of the
warrants outstanding for the three years in the period ended December 31, 1996,
is as follows:
<TABLE>
<CAPTION>
SERIES B SERIES C
COMMON STOCK PREFERRED STOCK PREFERRED STOCK
------------------------ ------------------------ -----------------------
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
----------- ----------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
OUTSTANDING, January 1, 1994.................... -- $ -- 43,752 $ 4.00 -- $ --
Issued........................................ -- -- -- 465,120 3.00-4.00
----------- --- ----------- ----- ---------- -----------
OUTSTANDING, December 31, 1994.................. -- -- 43,752 4.00 465,120 3.00-4.00
Issued........................................ -- -- 954,249 3.25-4.00
----------- --- ----------- ----- ---------- -----------
OUTSTANDING, December 31, 1995.................. -- -- 43,752 4.00 1,419,369 3.00-4.00
Issued........................................ 665,000 .01 -- -- -- --
Exercised..................................... -- -- -- -- (92,308) 4.00
----------- --- ----------- ----- ---------- -----------
OUTSTANDING, December 31, 1996.................. 665,000 $ .01 43,752 $ 4.00 1,327,061 $ 3.00-4.00
----------- --- ----------- ----- ---------- -----------
----------- --- ----------- ----- ---------- -----------
</TABLE>
F-20
<PAGE>
COINSTAR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7: STOCKHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
SERIES D SERIES E-2 SERIES E-3
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
------------------------ ------------------------ ------------------------
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
OUTSTANDING, January 1, 1994..................... -- $ -- -- $ -- -- $ --
Issued......................................... -- -- -- -- -- --
OUTSTANDING, December 31, 1994................... -- -- -- -- -- --
Issued......................................... 705,891 4.25 -- -- -- --
-----------
OUTSTANDING, December 31, 1995................... 705,891 4.25 -- -- -- --
Issued......................................... 144,926 4.00-4.25 350,000 11.40 550,000 15.61
Exercised...................................... (56,471) 4.25 -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
OUTSTANDING, December 31, 1996................... 794,346 $ 4.00-4.25 350,000 $ 11.40 550,000 $ 15.61
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
Such warrants have expiration dates from June 28, 1998, to December 15,
2000, and have been recorded at amounts which reflect management's best estimate
of fair value on the date of issuance.
NOTE 8: INCOME TAXES
The components of the Company's deferred tax asset at December 31, 1995 and
1996 were as follows:
<TABLE>
<CAPTION>
1995 1996
------------- -------------
<S> <C> <C>
Tax loss and credit carryforwards............................... $ 4,510,000 $ 10,629,000
Depreciation and amortization................................... (115,000) (863,000)
Other........................................................... 39,000 111,000
------------- -------------
4,434,000 9,877,000
Valuation allowance............................................. (4,434,000) (9,877,000)
------------- -------------
$ -- $ --
------------- -------------
------------- -------------
</TABLE>
A valuation allowance in the full amount of the net deferred tax asset
balances has been established as it is uncertain that the Company will be able
to realize such tax assets in the future. At December 31, 1996, the Company had
net operating loss and credit carryforwards in the amount of $31,143,000, which
expire through 2011.
The Company recorded deferred tax benefits of $1,472,000, $2,107,000, and
$5,422,000 for each of the years ended December 31, 1994, 1995 and 1996,
respectively, which were fully allowed for each year.
As a result of the anticipated completion of the Company's planned initial
public offering, the Company may incur a change in ownership as defined under
Section 382 of the Internal Revenue Code. Such change in ownership may impose
certain limitations on the utilization of the Company's net operating loss and
credit carryforwards.
F-21
<PAGE>
COINSTAR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9: STOCK OPTION PLAN
In March 1997, the Company adopted the 1997 Equity Incentive Plan, under
which options vest over four years and expire after 10 years. The Equity
Incentive Plan is an amendment and restatement of the Company's 1992 Stock
Option Plan, as amended. The Company has reserved a total of 2,900,000 shares of
Common Stock for issuance under the 1997 Equity Incentive Plan. Stock options
have been granted to officers and employees to purchase common stock at prices
ranging from $.10 to $10.00 per share and to directors to purchase Series B
Preferred stock at $4.00 per share, which represented management's best estimate
of fair market value at the dates of grant.
The price ranges of options exercised were $.10 to $.25 in 1995 and $.25 to
$.40 in 1996. At December 31, 1996, there were 1,333,166 shares of unissued
common stock reserved for issuance under the plan, of which options for the
purchase of 718,216 shares were available for future grants. Numbers of shares
under the plan are as follows as of December 31:
<TABLE>
<CAPTION>
1994 1995 1996
---------------------- ----------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- ----------- ---------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Number of common shares under option:
Outstanding, beginning of year.................. 133,500 $ 0.19 192,225 $ 0.25 376,550 $ 0.37
Granted......................................... 78,725 0.36 265,300 0.40 254,850 0.74
Exercised....................................... (53,334) 0.13 (13,500) 0.30
Canceled or expired............................. (20,000) 0.31 (27,641) 0.26 (2,950) 0.51
--------- ---------- ---------
Outstanding, end of year........................ 192,225 0.25 376,550 0.37 614,950 0.52
--------- ---------- ---------
--------- ---------- ---------
Exercisable, end of year........................ 59,386 $ 0.16 44,875 $ 0.26 84,017 $ 0.32
--------- ---------- ---------
--------- ---------- ---------
</TABLE>
The following table summarizes information about common stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
NUMBER OF OPTIONS WEIGHTED AVERAGE NUMBER OF OPTIONS
OUTSTANDING AT REMAINING EXERCISABLE AT
EXERCISE PRICE DECEMBER 31, 1996 CONTRACTUAL LIFE DECEMBER 31, 1996
- ------------------------------------- ----------------- ------------------- -----------------
<S> <C> <C> <C>
$0.25................................ 60,250 7 51,553
0.40................................ 315,250 9 29,753
0.70................................ 221,950 10 2,711
1.50................................ 17,500 10 --
------- ------
614,950 9 84,017
------- ------
------- ------
</TABLE>
F-22
<PAGE>
COINSTAR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9: STOCK OPTION PLAN (CONTINUED)
<TABLE>
<CAPTION>
1994 1995 1996
---------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Number of Series B Preferred shares under option
Outstanding, beginning of year....................... -- $ -- 35,000 $ 4.00 35,000 $ 4.00
Granted.............................................. 35,000 4.00 -- -- -- --
--------- ----- --------- ----- --------- -----
Outstanding, end of year............................... 35,000 4.00 35,000 4.00 35,000 4.00
--------- --------- ---------
--------- --------- ---------
Exercisable, end of year............................... 35,000 $ 4.00 35,000 $ 4.00 35,000 $ 4.00
--------- --------- ---------
--------- --------- ---------
</TABLE>
At December 31, 1996, there are 35,000 stock options for Series B Preferred
outstanding with a remaining contractual life of seven years.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its plans. Accordingly, no compensation cost has been recognized
for its stock option grants. Had compensation costs for the Company's
stock-based compensation plan been determined based on the fair value at the
grant dates for awards under those plans consistent with the method prescribed
in SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, the Company's net loss
and pro forma net loss per share would have increased to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1995 1996
------------ -------------
<S> <C> <C>
Net loss:
As reported.................................................... $ 6,168,715 $ 15,967,335
Pro forma...................................................... 6,173,058 15,981,530
Pro forma net loss per share:
As reported.................................................... $ -- $ 1.46
Pro forma...................................................... -- 1.46
</TABLE>
The weighted average fair value of options granted during 1995 and 1996 were
$0.11 and $0.20, respectively. The fair value of each option granted during 1995
and 1996 is estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions: five year expected life
from date of grant; no stock volatility; risk-free interest rates from 5.17% to
6.95%; and no dividends during the expected term.
In January 1997, the Board of Directors approved an agreement for
acceleration of exercise provisions for stock options granted to certain
employees. Under the terms of the agreement, these employees are allowed to
exercise unvested stock options. Any shares purchased by an employee relating to
unvested stock options will be held in escrow until such options are vested. In
addition, the Company has the right to repurchase such shares prior to the
applicable date of vesting should the employee terminate their employment
status. The agreement has not established a new measurement date for the
affected stock options.
F-23
<PAGE>
COINSTAR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9: STOCK OPTION PLAN (CONTINUED)
During the three month period ended March 31, 1997, the Company granted
4,500 and 497,750 common stock options to employees and directors of the Company
at exercise prices of $1.50 and $10.00 per share, respectively.
In March 1997, the Company adopted the Non-Employee Directors' Stock Option
Plan, under which the Board of Directors have provided for the automatic grant
of options to purchase shares of Common Stock to non-employee directors of the
Company. The Company has reserved a total of 100,000 shares of Common Stock for
issuance under the Non-Employee Directors' Stock Option Plan. No options have
been granted under this plan.
In March 1997, the Company adopted the Employee Stock Purchase Plan under
Section 423 of the Internal Revenue Code. Under the Employee Stock Purchase
Plan, the Board of Directors may authorize participation by eligible employees,
including officers, in periodic offerings. The Company has reserved a total of
200,000 shares of Common Stock for issuance under the Employee Stock Purchase
Plan. No amounts have been deferred by employees nor have any shares been issued
under this plan as of May 28, 1997.
NOTE 10: RETIREMENT PLAN
In July 1995, the Company adopted a tax-qualified employee savings and
retirement plan under Section 401(k) of the Internal Revenue Code of 1986 (the
"Plan"), available to all eligible employees. No amounts have been contributed
to the Plan.
NOTE 11: SUBSEQUENT EVENT
On June 18, 1997, the Company filed a complaint in the United States
District Court, Northern District of California, against CoinBank Automated
Systems, Inc. ("CoinBank"), one of its competitors, for infringement of one of
the Company's United States patents. CoinBank responded to the Company by
letter, dated June 23, 1997, demanding, among other things, that the Company
withdraw the complaint and indicating that if the complaint is not withdrawn by
a specified date, CoinBank will file a counterclaim against the Company for
damages related to tortious interference. On June 27, 1997, CoinBank answered
such complaint and counterclaimed for declaratory judgment of noninfringement,
invalidity and unenforceability of the subject patent and filed a claim for
breach of warranty against Scan Coin AB, one of the Company's suppliers. Company
management, on advice of counsel, believes this litigation or any other
threatened litigation is without merit and would intend to vigorously defend
itself in connection with any such litigation. Further, it is the opinion of
Company management that the ultimate resolution of the above matter will not
have a material adverse effect on the Company's financial condition or results
of operations.
F-24
<PAGE>
- -------------------------------------------
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- -------------------------------------------
-------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO BUY, IN ANY JURISDICTION WHERE, OR TO ANY
PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS NOT BEEN A CHANGE IN THE
FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE
DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Available Information.......................... 5
Additional Information......................... 5
Prospectus Summary............................. 6
Risk Factors................................... 15
The Company.................................... 25
Use of Proceeds................................ 25
Dividend Policy................................ 25
Capitalization................................. 26
Selected Financial and Other Data.............. 27
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 29
Business....................................... 41
Management..................................... 57
Certain Relationships and Transactions......... 67
Principal Stockholders......................... 68
The Exchange Offer............................. 71
Description of Old Notes....................... 78
Description of New Notes....................... 103
Certain U.S. Federal Income Tax
Considerations............................... 104
Plan of Distribution........................... 106
Legal Matters.................................. 107
Experts........................................ 107
Index to Financial Statements.................. F-1
</TABLE>
$95,000,000
PRINCIPAL AMOUNT AT MATURITY
COINSTAR, INC.
13% SENIOR DISCOUNT NOTES
DUE 2006
[LOGO]
---------------------
PROSPECTUS
---------------------
NOVEMBER 4, 1997
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