<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 20, 1997
REGISTRATION NO. 333-26843
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
COINSTAR, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 7299 94-3156448
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) Number)
</TABLE>
--------------------------
13231 SE 36TH STREET
SUITE 200
BELLEVUE, WASHINGTON 98006
(206) 644-6789
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
--------------------------
JENS H. MOLBAK
PRESIDENT AND CHIEF EXECUTIVE OFFICER
COINSTAR, INC.
13231 SE 36TH STREET
SUITE 200
BELLEVUE, WASHINGTON 98006
(206) 644-6789
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
--------------------------
COPIES TO:
<TABLE>
<S> <C>
MARK P. TANOURY, ESQ. BARRY E. TAYLOR, ESQ.
STEPHANIE A. ANAGNOSTOU, ESQ. TREVOR J. CHAPLICK, ESQ.
JAMES F. FULTON, JR., ESQ. WARREN CHAO, ESQ.
COOLEY GODWARD LLP WILSON SONSINI GOODRICH & ROSATI
3000 SAND HILL ROAD, BLDG. 3, SUITE PROFESSIONAL CORPORATION
230 650 PAGE MILL ROAD
MENLO PARK, CA 94025-7116 PALO ALTO, CA 94304
(415) 843-5000 (415) 493-9300
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED JUNE 20, 1997
PROSPECTUS
4,000,000 SHARES
[LOGO]
COMMON STOCK
---------
All of the 4,000,000 shares of Common Stock offered hereby are being sold by
Coinstar, Inc. (the "Company").
Prior to this offering, there has not been a public market for the Common
Stock of the Company. It is currently estimated that the initial public offering
price will be between $13.00 and $15.00 per share. See "Underwriting" for
information relating to the factors considered in determining the initial public
offering price. The Common Stock has been approved for quotation on The Nasdaq
National Market under the symbol "CSTR".
--------------
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF MATERIAL RISKS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
--------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS (1) COMPANY (2)
<S> <C> <C> <C>
Per Share $ $ $
Total (3) $ $ $
</TABLE>
(1)For information regarding indemnification of the Underwriters, see
"Underwriting".
(2)Before deducting expenses estimated at $1,000,000 payable by the Company.
(3)The Company has granted to the Underwriters a 30-day option to purchase up
to 600,000 additional shares of Common Stock solely
to cover over-allotments, if any. See "Underwriting". If such option is
exercised in full, the total Price to the Public,
Underwriting Discounts and Commissions, and Proceeds to Company will be
$ , $ and $ ,
respectively.
--------------
The shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as and if accepted by them and
subject to certain conditions. It is expected that certificates for the shares
of Common Stock offered hereby will be available for delivery on or about
, 1997 at the office of Smith Barney Inc., 333 West 34th Street, New York,
N.Y. 10001.
--------------
SMITH BARNEY INC. HAMBRECHT & QUIST
, 1997
<PAGE>
[GRAPHIC OF MAP OF UNITED STATES SHOWING
COINSTAR LOCATIONS WITH COINSTAR LOGO AND TEXT
"THE SELF-SERVICE COIN RECYCLING NETWORK"
AND A PICTURE OF A JAR OF COINS AND A
COINSTAR UNIT WITH TEXT "GOT A JAR OF COINS AT HOME?"
"GET CASH! IT'S AS EASY AS 1, 2, 3."]
The above map depicts supermarket chains which have entered into installation
agreements with the Company. None of these supermarket chains has a long-term
commitment to retain the units in its store. See "Business--Sales and
Marketing."
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING TRANSACTIONS
OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
2
<PAGE>
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. EXCEPT AS OTHERWISE INDICATED,
THE INFORMATION CONTAINED IN THIS PROSPECTUS ASSUMES (I) NO EXERCISE OF THE
UNDERWRITERS' OVER-ALLOTMENT OPTION, (II) THE CONVERSION OF ALL OUTSTANDING
SHARES OF PREFERRED STOCK INTO SHARES OF COMMON STOCK UPON THE CLOSING OF THIS
OFFERING AND (III) THE CASH EXERCISE OF WARRANTS TO PURCHASE 2,693,420 SHARES OF
COMMON STOCK, WHICH WARRANTS EXPIRE UPON THE CLOSING OF THIS OFFERING OR WITHIN
90 DAYS THEREAFTER (SUCH WARRANTS MAY BE EXERCISED ON A CASHLESS BASIS IN WHICH
EVENT THE COMPANY WOULD NOT RECEIVE CASH PROCEEDS FROM THEIR EXERCISE). SEE
"DESCRIPTION OF CAPITAL STOCK" AND "UNDERWRITING." 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 in 20 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%. 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 7 million customer transactions consisting
of over 5 billion coins worth over $190 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 March 31, 1997, the Company had an installed base of 1,929 units located in
supermarkets in 27 regional markets across the United States.
The Company believes consumers in the United States conduct an estimated 288
billion cash transactions annually, which the Company estimates result in
approximately $144 billion of coin flow each year. 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 an
estimated $7 billion of non-circulating coins that has been increasing at the
rate of approximately $250 million annually. 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, although the Company's ability to capture a significant portion of this
market opportunity is limited by the current scope of its operations, its
dependence on market acceptance and other factors. 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 highly reliable,
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.
3
<PAGE>
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, although not all are located in regions 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
March 31, 1997, the Company had an accumulated deficit of $36.4 million. An
investment in the shares of Common Stock offered hereby involves a high degree
of risk, including the risks associated with the Company's history of
substantial losses, anticipated 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 6.
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Company...... 4,000,000 shares
Common Stock to be Outstanding
After the Offering..................... 16,666,396 shares (1)
Use of Proceeds.......................... To fund the continued expansion of the Coinstar
network; for working capital, product research
and development activities and general corporate
purposes. See "Use of Proceeds."
Nasdaq National Market symbol............ CSTR
</TABLE>
- ------------------------------
(1) Based on the number of shares outstanding as of March 31, 1997, after giving
effect to the automatic conversion of all outstanding shares of Preferred
Stock into Common Stock and the assumed cash exercise of warrants to
purchase 2,693,420 shares of Common Stock, which warrants expire upon the
closing of this offering or within 90 days thereafter. Excludes 921,900
shares of Common Stock issuable upon exercise of outstanding stock options
granted under the Company's 1997 Equity Incentive Plan, which amends and
restates the Company's 1992 Stock Option Plan, as amended (the "Equity
Incentive Plan"), as of March 31, 1997 at a weighted average exercise price
of $5.67 per share and 40,000 shares of Common Stock issuable upon exercise
of outstanding stock options granted outside of the Equity Incentive Plan as
of March 31, 1997 at a weighted average exercise price of $3.50 per share.
Also excludes 1,042,981 shares of Common Stock issuable upon exercise of
warrants outstanding as of March 31, 1997 at a weighted average exercise
price of $12.57 per share, which warrants do not expire upon the closing of
this offering or within 90 days thereafter. See "Management -- Equity
Incentive Plans," "Description of Capital Stock -- Warrants" and Notes 6, 7
and 9 to Financial Statements.
4
<PAGE>
SUMMARY FINANCIAL INFORMATION AND OTHER DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------ --------------------
1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue................................................ $ 15 $ 325 $ 1,063 $ 8,312 $ 746 $ 3,995
Expenses:
Direct operating..................................... 45 488 1,336 7,258 888 3,450
Regional sales and marketing......................... 3 86 349 1,505 208 630
Product research and development..................... 1,368 1,648 1,830 3,969 661 1,441
Selling, general and administrative.................. 402 1,716 2,790 5,351 872 2,528
Depreciation and amortization........................ 40 440 1,117 4,135 499 1,684
Loss from operations................................... (1,843) (4,053) (6,359) (13,906) (2,382) (5,738)
Net loss............................................... $ (1,814) $ (4,316) $ (6,169) $ (15,967) $ (2,309) $ (7,502)
Pro forma net loss per share (1)....................... -- -- -- $ (1.46) $ (0.21) $ (0.69)
Pro forma weighted average shares outstanding (000's)
(1).................................................. -- -- -- 10,927 10,927 10,927
OTHER DATA:
Number of new Coinstar units installed during the
period............................................... 13 31 215 1,238 169 428
Installed base of Coinstar units at end of period...... 17 48 263 1,501 432 1,929
Number of regional markets............................. 2 4 11 23 13 27
Dollar value of coins processed........................ $ 74 $ 5,245 $ 17,701 $ 115,476 $ 12,306 $ 52,724
Capital expenditures................................... 620 2,163 3,823 20,820 3,185 7,675
Direct contribution (loss) (2)......................... (30) (163) (273) 1,054 (142) 545
Direct operating expense per average installed unit
(3).................................................. -- 20,353 11,717 8,610 2,515 2,037
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1997
---------------------------------------------
PRO FORMA
ACTUAL PRO FORMA (4) AS ADJUSTED (5)
----------- --------------- ---------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments (6).............. $ 48,184 $ 48,184 $ 99,264
Total assets....................................................... 81,538 81,538 132,618
Total debt, including current portion.............................. 72,188 72,188 72,188
Mandatorily Redeemable Preferred Stock............................. 24,972 -- --
Total stockholders' equity (deficit)............................... $ (29,449) $ 4,477 $ 46,603
</TABLE>
- ------------------------------
(1) See Note 2 to 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.
(4) Reflects the conversion of all outstanding shares of Preferred Stock into
Common Stock and excludes warrants to purchase 2,693,420 shares of Common
Stock at a weighted average exercise price per share of approximately $2.96
which expire upon the closing of this 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.
(5) Adjusted to reflect the sale of 4,000,000 shares of Common Stock in this
offering at an assumed initial public offering price of $14.00 per share and
the receipt of the estimated net proceeds therefrom 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 $8.3 million of
funds in transit, which represent amounts being processed by armored car
carriers or residing in Coinstar units.
5
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING RISK
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY AND ITS
BUSINESS BEFORE PURCHASING SHARES OF THE COMMON STOCK 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 three months
ended March 31, 1997 was $6.2 million, $16.0 million and $7.5 million,
respectively. As of March 31, 1997, the Company had an accumulated deficit of
$36.4 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 86% of the
installed base as of March 31, 1997 in service during 1996 and the three months
ended March 31, 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
6
<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 supermarket partners, age of the installed
unit, adverse weather conditions and other factors, many of which are not in the
Company's control. The Company has also experienced seasonal trends, with lower
customer usage during certain months corresponding to the Company's first and
fourth fiscal quarters. 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 March 31, 1997 of $72.2
million, which included $68.4 million of the Company's 13.0% Senior Subordinated
Discount Notes due 2006 (the "Notes"). The Notes will accrete to $95.0 million
by October 1999. The Company must begin paying cash interest on the Notes in
April 2000. Beginning at that time, the Company will have debt service
obligations of over $12.0 million per year until October 2006 when the principal
amount of $95.0 million will be due. The Company's capital expenditures will
increase significantly upon the continued expansion of the Coinstar network, and
the Company expects that its operating cash flow will be insufficient to finance
capital expenditures over the next several years. The ability of the Company to
meet its debt service requirements will depend upon achieving significant and
sustained growth in the Company's cash flow, which will be affected by its
success in implementing its business strategy, prevailing economic conditions
and financial, business and other factors, certain of which are beyond the
Company's control. Accordingly, there can be no assurance as to whether or when
the Company's operations will generate positive cash flow or become profitable
or whether the Company will at any time have sufficient resources to meet its
debt service obligations. If the Company is unable to generate sufficient cash
flow to service its indebtedness, it will have to reduce or delay planned
capital expenditures, sell assets, restructure or refinance its indebtedness or
seek additional equity capital. There can be no assurance that any of these
strategies could be effected on satisfactory terms, if at all, particularly in
light of the Company's high levels of indebtedness. In addition, the degree to
which the Company is leveraged could have significant consequences, including,
but not limited to, the following: (i) the Company's ability to obtain
additional financing in the future for working capital, capital expenditures,
product research and development, acquisitions, and other general corporate
purposes may be materially limited or impaired, (ii) a substantial portion of
the Company's cash flow from operations may need to be dedicated to the payment
of principal and interest on its indebtedness and therefore not available to
finance the Company's business and (iii) the Company's high degree of
7
<PAGE>
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 supermarket 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."
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
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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 1996 and the first quarter
ended March 31, 1997, Coinstar units in service in three supermarket chains
accounted for approximately 36.2% and 30.3%, respectively, of the Company's
revenue for such periods. The units in service in two of these chains, Ralphs
Grocery Co. ("Ralphs") and Quality Food Centers, Inc., including Hughes Markets,
Inc., its subsidiary, ("QFC-Hughes"), accounted for approximately 12.7% and
14.9%, respectively, of the Company's 1996 revenue and 12.2% and 9.1%,
respectively, of the Company's revenue in the first quarter ended March 31,
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
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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 has a contract with
SeaMed, it does not have a long-term obligation to continue the manufacture of
the
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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 of value-added services. While the
Company is taking steps to ensure that the potential adverse impact of
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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. 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"). There can be no
assurance that the Company will prevail in such Patent Infringement Claim, 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
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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
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."
NO PRIOR PUBLIC MARKET FOR COMMON STOCK; POTENTIAL VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that an active trading market for
the Common Stock will develop or be sustained after this offering or that the
market price of the Common Stock will not decline below the initial public
offering price. The initial public offering price will be determined through
negotiations between the Company and the Underwriters based upon several factors
and may not be indicative of future market prices. See "Underwriting" for a
discussion of the factors considered in determining the initial public offering
price. In addition, the securities markets have from time to time experienced
significant price and volume fluctuations that are unrelated to the operating
performance of particular companies. Announcements of technological innovations
or new products or services by the Company or its competitors, the termination
of one or more retail distribution contracts, release of reports, changes in or
failure of the Company to meet financial estimates by securities analysts,
industry developments, market acceptance of the Coinstar service by retail
distribution partners and consumers, economic and other external factors, as
well as period-to-period fluctuations in the Company's financial results, may
have a significant and adverse impact on the market price of the Common Stock.
See "Risk Factors -- Possible Termination of Retail
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Distribution Partner Agreements," "Risk Factors -- Dependence on Continued
Market Acceptance By Consumers and Retail Distribution Partners" and "Risk
Factors -- Fluctuations in Quarterly Operating Results."
POTENTIAL ADVERSE IMPACT OF SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Sales of shares of Common Stock (including shares issued upon the exercise
of outstanding options) in the public market after this offering could adversely
affect the market price of the Common Stock. Such sales also might make it more
difficult for the Company to sell equity securities or equity-related securities
in the future at a time and price that the Company deems appropriate. Upon
completion of this offering, the Company will have outstanding an aggregate of
16,666,396 shares of Common Stock, assuming no exercise of the Underwriters'
over-allotment option and no exercise of options outstanding as of March 31,
1997. Of these shares, the 4,000,000 shares of Common Stock sold in this
offering will be freely tradable without restriction or further registration
under the Securities Act, unless held by affiliates of the Company as that term
is defined in Rule 144 under the Securities Act ("Affiliates"). The remaining
12,666,396 shares of Common Stock held by existing stockholders are restricted
securities as that term is defined in Rule 144 under the Securities Act (the
"Restricted Shares"). Restricted Shares may be sold in the public market only if
registered or if they qualify for an exemption from registration under Rules 144
or 701, promulgated under the Securities Act.
As a result of agreements not to sell such shares (the "Lock-up Agreements")
and the provisions of Rules 144 and 701, additional shares will be available in
the public market as follows: (i) no Restricted Shares will be eligible for
immediate sale on the effective date of this offering; (ii) 7,355,328 Restricted
Shares will be eligible for sale without restriction upon expiration of Lock-up
Agreements 180 days after the date of this Prospectus; (iii) 2,617,648
Restricted Shares will be eligible for sale upon expiration of the Lock-up
Agreements, subject to the volume and other restrictions of Rule 144; and (iv)
the remaining 2,693,420 Restricted Shares (representing all of the shares of
Common Stock issuable upon the assumed cash exercise of certain warrants) will
be eligible for sale from time to time thereafter upon expiration of their
respective one-year holding periods. The Company intends to register, following
this offering, a total of 2,900,000 shares of Common Stock subject to
outstanding options or reserved for issuance under the Equity Incentive Plan,
200,000 shares of Common Stock reserved for issuance under its 1997 Employee
Stock Purchase Plan (the "Purchase Plan") and 100,000 shares of Common Stock
reserved for issuance under its 1997 Non-Employee Directors' Stock Option Plan
(the "Directors' Plan") which shares will become available for sale in the
public market after the expiration of the Lock-up Agreements as such options
become exercisable. As of March 31, 1997, 921,900 shares of Common Stock were
subject to outstanding options, 285,663 of which were then vested. All of these
shares are subject to Lock-up Agreements. Furthermore, upon completion of this
offering and the expiration of the Lock-up Agreements, the holders of 8,988,964
shares of Common Stock and 2,693,420 shares issuable upon the assumed cash
exercise of warrants to purchase Common Stock, or their transferees, will be
entitled to certain rights with respect to the registration of such shares under
the Securities Act. Registration of such shares under the Securities Act would
result in such shares becoming freely tradable without restriction under the
Securities Act (except for shares purchased by Affiliates) immediately upon the
effectiveness of such registration. Such registration and sale of Common Stock
in the public market may have an adverse effect on the market price of the
Common Stock. See "Description of Capital Stock" and "Shares Eligible for Future
Sale."
IMMEDIATE AND SUBSTANTIAL DILUTION TO NEW PURCHASERS
Purchasers of the shares of Common Stock offered hereby will incur immediate
and substantial dilution of $10.91 per share in the net tangible book value of
the Common Stock from the initial public offering price. Such investors will
experience additional dilution upon the exercise of outstanding options and
warrants to purchase the Company's Common Stock. See "Dilution."
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BROAD DISCRETION OF MANAGEMENT REGARDING PROCEEDS OF THE OFFERING
A substantial portion of the net proceeds of this offering has been
allocated to capital expenditures, working capital and general corporate
purposes. Accordingly, management will have broad discretion as to the
application of the offering proceeds. Pending the Company's use of such proceeds
to fund capital expenditures and working capital incurred in connection with the
continued expansion of the Coinstar network, for product research and
development, and deployment of enhancements to the Coinstar unit and the coin
processing network and for general corporate purposes, the net proceeds will be
invested in short-term, interest-bearing, investment grade securities. In
addition, a portion of the proceeds may also be used for the early retirement of
debt, which may include the purchase or redemption of a portion of the Notes,
although the Company currently has no specific plans or commitments in this
regard. In addition, the Company may make one or more acquisitions of or
investments in complementary technologies, products or businesses which broaden
or enhance the Company's current product offerings. However, the Company has no
specific plans, agreements or commitments, oral or written, and is not currently
engaged in any negotiations for any such acquisition. It is possible that the
return on such investments will be less than that which would be realized were
the Company immediately to use such funds for other purposes. See "Use of
Proceeds."
ADVERSE IMPACT OF POSSIBLE ISSUANCES OF PREFERRED STOCK; ANTI-TAKEOVER EFFECT OF
CERTAIN CHARTER AND BYLAW PROVISIONS
Upon completion of this offering, the Board of Directors will have authority
to issue up to 5,000,000 shares of Preferred Stock and to fix the price, rights,
preferences, privileges and restrictions, including voting rights, of those
shares without any further vote or action by the stockholders. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of any Preferred Stock that may be issued in the
future. The issuance of Preferred Stock could affect adversely the voting power
of holders of Common Stock and the likelihood that such holders will receive
dividend payments and payments upon liquidation. Additionally, the issuance of
Preferred Stock may have the effect of delaying, deferring or preventing a
change in control of the Company, may discourage bids for the Common Stock at a
premium over the market price of the Common Stock and may affect adversely the
market price of and the voting and other rights of the holders of the Common
Stock. In addition, the Company's Bylaws provide that special meetings of
stockholders may be called only by the Chairman of the Board of Directors, the
Chief Executive Officer or the Board of Directors pursuant to a resolution
approved by a majority of the Board of Directors. In addition, the Company is
subject to the anti-takeover provisions of Section 203 of the Delaware General
Corporation Law, which prohibits the Company from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
These provisions, could have the effect of discouraging certain attempts to
acquire the Company which could deprive the Company's stockholders of the
opportunity to sell their shares of Common Stock at prices higher than
prevailing market prices. See "Description of Capital Stock."
NO DIVIDENDS; RESTRICTIONS ON PAYMENT OF DIVIDENDS
The Company has not declared or paid any dividends on its capital stock
since its inception. The Company currently anticipates that it will retain all
of its future earnings, if any, for use in the operation and expansion of its
business and does not anticipate paying any cash dividends in the foreseeable
future. In addition, the Company's indenture governing the Notes restricts the
payment of 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. See "Dividend Policy."
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THE COMPANY
The Company's executive offices are located at 13231 SE 36th Street, Suite
200, Bellevue, Washington 98006. Its telephone number at that address is (206)
644-6789.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 4,000,000 shares of
Common Stock offered by the Company hereby are estimated to be $51.1 million
($58.9 million if the Underwriters' over-allotment option is exercised in full),
assuming an initial public offering price of $14.00 per share, and after
deducting the estimated underwriting discounts and commissions and estimated
offering expenses payable by the Company.
The Company intends to use the net proceeds of this offering as follows: (i)
$40 million to fund capital expenditures and working capital in connection with
the continued expansion and enhancements of the Coinstar network, (ii) $5
million for product research and development, and deployment of enhancements to
the Coinstar unit and the coin processing network and (iii) $6.1 million for
general corporate purposes. A portion of the proceeds may also be used for the
early retirement of debt, which may include the purchase or redemption of a
portion of the $95 million principal amount of 13% Senior Subordinated Discount
Notes due 2006, and for investment purposes related to the expansion of its
business, including internationally, although the Company currently has no
specific plans or commitments in this regard. The amounts actually expended by
the Company for working capital purposes will vary significantly depending upon
a number of factors, including future revenue growth, if any, the amount of cash
generated by the Company's operations and the progress of the Company's product
development efforts. Accordingly, the Company's management will retain broad
discretion in the allocation of the net proceeds from this offering. In
addition, the Company may make one or more acquisitions of or investments in
complementary technologies, products or businesses which broaden or enhance the
Company's current product offerings. However, the Company has no specific plans,
agreements or commitments, oral or written, and is not currently engaged in any
negotiations for any such acquisition. Pending the application of proceeds
described above, the net proceeds will be invested in short-term,
interest-bearing, investment grade securities. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
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 any 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.
16
<PAGE>
CAPITALIZATION
The following table sets forth (i) the capitalization of the Company as of
March 31, 1997, (ii) the pro forma capitalization after giving effect to the
automatic conversion of all outstanding shares of Preferred Stock into Common
Stock and (iii) the capitalization as adjusted to give effect to the sale of the
4,000,000 shares of Common Stock offered by the Company hereby at an assumed
initial public offering price of $14.00 per share (after deducting the estimated
underwriting discounts and commissions and offering expenses payable by the
Company) and the application of the estimated net proceeds therefrom. This table
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 closing of this
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 should be
read in conjunction with the Financial Statements and related Notes thereto
appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1997
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
---------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash, cash equivalents and short-term investments (1)........................ $ 48,184 $ 48,184 $ 99,264
---------- ---------- -----------
---------- ---------- -----------
Debt:
13% Senior Subordinated Discount Notes due 2006............................ $ 68,382 $ 68,382 $ 68,382
Other long term obligations, including current portion..................... 3,806 3,806 3,806
---------- ---------- -----------
Total debt, including current portion...................................... 72,188 72,188 72,188
---------- ---------- -----------
Mandatorily 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 (2); and 13,972,976 shares outstanding
as adjusted.............................................................. 94 29,298 80,378
Contributed capital for warrants........................................... 2,621 2,621 2,621
Accumulated deficit........................................................ (36,396) (36,396) (36,396)
---------- ---------- -----------
Total stockholders' equity (deficit)....................................... (29,449) 4,477 46,603
---------- ---------- -----------
Total capitalization................................................... $ 67,711 $ 67,711 $ 118,791
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
- ------------------------------
(1) Cash, cash equivalents and short-term investments include $8.3 million of
funds in transit, which represent amounts being processed by armored car
carriers or residing in Coinstar units.
(2) Excludes 921,900 shares of Common Stock issuable upon exercise of
outstanding options granted under the Equity Incentive Plan as of March 31,
1997 at a weighted average exercise price of $5.67 per share, 40,000 shares
of Common Stock issuable upon exercise of outstanding options granted
outside the Equity Incentive Plan as of March 31, 1997 at a weighted average
exercise price of $3.50 per share and 3,736,401 shares of Common Stock
issuable upon exercise of outstanding warrants to purchase Common Stock at a
weighted average exercise price of $5.64 per share. See "Management --
Equity Incentive Plans," "Description of Capital Stock -- Warrants" and
Notes 6, 7 and 9 to Financial Statements.
17
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of March 31, 1997
was approximately $98,000 or $0.01 per share of outstanding Common Stock. Pro
forma net tangible book value per share is equal to the Company's total tangible
assets less its total liabilities, divided by the number of outstanding shares
of Common Stock, assuming the conversion of all outstanding shares of Preferred
Stock into Common Stock. Dilution per share represents the difference between
the price per share paid by investors in this offering and the as adjusted pro
forma net tangible book value per share immediately after this offering. After
giving effect to the sale of the 4,000,000 shares of Common Stock offered by the
Company hereby at an assumed initial public offering price of $14.00 per share
(after deducting the estimated underwriting discounts and commissions and
offering expenses payable by the Company), the as adjusted pro forma net
tangible book value of the Company at March 31, 1997 would have been
approximately $43.2 million or $3.09 per share. This represents an immediate
increase in such net tangible book value of $3.88 per share to existing
stockholders and an immediate dilution of $10.91 per share to new investors
purchasing shares in this offering. The following table illustrates this per
share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................... $ 14.00
Pro forma net tangible book value per share as of March 31,
1997........................................................... $ (0.79)
Increase per share attributable to new investors................. 3.88
As adjusted pro forma net tangible book value per share after this
offering......................................................... 3.09
-----------
Dilution per share to new investors in this offering............... $ 10.91
-----------
-----------
</TABLE>
The following table summarizes on a pro forma basis as of March 31, 1997,
the number of shares of Common Stock purchased from the Company, the total cash
consideration paid and the average price paid per share by the existing holders
of Common Stock and by the new investors in this offering at an assumed initial
public offering price of $14.00 per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------------- ------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ --------- ------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Existing stockholders................... 9,972,976 71.0% $ 29,597,620 35.0% $ 2.97
New investors........................... 4,000,000 29.0 56,000,000 65.0 14.00
------------ --------- ------------- ----------
Total................................... 13,972,976 100.0% $ 85,597,620 100.0%
------------ --------- ------------- ----------
------------ --------- ------------- ----------
</TABLE>
The foregoing table assumes the automatic conversion of all outstanding
shares of Preferred Stock into Common Stock and excludes (i) 2,693,420 shares of
Common Stock issuable upon the exercise of certain outstanding warrants at a
weighted average exercise price of $2.96 per share which expire upon the closing
of this 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; (ii)
2,900,000 shares of Common Stock reserved for issuance pursuant to the Company's
Equity Incentive Plan, under which options to purchase 921,900 shares of Common
Stock at a weighted average exercise price of $5.67 per share were outstanding
as of March 31, 1997; (iii) 40,000 shares of Common Stock issuable upon exercise
of outstanding options granted outside the Equity Incentive Plan as of March 31,
1997 at a weighted average exercise price of $3.50 per share; (iv) 1,042,981
shares of Common Stock issuable upon exercise of certain outstanding warrants at
a weighted average exercise price of $12.57 per share; (v) 200,000 shares of
Common Stock reserved for future issuance under the Company's Purchase Plan; and
(vi) 100,000 shares of Common Stock reserved for future issuance under the
Company's Directors' Plan. To the extent that outstanding options or warrants
are exercised in the future, there may be further dilution to new stockholders.
See "Management -- Equity Incentive Plans," "Description of Capital Stock --
Warrants" and Notes 6, 7 and 9 to Financial Statements.
18
<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 and as
of and for the three month periods ended March 31, 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 three month periods ended March 31, 1996 and 1997 and
the balance sheet data as of March 31, 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 three
months ended March 31, 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 ENDED
INCEPTION TO YEAR ENDED DECEMBER 31, MARCH 31,
DECEMBER 31, -------------------------------------------- --------------------
1992(1) 1993(1) 1994 1995 1996 1996 1997
------------- ----------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue......................... $ 8 $ 15 $ 325 $ 1,063 $ 8,312 $ 746 $ 3,995
Expenses:
Direct operating.............. 46 45 488 1,336 7,258 888 3,450
Regional sales and
marketing................... -- 3 86 349 1,505 208 630
Product research and
development................. 383 1,368 1,648 1,830 3,969 661 1,441
Selling, general and
administrative.............. 171 402 1,716 2,790 5,351 872 2,528
Depreciation and
amortization................ -- 40 440 1,117 4,135 499 1,684
----- ----------- --------- --------- --------- --------- ---------
Loss from operations............ (592) (1,843) (4,053) (6,359) (13,906) (2,382) (5,738)
Other income (expense)
Interest income............. 11 29 34 398 848 160 580
Interest expense............ -- -- (297) (208) (2,661) (87) (2,344)
----- ----------- --------- --------- --------- --------- ---------
Net loss before extraordinary
item.......................... (581) (1,814) (4,316) (6,169) (15,719) (2,309) (7,502)
Extraordinary item -- loss
related to early retirement of
debt.......................... -- -- -- -- (248) -- --
----- ----------- --------- --------- --------- --------- ---------
Net loss........................ $ (581) $ (1,814) $ (4,316) $ (6,169) $ (15,967) $ (2,309) $ (7,502)
----- ----------- --------- --------- --------- --------- ---------
----- ----------- --------- --------- --------- --------- ---------
Pro forma net loss per share
before extraordinary item
(2)........................... -- -- -- -- $ (1.44) $ (0.21) $ (0.69)
Pro forma extraordinary item per
share (2)..................... -- -- -- -- (0.02) -- --
--------- --------- ---------
Pro forma net loss per share
(2)........................... -- -- -- -- $ (1.46) $ (0.21) $ (0.69)
--------- --------- ---------
--------- --------- ---------
Pro forma weighted average
shares outstanding
(000's)(2).................... -- -- -- -- 12,921 12,921 12,921
OTHER DATA:
Number of new Coinstar units
installed during the period... 4 13 31 215 1,238 169 428
Installed base of Coinstar units
at end of the period.......... 4 17 48 263 1,501 432 1,929
Number of regional markets...... 2 4 11 23 13 27
Dollar value of coins
processed..................... $ -- $ 74 $ 5,245 $ 17,701 $ 115,476 $ 12,306 $ 52,724
Capital expenditures............ 8 620 2,163 3,823 20,820 3,185 7,675
Direct contribution (loss)
(3)........................... (38) (30) (163) (273) 1,054 (142) 545
Direct operating expense per
average installed unit (4).... -- -- 20,353 11,717 8,610 2,515 2,037
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------- MARCH 31,
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 $ 48,184
Total assets............................. 80 2,090 3,913 19,601 82,531 81,538
Total debt, including current portion.... 4 -- 4,660 1,658 70,065 72,188
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) $ (29,449)
</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 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 $8.3 million at December
31, 1995 and 1996, and March 31, 1997, respectively. Funds in transit prior
to such dates are negligible.
20
<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
March 31, 1997 had an installed base of 1,929 units located in supermarkets in
27 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 $36.4
million as of March 31, 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 20 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. 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 has resulted in a
reduction in average age of all units in operation and consequently have
contributed to a lower 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 similarly decrease even as the
per unit dollar volume of mature units increases.
21
<PAGE>
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 MARCH 31, 1997 AND 1996
REVENUE
Revenue increased to $4.0 million in the first three months of 1997 from
$746,000 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 1,929 as of March
31, 1997 from 432 units as of March 31, 1996. The dollar value of coins
processed increased to $52.7 million during the 1997 period from $12.3 million
in the comparable 1996 period.
22
<PAGE>
DIRECT OPERATING EXPENSES
Direct operating expenses increased to $3.5 million in the first three
months of 1997 from $888,000 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 14 new regional markets since March
31, 1996. Direct operating expenses as a percentage of revenue decreased to 86%
in the 1997 period from 119% 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.
REGIONAL SALES AND MARKETING
Regional sales and marketing expenses increased to $630,000 in the first
three months of 1997 from $208,000 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 $1.4 million in the
first three months of 1997 from $661,000 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 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 $2.5 million in the
first three months of 1997 from $872,000 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 three 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 $1.7 million in the first
three months of 1997 from $499,000 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 expense to
increase significantly over the next several years as a result of expected
increases in the installation of Coinstar units.
23
<PAGE>
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 $580,000 in the first three months of 1997 from
$160,000 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 $2.3 million in first three months of 1997
from $87,000 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.
NET LOSS
Net loss increased to $7.5 million in the first three months of 1997 from
$2.3 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.
24
<PAGE>
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.
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.
25
<PAGE>
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.
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.
26
<PAGE>
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. This 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, 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 March 31, 1997, the Company had cash and cash
equivalents of $16.3 million, short-term investments of $31.9 million and
working capital of $34.6 million. Cash and cash equivalents include $8.3 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 $680,000 for the three months ended March 31, 1997 and net cash provided by
operating activities was $564,000 for the three months ended March 31, 1996. Net
cash used by operating activities was $3.4 million, $4.5 million, $2.6 million
for 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 three months ended March 31, 1997 by
an increase in accrued liabilities.
Net cash used by investing activities during the three month period ended
March 31, 1997 was $6.9 million and $3.2 million for the comparable 1996 period.
Capital expenditures for such periods were $7.7 million and $3.2 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 totalled $8.7 million.
Net cash used by financing activities for the three month period ended March
31, 1997 was $6,900 and net cash provided by financing activities for the three
month period ended March 31, 1996 was $578,000. 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
27
<PAGE>
$3.25. Upon the closing of this offering, such warrants will automatically
convert 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 this offering, such warrants will automatically convert 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 this
offering, such warrants will automatically convert 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 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 the Company's
initial public 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.
The Company intends to use the net proceeds from this offering predominantly
to fund capital expenditures and for working capital purposes in connection with
the continued expansion of the Coinstar network, for product research and
development, deployment of enhancements to the Coinstar unit and the coin
processing network and for general corporate purposes. A portion of the proceeds
may also be used for early retirement of existing indebtedness, which may
include the purchase or redemption of a portion of the Notes, for investment
purposes related to the expansion of the business, including internationally,
and for one or more acquisitions of or investments in businesses or technologies
that are complementary to those of the Company. The Company currently has no
commitments or understandings with respect to the retirement of debt or
international expansion nor is it presently engaged in any discussions or
negotiations for such acquisitions. Pending such uses, the Company intends to
invest the net proceeds of this offering in short term, investment grade
securities.
The Company believes that the net proceeds from this offering, together with
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
28
<PAGE>
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
that management considers necessary for a fair statement of the quarterly
results for the periods. The operating results and data for any quarter are not
necessarily indicative of the results for future periods.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1996 1996 1996 1996 1997
----------- --------- ------------- ------------ -----------
(DOLLARS IN THOUSANDS, EXCEPT UNIT AND PER UNIT DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue......................................... $ 746 $ 1,388 $ 2,830 $ 3,349 $ 3,995
Expenses:
Direct operating.............................. 888 1,321 2,110 2,940 3,450
Regional sales and marketing.................. 208 407 396 494 630
Product research and development.............. 661 762 1,014 1,533 1,441
Selling, general and administrative........... 872 1,067 1,425 1,987 2,528
Depreciation and amortization................. 499 796 1,098 1,741 1,684
Loss from operations............................ $ (2,382) $ (2,965) $ (3,213) $ (5,346) $ (5,738)
OTHER DATA:
Number of new Coinstar units installed during
the period.................................... 169 364 413 292 428
Installed base of Coinstar units at end of
period........................................ 432 796 1,209 1,501 1,929
Number of regional markets...................... 13 18 22 23 27
Dollar value of coins processed................. $ 12,306 $ 20,692 $ 37,637 $ 44,841 $ 52,724
Direct contribution (loss) (1).................. (142) 67 720 409 545
Direct operating expense per average installed
unit (2)...................................... 2,515 2,205 2,055 2,112 2,037
</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 historical results of operations, the Company believes that
customer usage of the Coinstar units follows a seasonal pattern resulting in
lower customer usage during the months corresponding to the Company's first and
fourth fiscal quarters. The Company's revenue growth in the third and fourth
quarters reflects the acceleration of Coinstar unit installations beginning in
the second quarter and higher coin
29
<PAGE>
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 fourth quarter revenues, direct contribution in the
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 quarter ended March 31, 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 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 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 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.
30
<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 in 20 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%. 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 7 million customer transactions consisting of over 5
billion coins worth over $190 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 March 31, 1997, the Company had an installed base of 1,929 units located in
supermarkets in 27 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 highly reliable,
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 company believes consumers in the United States conduct an estimated 288
billion cash transactions annually, which the Company estimates result in
approximately $144 billion of coin flow each year. Based on the current
population in the United States, each 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 turns over approximately 18 times a
year. The prevalence of coins in cash transactions and the lack of a convenient
alternative for converting
31
<PAGE>
coins into cash has resulted in an estimated $7 billion of non-circulating coins
that has been increasing at the rate of approximately $250 million annually. 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, although the Company's ability to capture a significant
portion of this market opportunity is limited by the current scope of its
operations, its dependence on market acceptance and other factors. 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. In 1996,
the Coinstar network recycled nearly 3.4 billion coins worth over $115 million.
[CHART]
32
<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%.
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,
essential 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%.
33
<PAGE>
The Company's Coinstar units, first test marketed in 1993, were in operation
in 1,929 supermarkets in 27 market regions across the United States as of March
31, 1997. The following table sets forth key data which highlight the Company's
growth:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------------------- ------------------------
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 1,501 432 1,929
Number of regional markets....... 2 4 11 23 13 27
Number of full time employees.... 15 35 56 160 68 213
Number of coins processed (in
millions)...................... 2 147 461 3,407 351 1,543
Dollar value of coins processed
(in thousands)................. $ 74 $ 5,245 $ 17,701 $ 115,476 $ 12,306 $ 52,724
</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, although not all are
located in regions 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
34
<PAGE>
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 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. There are over 100,000 banks and
depository institutions located in the United States. The first pilot program
with a regional bank was deployed in May 1997, although not all are located in
regions targeted by the Company.
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. There are over
55,000 convenience stores and over 15,000 mass merchants in the United States,
although not all are located in regions targeted by the Company.
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 50 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 50 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
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<PAGE>
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 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.
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The following table presents the Company's historical unit growth and
geographical expansion over the last four years and during the first quarter
ended March 31, 1997. As of March 31, 1997, the Company's network of Coinstar
units was operating in 1,929 supermarket stores located in 20 states.
UNIT EXPANSION BY STATE
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- MARCH 31,
STATE 1993 1994 1995 1996 1997
- ---------------------------------------- ---- ---- ---- ----- ---------
<S> <C> <C> <C> <C> <C>
California.............................. 17 30 112 491 511
Washington.............................. 18 55 93 99
North Carolina.......................... 32 70 97
Virginia................................ 24 37 37
New York................................ 19 153 200
New Jersey.............................. 13 98 173
Ohio.................................... 6 83 113
South Carolina.......................... 2 3 29
Texas................................... 135 158
Pennsylvania............................ 98 104
Indiana................................. 58 83
Massachusetts........................... 54 56
Arizona................................. 51 52
Georgia................................. 33 76
Colorado................................ 31 49
Delaware................................ 7 9
Kentucky................................ 5 5
Vermont................................. 1 1
Michigan................................ 57
Utah.................................... 20
---- ---- ---- ----- ---------
Total installed units................... 17 48 263 1,501 1,929
---- ---- ---- ----- ---------
---- ---- ---- ----- ---------
</TABLE>
37
<PAGE>
The Company estimates that there are approximately 30,000 supermarkets in
the United States. The following table set forth, as of March 31, 1997 for each
supermarket chain, the number of Coinstar units installed, the total number of
stores in operation and the penetration of the Company's installed base.
<TABLE>
<CAPTION>
UNITS TOTAL
CHAIN INSTALLED STORES (1) PENETRATION
- ----------------------------------------------------------- ----------- ----------- --------------
<S> <C> <C> <C>
A & P...................................................... 63 427 15%
Bel Air.................................................... 16 17 94
Bi-Lo...................................................... 32 261 12
Cala Foods................................................. 19 29 66
Fleming Foods.............................................. 14 87 16
Food 4 Less................................................ 74 77 96
Gerland's.................................................. 20 20 100
Giant Eagle................................................ 98 104 94
Grand Union................................................ 20 224 9
Haggen's................................................... 15 17 88
Harris Teeter.............................................. 82 136 60
Hughes Family Markets...................................... 57 57 100
King Kullen................................................ 44 47 94
Kroger(2).................................................. 366 1,372 27
Larry's Markets............................................ 5 6 83
Lucky Stores............................................... 13 436 3
Marsh Supermarkets......................................... 58 86 67
Pathmark Stores............................................ 118 144 82
Price Chopper.............................................. 38 93 41
Quality Food Centers....................................... 76 89 85
Raley's.................................................... 45 70 64
Ralph's.................................................... 254 265 96
Randall's.................................................. 69 71 97
Safeway.................................................... 5 836 1
Save Mart.................................................. 22 92 24
Shop-Rite.................................................. 52 54 96
Smith's.................................................... 72 150 48
Star Market................................................ 51 51 100
Tom Thumb.................................................. 48 51 94
Twin County Grocers(3)..................................... 18 22 82
Waldbaum's................................................. 49 90 54
Other(4)................................................... 16 -- --
----- ----- ---
Total(5)................................................. 1,929 5,481 35%
----- ----- ---
----- ----- ---
</TABLE>
- ------------------------
(1) Source: Company estimates and TRADE DIMENSIONS.
(2) Includes King Soopers Stores, a division of Kroger.
(3) Includes Foodtown Stores, a division of Twin County Grocers.
(4) Includes units in the following supermarkets: Acme (2 units), Food Lion,
Food Mark (3 units), L&R Food, Mega Foods,
Olson's, Pak-n-Sav, Stater (5 units) and Super Fresh.
(5) Does not include supermarkets with installations or agreements after March
31, 1997 which include: ABCO, Clemens,
Dominick's, Kash 'n Karry, Omni, Schwegmann, Top Valu and Vons.
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<PAGE>
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 1996 and
the first quarter ended March 31, 1997, Coinstar units in service in three
supermarket chains accounted for approximately 36.2% and 30.3%, respectively, of
the Company's revenue for such periods. The units in service in two of these
chains, Ralphs and QFC-Hughes, accounted for approximately 12.7% and 14.9%,
respectively, of the Company's 1996 revenue and 12.2% and 9.1%, respectively, of
the Company's revenue in the first quarter ended March 31, 1997. Mr Weinstein, a
director of the Company, is also a director of QFC-Hughes. 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 functionality of the Coinstar unit so that consumers
can designate the full value of their processed coins to
39
<PAGE>
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 and highly reliable 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, essential 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.
The Coinstar unit is controlled by an internal computer that runs
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 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
40
<PAGE>
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 engineer 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 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 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."
41
<PAGE>
REGIONAL FIELD SERVICE ORGANIZATION
The Company has assembled a regional field service organization comprised of
approximately 100 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."
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.
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<PAGE>
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 35 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."
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
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<PAGE>
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.
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. There can be no
assurance that the Company will prevail in such Patent Infringement Claim, 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
44
<PAGE>
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 March 31, 1997, the Company had 236 employees, including 23 part-time
field service employees. The Company has separate internal departments,
including sales and marketing, operations, technology systems and engineering,
and finance and administration. No employee is represented by a union, and the
Company has not experienced a work stoppage. The Company believes its employee
relations are good.
PROPERTIES
The Company's headquarters occupies a 24,700 square foot facility in
Bellevue, Washington. The Company operates under a lease which expires in
October 1997. The Company has signed a lease for a 10,196 square foot building
in Bellevue, Washington (the "Maplewood Building") commencing April 1997 and
expiring in March 2002. The Company has also signed a lease for a 46,070 square
foot building currently under construction near the Maplewood Building. The
building is scheduled to be available for occupancy in September 1997, and the
lease for such building expires in August 2004. 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 the
Patent Infringement Claim. See "Business--Proprietary Rights."
45
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND SENIOR MANAGEMENT
The executive officers, directors and senior management of the Company, and
their ages as of March 31, 1997 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------- --- ---------------------------------------------------
<S> <C> <C>
Jens H. Molbak 34 President, Chief Executive Officer and Director
Rod W. Brooks 43 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 35 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 42 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 46 National Director, Philanthropic Services
Timothy J. Manion 39 Director, Operations Strategy and Planning
Marion E. Mehrer 40 Director, Corporate Services
Michael W. Parks 50 Director, Field Operations
Marlane L. Wolf 51 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
46
<PAGE>
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 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 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.
47
<PAGE>
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-Hughes.
The Company intends to name two additional non-employee directors following
this offering.
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.
48
<PAGE>
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.
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.
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., of which Mr.
Lumry is a majority owner and employee, is a financial advisor of the Company.
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. In the role of financial advisor, 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.
49
<PAGE>
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 this 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") 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 ($) OPTIONS (#) COMPENSATION ($)
- -------------------------------------------------- ---------- ----------- ------------------- ----------------
<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
50
<PAGE>
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 is currently on a 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 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 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
51
<PAGE>
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 March 31, 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, 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 this 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.
52
<PAGE>
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.
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>
POTENTIAL
REALIZABLE
VALUE AT
ASSUMED
INDIVIDUAL GRANTS ANNUAL RATES
------------------------------------------------------------ OF STOCK
NUMBER OF PERCENTAGE PRICE
SECURITIES OF TOTAL APPRECIATION
UNDERLYING OPTIONS MARKET FOR OPTION
OPTIONS GRANTED IN EXERCISE PRICE TERM ($) (4)
GRANTED FISCAL 1996 PRICE ($/SH) EXPIRATION -------------
NAME (1) (%) (2) ($/SH) (3) DATE 0% 5% 10%
- ------------------------------ ---------- ----------- -------- --------- ---------- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Jens H. Molbak................ 25,000 9.8 $0.70 $ 14.00 4/30/2006 $332,500 $525,465 $807,782
Rod W. Brooks................. 25,000 9.8 0.70 14.00 4/30/2006 332,500 525,465 807,782
Aaron R. Finch................ 15,000 5.9 0.70 14.00 4/30/2006 199,500 315,279 484,669
Daniel A. Gerrity............. 30,000 11.8 0.70 14.00 4/30/2006 399,000 630,558 969,338
Warren M. Gordon (5).......... 15,000 5.9 0.70 14.00 4/30/2006 199,500 315,279 484,669
</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 an assumed initial public offering price of $14.00 per share.
(4) 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. The potential realizable value is calculated by assuming
that the assumed initial public offering price of $14.00 per share
appreciates at the indicated rate for the entire term of the option and that
the option is exercised at the exercise price and sold on the last day of
its term at the appreciated price.
(5) In February 1997, Mr. Gordon resigned from his position as the Company's
Chief Financial Officer and is currently on a leave of absence.
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<PAGE>
AGGREGATE OPTIONS EXERCISED IN 1996 AND YEAR-END OPTION VALUES
The following table sets forth for each of the Named Executive Officers the
shares acquired and the value realized on each exercise of stock options during
the year ended December 31, 1996 and the number and value of securities
underlying unexercised options held by the Named Executive Officers at December
31, 1996:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED OPTIONS
AT VALUE OF UNEXERCISED
SHARES DECEMBER 31, 1996 (#) IN-THE-MONEY OPTIONS AT
ACQUIRED ON VALUE ------------------------------ DECEMBER 31, 1996 ($) (2)
EXERCISE REALIZED UNEXERCISABLE ---------------------------
NAME (#) ($) EXERCISABLE (1) EXERCISABLE UNEXERCISABLE
- ------------------------------ ----------- ----------- ----------- ---------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jens H. Molbak................ -- -- 25,000 -- $ 337,500 --
Rod W. Brooks................. -- -- 100,000 -- 1,352,500 --
Aaron R. Finch................ -- -- 96,500 -- 1,313,150 --
Daniel A. Gerrity............. -- -- 90,000 -- 1,216,875 --
Warren M. Gordon (3).......... 13,500 $ 5,400 61,500 -- 832,425 --
</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 assumed initial public offering price of
$14.00 per share and the exercise price.
(3) In February 1997, Mr. Gordon resigned from his position as the Company's
Chief Financial Officer and is currently on a leave of absence.
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
54
<PAGE>
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.
55
<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.
56
<PAGE>
As of December 31, 1996, the Company had approximately 116 Coinstar units
installed in 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-Hughes.
The Company believes that the foregoing transactions were on terms no less
favorable to the Company than could be obtained from unaffiliated third parties.
57
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of March 31, 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>
PERCENTAGE OF SHARES
NUMBER OF BENEFICIALLY OWNED(1)(2)
SHARES ------------------------
BENEFICIALLY BEFORE AFTER
BENEFICIAL OWNER OWNED OFFERING OFFERING
- --------------------------------------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Benaroya Capital Company, L.L.C. (3)............................................. 1,154,118 9.1% 6.9%
1001 Fourth Avenue, Suite 4700
Seattle, WA 98154
Vencap, Inc. (4)................................................................. 1,092,353 8.6 6.6
1980 Manulife Place
10180-101 Street
Edmonton, Alberta T5J3S4
CIBC Wood Gundy Ventures, Inc. (5)............................................... 1,065,088 8.4 6.4
425 Lexington Avenue, 2nd Floor
New York, NY 10017
Acorn Ventures, Inc. (6)......................................................... 1,000,000 7.4 5.7
11400 SE 6th Street, Suite 120
Bellevue, WA 98004
Eos Partners SBIC, L.P. (7)...................................................... 860,295 6.8 5.2
320 Park Avenue
New York, NY 10022
Entities affiliated with Olympic Venture Partners (8)............................ 798,309 6.3 4.8
2420 Carillon Point
Kirkland, WA 98033
Roanoke Investors' Limited Partnership........................................... 656,471 5.2 3.9
1111 Third Avenue, Suite 2220
Seattle, WA 98101
Jens H. Molbak (9)............................................................... 701,225 5.5 4.2
Rod W. Brooks (10)............................................................... 108,015 * *
Kirk A. Collamer................................................................. 0 0 0
Aaron R. Finch (11).............................................................. 163,261 1.3 *
Daniel A. Gerrity (12)........................................................... 90,000 * *
George H. Clute (13)............................................................. 808,309 6.4 4.8
Larry A. Hodges (14)............................................................. 15,003 * *
David E. Stitt (15).............................................................. 1,102,353 8.7 6.6
Ronald A. Weinstein (16)......................................................... 258,380 2.0 1.5
All directors and executive officers as a group
(9 persons) (17)............................................................... 3,246,546 25.1% 19.2%
----------- --- ---
</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
March 31, 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,
58
<PAGE>
and subject to community property laws where applicable, the persons 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 12,666,396 shares of Common Stock
outstanding as of March 31, 1997 and 16,666,396 shares of Common Stock
outstanding after completion of this offering.
(2) Assumes no exercise of the Underwriters' over-allotment option to purchase
up to 600,000 shares of Common Stock from the Company. See "Underwriting."
(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.
(4) Includes 250,045 shares that may be acquired upon the exercise of certain
warrants issued in connection with a prior Preferred Stock financing. 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.
(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.
(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. 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. 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 March 31, 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 March 31, 1997, but such shares are subject to
repurchase by the Company through April 2000. Also includes 1,765 shares
issuable upon the exercise of a warrant which expires upon the completion
of this offering.
(11) Includes 16,250 shares issuable upon the exercise of options exercisable
within 60 days of March 31, 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 expires upon the completion
of this offering.
(12) Includes 66,000 shares issuable upon the exercise of options exercisable
within 60 days of March 31, 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. 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. 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 March 31, 1997.
(14) Includes 15,003 shares issuable upon the exercise of options exercisable
within 60 days of March 31, 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. 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 March 31, 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. 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 and shares issuable upon the exercise of options.
(17) Includes 243,681 shares subject to stock options exercisable within 60
days of March 31, 1997 and 311,429 shares that may be acquired upon the
exercise of certain warrants issued in connection with prior Preferred
Stock financings.
59
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock of the Company and certain
provisions of the Company's Certificate of Incorporation and Bylaws is a summary
and is qualified in its entirety by the provisions of the Certificate of
Incorporation and Bylaws, which have been filed as exhibits to the Company's
Registration Statement, of which this Prospectus is a part.
Upon the closing of the offering, the authorized capital stock of the
Company after giving effect to the conversion of all outstanding shares of
Preferred Stock into Common Stock, and the amendment of the Company's
Certificate of Incorporation, will consist of 45,000,000 shares of Common Stock,
$.001 par value and 5,000,000 shares of Preferred Stock, $.001 par value. As of
March 31, 1997 there were approximately 141 holders of record of the Company's
Common and Preferred Stock.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. The holders of
Common Stock are not entitled to cumulative voting rights with respect to the
election of directors, and as a consequence, minority stockholders will not be
able to elect directors on the basis of their votes alone. Subject to
preferences that may be applicable to any then outstanding shares of Preferred
Stock, holders of Common Stock are entitled to receive ratably such dividends as
may be declared by the Board of Directors out of funds legally available
therefor. See "Dividend Policy." In the event of a liquidation, dissolution or
winding up of the Company, holders of the Common Stock are entitled to share
ratably in all assets remaining after payment of liabilities and the liquidation
preference of any then outstanding Preferred Stock. Holders of Common Stock have
no preemptive rights and no right to convert their Common Stock into any other
securities. There are no redemption or sinking fund provisions applicable to the
Common Stock. All outstanding shares of Common Stock are, and all shares of
Common Stock to be outstanding upon completion of this offering will be, fully
paid and nonassessable.
PREFERRED STOCK
Upon the closing of this offering, all outstanding shares of Preferred Stock
will automatically be converted into 8,989,005 shares of Common Stock. See Notes
6 and 7 to the Financial Statements for a description of the currently
outstanding Preferred Stock. Under the Amended and Restated Certificate of
Incorporation, which will become effective in connection with the closing of
this offering, the Board of Directors has the authority to issue up to 5,000,000
shares of Preferred Stock in one or more series and to fix the rights,
preferences, privileges, and restrictions granted to or imposed upon such
Preferred Stock, including dividend rights, conversion rights, terms of
redemption, liquidation preference sinking fund terms and the number of shares
constituting any series or the designation of such series, without any further
vote or action by the stockholders. The Board of Directors, without stockholder
approval, can issue additional Preferred Stock with voting and conversion rights
which could adversely affect the voting power of the holders of Common Stock.
The issuance of Preferred Stock could have the effect of delaying, deferring or
preventing a change in control of the Company. The Company has no present plan
to issue any shares of Preferred Stock.
WARRANTS
Upon the closing of this offering, the Company will have outstanding
warrants to purchase an aggregate of 377,981 shares of Common Stock, after
giving effect to an assumed cash exercise of certain warrants to purchase
2,693,420 shares of Common Stock. Such outstanding warrants consist of a warrant
to purchase 49,231 shares of Common Stock at an exercise price of $3.25 per
share (the "$3.25 Warrant"), a warrant to purchase 93,750 shares of Common Stock
at an exercise price of $4.00 per share (the "$4.00 Warrant"), a warrant to
purchase 350,000 shares of Common Stock at an exercise price of $12.00 per share
60
<PAGE>
(the "$12.00 Warrant") and a warrant to purchase 550,000 shares of Common Stock
at $16.00 per share (the "$16.00 Warrant"). The terms of the $12.00 Warrant and
the $16.00 Warrant provide that the purchase price paid for each warrant will be
credited toward the exercise price for such warrant, resulting in effective
exercise prices for the $12.00 Warrant and the $16.00 Warrant of $11.40 and
$15.61136 per share, respectively. The $3.25 Warrant will expire on June 30,
2005, the $4.00 Warrant will expire on the fourth anniversary of the
consummation of this offering and the $12.00 Warrant and the $16.00 Warrant will
expire on July 1, 2000. All of the warrants described in this paragraph contain
a "net exercise" provision that enables the warrantholders to exercise a portion
of their warrant without paying the exercise price. To the extent the
warrantholders choose to "net exercise" their warrants, the Company will not
receive the proceeds from the exercise of such warrants.
REGISTRATION RIGHTS
After this offering, the holders of 8,988,964 shares of Common Stock and
2,028,420 shares issuable upon the assumed cash exercise of warrants to purchase
Common Stock, or their tranferees, will be entitled to certain rights with
respect to the registration of such shares under the Securities Act, pursuant to
the Second Amended and Restated Investor Rights Agreement among such holders and
the Company, dated August 27, 1996, as amended on October 22, 1996 and March 10,
1997 (the "Investors' Rights Agreement"). Under the terms of the Investors'
Rights Agreement, if the Company proposes to register any of its securities
under the Securities Act, either for its own account or for the account of other
security holders exercising registration rights, such holders are entitled to
notice of such registration and are entitled, subject to certain limitations, to
include shares therein. The holders may also require the Company to file a
registration statement under the Securities Act with respect to their shares,
and the Company is required to use its best efforts to effect to such
registration. Furthermore, the holders may require the Company to register their
shares on Form S-3 when such form becomes available to the Company. Generally,
the Company is required to bear all registration and selling expenses incurred
in connection with any such registrations. These rights are subject to certain
conditions and limitations, among them the right of the underwriters of an
offering to limit the number of shares included in such registration. Such
registration rights terminate on December 15, 2005 or upon such earlier date on
which such shares may be sold during any 90-day period under Rule 144 of the
Securities Act, excluding subsection (k) of Rule 144.
Pursuant to its obligation under that certain Warrant Registration Rights
Agreement dated as of October 22, 1996 between the Company and Smith Barney Inc.
(the "Note Warrants Registration Rights Agreement"), concurrently with the
closing of this offering, the Company is required, upon the election of a
majority of the holders of certain warrants (the "Note Warrants"), to register
the issuance of 665,000 shares of Common Stock (the "Note Warrant Shares") upon
exercise by the holders of the Note Warrants if permissible under law. Pursuant
to the Note Warrant Registration Rights Agreement, the Company is required to
register the issuance of the Note Warrant Shares upon exercise of the Note
Warrants to the extent legally permissible in connection with the Company's
initial public offering of its Common Stock. The Note Warrants are exercisable
at any time beginning on the closing of this offering and ending 90 days after
the closing date of this offering (the "Expiration Date"). If not exercised by
the Expiration Date, the Note Warrants terminate and may not be exercised. The
Note Warrant Shares are currently subject to agreements which prohibit the
resale of the Note Warrant Shares for 180 days from the closing of this
offering. Under the Note Warrant Registration Rights Agreement, after this
offering the holders of the Note Warrants may require that the Company file up
to two registration statements under the Securities Act with respect to the Note
Warrant Shares. Furthermore, if the Company proposes to register any of its
securities under the Securities Act, either for its own account or for the
account of other security holders, the holders of the Note Warrant Shares are
entitled to notice of such registration and are entitled to include their shares
therein, subject to certain conditions and limitations including the right of
underwriters of an offering to limit the number of shares included in such
registration in certain circumstances. The Company will pay certain expenses in
connection with the exercise of the foregoing rights. The registration
61
<PAGE>
rights of the holders of the Note Warrant Shares under the Note Warrant
Registration Rights Agreement terminate when such shares have been exercised or
disposed of by the holder pursuant to a registration statement or may be sold
without limitation under the Securities Act.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
The Company is governed by the provisions of Section 203 of the Delaware
General Corporation Law. In general, Section 203 prohibits a public Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. A "business combination"
includes mergers, asset sales or other transactions resulting in a financial
benefit to the stockholder. An "interested stockholder" is a person who,
together with affiliates and associates, owns (or within three years, did own)
15% or more of the corporation's voting stock. The statute could have the effect
of delaying, deferring or preventing a change in control of the Company.
The Company's Amended and Restated Certificate of Incorporation and Bylaws
also require that, effective upon the closing of this offering, any action
required or permitted to be taken by stockholders of the Company must be
effected at a duly called annual or special meeting of the stockholders and may
not be effected by a consent in writing. In addition, special meetings of the
stockholders of the Company may be called only by the Board of Directors, the
Chairman of the Board or the Chief Executive Officer of the Company. The
Company's Amended and Restated Certificate of Incorporation also specifies that
the authorized number of directors may be changed only by resolution of the
Board of Directors. The stockholders may amend the Company's Bylaws or adopt new
Bylaws, only by the affirmative vote of 2/3 of the outstanding voting
securities. These provisions may have the effect of deterring hostile takeovers
or delaying changes in control or management of the Company.
TRANSFER AGENT AND REGISTRAR
American Securities Transfer & Trust, Inc. is the transfer agent and
registrar for the Company's Common Stock. Its telephone number is (303)
298-5370.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the Common Stock
of the Company. Future sales of substantial amounts of Common Stock in the
public market could adversely affect market prices prevailing from time to time.
Furthermore, since only a limited number of shares will be available for sale
shortly after this offering because of certain contractual and legal
restrictions on resale described below, sales of substantial amounts of Common
Stock of the Company in the public market after the restrictions lapse could
adversely affect the prevailing market price and the ability of the Company to
raise equity capital in the future.
Upon completion of this offering, the Company will have outstanding an
aggregate 16,666,396 shares of Common Stock, assuming (i) the cash exercise of
warrants to purchase 2,693,420 shares of Common Stock (which warrants may be
exercised on a cashless basis in which event the Company would not receive cash
proceeds from their exercise), (ii) no exercise of the Underwriters'
over-allotment option and (iii) no exercise of options to purchase 961,900
shares of Common Stock outstanding as of March 31, 1997. Of these shares, the
4,000,000 shares of Common Stock sold in this offering will be freely tradable
without restriction or further registration under the Securities Act, unless
such shares are purchased by "affiliates" of the Company as that term is defined
in Rule 144 under the Securities Act ("Affiliates"). The remaining 12,666,396
shares of Common Stock held by existing stockholders are "restricted securities"
as that term is defined in Rule 144 under the Securities Act (the "Restricted
Shares"). Restricted Shares may be sold in the public market only if registered
or if they qualify for an exemption from registration under Rules 144 or
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<PAGE>
701 promulgated under the Securities Act, which rules are summarized below. As a
result of the contractual restrictions described below and the provisions of
Rules 144 and 701, additional shares will be available for sale in the public
market as follows: .
Upon completion of this offering, the holders of approximately 8,988,964
shares of Common Stock and 2,693,420 shares issuable upon the assumed cash
exercise of warrants to purchase Common Stock, or their transferees, will be
entitled to certain rights with respect to the registration of such shares under
the Securities Act. Registration of such shares under the Securities Act would
result in such shares becoming freely tradable without restriction under the
Securities Act (except for shares purchased by Affiliates) immediately upon the
effectiveness of such registration. See "Description of Capital Stock --
Registration Rights."
The Company's officers, directors and certain stockholders have agreed that
they will not, without the prior written consent of Smith Barney Inc., directly
or indirectly offer, sell, contract to sell or otherwise dispose of any shares
of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock during the 180-day period commencing on the
Effective Date. The Company has agreed that it will not, without the prior
written consent of Smith Barney Inc., directly or indirectly offer, sell,
contract to sell or otherwise dispose of any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock
during such 180-day period except for the sale of the shares of Common Stock in
this offering, the issuance of options and shares of Common Stock pursuant to
employee benefit plans set forth in this Prospectus, and the issuance of shares
of Common Stock upon exercise of warrants or options presently outstanding. Any
shares subject to the lock-up agreements may be released at any time without
notice by Smith Barney Inc., except for 133,537 shares that may not be so
released until 90 days after the Effective Date.
In general, under Rule 144 as currently in effect, beginning 90 days after
the Effective Date, an Affiliate of the Company, or person (or persons whose
shares are aggregated) who has beneficially owned Restricted Shares for at least
one year will be entitled to sell in any three-month period a number of shares
that does not exceed greater of (i) one percent of the then outstanding shares
of the Company's Common Stock or (ii) the average weekly trading volume of the
Company's Common Stock in the Nasdaq National Market during the four calendar
weeks immediately preceding the date on which notice of the sale is filed with
the Securities and Exchange Commission. Sales pursuant to Rule 144 are subject
to certain requirements relating to manner of sale, notice, and the availability
of current public information about the Company. A person (or persons whose
shares are aggregated) who is not deemed to have been an Affiliate of the
Company at any time during the 90 days immediately preceding the sale and who
has beneficially owned Restricted Shares for at least two years is entitled to
sell such shares under Rule 144(k) without regard to the limitations described
above.
An employee, officer or director of or consultant to the Company who
purchased or was awarded shares or options to purchase shares pursuant to a
written compensatory plan or contract is entitled to rely on the resale
provisions of Rule 701 under the Securities Act, which permits Affiliates and
non-Affiliates to sell their Rule 701 shares without having to comply with Rule
144's holding period restrictions, in each case commencing 90 days after the
date of this Prospectus. In addition, non-Affiliates may sell Rule 701 shares
without complying with the public information, volume and notice provisions of
Rule 144.
The Company intends to file a registration statement under the Securities
Act covering shares of Common Stock reserved for issuance under the Company's
stock option and purchase plans. Based on the number of options outstanding and
options and shares reserved for issuance at March 31, 1997, such registration
statement would cover approximately 3,000,000 shares. Such registration
statement is expected to be filed and to become effective as soon as practicable
after the date hereof. Shares registered under such registration statement will,
subject to Rule 144 volume limitations applicable to Affiliates, be available
for sale in the open market, unless such shares are subject to vesting
restrictions with the Company or the lock up agreements described above. See
"Management -- Equity Incentive Plans."
63
<PAGE>
UNDERWRITING
Upon the terms and subject to the conditions stated in the Underwriting
Agreement dated the date hereof, each Underwriter named below has severally
agreed to purchase, and the Company has agreed to sell to such Underwriter, the
number of shares of Common Stock set forth opposite the name of such
Underwriter.
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- ----------------------------------------------------------------------- ----------
<S> <C>
Smith Barney Inc.......................................................
Hambrecht & Quist LLC..................................................
----------
Total............................................................ 4,000,000
----------
----------
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares are subject to
approval of certain legal matters by counsel and to certain other conditions.
The Underwriters are obligated to take and pay for all shares of Common Stock
offered hereby (other than those covered by the over-allotment option described
below) if any such shares are taken.
The Underwriters, for whom Smith Barney Inc. and Hambrecht & Quist LLC are
acting as the Representatives, propose to offer part of the shares directly to
the public at the public offering price set forth on the cover page of this
Prospectus and part of the shares to certain dealers at a price which represents
a concession not in excess of $ per share under the public offering price.
The Underwriters may allow, and such dealers may reallow, a concession not in
excess of $ per share to certain other dealers. After the initial offering
of the shares to the public, the public offering price and such concessions may
be changed by the Representatives. The Representatives of the Underwriters have
advised the Company that the Underwriters do not intend to confirm any shares to
any accounts over which they exercise discretionary authority.
The Company has granted to the Underwriters an option, exercisable for
thirty days from the date of this Prospectus, to purchase up to 600,000
additional shares of Common Stock at the price to public set forth on the cover
page of this Prospectus minus the underwriting discounts and commissions. The
Underwriters may exercise such option solely for the purpose of covering
over-allotments, if any, in connection with the offering of the shares offered
hereby. To the extent such option is exercised, each Underwriter will be
obligated, subject to certain conditions, to purchase approximately the same
percentage of such additional shares as the number of shares set forth opposite
each Underwriter's name in the preceding table bears to the total number of
shares listed in such table.
In connection with this offering and in compliance with applicable law, the
Underwriters may overallot (I.E., sell more Common Stock than the total amount
shown on the list of Underwriters and participations which appears above) and
may effect transactions which stabilize, maintain or otherwise affect the market
price of the Common Stock at levels above those which might otherwise prevail in
the open market. Such transactions may include placing bids for the Common Stock
or effecting purchases of the Common Stock for the purpose of pegging, fixing or
maintaining the price of the Common Stock or for the purpose of reducing a
syndicate short position created in connection with this offering. A syndicate
short position may be covered by exercise of the option described above rather
than by open market purchases. In addition, the contractual arrangements among
the Underwriters include a provision whereby,
64
<PAGE>
if, prior to termination of price and trading restrictions, the Representatives
purchase Common Stock in the open market for the account of the underwriting
syndicate and the securities purchased can be traced to a particular Underwriter
or member of the selling group, the underwriting syndicate may require the
Underwriter or selling group member in question to purchase the Common Stock in
question at the cost price to the syndicate or may recover from (or decline to
pay to) the Underwriter or selling group member in question, the selling
concession applicable to the securities in question. The Underwriters are not
required to engage in any of these activities and any such activities, if
commenced, may be discontinued at any time.
The Company, its officers and directors, and certain stockholders of the
Company designated by the Representatives have agreed that, for a period of 180
days from the date of this Prospectus, they will not, without the prior written
consent of Smith Barney Inc., offer, sell, contract to sell, or otherwise
dispose of, any shares of Common Stock of the Company or any securities
convertible into, or exercisable or exchangeable for, Common Stock of the
Company.
Prior to this offering, there has not been any public market for the Common
Stock of the Company. Consequently, the initial public offering price for the
shares of Common Stock included in this offering has been determined by
negotiations between the Company and the Representatives. Among the factors
considered in determining such price were the history of and prospects for the
Company's business and the industry in which it competes, an assessment of the
Company's management and the present state of the Company's development, the
past and present revenues and earnings of the Company, the prospects for growth
of the Company's revenues and earnings, the current state of the economy in the
United States and the current level of economic activity in the industry in
which the Company competes and in related or comparable industries, and
currently prevailing conditions in the securities markets, including current
market valuations of publicly traded companies which are comparable to the
Company.
The Company and the Underwriters have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act. In the
opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
At the request of the Company, the Underwriters have reserved, pursuant to a
reserved share program, up to 280,000 shares of the shares of Common Stock
offered hereby for sale at the initial public offering price to employees,
officers, directors and certain persons associated with, or designated by, the
Company. The number of shares available for sale to the general public will be
reduced to the extent such persons purchase such reserved shares. Any reserved
shares not so purchased will be released for sale by the Underwriters to the
general public on the same terms as the other shares offered hereby.
Smith Barney Inc. acted as placement agent for the Company's private
placement of the Notes in October 1996 and in connection therewith received a
customary fee.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by its counsel, Cooley Godward LLP, Menlo Park, California.
As of the date of this Prospectus, certain members and associates of Cooley
Godward LLP own an aggregate of 31,170 shares of Common Stock through an
investment partnership. Certain legal matters in connection with the offering
will be passed upon for the Underwriters by Wilson Sonsini Goodrich & Rosati,
Professional Corporation, Palo Alto, California.
EXPERTS
The financial statements of Coinstar, Inc. as of December 31, 1996 and 1995,
and for each of the three years in the period ended December 31, 1996, included
in this Prospectus have been audited by Deloitte &
65
<PAGE>
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.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"SEC"), Washington, D.C. 20549, a Registration Statement on Form S-1 under the
Securities Act, of which this Prospectus forms a part, with respect to the
Common Stock offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and such
Common Stock, reference is made to the Registration Statement and the exhibits
and schedules filed as part thereof. Statements contained in this Prospectus as
to the contents of any contract or document filed as an exhibit to the
Registration Statement are qualified by reference to such exhibit as filed. A
copy of the Registration Statement, and the exhibits and schedules thereto, may
be inspected without charge at the public reference facilities maintained by the
SEC in Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
SEC's regional offices located at the Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade
Center, 13th Floor, New York, New York 10048, and copies of all or any part of
the Registration Statement may be obtained from such offices upon the payment of
the fees prescribed by the SEC. The SEC maintains a World Wide Web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC. The address of the
SEC's site is http://www.sec.gov.
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by its independent auditors and with
quarterly reports containing unaudited financial information for each of the
first three quarters of each fiscal year.
66
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditors' Report............................................................................... F-2
Balance Sheets............................................................................................. F-3
Statements of Operations................................................................................... F-4
Statements of Stockholders' Equity (Deficit)............................................................... F-5
Statements of Cash Flows................................................................................... F-6
Notes to Financial Statements.............................................................................. F-7
</TABLE>
F-1
<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, 2 and 9)
F-2
<PAGE>
COINSTAR, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1996
------------ ------------
MARCH 31, PRO FORMA
1997 MARCH 31,
------------ 1997
------------
(UNAUDITED)
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................... $ 14,119,532 $ 23,867,763 $ 16,301,302 $ 16,301,302
Short-term investments available for sale....... -- 32,441,912 31,882,909 31,882,909
Prepaid expenses and other current assets....... 251,516 865,000 1,436,033 1,436,033
------------ ------------ ------------ ------------
Total current assets.......................... 14,371,048 57,174,675 49,620,244 49,620,244
PROPERTY AND EQUIPMENT:
Coinstar units.................................. 6,200,246 24,843,112 31,676,374 31,676,374
Computers....................................... 396,131 1,653,768 1,998,059 1,998,059
Office furniture and equipment.................. 135,242 413,317 651,634 651,634
Leasehold improvements.......................... -- 29,953 47,490 47,490
Coinstar components............................. -- 840,167 1,075,726 1,075,726
------------ ------------ ------------ ------------
6,731,619 27,780,317 35,449,283 35,449,283
Accumulated depreciation........................ (1,582,842) (5,321,063) (6,929,794) (6,929,794)
------------ ------------ ------------ ------------
5,148,777 22,459,254 28,519,489 28,519,489
OTHER ASSETS, net of accumulated amortization of
$16,680, $78,497 and $147,672................... 81,044 2,897,177 3,398,737 3,398,737
------------ ------------ ------------ ------------
TOTAL....................................... $ 19,600,869 $ 82,531,106 $ 81,538,470 $ 81,538,470
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable................................ $ 910,674 $ 1,779,702 $ 2,656,015 $ 2,656,015
Accrued liabilities............................. 955,910 7,690,288 11,171,189 11,171,189
Current portion of long-term debt and capital
lease obligations............................. 593,208 910,535 1,208,072 1,208,072
------------ ------------ ------------ ------------
Total current liabilities..................... 2,459,792 10,380,525 15,035,276 15,035,276
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 70,980,137 70,980,137
------------ ------------ ------------ ------------
Total liabilities........................... 3,524,100 79,535,461 86,015,413 86,015,413
MANDATORILY 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 (preference in
liquidation, $15,142,803), pro forma none
outstanding................................. 14,094,787 14,509,472 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 9,862,612 --
Series E-1 -- Designated, issued, and
outstanding, 100,000 shares (preference in
liquidation, $600,000), pro forma none
outstanding................................. -- 600,000 600,000 --
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 24,972,084 --
COMMITMENTS AND CONTINGENCIES (Notes 3 and 4)
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................................. 649,775 649,775 649,775 --
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 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 93,727 29,297,620
Contributed capital for warrants................ 1,163,319 2,621,160 2,621,160 2,621,160
Accumulated deficit............................. (12,880,469) (28,847,804) (36,395,723) (36,395,723)
------------ ------------ ------------ ------------
Total stockholders' equity (deficit)........ (7,470,995) (21,976,439) (29,449,027) (4,476,943)
------------ ------------ ------------ ------------
TOTAL..................................... $ 19,600,869 $ 82,531,106 $ 81,538,470 $ 81,538,470
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
See notes to financial statements.
F-3
<PAGE>
COINSTAR, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1994 1995 1996
------------- ------------- -------------- THREE MONTHS ENDED
MARCH 31,
----------------------------
1996 1997
------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE.............................. $ 324,810 $ 1,062,865 $ 8,312,080 $ 745,661 $ 3,995,024
EXPENSES:
Direct operating................... 488,467 1,335,721 7,258,406 887,890 3,450,144
Regional sales and marketing....... 85,691 349,131 1,504,633 208,154 629,908
Product research and development... 1,647,923 1,830,153 3,969,185 660,540 1,440,642
Selling, general, and
administrative................... 1,716,407 2,789,538 5,351,476 871,602 2,527,663
Depreciation and amortization...... 439,378 1,117,655 4,133,904 499,184 1,684,328
------------- ------------- -------------- ------------- -------------
Loss from operations............. (4,053,056) (6,359,333) (13,905,524) (2,381,709) (5,737,661)
OTHER INCOME (EXPENSE):
Interest income.................... 34,364 398,305 848,194 159,961 580,038
Interest expense................... (297,758) (207,687) (2,661,374) (87,363) (2,344,068)
------------- ------------- -------------- ------------- -------------
Net loss before extraordinary
item........................... (4,316,450) (6,168,715) (15,718,704) (2,309,111) (7,501,691)
EXTRAORDINARY ITEM -- Loss related to
early retirement of debt........... -- -- 248,631 -- --
------------- ------------- -------------- ------------- -------------
NET LOSS............................. $ (4,316,450) $ (6,168,715) $ (15,967,335) $ (2,309,111) $ (7,501,691)
------------- ------------- -------------- ------------- -------------
------------- ------------- -------------- ------------- -------------
UNAUDITED PRO FORMA INFORMATION (Note
2):
Pro forma net loss per share before
extraordinary item............... $ (1.44) $ (0.21) $ (0.69)
Pro forma extraordinary item per
share............................ (0.02) -- --
-------------- ------------- -------------
Pro forma net loss per share....... $ (1.46) $ (0.21) $ (0.69)
-------------- ------------- -------------
-------------- ------------- -------------
Pro forma weighted average shares
outstanding...................... 10,927,483 10,927,483 10,927,483
-------------- ------------- -------------
-------------- ------------- -------------
</TABLE>
See notes to financial statements.
F-4
<PAGE>
COINSTAR, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
SERIES A SERIES B
COMMON STOCK PREFERRED STOCK PREFERRED STOCK
---------------- ----------------- -------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------- ------- ------- -------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1994................ 726,225 $7,262 649,775 $649,775 895,506 $3,582,034
Contributed capital for warrants...... -- -- -- -- -- --
Net loss.............................. -- -- -- -- -- --
------- ------- ------- -------- ------- ----------
BALANCE, December 31, 1994.............. 726,225 7,262 649,775 649,775 895,506 3,582,034
Exercise of stock options............. 53,334 7,084 -- -- -- --
Contributed capital for warrants...... -- -- -- -- -- --
Net loss.............................. -- -- -- -- -- --
------- ------- ------- -------- ------- ----------
BALANCE, December 31, 1995.............. 779,559 14,346 649,775 649,775 895,506 3,582,034
Exercise of stock options............. 13,500 4,050 -- -- -- --
Exercise of Series C Preferred stock
warrants............................ -- -- -- -- -- --
Exercise of Series D Preferred stock
warrants............................ -- -- -- -- -- --
Contributed capital for warrants...... -- -- -- -- -- --
Net loss.............................. -- -- -- -- -- --
------- ------- ------- -------- ------- ----------
BALANCE, December 31, 1996.............. 793,059 $18,396 649,775 $649,775 895,506 $3,582,034
Exercise of stock options............. 190,953 75,331 -- -- -- --
Unrealized loss on short-term
investments available for sale...... -- -- -- -- -- --
Net loss.............................. -- -- -- -- -- --
------- ------- ------- -------- ------- ----------
BALANCE, March 31, 1997................. 984,012 $93,727 649,775 $649,775 895,506 $3,582,034
------- ------- ------- -------- ------- ----------
------- ------- ------- -------- ------- ----------
<CAPTION>
CONTRIBUTED
CAPITAL FOR ACCUMULATED
WARRANTS DEFICIT TOTAL
----------- ------------- ------------
<S> <C> <C> <C>
BALANCE, January 1, 1994................ $ -- $ (2,395,304) $ 1,843,767
Contributed capital for warrants...... 272,678 -- 272,678
Net loss.............................. -- (4,316,450) (4,316,450)
----------- ------------- ------------
BALANCE, December 31, 1994.............. 272,678 (6,711,754) (2,200,005)
Exercise of stock options............. -- -- 7,084
Contributed capital for warrants...... 890,641 -- 890,641
Net loss.............................. -- (6,168,715) (6,168,715)
----------- ------------- ------------
BALANCE, December 31, 1995.............. 1,163,319 (12,880,469) (7,470,995)
Exercise of stock options............. -- -- 4,050
Exercise of Series C Preferred stock
warrants............................ (45,453) -- (45,453)
Exercise of Series D Preferred stock
warrants............................ (34,329) -- (34,329)
Contributed capital for warrants...... 1,537,623 -- 1,537,623
Net loss.............................. -- (15,967,335) (15,967,335)
----------- ------------- ------------
BALANCE, December 31, 1996.............. $2,621,160 $(28,847,804) $(21,976,439)
Exercise of stock options............. -- -- 75,331
Unrealized loss on short-term
investments available for sale...... -- (46,228) (46,228)
Net loss.............................. -- (7,501,691) (7,501,691)
----------- ------------- ------------
BALANCE, March 31, 1997................. $2,621,160 $(36,395,723) $(29,449,027)
----------- ------------- ------------
----------- ------------- ------------
</TABLE>
See notes to financial statements.
F-5
<PAGE>
COINSTAR, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1994 1995 1996
---------- ---------- ----------- THREE MONTHS ENDED
MARCH 31,
------------------------
1996 1997
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss....................................... $(4,316,450) $(6,168,715) $(15,967,335) ($2,309,111) ($7,501,691)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization................ 439,378 1,117,655 4,133,904 499,184 1,684,328
Debt discount amortization................... 211,757 88,545 1,819,457 -- 2,204,942
Accrued investment income.................... -- -- (263,063) (18,372) (283,178)
Cash provided (used) by changes in operating
assets and liabilities:
Prepaid expenses and other current
assets................................... (167,365) (28,956) (613,484) (21,880) (571,033)
Other assets............................... (31,384) (867) (64,803) (4,450) (570,736)
Accounts payable........................... 916,637 (205,791) 869,029 1,130,511 876,313
Accrued liabilities........................ 314,445 670,839 6,734,378 1,288,159 3,480,901
---------- ---------- ----------- ----------- -----------
Net cash provided (used) by operating
activities................................... (2,632,982) (4,527,290) (3,351,917) 564,041 (680,154)
INVESTING ACTIVITIES:
Purchases of short-term investments............ -- -- (32,245,346) -- (2,970,693)
Sale of short-term investments................. -- -- -- -- 3,766,644
Purchases of fixed assets...................... (2,162,585) (3,823,307) (20,819,556) (3,184,725) (7,675,390)
Payment of security deposit.................... -- (33,975) (98,791) -- --
---------- ---------- ----------- ----------- -----------
Net cash used by investing activities.......... (2,162,585) (3,857,282) (53,163,693) (3,184,725) (6,879,439)
FINANCING ACTIVITIES:
Borrowings under short-term debt agreements.... 4,448,424 100,000 -- 603,750 --
Payments on short-term debt.................... -- (460,000) -- -- --
Payments on long-term debt..................... -- -- (6,462,640) (158,297) (82,199)
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........................................ -- 9,452,977 375,306 132,097 --
Proceeds from sale of Series E Preferred
stock........................................ -- -- 600,000 -- --
Proceeds from exercise of stock options........ -- 7,084 4,050 -- 75,331
Contributed capital for warrants............... 272,678 890,641 1,537,623 -- --
---------- ---------- ----------- ----------- -----------
Net cash provided (used) by financing
activities................................... 4,721,102 21,161,494 66,263,841 577,550 (6,868)
---------- ---------- ----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................... (74,465) 12,776,922 9,748,231 (2,043,134) (7,566,461)
CASH AND CASH EQUIVALENTS:
Beginning of period............................ 1,417,075 1,342,610 14,119,532 14,119,532 23,867,763
---------- ---------- ----------- ----------- -----------
End of period.................................. $1,342,610 $14,119,532 $23,867,763 1$2,076,398 1$6,301,302
---------- ---------- ----------- ----------- -----------
---------- ---------- ----------- ----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest....... -- $ 119,142 $ 832,061 $ 87,363 $ 139,126
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 46,544 --
</TABLE>
See notes to financial statements.
F-6
<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 March 31, 1997, had an installed base of 1,929 units located in
supermarkets in 20 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, $5.5 million and $8.3 million at December 31, 1995
and 1996, and March 31, 1997, respectively.
SECURITIES AVAILABLE FOR SALE: The Company's investments are all classified
as available for sale and are stated at fair value in accordance with Statement
of Financial Accounting Standards (SFAS) No. 115, ACCOUNTING FOR CERTAIN
INVESTMENTS IN DEBT AND EQUITY SECURITIES. This statement specifies that
available for sale securities are reported at fair value with changes in
unrealized gains and losses recorded directly to stockholders' equity. All of
the Company's investments have maturities of one year or less. 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>
USEFUL
TYPE OF ASSET METHOD LIFE
- --------------------------------------------------------- --------------------- ----------
<S> <C> <C>
150% declining
Coinstar units purchased prior to January 1, 1996 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.
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
F-7
<PAGE>
COINSTAR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
INTERIM FINANCIAL INFORMATION: The interim financial information as of
March 31, 1997, and for the three-month periods ended March 31, 1996, and 1997,
was prepared by the Company in a manner consistent with the audited financial
statements and pursuant to the rules and requirements of the Securities and
Exchange Commission. The unaudited information, in management's opinion,
reflects all adjustments that are of a normal recurring nature and that are
necessary to present fairly the results for the periods presented. The results
of operations for the three-month period ended March 31, 1997, are not
necessarily indicative of the results to be expected for the entire year.
RECLASSIFICATIONS: Certain reclassifications have been made to the 1994,
1995 and 1996 financial statements to conform to the presentation used in 1997.
UNAUDITED PRO FORMA BALANCE SHEET: The accompanying pro forma balance
sheet, which is unaudited, is presented as if the conversion of preferred stock
into common stock had occurred on March 31, 1997 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 closing of this 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 and Exchange Commission, all common stock,
F-8
<PAGE>
COINSTAR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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,
------------------------ MARCH 31,
1995 1996 1997
---------- ------------ -------------
<S> <C> <C> <C>
Funds in transit.............................................. $ 766,666 $ 5,490,260 $ 8,259,934
Accrued liabilities to service contract providers............. -- 661,449 711,042
Accrued liabilities to manufacturers.......................... -- 502,500 790,237
Other......................................................... 189,244 1,036,079 1,409,976
---------- ------------ -------------
$ 955,910 $ 7,690,288 $ 11,171,189
---------- ------------ -------------
---------- ------------ -------------
</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.
F-9
<PAGE>
COINSTAR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4: LONG-TERM DEBT (CONTINUED)
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 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,
F-10
<PAGE>
COINSTAR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4: LONG-TERM DEBT (CONTINUED)
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. 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>
<CAPTION>
<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...................................... 28,831,550
----------
$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-11
<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.
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
F-12
<PAGE>
COINSTAR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6: MANDATORILY REDEEMABLE PREFERRED STOCK (CONTINUED)
$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-13
<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>
<TABLE>
<CAPTION>
<S>
OUTSTANDING, January 1, 1994............
Issued................................
OUTSTANDING, December 31, 1994..........
Issued................................
OUTSTANDING, December 31, 1995..........
Issued................................
Exercised.............................
OUTSTANDING, December 31, 1996..........
<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>
F-14
<PAGE>
COINSTAR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
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
F-15
<PAGE>
COINSTAR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9: STOCK OPTION PLAN (CONTINUED)
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>
WEIGHTED
AVERAGE
NUMBER OF OPTIONS REMAINING NUMBER OF OPTIONS
OUTSTANDING AT CONTRACTUAL EXERCISABLE AT
EXERCISE PRICES DECEMBER 31, 1996 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-16
<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.
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.
F-17
<PAGE>
COINSTAR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9: STOCK OPTION PLAN (CONTINUED)
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 March 31, 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 as of March 31, 1997.
F-18
<PAGE>
[PICTURE OF CUSTOMER USING COINSTAR UNIT IN RETAIL SETTING WITH COINSTAR LOGO,
AND TEXT "GOT A JAR OF COINS AT HOME?" "GET CASH IT'S AS EASY AS 1, 2, 3."
"THE COINSTAR NETWORK CONSISTS OF ON-LINE MACHINES LOCATED AT THE FRONT ENTRANCE
OF SUPERMARKETS THROUGHOUT THE U.S. THE UNITS COUNT SHOPPERS' ACCUMULATED COINS
AND DISPENSE VOUCHERS THAT CAN BE EXCHANGED IN THE STORE FOR GROCERIES OR
CASH."]
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR BY ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES
OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THOSE TO WHICH IT
RELATES IN ANY STATE TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE SUCH OFFER
IN SUCH STATE. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT
THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 6
The Company.................................... 16
Use of Proceeds................................ 16
Dividend Policy................................ 16
Capitalization................................. 17
Dilution....................................... 18
Selected Financial and Other Data.............. 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 21
Business....................................... 31
Management..................................... 46
Certain Relationships and Related
Transactions................................. 56
Principal Stockholders......................... 58
Description of Capital Stock................... 60
Shares Eligible for Future Sale................ 62
Underwriting................................... 64
Legal Matters.................................. 65
Experts........................................ 65
Available Information.......................... 66
Index to Financial Statements.................. F-1
</TABLE>
--------------
UNTIL , 1997 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
4,000,000 SHARES
COINSTAR, INC.
COMMON STOCK
[LOGO]
------
PROSPECTUS
, 1997
---------
SMITH BARNEY INC.
HAMBRECHT & QUIST
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses payable by the Registrant in
connection with the sale of the Common Stock being registered. All the amounts
shown are estimates except for the SEC registration fee and the NASD filing fee.
<TABLE>
<S> <C>
Registration fee........................................................ $ 20,909
NASD filing fee......................................................... 7,400
Nasdaq Stock Market Listing Application fee............................. 50,000
Blue sky qualification fees and expenses................................ 5,000
Printing and engraving expenses......................................... 175,000
Legal fees and expenses................................................. 350,000
Directors' and officer's liability insurance............................ 100,000
Accounting fees and expenses............................................ 250,000
Transfer agent and registrar fees....................................... 25,000
Miscellaneous........................................................... 16,691
---------
Total............................................................... $1,000,000
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under Section 145 of the Delaware General Corporation Law, the Registrant
has broad powers to indemnify its directors and officers against liabilities
they may incur in such capacities, including liabilities under the Securities
Act of 1933, as amended (the "Securities Act").
The Registrant's Amended and Restated Certificate of Incorporation and
By-laws include provisions to (i) eliminate the personal liability of its
directors for monetary damages resulting from breaches of their fiduciary duty
to the extent permitted by Section 102(b)(7) of the General Corporation Law of
Delaware (the "Delaware Law") and (ii) require the Registrant to indemnify its
directors and officers to the fullest extent permitted by Section 145 of the
Delaware Law, including circumstances in which indemnification is otherwise
discretionary. Pursuant to Section 145 of the Delaware Law, a corporation
generally has the power to indemnify its present and former directors, officers,
employees and agents against expenses incurred by them in connection with any
suit to which they are or are threatened to be made, a party by reason of their
serving in such positions so long as they acted in good faith and in a manner
they reasonably believed to be in or not opposed to, the best interests of the
corporation and with respect to any criminal action, they had no reasonable
cause to believe their conduct was unlawful. The Registrant believes that these
provisions are necessary to attract and retain qualified persons as directors
and officers. These provisions do not eliminate the directors' duty of care,
and, in appropriate circumstances, equitable remedies such as injunctive or
other forms of non-monetary relief will remain available under Delaware Law. In
addition, each director will continue to be subject to liability for breach of
the director's duty of loyalty to the Registrant, for acts or omissions not in
good faith or involving intentional misconduct, for knowing violations of law,
for acts or omissions that the director believes to be contrary to the best
interests of the Registrant or its stockholders, for any transaction from which
the director derived an improper personal benefit, for acts or omissions
involving a reckless disregard for the director's duty to the Registrant or its
stockholders when the director was aware or should have been aware of a risk of
serious injury to the Registrant or its stockholders, for acts or omissions that
constitute an unexcused pattern of inattention that amounts to an abdication of
the director's duty to the Registrant or its stockholders, for
II-1
<PAGE>
improper transactions between the director and the Registrant and for improper
distributions to stockholders and loans to directors and officers. The provision
also does not affect a director's responsibilities under any other law, such as
the federal securities law or state or federal environmental laws.
The Registrant has entered into indemnity agreements with each of its
directors and executive officers that require the Registrant to indemnify such
persons against expenses, judgments, fines, settlements and other amounts
incurred (including expenses of a derivative action) in connection with any
proceeding, whether actual or threatened, to which any such person may be made a
party by reason of the fact that such person is or was a director or an
executive officer of the Registrant or any of its affiliated enterprises,
provided that such person acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interests of the
Registrant and, with respect to any criminal proceeding, had no reasonable cause
to believe his conduct was unlawful. The indemnification agreements also set
forth certain procedures that will apply in the event of a claim for
indemnification thereunder.
At present, there is no pending litigation or proceeding involving a
director or officer of the Registrant as to which indemnification is being
sought nor is the Registrant aware of any threatened litigation that may result
in claims for indemnification by any officer or Director.
The Registrant has an insurance policy covering the officers and directors
of the Registrant with respect to certain liabilities, including liabilities
arising under the Securities Act or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since March 30, 1994, the Registrant has sold and issued the following
unregistered securities:
(1) In February 1995, the Company issued an aggregate of 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 and $4.00
per share.
(2) In December 1995, the Company issued an aggregate of 2,500,000
shares of Series D Preferred Stock at $4.00 per share along with warrants to
purchase 705,891 shares of Series D Preferred Stock for $4.25 per share.
(3) In August 1996, the Company issued an aggregate of 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 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 and Series E-3 Preferred Stock of $11.40 and $15.61136 per share,
respectively.
(4) In December 1996, the Registrant sold an aggregate of 92,308 shares
of Series C Preferred Stock and 56,471 shares of Series D Preferred Stock
for an aggregate amount of $609,233.75 to one shareholder of the Registrant
pursuant to the exercise of warrants.
(5) In October 1996, the Registrant sold 95,000 units consisting in the
aggregate of $95,000,000 principal amount at maturity of 13% Senior
Subordinated Discount Notes due October 1, 2006 and 95,000 warrants, each
representing the right to purchase initially seven shares of Common Stock of
the Company at an exercise price of $0.01 per share, to a group of qualified
institutional buyers for aggregate cash proceeds of $65,586,846. The Company
paid a placement fee of $2,197,159 to Smith Barney Inc. in connection with
these issuances.
(6) In February 1997, the Registrant sold an aggregate of 257,788 shares
of its Common Stock to seven employees of the Registrant for consideration
in the aggregate amount of $86,464.20 pursuant to the exercise of stock
options granted under the Equity Incentive Plan.
II-2
<PAGE>
The sales and issuances of securities in the transactions described in
paragraphs (1) through (4) above were made to "Accredited Investors" as such
term is defined under Rule 501 of the Securities Act and were deemed to be
exempt from registration under the Securities Act by virtue of Section 4(2) and
Rule 506 of Regulation D promulgated under the Securities Act. The purchasers in
each case represented their intention to acquire the securities for investment
only and not with a view to the distribution thereof. Appropriate legends are
affixed to the stock certificates issued in such transactions. Similar legends
were imposed in connection with any subsequent sales of any such securities. All
recipients either received adequate information about the Registrant or had
access, through employment or other relationships, to such information.
The sales and issuance of securities in the transaction described in
paragraph (5) above were made to "qualified institutional buyers" (a "QIB") as
such term is defined under Rule 144A of the Securities Act and were deemed to be
exempt from registration under the Securities Act by virtue of Rule 144A of the
General Regulations promulgated under the Securities Act. The purchasers in each
case represented that they were a QIB or purchasing the shares on account of a
QIB and that the securities were subject to transfer restrictions. Appropriate
legends are affixed to the securities issued in such transactions. Similar
legends were imposed in connection with any subsequent sales of any such
securities. All recipients either received adequate information about the
Registrant or had access, through employment or other relationships, to such
information.
The sales and issuance of securities in the transaction described in
paragraph (6) above were deemed to be exempt from registration under the
Securities Act by virtue of Rule 701 promulgated thereunder in that they were
offered and sold either pursuant to written compensatory benefit plans or
pursuant to a written contract relating to compensation, as provided by Rule
701.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1* Amended and Restated Certificate of Incorporation of the Registrant currently in effect.
3.2* Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Registrant.
3.3* Amended and Restated Certificate of Incorporation of the Registrant expected to be in effect
immediately after the closing of this offering.
3.4* Amended and Restated Bylaws of the Registrant.
3.5* Amended and Restated Bylaws of the Registrant expected to be in effect by the closing of this offering.
4.1* Reference is made to Exhibits 3.1 through 3.5.
4.2* Specimen Stock Certificate.
4.3* Second Amended and Restated Investor Rights Agreement, dated August 27, 1996, between the Registrant
and certain investors, as amended October 22, 1996.
4.4* Indenture between Registrant and The Bank of New York dated October 1, 1996.
4.5* Warrant Agreement between Registrant and The Bank of New York dated October 22, 1996.
4.6* Notes Registration Rights Agreement between Registrant and Smith Barney Inc. dated October 22, 1996.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
4.7* Warrant Registration Rights Agreement between Registrant and Smith Barney Inc. dated October 22, 1996.
5.1 Opinion of Cooley Godward LLP.
10.1* Registrant's 1997 Equity Incentive Plan.
10.2* Registrant's 1997 Employee Stock Purchase Plan.
10.3* Registrant's 1997 Non-Employee Directors' Stock Option Plan.
10.4* Form of Indemnity Agreement to be entered into between the Registrant and its executive officers and
directors.
10.5* Series E Preferred Stock and Warrant Purchase Agreement between Registrant and Acorn Ventures, Inc.,
dated August 27, 1996.
10.6* Office Building Lease between Registrant and Factoria Heights dated June 1, 1994, as amended on January
24, 1997.
10.7* Sublease between Registrant and Maruyama U.S., Inc. dated January 15, 1997.
10.8* Lease agreement between Registrant and Spieker Properties, L.P. dated January 29, 1997.
10.9* Lease agreement between Registrant and Spieker Properties, L.P. dated January 29, 1997.
10.10* Manufacturing Agreement between Registrant and SeaMed Corporation dated September 1, 1996.
10.11+ Letter of Intent between Registrant and Scan Coin AB dated March 5, 1997.
10.12+ Agreement between Registrant and Scan Coin AB dated April 30, 1993, as amended.
10.13* Purchase Agreement between Registrant and Smith Barney Inc. dated October 22, 1996.
11.1 Computation of Earnings Per Share
23.1 Consent of Deloitte & Touche LLP, Independent Auditors.
23.2 Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1.
24.1* Power of Attorney. Reference is made to the Signatures page.
27.1 Financial Data Schedule
</TABLE>
- ------------------------
* Filed previously
+ Confidential treatment requested as to a portion of this exhibit pursuant to
Rule 406 under the Securities Act. The confidential portions of such exhibit
have been omitted and filed separately with the Commission.
(B) FINANCIAL STATEMENT SCHEDULES.
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to provisions described in Item 15 or otherwise, the
registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action,
II-4
<PAGE>
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes:
(1) That, for purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) The undersigned Registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreement
certificates in such denominations and registered in such names as required
by the underwriter to permit prompt delivery to each purchaser.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-1, and has duly caused this amendment
to the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Bellevue, County of King, State of
Washington, on the 20th day of June, 1997.
By: /s/ JENS H. MOLBAK*
-----------------------------------------
Jens H. Molbak
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, as amended, this
amendment to the Registration Statement has been signed by the following persons
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
President, Chief Executive
/s/ JENS H. MOLBAK* Officer and Director
- ------------------------------ (PRINCIPAL EXECUTIVE June 20, 1997
Jens H. Molbak OFFICER)
Vice President and Chief
/s/ KIRK A. COLLAMER Financial Officer
- ------------------------------ (PRINCIPAL FINANCIAL AND June 20, 1997
Kirk A. Collamer ACCOUNTING OFFICER)
/s/ GEORGE H. CLUTE*
- ------------------------------ Director June 20, 1997
George H. Clute
/s/ LARRY A. HODGES*
- ------------------------------ Director June 20, 1997
Larry A. Hodges
/s/ DAVID E. STITT*
- ------------------------------ Director June 20, 1997
David E. Stitt
/s/ RONALD A. WEINSTEIN*
- ------------------------------ Director June 20, 1997
Ronald A. Weinstein
</TABLE>
<TABLE>
<S> <C>
*By: /s/ KIRK A. COLLAMER
-------------------------------
Kirk A. Collamer
Attorney-in-fact
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1* Amended and Restated Certificate of Incorporation of the Registrant currently in effect.
3.2* Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Registrant.
3.3* Amended and Restated Certificate of Incorporation of the Registrant expected to be in effect immediately
after the closing of this offering.
3.4* Amended and Restated Bylaws of the Registrant.
3.5* Amended and Restated Bylaws of the Registrant expected to be in effect upon the closing of this
offering.
4.1* Reference is made to Exhibits 3.1 through 3.5.
4.2* Specimen Stock Certificate.
4.3* Second Amended and Restated Investor Rights Agreement, dated August 27, 1996, between the Registrant and
certain investors, as amended October 22, 1996.
4.4* Indenture between Registrant and The Bank of New York dated October 1, 1996.
4.5* Warrant Agreement between Registrant and The Bank of New York dated October 22, 1996.
4.6* Notes Registration Rights Agreement between Registrant and Smith Barney Inc. dated October 22, 1996.
4.7* Warrant Registration Rights Agreement between Registrant and Smith Barney Inc. dated October 22, 1996.
5.1 Opinion of Cooley Godward LLP.
10.1* Registrant's 1997 Equity Incentive Plan.
10.2* Registrant's 1997 Employee Stock Purchase.
10.3* Registrants 1997 Non-Employee Directors' Stock Option Plan.
10.4* Form of Indemnity Agreement to be entered into between the Registrant and its executive officers and
directors.
10.5* Series E Preferred Stock and Warrant Purchase Agreement between Registrant and Acorn Ventures, Inc.,
dated August 27, 1996.
10.6* Office Building Lease between Registrant and Factoria Heights dated June 1, 1994, as amended on January
24, 1997.
10.7* Sublease between Registrant and Maruyama U.S., Inc. dated January 15, 1997.
10.8* Lease agreement between Registrant and Spieker Properties, L.P. dated January 29, 1997.
10.9* Lease agreement between Registrant and Spieker Properties, L.P. dated January 29, 1997.
10.10* Manufacturing Agreement between Registrant and SeaMed Corporation dated September 1, 1996.
10.11+ Letter of Intent between Registrant and Scan Coin AB dated March 5, 1997.
10.12+ Agreement between Registrant and Scan Coin AB dated April 30, 1993, as amended.
10.13* Purchase Agreement between Registrant and Smith Barney Inc. dated October 22, 1996.
11.1 Computation of Earnings Per Share
23.1 Consent of Deloitte & Touche LLP, Independent Auditors.
23.2 Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1.
24.1* Power of Attorney. Reference is made to the Signatures page.
27.1 Financial Data Schedule
</TABLE>
- ------------------------
* Previously filed
+ Confidential treatment requested as to a portion of this exhibit pursuant to
Rule 406 under the Securities Act. The confidential portions of such exhibit
have been omitted and filed separately with the Commission.
<PAGE>
4,000,000 Shares
COINSTAR, INC.
Common Stock
UNDERWRITING AGREEMENT
June __, 1997
SMITH BARNEY INC.
HAMBRECHT & QUIST LLC
As Representatives of the Several Underwriters
c/o SMITH BARNEY INC.
388 Greenwich Street
New York, New York 10013
Dear Sirs:
Coinstar, Inc., a Delaware corporation (the "Company"), proposes to
issue and sell an aggregate of 4,000,000 shares (the "Firm Shares") of its
common stock, $0.001 par value per share (the "Common Stock"), to the several
Underwriters named in Schedule I hereto (the "Underwriters"). The Company
also proposes to sell to the Underwriters, upon the terms and conditions set
forth in Section 2 hereof, up to an additional 600,000 shares (the
"Additional Shares") of Common Stock. The Firm Shares and the Additional
Shares are hereinafter collectively referred to as the "Shares."
The Company wishes to confirm as follows its agreement with you (the
"Representatives") and the other several Underwriters on whose behalf you are
acting, in connection with the several purchases of the Shares by the
Underwriters.
1. REGISTRATION STATEMENT AND PROSPECTUS. The Company has prepared
and filed with the Securities and Exchange Commission (the "Commission") in
accordance with the provisions of the Securities Act of 1933, as amended, and
the rules and regulations of the Commission thereunder (collectively, the
"Act"), a registration statement on Form S-1 under the Act (the "registration
statement"), including a prospectus subject to completion relating to the
Shares. The term "Registration Statement" as used in this Agreement means
the registration statement (including all financial schedules and exhibits),
as amended at the time it becomes effective, or, if the registration
statement became effective prior to the execution of this Agreement, as
supplemented or amended prior to the execution of this Agreement. If it is
contemplated, at the time this Agreement is executed, that a post-effective
amendment to the registration statement will be filed and must be declared
effective before the offering of the Shares may commence, the term
"Registration Statement" as used in this Agreement means the registration
statement as amended by said post-effective amendment. If an abbreviated
registration
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statement is prepared and filed with the Commission in accordance with Rule
462(b) under the Act (an "Abbreviated Registration Statement"), the term
"Registration Statement" as used in this Agreement includes the Abbreviated
Registration Statement. The term "Prospectus" as used in this Agreement
means the prospectus in the form included in the Registration Statement, or,
if the prospectus included in the Registration Statement omits information in
reliance on Rule 430A under the Act and such information is included in a
prospectus filed with the Commission pursuant to Rule 424(b) under the Act,
the term "Prospectus" as used in this Agreement means the prospectus in the
form included in the Registration Statement as supplemented by the addition
of the Rule 430A information contained in the prospectus filed with the
Commission pursuant to Rule 424(b). The term "Prepricing Prospectus" as used
in this Agreement means the prospectus subject to completion in the form
included in the registration statement at the time of the initial filing of
the registration statement with the Commission, and as such prospectus shall
have been amended from time to time prior to the date of the Prospectus.
2. AGREEMENTS TO SELL AND PURCHASE. The Company hereby agrees,
subject to all the terms and conditions set forth herein, to issue and sell
to each Underwriter and, upon the basis of the representations, warranties
and agreements of the Company herein contained and subject to all the terms
and conditions set forth herein, each Underwriter agrees, severally and not
jointly, to purchase from the Company, at a purchase price of [$_____] per
Share (the "purchase price per share"), the number of Firm Shares set forth
opposite the name of such Underwriter in Schedule I hereto (or such number of
Firm Shares increased as set forth in Section 10 hereof).
The Company also agrees, subject to all the terms and conditions set
forth herein, to sell to the Underwriters, and, upon the basis of the
representations, warranties and agreements of the Company herein contained
and subject to all the terms and conditions set forth herein, the
Underwriters shall have the right to purchase from the Company, at the
purchase price per share, pursuant to an option (the "over-allotment option")
which may be exercised at any time and from time to time prior to 9:00 P.M.,
New York City time, on the 30th day after the date of the Prospectus (or, if
such 30th day shall be a Saturday or Sunday or a holiday, on the next
business day thereafter when the New York Stock Exchange is open for
trading), up to an aggregate of 600,000 Additional Shares. Additional Shares
may be purchased only for the purpose of covering over-allotments made in
connection with the offering of the Firm Shares. Upon any exercise of the
over-allotment option, each Underwriter, severally and not jointly, agrees to
purchase from the Company the number of Additional Shares (subject to such
adjustments as you may determine in order to avoid fractional shares) which
bears the same proportion to the number of Additional Shares to be purchased
by the Underwriters as the number of Firm Shares set forth opposite the name
of such Underwriter in Schedule I hereto (or such number of Firm Shares
increased as set forth in Section 10 hereof) bears to the aggregate number of
Firm Shares.
3. TERMS OF PUBLIC OFFERING. The Company has been advised by you that
the Underwriters propose to make a public offering of their respective
portions of the Shares as soon after the Registration Statement and this
Agreement have become effective as in your judgment is advisable and
initially to offer the Shares upon the terms set forth in the Prospectus.
4. DELIVERY OF THE SHARES AND PAYMENT THEREFOR. Delivery to the
Underwriters of and payment for the Firm Shares shall be made at the office
of Smith Barney Inc., 388 Greenwich Street, New
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York, New York 10013, at 10:00 A.M., New York City time, on [JUNE __, 1997]
(the "Closing Date"). The place of closing for the Firm Shares and the
Closing Date may be varied by agreement between you and the Company.
Delivery to the Underwriters of and payment for any Additional Shares to
be purchased by the Underwriters shall be made at the aforementioned office
of Smith Barney Inc. at such time on such date (the "Option Closing Date"),
which may be the same as the Closing Date but shall in no event be earlier
than the Closing Date nor earlier than two nor later than ten business days
after the giving of the notice hereinafter referred to, as shall be specified
in a written notice from you on behalf of the Underwriters to the Company of
the Underwriters' determination to purchase a number, specified in such
notice, of Additional Shares. The place of closing for any Additional Shares
and the Option Closing Date for such Shares may be varied by agreement
between you and the Company.
Certificates for the Firm Shares and for any Additional Shares to be
purchased hereunder shall be registered in such names and in such
denominations as you shall request by written notice prior to 9:30 A.M., New
York City time, on the second business day preceding the Closing Date or any
Option Closing Date, as the case may be. Such certificates shall be made
available to you in New York City for inspection and packaging not later than
9:30 A.M., New York City time, on the business day next preceding the Closing
Date or the Option Closing Date, as the case may be. The certificates
evidencing the Firm Shares and any Additional Shares to be purchased
hereunder shall be delivered to you on the Closing Date or the Option Closing
Date, as the case may be, against payment of the purchase price therefor in
immediately available funds.
5. AGREEMENTS OF THE COMPANY. The Company agrees with the several
Underwriters as follows:
(a) If, at the time this Agreement is executed and delivered, it
is necessary for the Registration Statement or a post-effective amendment
thereto to be declared effective before the offering of the Shares may
commence, the Company will endeavor to cause the Registration Statement or
such post-effective amendment to become effective as soon as possible and
will advise you promptly and, if requested by you, will confirm such advice
in writing, when the Registration Statement or such post-effective amendment
has become effective.
(b) The Company will advise you promptly and, if requested by you,
will confirm such advice in writing: (i) of any request by the Commission for
amendment of or a supplement to the Registration Statement, any Prepricing
Prospectus or the Prospectus or for additional information; (ii) of the
issuance by the Commission of any stop order suspending the effectiveness of
the Registration Statement or of the suspension of qualification of the
Shares for offering or sale in any jurisdiction or the initiation of any
proceeding for such purpose; and (iii) within the period of time referred to
in paragraph (f) below, of any change in the Company's condition (financial
or other), business, prospects, properties, net worth or results of
operations, or of the happening of any event, which makes any statement of a
material fact made in the Registration Statement or the Prospectus (as then
amended or supplemented) untrue or which requires the making of any additions
to or changes in the Registration Statement or the Prospectus (as then
amended or supplemented) in order to state a material fact required
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by the Act or the regulations thereunder to be stated therein or necessary in
order to make the statements therein not misleading, or of the necessity to
amend or supplement the Prospectus (as then amended or supplemented) to
comply with the Act or any other law. If at any time the Commission shall
issue any stop order suspending the effectiveness of the Registration
Statement, the Company will make every reasonable effort to obtain the
withdrawal of such order at the earliest possible time.
(c) The Company will furnish to you, without charge, three (3)
signed copies of the registration statement as originally filed with the
Commission and of each amendment thereto, including financial statements and
all exhibits thereto, and will also furnish to you, without charge, such
number of conformed copies of the registration statement as originally filed
and of each amendment thereto, but without exhibits, as you may reasonably
request.
(d) The Company will not (i) file any amendment to the
Registration Statement or make any amendment or supplement to the Prospectus
of which you shall not previously have been advised or to which you shall
object after being so advised or (ii) so long as, in the opinion of counsel
for the Underwriters, a Prospectus is required to be delivered in connection
with sales by any Underwriter or dealer, file any information, documents or
reports pursuant to the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), without delivering a copy of such information, documents or
reports to you, as Representatives of the Underwriters, prior to or
concurrently with such filing.
(e) Prior to the execution and delivery of this Agreement, the
Company has delivered to you, without charge, in such quantities as you have
requested, copies of each form of the Prepricing Prospectus. The Company
consents to the use, in accordance with the provisions of the Act and with
the securities or Blue Sky laws of the jurisdictions in which the Shares are
offered by the several Underwriters and by dealers, prior to the date of the
Prospectus, of each Prepricing Prospectus so furnished by the Company.
(f) As soon after the execution and delivery of this Agreement as
possible and thereafter from time to time for such period as in the opinion
of counsel for the Underwriters a prospectus is required by the Act to be
delivered in connection with sales by any Underwriter or dealer, the Company
will expeditiously deliver to each Underwriter and each dealer, without
charge, as many copies of the Prospectus (and of any amendment or supplement
thereto) as you may reasonably request. The Company consents to the use of
the Prospectus (and of any amendment or supplement thereto) in accordance
with the provisions of the Act and with the securities or Blue Sky laws of
the jurisdictions in which the Shares are offered by the several Underwriters
and by all dealers to whom Shares may be sold, both in connection with the
offering and sale of the Shares and for such period of time thereafter as the
Prospectus is required by the Act to be delivered in connection with sales by
any Underwriter or dealer. If during such period of time any event shall
occur that in the judgment of the Company or in the opinion of counsel for
the Underwriters is required to be set forth in the Prospectus (as then
amended or supplemented) or should be set forth therein in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, or if it is necessary to supplement or amend the
Prospectus to comply with the Act or any other law, the Company will
forthwith prepare and, subject to the provisions of paragraph (d) above, file
with the Commission an appropriate supplement or amendment thereto, and will
expeditiously furnish to the Underwriters and dealers a reasonable number
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of copies thereof. In the event that the Company and you, as Representatives
of the several Underwriters, agree that the Prospectus should be amended or
supplemented, the Company, if requested by you, will promptly issue a press
release announcing or disclosing the matters to be covered by the proposed
amendment or supplement.
(g) The Company will cooperate with you and with counsel for the
Underwriters in connection with the registration or qualification of the
Shares for offering and sale by the several Underwriters and by dealers under
the securities or Blue Sky laws of such jurisdictions as you may designate
and will file such consents to service of process or other documents
necessary or appropriate in order to effect such registration or
qualification; provided that in no event shall the Company be obligated to
qualify to do business in any jurisdiction where it is not now so qualified
or to take any action which would subject it to service of process in suits,
other than those arising out of the offering or sale of the Shares, in any
jurisdiction where it is not now so subject.
(h) The Company will make generally available to its security
holders a consolidated earnings statement, which need not be audited,
covering a twelve-month period commencing after the effective date of the
Registration Statement and ending not later than 15 months thereafter, as
soon as practicable after the end of such period, which consolidated earnings
statement shall satisfy the provisions of Section ll(a) of the Act.
(i) During the period of five years hereafter, the Company will
furnish to you (i) as soon as available, a copy of each report of the Company
mailed to stockholders or filed with the Commission, and (ii) from time to
time such other information concerning the Company as you may reasonably
request.
(j) If this Agreement shall terminate or shall be terminated after
execution pursuant to any provisions hereof (otherwise than pursuant to the
second paragraph of Section 10 hereof or by notice given by you terminating
this Agreement pursuant to Section 10 or Section 11 hereof) or if this
Agreement shall be terminated by the Underwriters because of any failure or
refusal on the part of the Company to comply with the terms or fulfill any of
the conditions of this Agreement, unless otherwise waived by the
Underwriters, the Company agrees to reimburse the Representatives for all
out-of-pocket expenses (including fees and expenses of counsel for the
Underwriters) incurred by you in connection herewith.
(k) The Company will apply the net proceeds from the sale of the
Shares substantially in accordance with the description set forth in the
Prospectus.
(l) If Rule 430A of the Act is employed, the Company will timely
file the Prospectus pursuant to Rule 424(b) under the Act and will advise you
of the time and manner of such filing.
(m) Except as provided in this Agreement, the Company will not
sell, contract to sell or otherwise dispose of any Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock,
or grant any options or warrants to purchase Common Stock, for a
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period of 180 days after the date of the Prospectus, without the prior
written consent of Smith Barney Inc. (except pursuant to stock benefit plans
of the Company).
(n) The Company has furnished or will furnish to you "lock-up"
letters, in form and substance satisfactory to you, signed by each of its
current officers and directors and each of its stockholders designated by you.
(o) Except as stated in this Agreement and in the Prepricing
Prospectus and Prospectus, the Company has not taken, nor will it take,
directly or indirectly, any action designed to or that might reasonably be
expected to cause or result in stabilization or manipulation of the price of
the Common Stock to facilitate the sale or resale of the Shares.
(p) The Company will use its best efforts to have the Common Stock
listed, subject to notice of issuance, on the Nasdaq National Market
concurrently with the effectiveness of the registration statement.
6. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to each Underwriter that:
(a) Each Prepricing Prospectus included as part of the
registration statement as originally filed or as part of any amendment or
supplement thereto, or filed pursuant to Rule 424 under the Act, complied
when so filed in all material respects with the provisions of the Act. To
the Company's knowledge, the Commission has not issued any order preventing
or suspending the use of any Prepricing Prospectus.
(b) The registration statement in the form in which it became or
becomes effective and also in such form as it may be when any post-effective
amendment thereto shall become effective and the Prospectus and any
supplement or amendment thereto when filed with the Commission under Rule
424(b) under the Act, complied or will comply in all material respects with
the provisions of the Act and did not or will not at any such times contain
an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading,
except that this representation and warranty does not apply to statements in
or omissions from the registration statement or the Prospectus made in
reliance upon and in conformity with information relating to any Underwriter
furnished to the Company in writing by or on behalf of any Underwriter
through you expressly for use therein.
(c) All the outstanding shares of Common Stock of the Company have
been duly authorized and validly issued, are fully paid and nonassessable and
are free of any preemptive or similar rights (other than such rights as shall
terminate upon completion of the offering contemplated hereby); the Shares
have been duly authorized and, when issued and delivered to the Underwriters
against payment therefor in accordance with the terms hereof, will be validly
issued, fully paid and nonassessable and free of any preemptive or similar
rights; and the capital stock of the Company conforms to the description
thereof in the Registration Statement and the Prospectus.
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(d) The Company is a corporation duly organized and validly
existing in good standing under the laws of the State of Delaware with full
corporate power and authority to own, lease and operate its properties and to
conduct its business as described in the Registration Statement and the
Prospectus, and is duly qualified as a foreign corporation to conduct its
business and is in good standing in each jurisdiction or place where the
nature of its properties or the conduct of its business requires such
registration or qualification, except where the failure so to qualify does
not have a material adverse effect on the condition (financial or other),
business, properties, net worth or results of operations of the Company
("Material Adverse Effect").
(e) The Company does not have any subsidiaries.
(f) There are no legal or governmental proceedings pending or, to
the knowledge of the Company, threatened, against the Company, or to which
the Company, or to which any of its properties is subject, that are required
to be described in the Registration Statement or the Prospectus but are not
described as required, and there are no agreements, contracts, indentures,
leases or other instruments that are required to be described in the
Registration Statement or the Prospectus or to be filed as an exhibit to the
Registration Statement that are not described or filed as required by the Act.
(g) The Company is not in violation in any material respect of its
certificate or articles of incorporation or by-laws, or other organizational
documents, or of any law, ordinance, administrative or governmental rule or
regulation applicable to the Company or of any decree of any court or
governmental agency or body having jurisdiction over the Company, or in
default in any material respect in the performance of any material
obligation, agreement or condition contained in any material bond, debenture,
note or any other material evidence of indebtedness or in any other material
agreement, indenture, lease or other material instrument to which the Company
is a party or by which it or any of its properties may be bound.
(h) Neither the issuance and sale of the Shares, the execution,
delivery or performance of this Agreement by the Company, nor the
consummation by the Company of the transactions contemplated hereby (A)
requires any consent, approval, authorization or other order of or
registration or filing with, any court, regulatory body, administrative
agency or other governmental body, agency or official (except such as may be
required for the registration of the Shares under the Act and the Exchange
Act and compliance with the securities or Blue Sky laws of various
jurisdictions and the clearance of the offering with the National Association
of Securities Dealers, Inc., all of which have been or will be effected in
accordance with this Agreement) or conflicts or will conflict with or
constitutes or will constitute a breach of, or a default under the
certificate or articles of incorporation or bylaws, or other organizational
documents, of the Company or (B) conflicts or will conflict with or
constitutes or will constitute a breach of, or a default under, any
agreement, indenture, lease or other instrument to which the Company is a
party or by which it or any of its properties may be bound, or will result in
the creation or imposition of any lien, charge or encumbrance upon any
property or assets of the Company, or violates or will violate any statute,
law, regulation or filing or judgment, injunction, order or decree applicable
to the Company or any of its properties.
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(i) The accountants, Deloitte & Touche LLP, who have certified or
shall certify the financial statements included in the Registration Statement
and the Prospectus (or any amendment or supplement thereto) are independent
public accountants as required by the Act.
(j) The financial statements, together with related schedules and
notes, included in the Registration Statement and the Prospectus (and any
amendment or supplement thereto), present fairly the financial position,
results of operations and changes in financial position of the Company on the
basis stated in the Registration Statement at the respective dates or for the
respective periods to which they apply; such statements and related schedules
and notes have been prepared in accordance with generally accepted accounting
principles consistently applied throughout the periods involved, except as
disclosed therein; and the other financial and statistical information and
data included in the Registration Statement and the Prospectus (and any
amendment or supplement thereto) are in all material respects accurately
presented.
(k) The execution and delivery of, and the performance by the
Company of its obligations under, this Agreement have been duly and validly
authorized by the Company, and this Agreement has been duly executed and
delivered by the Company and constitutes the valid and legally binding
agreement of the Company, enforceable against the Company in accordance with
its terms, except as rights to indemnity and contribution hereunder may be
limited by federal or state securities laws or principles of public policy
and subject to the qualification that the enforceability of the Company's
obligations hereunder may be limited by bankruptcy, fraudulent conveyance,
insolvency, reorganization, moratorium and other laws relating to or
affecting creditors' rights generally and by general equitable principles and
limitations on the availability of equitable remedies.
(l) Except as disclosed in the Registration Statement and the
Prospectus (or any amendment or supplement thereto), subsequent to the
respective dates as of which such information is given in the Registration
Statement and the Prospectus (or any amendment or supplement thereto), the
Company has not incurred any liability or obligation, direct or contingent,
or entered into any transaction, not in the ordinary course of business, that
is material to the Company, and there has not been any change in the capital
stock, or material increase in the short-term debt or long-term debt, of the
Company, or any material adverse change, or any development involving or
which may reasonably be expected to involve, a prospective material adverse
change, in the condition (financial or other), business, net worth or results
of operations of the Company.
(m) The Company has good and marketable title to all property
(real and personal) described in the Prospectus as being owned by it, free
and clear of all liens, claims, security interests or other encumbrances
except such as (i) are described in the Registration Statement and the
Prospectus or in a document filed as an exhibit to the Registration Statement
or (ii) are neither, individually or in the aggregate, material in amount nor
materially significant in relation to the business of the Company, and all
the property described in the Prospectus as being held under lease by the
Company is held by it under valid, subsisting and enforceable leases.
(n) The Company has not distributed and, prior to the later to
occur of (i) the Closing Date and (ii) completion of the distribution of the
Shares, will not distribute any offering material in
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connection with the offering and sale of the Shares other than the
Registration Statement, the Prepricing Prospectus, the Prospectus or other
materials, if any, permitted by the Act.
(o) The Company has such permits, licenses, franchises and
authorizations of governmental or regulatory authorities ("permits") as are
necessary in all material respects to own its properties and to conduct its
business in the manner described in the Prospectus, subject to such
qualifications as may be set forth in the Prospectus; the Company has
fulfilled and performed all its material obligations with respect to such
permits and no event has occurred which allows, or after notice or lapse of
time would allow, revocation or termination thereof or results in any other
material impairment of the rights of the holder of any such permit, subject
in each case to such qualification as may be set forth in the Prospectus;
and, except as described in the Prospectus, none of such permits contains any
restriction that is materially burdensome to the Company.
(p) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific authorization;
(ii) transactions are recorded as necessary to permit preparation of
financial statements in conformity with generally accepted accounting
principles and to maintain accountability for assets; (iii) access to assets
is permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared
with existing assets at reasonable intervals and appropriate action is taken
with respect to any differences.
(q) To the Company's knowledge and except as otherwise disclosed
in the Prospectus, neither the Company nor any employee or agent of the
Company has made any payment of funds of the Company or received or retained
any funds in violation of any law, rule or regulation, which payment, receipt
or retention of funds is of a character required to be disclosed in the
Prospectus.
(r) The Company has filed all tax returns required to be filed,
which returns are complete and correct in all material respects, and the
Company is not in default in the payment of any taxes which were payable
pursuant to said returns or any assessments with respect thereto, except as
otherwise disclosed in the Prospectus.
(s) Except (i) as disclosed in the Prospectus, (ii) for rights
that have been waived and (iii) as contemplated in that certain Warrants
Registration Rights Agreement dated as of October 22, 1996 between the
Company and Smith Barney Inc. and that certain Notes Registration Rights
Agreement dated as of October 22, 1996 between the Company and Smith Barney
Inc., no holder of any security of the Company has any right to require
registration of shares of Common Stock or any other security of the Company
because of the filing of the registration statement or consummation of the
transactions contemplated by this Agreement.
(t) The Company owns or possesses or has applied for all patents,
trademarks, trademark registrations, service marks, service mark
registrations, trade names, copyrights, licenses, inventions, trade secrets
and rights described in the Prospectus as being owned by it or necessary for
the conduct of its business, and except as otherwise disclosed in the
Prospectus, the Company is not aware
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of any claim to the contrary or any challenge by any other person to the
rights of the Company with respect to the foregoing.
(u) The Company is not now, and after sale of the Shares to be
sold by it hereunder and application of the net proceeds from such sale as
described in the Prospectus under the caption "Use of Proceeds" will not be,
an "investment company" within the meaning of the Investment Company Act of
1940, as amended.
(v) The Company has complied with all provisions of Florida
Statutes, Section 517.075, relating to issuers doing business with Cuba.
7. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company agrees to indemnify and hold harmless each of you
and each other Underwriter and each person, if any, who controls any
Underwriter within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act from and against any and all losses, claims, damages,
liabilities and expenses (including reasonable costs of investigation)
arising out of or based upon any untrue statement or alleged untrue statement
of a material fact contained in any Prepricing Prospectus or in the
Registration Statement or the Prospectus or in any amendment or supplement
thereto, or arising out of or based upon any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, except insofar as such losses,
claims, damages, liabilities or expenses arise out of or are based upon any
untrue statement or omission or alleged untrue statement or omission which
has been made therein or omitted therefrom in reliance upon and in conformity
with the information relating to such Underwriter furnished in writing to the
Company by or on behalf of any Underwriter through you expressly for use in
connection therewith; provided, however, that the indemnification contained
in this paragraph (a) with respect to any Prepricing Prospectus shall not
inure to the benefit of any Underwriter (or to the benefit of any person
controlling such Underwriter) on account of any such loss, claim, damage,
liability or expense arising from the sale of the Shares by such Underwriter
to any person if a copy of the Prospectus shall not have been delivered or
sent to such person within the time required by the Act and the regulations
thereunder, and the untrue statement or alleged untrue statement or omission
or alleged omission of a material fact contained in such Prepricing
Prospectus was corrected in the Prospectus, provided that the Company has
delivered the Prospectus to the several Underwriters in requisite quantity on
a timely basis to permit such delivery or sending. The foregoing indemnity
agreement shall be in addition to any liability which the Company may
otherwise have.
(b) If any action, suit or proceeding shall be brought against any
Underwriter or any person controlling any Underwriter in respect of which
indemnity may be sought against the Company, such Underwriter or such
controlling person shall promptly notify the Company, and the Company shall
assume the defense thereof, including the employment of counsel and payment
of all fees and expenses. Such Underwriter or any such controlling person
shall have the right to employ separate counsel in any such action, suit or
proceeding and to participate in the defense thereof, but the fees and
expenses of such counsel shall be at the expense of such Underwriter or such
controlling person unless (i) the Company has agreed in writing to pay such
fees and expenses, (ii) the Company has failed to assume the defense
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and employ counsel, or (iii) the named parties to any such action, suit or
proceeding (including any impleaded parties) include both such Underwriter or
such controlling person and the Company and such Underwriter or such
controlling person shall have been advised by its counsel that representation
of such indemnified party and the Company by the same counsel would be
inappropriate under applicable standards of professional conduct (whether or
not such representation by the same counsel has been proposed) due to actual
or potential differing interests between them (in which case the Company
shall not have the right to assume the defense of such action, suit or
proceeding on behalf of such Underwriter or such controlling person). It is
understood, however, that the Company shall, in connection with any one such
action, suit or proceeding or separate but substantially similar or related
actions, suits or proceedings in the same jurisdiction arising out of the
same general allegations or circumstances, be liable for the reasonable fees
and expenses of only one separate firm of attorneys (in addition to any local
counsel) at any time for all such Underwriters and controlling persons not
having actual or potential differing interests with you or among themselves,
which firm shall be designated in writing by Smith Barney Inc., and that all
such fees and expenses shall be reimbursed as they are incurred. The Company
shall not be liable for any settlement of any such action, suit or proceeding
effected without its written consent, but if settled with such written
consent, or if there be a final judgment for the plaintiff in any such
action, suit or proceeding, the Company agrees to indemnify and hold harmless
any Underwriter and any such controlling person, to the extent provided in
the preceding paragraph, from and against any loss, claim, damage, liability
or expense by reason of such settlement or judgment.
(c) Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless the Company, its directors, its officers who sign
the Registration Statement, and any person who controls the Company within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act, to
the same extent as the foregoing indemnity from the Company to each
Underwriter, but only with respect to information relating to such
Underwriter furnished in writing by or on behalf of such Underwriter through
you expressly for use in the Registration Statement, the Prospectus or any
Prepricing Prospectus, or any amendment or supplement thereto. If any
action, suit or proceeding shall be brought against the Company, any of its
directors, any such officer, or any such controlling person based on the
Registration Statement, the Prospectus or any Prepricing Prospectus, or any
amendment or supplement thereto, and in respect of which indemnity may be
sought against any Underwriter pursuant to this paragraph (c), such
Underwriter shall have the rights and duties given to the Company by
paragraph (b) above (except that if the Company shall have assumed the
defense thereof such Underwriter shall not be required to do so, but may
employ separate counsel therein and participate in the defense thereof, but
the fees and expenses of such counsel shall be at such Underwriter's
expense), and the Company, its directors, any such officer, and any such
controlling person shall have the rights and duties given to the Underwriters
by paragraph (b) above. The foregoing indemnity agreement shall be in
addition to any liability which the Underwriters may otherwise have.
(d) If the indemnification provided for in this Section 7 is
unavailable to an indemnified party under paragraph (a) or (c) hereof in
respect of any losses, claims, damages, liabilities or expenses referred to
therein, then an indemnifying party, in lieu of indemnifying such indemnified
party, shall contribute to the amount paid or payable by such indemnified
party as a result of such losses, claims, damages, liabilities or expenses
(i) in such proportion as is appropriate to reflect the relative benefits
received by the Company on the one hand and the Underwriters on the other
hand from the offering of
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the Shares, or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect
not only the relative benefits referred to in clause (i) above but also the
relative fault of the Company on the one hand and the Underwriters on the
other in connection with the statements or omissions that resulted in such
losses, claims, damages, liabilities or expenses, as well as any other
relevant equitable considerations. The relative benefits received by the
Company on the one hand and the Underwriters on the other shall be deemed to
be in the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company bear to the total underwriting
discounts and commissions received by the Underwriters, in each case as set
forth in the table on the cover page of the Prospectus. The relative fault
of the Company on the one hand and the Underwriters on the other hand shall
be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the
Company on the one hand or by the Underwriters on the other hand and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission.
(e) The Company and the Underwriters agree that it would not be
just and equitable if contribution pursuant to this Section 7 were determined
by a pro rata allocation (even if the Underwriters were treated as one entity
for such purpose) or by any other method of allocation that does not take
account of the equitable considerations referred to in paragraph (d) above.
The amount paid or payable by an indemnified party as a result of the losses,
claims, damages, liabilities and expenses referred to in paragraph (d) above
shall be deemed to include, subject to the limitations set forth above, any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating any claim or defending any such action, suit or
proceeding. Notwithstanding the provisions of this Section 7, no Underwriter
shall be required to contribute any amount in excess of the amount by which
the total price of the Shares underwritten by it and distributed to the
public exceeds the amount of any damages which such Underwriter has otherwise
been required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section 7 are several in proportion to the respective
numbers of Firm Shares set forth opposite their names in Schedule I hereto
(or such numbers of Firm Shares increased as set forth in Section 10 hereof)
and not joint.
(f) No indemnifying party shall, without the prior written consent
of the indemnified party, effect any settlement of any pending or threatened
action, suit or proceeding in respect of which any indemnified party is or
could have been a party and indemnity could have been sought hereunder by
such indemnified party, unless such settlement includes an unconditional
release of such indemnified party from all liability on claims that are the
subject matter of such action, suit or proceeding.
(g) Any losses, claims, damages, liabilities or expenses for which
an indemnified party is entitled to indemnification or contribution under
this Section 7 shall be paid by the indemnifying party to the indemnified
party as such losses, claims, damages, liabilities or expenses are incurred.
The indemnity and contribution agreements contained in this Section 7 and the
representations and warranties of the Company set forth in this Agreement
shall remain operative and in full force and effect, regardless
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of (i) any investigation made by or on behalf of any Underwriter or any
person controlling any Underwriter, the Company, its directors or officers,
or any person controlling the Company, (ii) acceptance of any Shares and
payment therefor hereunder, and (iii) any termination of this Agreement. A
successor to any Underwriter or any person controlling any Underwriter, or to
the Company, its directors or officers, or any person controlling the
Company, shall be entitled to the benefits of the indemnity, contribution,
and reimbursement agreements contained in this Section 7.
8. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The several obligations
of the Underwriters to purchase the Firm Shares hereunder are subject to the
following conditions:
(a) If, at the time this Agreement is executed and delivered, it
is necessary for the registration statement or a post-effective amendment
thereto to be declared effective before the offering of the Shares may
commence, the registration statement or such post-effective amendment shall
have become effective not later than 5:30 P.M., New York City time, on the
date hereof, or at such later date and time as shall be consented to in
writing by you, and all filings, if any, required by Rules 424 and 430A under
the Act shall have been timely made; no stop order suspending the
effectiveness of the registration statement shall have been issued and no
proceeding for that purpose shall have been instituted or, to the knowledge
of the Company or any Underwriter, threatened by the Commission, and any
request of the Commission for additional information (to be included in the
registration statement or the prospectus or otherwise) shall have been
complied with to your satisfaction.
(b) Subsequent to the effective date of this Agreement, there
shall not have occurred (i) any change, or any development involving a
prospective change, in or affecting the condition (financial or other),
business, properties, net worth, or results of operations of the Company not
contemplated by the Prospectus, which in your reasonable opinion, as
Representatives of the several Underwriters, would materially, adversely
affect the market for the Shares, or (ii) any event or development relating
to or involving the Company or any officer or director of the Company which
makes any statement made in the Prospectus untrue or which, in the opinion of
the Company and its counsel or the Underwriters and their counsel, requires
the making of any addition to or change in the Prospectus in order to state a
material fact required by the Act or any other law to be stated therein or
necessary in order to make the statements therein not misleading, if amending
or supplementing the Prospectus to reflect such event or development would,
in your reasonable opinion, as Representatives of the several Underwriters,
materially adversely affect the market for the Shares.
(c) You shall have received on the Closing Date, an opinion of
Cooley Godward LLP, counsel for the Company, dated the Closing Date and
addressed to you, as Representatives of the several Underwriters, to the
effect that:
(i) To the knowledge of such counsel, the Company is a
corporation duly incorporated and validly existing in good standing under the
laws of the State of Delaware with full corporate power and authority to own,
lease and operate its properties and to conduct its business as described in
the Registration Statement and the Prospectus (and any amendment or
supplement thereto), and is duly qualified as a foreign corporation to
conduct its business and is in good standing in each jurisdiction or place
where the nature of its properties or the conduct of its business requires
such
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<PAGE>
registration or qualification, except where the failure so to qualify does
not have a material adverse effect on the condition (financial or other),
business, properties, net worth or results of operations of the Company;
(ii) The authorized and outstanding capital stock of the
Company was as set forth under the caption "Capitalization" in the Prospectus
as of the date set forth therein; and the authorized capital stock of the
Company conforms in all material respects as to legal matters to the
description thereof contained in the Prospectus under the caption
"Description of Capital Stock";
(iii) All the shares of capital stock of the Company
outstanding prior to the issuance of the Shares have been duly authorized and
validly issued, and are fully paid and nonassessable;
(iv) The Shares have been duly authorized and, when issued and
delivered to the Underwriters against payment therefor in accordance with the
terms hereof, will be validly issued, fully paid and nonassessable and free
of any preemptive, or to the knowledge of such counsel, similar rights
provided for in any agreement or other document filed as an exhibit to the
Registration Statement that entitle or will entitle any person to acquire any
Shares upon the issuance thereof by the Company;
(v) The form of certificate for the Shares which are filed as
an exhibit to the Registration Statement (assuming such form of certificate
is used by the Company's transfer agent for the Shares) conforms to the
requirements of the Delaware General Corporation Law;
(vi) Such counsel has received oral confirmation from the
staff of the Commission that the Registration Statement and all
post-effective amendments, if any, have become effective under the Act and,
to the knowledge of such counsel, no stop order suspending the effectiveness
of the Registration Statement has been issued and no proceedings or
investigations for that purpose are pending before or overtly threatened by
the Commission; and any required filing of the Prospectus pursuant to Rule
424(b) has been made in accordance with Rule 424(b);
(vii) The Company has corporate power and authority to enter
into this Agreement and to issue, sell and deliver the Shares to the
Underwriters as provided herein, and this Agreement has been duly authorized,
executed and delivered by the Company and is a valid, legal and binding
agreement of the Company, enforceable against the Company in accordance with
its terms, except as enforcement of rights to indemnity and contribution
hereunder may be limited by Federal or state securities laws or principles of
public policy and subject to the qualification that the enforceability of the
Company's obligations hereunder may be limited by bankruptcy, fraudulent
conveyance, insolvency, reorganization, moratorium, and other laws relating
to or affecting creditors' rights generally and by general equitable
principles and limitations on the availability of equitable remedies;
(viii) The performance of this Agreement and the consummation of
the transactions therein contemplated (other than performance of the
Company's indemnification and contribution obligations thereunder, concerning
which we express no opinion) will not (a) result in any violation of the
Company's charter or bylaws or (b) to our knowledge, result in a breach or
violation of any of the terms and provisions of, or constitute a default
under, any material bond, debenture, note or
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other evidence of indebtedness, or any material lease, contract, indenture,
mortgage, deed of trust, loan agreement, joint venture or other agreement or
instrument, filed as an exhibit to the Registration Statement, or any
applicable material statute, rule or regulation, known to us (other than
state securities or Blue Sky laws, as to which we express no opinion) or, to
our knowledge, any material order, writ or decree of any court, government or
governmental agency or body having jurisdiction over the Company, or over any
of its properties or operations, or to the knowledge of such counsel, is in
default in the performance of any material obligation, agreement or condition
contained in any bond, debenture, note or other evidence of indebtedness,
except as may be disclosed in the Prospectus;
(ix) To our knowledge, the Company is not in violation of its
certificate of incorporation or bylaws or in breach of or default with
respect to any provision of any contract or agreement which is an exhibit to
the Registration Statement, except where such default would not materially
adversely affect the Company, and, to our knowledge, the Company is in
compliance with all laws, rules, regulations, judgments, decrees, orders and
statutes of any court or jurisdiction to which they are subject and which
based on our experience are typically applicable to a company in the
Company's line of business, except where noncompliance would not have a
Material Adverse Effect on the condition (financial or other), business,
properties, net worth or results of operations of the Company;
(x) Neither the offer, sale or delivery of the Shares, the
execution, delivery or performance of this Agreement, compliance by the
Company with the provisions hereof nor consummation by the Company of the
transactions contemplated hereby conflicts or will conflict with or
constitutes or will constitute a breach of, or a default under the
certificate of incorporation or bylaws, or other organizational documents, of
the Company or any agreement, indenture, lease or other instrument to which
the Company is a party or by which it or any of its properties is bound that
is an exhibit to the Registration Statement, or will result in the creation
or imposition of any lien, charge or encumbrance upon any property or assets
of the Company, nor will any such action result in any violation of any
existing law, regulation, ruling (other than compliance with all applicable
state securities and Blue Sky laws as to which such counsel need not express
an opinion), judgment, injunction, order or decree known to such counsel,
applicable to the Company or any of its properties, in each case where the
breach, default, lien, charge, encumbrance or violation would not have a
Material Adverse Effect on the condition (financial or other), business,
properties, net worth or results of operations of the Company;
(xi) No consent, approval, authorization or other order of, or
registration or filing with, any court, regulatory body, administrative
agency or other governmental body, agency, or official is required on the
part of the Company (except as have been obtained under the Act and the
Exchange Act or such as may be required under state securities or Blue Sky
laws governing the purchase and distribution of the Shares and clearance of
the offering contemplated hereby with the National Association of Securities
Dealers, Inc.) for the valid issuance and sale of the Shares to the
Underwriters as contemplated by this Agreement;
(xii) The Registration Statement and the Prospectus and any
supplements or amendments thereto (except for the financial statements and
the notes thereto, operating statistics and the schedules and other financial
and statistical data included therein, as to which such counsel need not
express any opinion) comply as to form in all material respects with the
requirements of the Act;
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<PAGE>
(xiii) To the knowledge of such counsel (A) there are no legal
or governmental proceedings pending or threatened against the Company, or to
which the Company, or any of its property, is subject, which are required to
be described in the Registration Statement or Prospectus (or any amendment or
supplement thereto) that are not described as required and (B) there are no
agreements, contracts, indentures, leases or other instruments, that are
required to be described in the Registration Statement or the Prospectus (or
any amendment or supplement thereto) or to be filed as an exhibit to the
Registration Statement that are not described or filed as required, as the
case may be;
(xiv) To our knowledge, there are no agreements,
contracts, leases or documents to which the Company is a party of a
character required under the Act and the applicable Rules and Regulations to
be described or referred to in the Registration Statement or Prospectus or to
be filed as an exhibit to the Registration Statement which are not described
or referred to therein or filed as required; the description of the
certificate of incorporation and bylaws of the Company and of statutes and
contracts contained in "Risk Factors -- Possible Termination of Retail
Distribution Partner Agreements," "Risk Factors -- Potential Adverse Impact
of Shares Eligible for Future Sale; Registration Rights", "Risk Factors --
Adverse Impact of Possible Issuances of Preferred Stock; Anti-Takeover Effect
of Certain Charter and Bylaw Provisions," "Business -- Marketing to Retail
Distribution Partners," "Business -- Litigation," "Management," Certain
Transactions," "Description of Capital Stock" (other than the statements
under "--Transfer Agent and Registrar") and "Shares Eligible for Future Sale"
and in Items 14 and 15 of Part II of the Registration Statement are accurate
in all material respects and fairly summarize the information required to be
presented by the Act;
(xv) In addition, such counsel shall state that such counsel
has participated in conferences with officers and other representatives of
the Company, representatives of the independent public accountants of the
Company and representatives of the Underwriters at which the contents of the
Registration Statement and Prospectus were discussed and, although such
counsel is not passing upon and does not assume responsibility for the
accuracy, completeness or fairness of the statements contained in the
Registration Statement or Prospectus (except as and to the extent stated in
subparagraphs (ii), (xi), and (xiii) above), on the basis of the foregoing
nothing has come to the attention of such counsel that causes it to believe
that the Registration Statement at the time such Registration Statement
became effective, contained an untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary to make
the statements therein not misleading, or that the Prospectus or any
supplement thereto at the date of such Prospectus or such supplement, and as
of the Closing Date or the Option Closing Date, as the case may be, contained
an untrue statement of a material fact or omitted to state a material fact
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading (it being understood that such counsel
need express no opinion with respect to the financial statements and the
notes thereto, operating statistics, and the schedules and other financial
and statistical data included in the Registration Statement or Prospectus).
In rendering their opinion as aforesaid, counsel may rely upon an
opinion or opinions, each dated the Closing Date, of other counsel retained
by them or the Company as to laws of any jurisdiction other than the United
States or the State of California, provided that (1) each such local counsel
is acceptable to the Representatives, (2) such reliance is expressly
authorized by each opinion so relied upon and a copy of each such opinion is
delivered to the Representatives and is, in form and substance satisfactory
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to them and their counsel, and (3) counsel shall state in their opinion that
they believe that they and the Underwriters are justified in relying thereon.
(d) You shall have received on the Closing Date, an opinion of
Sheridan & Ross, patent counsel to the Company, dated the Closing Date
addressed to you as Representatives of the Underwriters and in form and
substance satisfactory to Underwriters' counsel to the effect that the
statements in the Registration Statement and the Prospectus under the
captions "Risk Factors -- Uncertainty of Protection of Patents and Proprietary
Rights" and "Business -- Proprietary Rights" and other references therein to
patent matters have been reviewed by such counsel and fairly summarize the
legal matters, documents and proceedings described therein and are complete
in all material respects.
(e) You shall have received on the Closing Date an opinion of
Wilson Sonsini Goodrich & Rosati, counsel for the Underwriters, dated the
Closing Date and addressed to you, as Representatives of the several
Underwriters, with respect to the matters referred to in clause (iv) of the
foregoing paragraph (c) and such other related matters as you may request.
(f) You shall have received letters addressed to you, as
Representatives of the several Underwriters, and dated the date hereof and
the Closing Date from Deloitte & Touche LLP, independent certified public
accountants, substantially in the forms heretofore approved by you.
(g) (i) No stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
purpose shall have been instituted or, to the knowledge of the Company, shall
be contemplated by the Commission at or prior to the Closing Date; (ii) there
shall not have been any change in the capital stock of the Company nor any
material increase in the short-term or long-term debt of the Company (other
than in the ordinary course of business) from that set forth or contemplated
in the Registration Statement or the Prospectus (or any amendment or
Supplement thereto); (iii) there shall not have been, since the respective
dates as of which information is given in the Registration Statement and the
Prospectus (or any amendment or supplement thereto), except as may otherwise
be stated in the Registration Statement and Prospectus (or any amendment or
supplement thereto), any material adverse change in the condition (financial
or other), business, prospects, properties, net worth or results of
operations of the Company; (iv) the Company shall not have any liabilities or
obligations, direct or contingent (whether or not in the ordinary course of
business), that are material to the Company, other than those reflected in
the Registration Statement or the Prospectus (or any amendment or supplement
thereto); and (v) all the representations and warranties of the Company
contained in this Agreement shall be true and correct in all material
respects on and as of the date hereof and on and as of the Closing Date as if
made on and as of the Closing Date, and you shall have received a
certificate, dated the Closing Date and signed by the chief executive officer
and the chief financial officer of the Company (or such other officers as are
acceptable to you), to the effect set forth in this Section 8(g) and in
Section 8(h) hereof.
(h) The Company shall not have failed at or prior to the Closing
Date to have performed or complied with any of its agreements herein
contained and required to be performed or complied with by it hereunder at or
prior to the Closing Date.
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(i) Prior to the Closing Date the Shares shall have been listed or
approved for quotation, subject to notice of issuance, on the Nasdaq National
Market.
(j) The Company shall have furnished or caused to be furnished to
you such further certificates and documents as you shall have reasonably
requested in writing.
All such opinions, certificates, letters and other documents will be in
compliance with the provisions hereof only if they are reasonably
satisfactory in form and substance to you and your counsel.
Any certificate or document signed by any officer of the Company and
delivered to you, as Representatives of the Underwriters, or to counsel for
the Underwriters, shall be deemed a representation and warranty by the
Company to each Underwriter as to the statements made therein.
The several obligations of the Underwriters to purchase Additional
Shares hereunder are subject to the satisfaction on and as of any Option
Closing Date of the conditions set forth in this Section 8, except that, if
any Option Closing Date is other than the Closing Date, the certificates,
opinions and letters referred to in paragraphs (c) through (g) shall be dated
the Option Closing Date in question and the opinions called for by paragraphs
(c), (d) and (e) shall be revised to reflect the sale of Additional Shares.
9. EXPENSES. The Company agrees to pay the following costs and
expenses and all other costs and expenses incident to the performance by it
of its obligations hereunder: (i) the preparation, printing or reproduction,
and filing with the Commission of the registration statement (including
financial statements and exhibits thereto), each Prepricing Prospectus, the
Prospectus, and each amendment or supplement to any of them; (ii) the
printing (or reproduction) and delivery (including postage, air freight
charges and charges for counting and packaging) of such copies of the
registration statement, each Prepricing Prospectus, the Prospectus, and all
amendments or supplements to any of them as may be reasonably requested for
use in connection with the offering and sale of the Shares; (iii) the
preparation, printing, authentication, issuance and delivery of certificates
for the Shares, including any stamp taxes in connection with the original
issuance and sale of the Shares; (iv) the printing (or reproduction) and
delivery of this Agreement, the preliminary and supplemental Blue Sky
Memoranda and all other agreements or documents printed (or reproduced) and
delivered in connection with the offering of the Shares; (v) the registration
of the Common Stock under the Exchange Act and the listing of the Shares on
the Nasdaq National Market; (vi) the registration or qualification of the
Shares for offer and sale under the securities or Blue Sky laws of the
several states as provided in Section 5(g) hereof (including the reasonable
fees, expenses and disbursements of counsel for the Underwriters relating to
the preparation, printing or reproduction, and delivery of the preliminary
and supplemental Blue Sky Memoranda and such registration and qualification);
(vii) the filing fees and the reasonable fees and expenses of counsel for the
Underwriters in connection with any filings required to be made with the
National Association of Securities Dealers, Inc. in connection with the
offering; (viii) the transportation and other expenses incurred by or on
behalf of Company representatives in connection with presentations to
prospective purchasers of the Shares; (ix) the fees and expenses of the
Company's accountants and the fees and expenses of counsel (including local
and special counsel) for the Company.
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10. EFFECTIVE DATE OF AGREEMENT. This Agreement shall become
effective: (i) upon the execution and delivery hereof by the parties hereto;
or (ii) if, at the time this Agreement is executed and delivered, it is
necessary for the registration statement or a post-effective amendment
thereto to be declared effective before the offering of the Shares may
commence, when notification of the effectiveness of the registration
statement or such post-effective amendment has been released by the
Commission. Until such time as this Agreement shall have become effective,
it may be terminated by the Company, by notifying you, or by you, as
Representatives of the several Underwriters, by notifying the Company.
If any one or more of the Underwriters shall fail or refuse to purchase
Shares which it or they are obligated to purchase hereunder on the Closing
Date, and the aggregate number of Shares which such defaulting Underwriter or
Underwriters are obligated but fail or refuse to purchase is not more than
one-tenth of the aggregate number of Shares which the Underwriters are
obligated to purchase on the Closing Date, each non-defaulting Underwriter
shall be obligated, severally, in the proportion which the number of Firm
Shares set forth opposite its name in Schedule I hereto bears to the
aggregate number of Firm Shares set forth opposite the names of all
non-defaulting Underwriters or in such other proportion as you may specify in
accordance with Section 20 of the Master Agreement Among Underwriters of
Smith Barney Inc., to purchase the Shares which such defaulting Underwriter
or Underwriters are obligated, but fail or refuse, to purchase. If any one
or more of the Underwriters shall fail or refuse to purchase Shares which it
or they are obligated to purchase on the Closing Date and the aggregate
number of Shares with respect to which such default occurs is more than
one-tenth of the aggregate number of Shares which the Underwriters are
obligated to purchase on the Closing Date and arrangements satisfactory to
you and the Company for the purchase of such Shares by one or more
non-defaulting Underwriters or other party or parties approved by you and the
Company are not made within 36 hours after such default, this Agreement will
terminate without liability on the part of any non-defaulting Underwriter or
the Company. In any such case which does not result in termination of this
Agreement, either you or the Company shall have the right to postpone the
Closing Date, but in no event for longer than seven days, in order that the
required changes, if any, in the Registration Statement and the Prospectus or
any other documents or arrangements may be effected. Any action taken under
this paragraph shall not relieve any defaulting Underwriter from liability in
respect of any such default of any such Underwriter under this Agreement.
The term "Underwriter" as used in this Agreement includes, for all purposes
of this Agreement, any party not listed in Schedule I hereto who, with your
approval and the approval of the Company, purchases Shares which a defaulting
Underwriter is obligated, but fails or refuses, to purchase.
Any notice under this Section 10 may be given by telegram, telecopy or
telephone but shall be subsequently confirmed by letter.
11. TERMINATION OF AGREEMENT. This Agreement shall be subject to
termination in your absolute discretion, without liability on the part of any
Underwriter to the Company, by notice to the Company, if prior to the Closing
Date or any Option Closing Date (if different from the Closing Date and then
only as to the Additional Shares), as the case may be, (i) trading in
securities generally on the New York Stock Exchange, the American Stock
Exchange or the Nasdaq National Market shall have been suspended or
materially limited, (ii) a general moratorium on commercial banking
activities in New York or Washington shall have been declared by either
federal or state authorities, or (iii) there shall have
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occurred any outbreak or escalation of hostilities or other international or
domestic calamity, crisis or change in political, financial or economic
conditions, the effect of which on the financial markets of the United States
is such as to make it, in your judgment, impracticable or inadvisable to
commence or continue the offering of the Shares at the offering price to the
public set forth on the cover page of the Prospectus or to enforce contracts
for the resale of the Shares by the Underwriters. Notice of such termination
may be given to the Company by telegram, telecopy or telephone and shall be
subsequently confirmed by letter.
12. INFORMATION FURNISHED BY THE UNDERWRITERS. The statements set
forth in the last paragraph on the cover page, the stabilization legend on
the inside cover page, and the statements in the first and third paragraphs
under the caption "Underwriting" in any Prepricing Prospectus and in the
Prospectus, constitute the only information furnished by or on behalf of the
Underwriters through you as such information is referred to in Sections 6(b)
and 7 hereof.
13. MISCELLANEOUS. Except as otherwise provided in Sections 5, 10 and
11 hereof, notice given pursuant to any provision of this Agreement shall be
in writing and shall be delivered (i) if to the Company, at the office of the
Company at 13231 S.E. 36th Street, Suite 200, Bellevue, Washington 98006,
Attention: Jens H. Molbak, President and Chief Executive Officer; or (ii) if
to you, as Representatives of the several Underwriters, care of Smith Barney
Inc., 388 Greenwich Street, New York, New York 10013, Attention: Manager,
Investment Banking Division.
This Agreement has been and is made solely for the benefit of the
several Underwriters, the Company, its directors and officers, and the other
controlling persons referred to in Section 7 hereof and their respective
successors and assigns, to the extent provided herein, and no other person
shall acquire or have any right under or by virtue of this Agreement.
Neither the term "successor" nor the term "successors and assigns" as used in
this Agreement shall include a purchaser from any Underwriter of any of the
Shares in his status as such purchaser.
14. APPLICABLE LAW; COUNTERPARTS. This Agreement shall be governed by
and construed in accordance with the laws of the State of New York applicable
to contracts made and to be performed within the State of New York.
This Agreement may be signed in various counterparts which together
constitute one and the same instrument. If signed in counterparts, this
Agreement shall not become effective unless at least one counterpart hereof
shall have been executed and delivered on behalf of each party hereto.
-20-
<PAGE>
Please confirm that the foregoing correctly sets forth the agreement
between the Company and the several Underwriters.
Very truly yours,
COINSTAR, INC.
By:
----------------------------------------
Jens H. Molbak, President and Chief
Executive Officer
Confirmed as of the date first above
mentioned on behalf of themselves
and the other several Underwriters
named in Schedule I hereto.
SMITH BARNEY INC.
HAMBRECHT & QUIST LLC
As Representatives of the Several Underwriters
By SMITH BARNEY INC.
By:
---------------------------------------
Douglas Hurst, Managing Director
-21-
<PAGE>
SCHEDULE I
COINSTAR, INC.
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
UNDERWRITER FIRM SHARES UNDERWRITER FIRM SHARES
----------- ------------- ------------- ---------------
<S> <C> <C> <C>
Smith Barney Inc. . . . . . . . . . . . . .
Hambrecht & Quist LLC . . . . . . . . . . .
---------------
Total . . . . . . . . . .
---------------
---------------
</TABLE>
<PAGE>
[Cooley Godward Letterhead]
June 19, 1997
Coinstar, Inc.
13231 SE 36th Street, Suite 200
Bellevue, WA 98006
Ladies and Gentlemen:
You have requested our opinion with respect to certain matters in connection
with the filing by Coinstar, Inc. (the "Company") of a Registration Statement
of Form S-1 (the "Registration Statement") with the Securities and Exchange
Commission (the "Commission"), including a prospectus to be filed with the
Commission pursuant to Rule 424(b) of Regulation C promulgated under the
Securities Act of 1933, as amended (the "Prospectus"), and the underwritten
public offering of up to 4,000,000 shares of the Company's Common Stock (the
"Common Stock").
In connection with this opinion, we have (i) reviewed the Company's
Certificate of Incorporation and Bylaws and the originals or copies certified
to our satisfaction, of such records, documents, certificates, memoranda and
other instruments as in our judgment are necessary or appropriate to enable
us to render the opinion expressed below, and (ii) assumed that the shares of
the Common Stock will be sold to the Underwriters at a price established by
the Pricing Committee of the Board of Directors of the Company.
On the basis of the foregoing, and in reliance thereon, we are of the opinion
that the Common Stock, when sold and issued in accordance with the
Registration Statement and related Prospectus, will be validly issued, fully
paid and nonassessable.
We consent to the reference to our firm under the caption "Legal Matters" in
the Prospectus included in the Registration Statement and to the filing of
this opinion as an exhibit to the Registration Statement.
Very truly yours,
COOLEY GODWARD LLP
By: /s/ Mark P. Tanoury
-----------------------------
Mark P. Tanoury
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED UNDER 17
C.F.R. SECTIONS 200.80(b)(4), 200.83 AND
230.406 *** INDICATES OMITTED MATERIAL
THAT IS THE SUBJECT OF A CONFIDENTIAL
TREATMENT REQUEST THAT IS FILED
SEPARATELY WITH THE COMMISSION
MARKETING/DISTRIBUTION CONTRACT
SCAN COIN AB AND COINSTAR, INC.
LETTER OF INTENT, DATED MARCH 5, 1997
This letter of intent is designed to be effective starting March 5, 1997
through December 31, 2000, as agreed to below:
I. DEFINITION OF THE MARKET.
a) GEOGRAPHICAL - [***]
II. DEFINITION OF SELF-SERVICE COIN REDEMPTION SYSTEMS.
a) The contract's definition of self-service coin redemption systems will
include all electrical or mechanical devices that are designed or
manufactured or branded products by Scan Coin AB of Malmo, Sweden or
Scan Coin's affiliates to be placed in publicly accessible [***]
locations and operated unattended for the purpose of
counting/redeeming [***] coins and issuing notes, receipts/scripts,
making direct deposits, or interfacing with ATM or "Smart" cards.
b) As a result of a mutual agreement with Coinstar, future or yet to be
developed system, and any other systems which have as their intent to
serve as coin redemption/deposit self-service system in the [***],
will be covered under the exclusivity agreement of this contract.
III. PRICING.
a) [***] UNITS. The pricing for the [***] units is as follows:
-[***]
-[***]
-[***]
-[***]
b) The above pricing structure is intended to apply to orders that
specify the delivery dates during one calendar year.
c) Self-service coin redemption systems. Scan Coin will sell Coinstar
their CDS or other self-service line of self-service coin redemption
systems at a price equal to the current distributor price.
d) Both participants agree that during the life of this contract, prices
may be adjusted annually based upon the increase/decrease in the
consumer price index in Sweden for the preceding calendar year.
1. *CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
IV. PAYMENT TERMS.
Net 30 days
V. REQUIRED MINIMAL ANNUAL QUANTITIES.
Banks Bank/Financial Contract Contract
Minimum* Market Expectation Expectation Total Minimum*
-------- ------------------ ----------- --------------
1997 [***] [***] [***] [***]
1998 [***] [***] [***] [***]
1999 [***] [***] [***] [***]
2000 [***] [***] [***] [***]
*Purchases of this quantity of [***] by Coinstar, during the calendar
years listed above, will be required to maintain exclusivity.
Scan Coin has the right to verification of the number of machines
placed in banks, during the exclusive period. Coinstar will upon
request provide an independent auditor information permitting the
number of units placed to be verified.
VI. EXCLUSIVITY.
a) Scan Coin agrees that Coinstar will have exclusive rights to market
Scan Coin's self-service coin redemption systems (see definition,
Section 2) [***] for the life of this four year agreement which is an
annually renewable, (providing the contract minimums are met) to all
markets. Coinstar will have the right to establish the distribution
channel(s) to most effectively accomplish the goal of full penetration
of the market. Coinstar will grant Scan Coin A.B., the non-exclusive
right to solicit and accept orders directly from the following
organizations/markets;
- Federal Government and Military
- Casinos/Gaming
- All other organizations that would purchase/
lease the self-service products for internal
use by their own employees when conduction
internal transactions.
b) It is understood that Scan may sell/lease/place these above
non-exclusive markets directly or utilize agents or manufacturers reps
to penetrate these markets.
VII. SCAN COIN WILL GRANT COINSTAR THE;
a) Exclusive right to market the equipment as defined in this contract in
the [***] for a period of four (4) consecutive years if the contract
minimums are met.
b) Right to market all accessories, parts, and supplies for the above
mentioned equipment.
c) Right to use Scan Coin's name and display the Scan Coin mark
prominently on all equipment, advertising and promotional pieces, and
in trade publications.
2. *CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
d) Right to continue to purchase self service systems on a non-exclusive
basis for twelve consecutive months, following the termination of the
agreement, if Coinstar has purchased [***] of the contract minimum for
the previous period and pursue any other source of supply, while Scan
Coin agrees to supply spares and systems non-exclusively.
e) Right to renew this contract, on an annual basis, if the performance
minimums are met.
VIII. IN EXCHANGE FOR THE ABOVE CONSIDERATIONS, COINSTAR AGREES THAT IT
WILL, ON A BEST EFFORTS BASIS;
a) Continue to aggressively market the current Coinstar system to the
retail grocery stores and supermarkets in the [***]
b) Comply with the performance standards as stated in Section 5.
c) Initiate activities to penetrate the twenty (20) largest retail
financial institutions in the [***].
d) Establish a system and mechanism by which the systems are maintained
on a regular basis and the coins are collected in a manner consistent
with the local requirements.
e) Promote only the use of Scan Coin equipment in the [***] during the
exclusive period. Coinstar is not prevented from developing, building
or seeking alternative suppliers or sources at anytime.
f) Display prominently on all machines "Scan Coins" name whenever the
market permits.
IX. ADJUDICATION OF THE CONTRACT.
In the case of a dispute this contract will be adjudicated under the laws
of the court system of Sweden.
X. EQUIPMENT MODIFICATIONS/IMPROVEMENTS.
Modifications/improvements may be made to any self service equipment
defined Section II, for example [***] or any other self-service coin
redemption systems.
a) If at the request of Coinstar, then all development and engineering
and production costs, resulting in price increases/decreases will need
to be negotiated and agreed upon in a mutually beneficial manner prior
to the initiation of such a project.
b) If at the instigation of Scan Coin, then the resulting new/improved
systems will be offered to Coinstar at the price consistent with their
value in the marketplace.
XI. CONFIDENTIALITY/SECRECY.
Both parties agree to hold confidential all information of a technical,
scientific, and financial nature obtained from the other during the course
of their relationship. This information is to be held confidential for a
period of twelve (12) consecutive months following the termination of this
contract.
3. *CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
XII. RENEW OR NON-RENEW/NOTICE CLAUSE:
a) Scan Coin AB and Coinstar recognize that due to unforeseen
circumstances it may become necessary for one or both parties to
terminate this contract.
b) Without cause, it is agreed that neither party may terminate this
contract prior to September 30, 1998, thereafter only with six (6)
months notice.
XIII. QUALITY STANDARDS AND TESTING PROCEDURES.
Scan Coin AB and Coinstar agree that the Appendix of this contract will
contain the following two mutually agreeable documents.
a) The first document will specify the functional and physical
performance standards which the [***] units received from Scan Coin to
Coinstar must conform to.
b) The second portion will detail the testing methods and protocols that
both parties agree to use in evaluating the [***] system against these
quality standards.
XIV. DESIGN/ENGINEERING CHANGES.
a) Both parties recognize that due to the possibility of more advanced
technology and/or market forces that the unit referred to in this
contract as the [***] may require certain unspecified modifications
and changes which would substantially affect its cost and function.
Both parties agree that;
- They are amenable to discussing any suggestions/requests by either
party on an as needed basis.
- Both parties need to agree and commit in writing the objective of such
a project, the time line of said project, the checking or "exit"
points, who will bear the cost of the project, and how the benefits of
such project will be shared.
b) It is the intent of this clause to ensure that both parties feel free
to conduct an open and candid dialog regarding mutually beneficial
changes and/or modifications to the design or function of the [***]
system.
XV. APPENDIX. THE APPENDIX WILL INCLUDE;
a) The technical and marketing specifications of the [***] and or other
self service product lines.
b) Shipping options.
c) The quality control testing procedures and methodologies.
This letter is an expression of intent only, and does not set forth all of the
matters upon which agreement must be reached in order for the proposed agreement
to be executed. The respective rights and obligations of the parties remain to
be defined in the proposed agreement, and the parties do not intend to be
legally bound unless and until a proposed agreement is executed and delivered.
Accordingly, this document does not constitute a legally binding document and
does not create any legal obligations on the part of, or any rights in favor of,
either party.
4. *CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
Signed: Signed:
/s/ Jens Molbak /s/ Rickert Ovin
- ------------------------------------- ------------------------------------
Jens Molbak Rickert Ovin
on behalf of Coinstar, Inc. on behalf of Scan Coin, Inc.
/s/ Jack Karlsson
------------------------------------
Jack Karlsson
5. *CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
UNDER 17 C.F.R. SECTIONS 200.80(b)(4),
200.83 AND 230.406 *** INDICATES OMITTED
MATERIAL THAT IS THE SUBJECT OF A
CONFIDENTIAL TREATMENT REQUEST THAT IS
FILED SEPARATELY WITH THE COMMISSION
A G R E E M E N T
made and entered into as of April 30, 1993 by and between The Skydeck
Corporation, 495 Old Spanish Trail, Suite B, Portola Valley, California 94028,
USA (hereafter called "Skydeck")
and
Scan Coin AB, Reg No 556193-2673, Jagershillgatan 26, 213 75 Malmo, Sweden
(hereafter called "Scan Coin").
1. BACKGROUND
WHEREAS Skydeck is in the process of developing a coin deposit machine with
dispensing discount coupons to customers in or in connection with retail
establishments, which machine Skydeck intends to own and operate in such
places, and
WHEREAS Scan Coin has developed a coin validation and counting unit which can
be applied as part of Skydeck's aforementioned machine, and which unit
Skydeck wishes to buy from Scan Coin.
NOW THEREFORE, in consideration of the premises and mutual covenants
contained herein, the parties agree as follows.
2. DEFINITIONS
For the purpose of this Agreement
*CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
2.1 "Product" shall mean a coin validation and counting unit currently in
the form set out in ATTACHMENT 1, and parts thereof, as well as all
improvements and developments thereof.
2.2 "Machine" shall mean the coin deposit machine (self service) with
dispensing discount coupons to customers in or in connection with
retail establishments. The Machine is developed by Skydeck.
2.3 "Territory" shall mean the [***].
3. GRANT, EXCLUSIVITY ETC.
3.1 Skydeck hereby engages Scan Coin on an exclusive basis and Scan Coin
agrees to manufacture and supply the Product to Skydeck for use in the
Machine in the Territory.
3.2 Skydeck undertakes during the term of this Agreement not to manufacture
or from any other party than Scan Coin buy or use products similar to
the Product for use in the Machine. Skydeck is only allowed to use the
Product in the Machine and undertakes neither directly nor indirectly
through another party to utilize the Product for other purposes.
3.3 Scan Coin undertakes, not to sell the Products to customers of whom
Scan Coin knows that they intend to use the Product within the
Territory in coin deposit machines (self service) with dispensing
discount coupons to customers in or in connection with retail
establishments, developed, owned or handled by other than Skydeck. This
obligation does not restrict Scan Coin to sell the Product as a part
2. *CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
of Scan Coin's validation, counting and sorting machines included in
Scan Coin's normal product range. However, Scan Coin undertakes in the
Territory not to sell without Skydeck's approval, any Scan Coin
sorting self service product together with the improvements and
developments according to Clause 6.1, excluding the [***] which
compete with the Machine. Such approval shall not be unreasonably
withheld.
3.4 Skydeck has estimated to order and take deliveries of the following
minimum quantities of units of the Product during the term of the
Agreement.
Year Units of the Product
---- --------------------
1993 [***]
1994 [***]
1995 [***]
1996 [***]
1997 [***]
1998 [***]
-----
Total [***]
Should actual orders and deliveries of units of the Product for one
year exceed estimated minimum quantities such excess units of the
Product shall be credited Skydeck against the following year's minimum
quantity. Any delayed delivery from Scan Coin shall adjust the timing
of the said minimum quantities accordingly.
Should Skydeck not order and take deliveries according to above
mentioned estimated minimum quantities of units of the Product,
Skydeck's exclusivity granted in Clauses 3.1 and 3.3 is terminated
without notice and Scan Coin is free to sell the Product to
3. *CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
any other third party irrespectively of the customers' use of the
Product.
Skydeck is entitled to retain its exclusivity according to Clauses 3.1
and 3.3 by compensating Scan Coin for the loss of its net contribution
as defined in Attachment 3, calculated on the difference in said
estimated quantities and actual delivered quantity of the Product for
the calendar year Such compensation to Scan Coin shall be paid by
Skydeck on March 1 at the latest, following the year under which the
minimum quantity has not been met.
4. PRICE ETC
4.1 Scan Coin's price for deliveries of the Product during the full
calendar year of 1993 is set out in ATTACHMENT 2.
4.2 For each subsequent calendar year after 1993 the parties shall meet in
October, before the new calendar year, to agree on a new price
effective from the following January 1st. The new price shall be based
on Scan Coin's price model set out in ATTACHMENT 3, which price model
Scan Coin has utilized in its calculation of the price set out in
Attachment 2.
4.3 Notwithstanding the above, Scan Coin's price shall be subject to
increase or decrease at any time during the course of a calendar year
with immediate effect on orders not yet confirmed by Scan Coin, in the
event it is established the costs related to any of the items included
in the price model pursuant to Attachment 3, have changed, more than
five (5) percent compared with the level of such costs in the price
model at the time the prevailing price was established. Said minimum 5
percent change of costs shall also be reflected and included in the new
price.
4. *CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
From the first delivered [***] units of the Product [***] shall be
deducted from the calculated price for each unit as compensation for
Skydeck's payment of improvement- and development work (cf Clause 6.2)
5. DELIVERY AND PAYMENT
5.1 Unless otherwise agreed, deliveries of the Product shall be Ex works,
Incoterms 1990, Scan Coin's premises in Malmo, pursuant to the delivery
terms set out in ATTACHMENT 4.
5.2 Payment shall, if not otherwise agreed, be against Letter of
Credit payable at sight.
6. SPECIFICATION, IMPROVEMENT- AND DEVELOPMENT WORK ETC.
6.1 The technical specification of the Product and the improvement- and
development work and the functional responsibility for soft- and
hardware related to the Product are set out in ATTACHMENT 5.
6.2 The costs for the improvement- and development work, which shall be
paid by Skydeck as expenses, are set forth in ATTACHMENT 6. The costs
for the work according to Phase II and III (Design, prototype and
testing phases) shall be paid by Skydeck with [***] at the signing of
this Agreement and the remaining [***] by Skydeck simultaneously on
delivery of the prototypes. The costs for the work according to Phase
IV (Manufacturing phase) shall be paid by Skydeck with [***]
immediately after the termination of Phase III and the remaining part
by Skydeck simultaneously on delivery of the [***] units of the Product
(0-serie).
The improvement- and development costs for the serial production shall
be paid by Skydeck and is estimated to a maximum of [***]. As soon as
a
5. *CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
more accurate estimation of the costs has been carried out the parties
shall agree on Skydeck's terms of payment of the costs.
Skydeck's expenses for the improvements- and development costs will be
reimbursed Skydeck by deduction from the calculated price for units of
the Product according to Clause 4.3 last paragraph.
7. TIME SCHEDULE, 0-SERIE ETC
7.1 During the calendar year 1993 the Product will be developed and tested
and [***] units of the Product (0-serie) will be ordered and delivered
to Skydeck. The parties have estimated the work and time schedule
according to ATTACHMENT 7. The parties shall with due diligence make
their best efforts to keep this time schedule.
8. FORECAST, PLACEMENT OF PURCHASE ORDERS ETC
8.1 Forecast, placement of purchase orders and delivery times for the
serial production of the Products after deliveries of the first [***]
units of the Product are set forth in ATTACHMENT 8.
Initial start up phase for the serial production (included first order
of such production) shall be subject for a separate agreement between
the parties.
After the initial phase and up to the delivery of the first [***] units
of the Product (included the first order for serial production in the
initial start up phase), the [***] forecast in Attachment 8 is replaced
by a running [***] forecast submitted by Skydeck to Scan Coin [***]
before each [***] of the [***], showing a forecast for that [***]. This
forecast will be considered as a firm order [***].
6. *CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
Except as stated in this paragraph Attachment 8 applies on said
deliveries of the first [***] units of the Product.
8.2 Scan Coin shall use its best efforts to provide Skydeck with any
additional quantities of the Product in excess of Skydeck's estimated
minimum quantities of units of the Product according to Clause 3.4.
8.3 Should Scan Coin encounter substantial difficulties in fulfilling
confirmed orders to Skydeck, Scan Coin is willing to discuss the
setting up of a joint production of the Product in the [***].
9. INTELLECTUAL PROPERTY
9.1 Skydeck acknowledges that Scan Coin is the owner of all intellectual
property related to the Product, including but not limited to all
rights to patents, patent applications, know-how, designs, trade
secrets etc.
9.2 Any patent or patent application resulting from the work with a new
product (for example components that are compatible with the Product,
which does not fall under the definition in Clause 2.1) developed and
built by Scan Coin on request of Skydeck belongs to Skydeck under
condition that the work has been finally paid for by Skydeck. Scan Coin,
has the first option to negotiate a license under such patent or patent
application. Skydeck is not entitled to grant a license to any third
party on more favourable conditions than those offered to Scan Coin
under the condition that Scan Coin within thirty (30) days after the
offering of the license declares its interest to acquire the license.
Skydeck has the corresponding right to, under the same conditions,
negotiate a license for the
7. *CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
Territory under any new patent- or patent application that belongs to
Scan Coin and relates to the Machine.
Intellectual property related to a new product that is not owned by
Skydeck according to the forthgoing paragraph belongs to Scan Coin.
10. TOOLS ETC
10.1 Production equipment such as tools, special testing equipment etc
required exclusively for the improvement and development of the Product
according to Clause 6.2 shall be paid by the parties in equal shares and
shall remain the property of Scan Coin. The costs for the production
equipment is estimated to approximately [***]. All replacement tooling
will be paid for by Scan Coin.
11 DOCUMENTATION
11.1 Scan Coin's technical documentation regarding the Product which is
necessary for the operation and support of the Product and the market,
shall be furnished by Scan Coin to Skydeck. The documentation includes
a technical function description, maintenance description, physical
interfacing description, software interface description, circuit
diagram, mechanical/electrical assembly drawings and spare parts lists.
Skydeck shall be free to furnish above mentioned documentation to its
customers and service organization (cf Clause 16.1).
12 WARRANTY
12.1 Scan Coin represents and warrants that the Product is manufactured in
accordance with the specification and requirements set forth in
Attachment 1 or agreed upon between the parties separately in writing.
Scan
8. *CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
Coin's liability in respect of any defective parts of the Product shall
be limited to the sending of an equivalent part without delay to
Skydeck. Skydeck is not entitled to a price reduction for any defective
part and Scan Coin is not responsible for any damages incurred directly
or indirectly in connection with the sale or use of the Product.
Skydeck shall return all defective parts to Scan Coin for approval
whether the defect is included under Scan Coin's warranty. The freight
cost for the return of the defective part to Scan Coin and the sending
of an equivalent part shall be carried by Scan Coin. Scan Coin shall
make available any spare parts of all versions of the Product for ten
(10) years from delivery of each unit of the Product at a price
established pursuant to the price model in Attachment 3. Scan Coin will
maintain a level of spare parts to be agreed upon between the parties
annually.
Any claim under the warranty against defects in material and
workmanship shall be allowed only when it is submitted to Scan Coin in
writing within thirty (30) days after the discovery of the defect and
in any event within twelve (12) months after the delivery of the
Product to Skydeck.
13. PRODUCT LIABILITY
13.1 Scan Coin shall be liable for personal injury only if it is proved that
such injury was caused by negligence on the part of Scan Coin or others
for whom Scan Coin is responsible.
Scan Coin shall not be liable for damage to property occurring whilst
the Product is in the possession of Skydeck. Nor shall Scan Coin be
liable for damage to products manufactured by Skydeck, or to other pro-
9. *CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
ducts of which Skydeck's products form a part. Apart from these
limitations Scan Coin shall be liable for damage to property on the
same conditions as for personal injury.
Scan Coin shall in no circumstances be liable for loss of production,
loss of profit or any other consequential damage and indirect loss.
To the extent Scan Coin might incur product liability towards any third
party as a result of a Product purchased by Skydeck, Skydeck shall
indemnify Scan Coin as far as Scan Coin's liability has been limited by
the three preceding subparagraphs.
If a claim for damage as described in this Clause is lodged by a
third party against one of the parties, the latter party shall
forthwith inform the other party thereof.
The above limitations in Scan Coin's liability shall not apply where
Scan Coin is shown to have been guilty of gross misconduct.
14. FORCE MAJEURE
14.1 The following circumstances shall be considered as cases of force
majeure if they intervene after the formation of this Agreement and
impedes its performance: Government laws or regulations, industrial
disputes, war, riot, fire or any other causes beyond the control of
such party.
The party wishing to claim force majeure shall notify the other party
in writing without delay of the occurrence and cessation thereof.
10. *CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
15. PROJECT GROUP, ETC
15.1 For the continuous supervision of the parties' performance under this
Agreement, and with reference to the future improvement and development
of the Product, Scan Coin and Skydeck shall form a joint permanent
project group, (hereafter called the "Project Group"), consisting of
one representative from each party. The Project Group shall meet on a
regular basis. Each party shall carry the cost for its own
representation in the Project Group. Minutes from the meetings in the
Project Group shall be kept and approved by both parties'
representatives.
Within the framework of the Project Group the parties shall discuss
Skydeck's possible need for further improvement and development of the
Product beyond what is agreed in Clause 6.1. If prepared to implement
Skydeck's improvement and development proposals, Scan Coin shall
indicate its impact on already agreed requirements, price pursuant to
the price model in Attachment 3, delivery terms, warranties and other
material conditions. Any improvement or development of the Product,
beyond what is agreed in Clause 6.1, discussed in the Project Group
shall only be implemented to the extent that the parties have agreed in
writing on the terms of such development.
16. SECRECY
16.1 All information exchanges under this Agreement shall be regarded as
confidential and is for the use of the receiving party solely for the
purpose of this Agreement. The parties may not use or disclose any such
information to a third party without the prior written consent of the
furnishing party and shall
11. *CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
take all reasonable measures to prevent unauthorized use or disclosure
of confidential information by their own employees and/or consultants.
This secrecy undertaking shall be effective during the term of this
Agreement and for a period of five (5) years following its termination.
Any confidential documentation furnished by one party to the other
shall be treated by the other party in relation to customers and
service organization in the same way as the other party would treat its
own confidential information.
17. ASSIGNMENT
17.1 Neither party shall have the right to assign his rights or obligations
pursuant to this Agreement without the prior written consent of the
other party, which consent shall not be unreasonably withheld. Such
consent shall not be required in connection with an assignment to a
successor entity resulting from a corporate reorganization of either
party (including without limitation a reincorporation) under the
condition that the transferor in writing guarantees the succeeding
entity's obligations according to this Agreement.
18. DURATION OF THE AGREEMENT
18.1 This Agreement becomes effective on the date first set forth on page 1
above and remains effective until either party terminates this
Agreement with six (6) months written notice, provided that such
termination shall never become effective before December 31, 1998.
12. *CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
19. PREMATURE TERMINATION
19.1 If either party should commit a material breach of the provisions of
this Agreement, the other shall - in case of a breach capable of remedy
- give written notice requiring such breach to be remedied, and in the
event of such breach not being remedied within one (1) month of the
date of service of such notice, or in the case of a breach not capable
of remedy, have the right to terminate this Agreement forthwith,
unless the breach relates to any of the circumstances referred to in
Clause 14 (Force Majeure) above. If the grounds of force majeure
according to Clause 14 subsist for more than three (3) months the other
party shall be entitled to terminate this Agreement forthwith.
This Agreement may otherwise be terminated immediately upon written
notice by
(1) any party in the event the notified party becomes insolvent,
(2) Scan Coin if Skydeck, during any year, orders and takes
deliveries of less than 30 percent of the estimated minimum
quantities of units of the Product stipulated under Clause 3.4,
(3) Scan Coin if Skydeck discontinues its business relating to the
Product.
(4) Skydeck if Scan Coin at two (2) consecutive occasions has failed
to fulfill confirmed orders to Skydeck within thirty (30) days
calculated from committed delivery date,
(5) Skydeck if Scan Coin's price for the Product, calculated according
to the price model in
13. *CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
Attachment 3, any calendar year has increased in SEK with more
than 15% or in USD with more than 25%.
Skydeck is only entitled to terminate the Agreement according to point
5 above after the parties in good faith have concluded negotiations
regarding measures to reduce the costs for the Product, a joint
production of the Product or part thereof in the United States of
America etc.
20. ARBITRATION AND GOVERNING LAW
20.1 This Agreement presupposes a close and confidential collaboration and
the parties intend to try to solve as they arise, such problems as are
not envisaged in this Agreement, or may otherwise give rise to a
difference of opinion between the parties.
20.2 Any dispute, controversy or claim arising out of or in connection with
this Agreement, or the breach, termination or invalidity thereof, shall
be settled by arbitration in accordance with the Rules of the
Arbritration Institute of the Stockholm Chamber of Commerce.
The arbitral tribunal shall be composed of three (3) arbitrators.
The place of arbitration shall be Malmo, Sweden.
The language to be used in the arbitral proceedings shall be English.
20.3 This Agreement shall be governed by the law of Sweden.
14. *CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
21. NOTICES
21.1 All notices, reports, payments and communications required by this
Agreement by one party to the other shall be addressed to the parties
at their respective official addresses as set forth above or to such
other addresses notified by either party in writing. All such notices,
reports, payments and communications shall be made by personal
delivery, or telex, or telecopier, or registered mail, and shall be
considered as served the date received, provided however, in the case
of registered mail, that it shall be deemed to have been served at the
expiration of ten (10) days from the time of being posted and proof
that the letter was properly addessed and posted shall be sufficient
proof of service.
22. SEVERABILITY
22.1 If any provision of this Agreement should be or become fully or partly
invalid or unenforceable for any reason whatsoever or should violate
any applicable law, this Agreement is to be considered divisible as to
such provision and such provision is to be deemed deleted from this
Agreement, and the remainder of this Agreement shall be valid and
binding as if such provision was not included herein. There shall be
substituted for any such provision, a suitable provision which, as far
as legally possible, comes nearest to what the parties desired or would
have desired according to the sense and purpose of this Agreement, had
they considered the point when concluding the Agreement.
____________________________
15. *CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
The parties hereto have caused this Agreement to be executed by their
duly authorized representatives as of the date first above written.
SCAN COIN AB THE SKYDECK CORPORATION
/S/ JACK KARLSSON /s/ Jens H. Molbak
- ------------------------------- --------------------------------
Jack Karlsson Jens H. Molbak
2234L/EE
16. *CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
ATTACHMENT 1
93-04-28
DEFINITION OF THE "PRODUCT"
The "Product" in paragraph 2.1 is defined as:
For PROTOTYPES AND O-SERIES:
- [***]
- [***]
For SERIAL PRODUCTION:
- [***]
- [***]
1. *CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
ATTACHMENT 2
93-04-28
PRODUCT COST AND PRODUCT PRICE
Indicative Product Cost (PC) and Product Price (PP) in SEK, ex works Malmo
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
O-SERIES ([***] UNITS) [***] UNITS/YEAR
PARTS DESCRIPTION PRODUCT COST PRODUCT PRICE PRODUCT COST PRODUCT PRICE
SEK (SEK) SEK (SEK)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
[***] [***] [***] [***] [***]
[***] [***] [***] [***] [***]
[***] [***] [***] [***] [***]
- --------------------------------------------------------------------------------------------------
</TABLE>
The Product Prices in the column for [***] units/year is based on the price
model in Attachment 3.
The parts are defined in Attachment 5.
For each part the packing is included in the Product Price.
1. *CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
Attachment 3
1993-03-05
1. PRODUCT COST CALCULATION
Product cost is defined as follows:
[***]
[***]
Product cost (PC) = X + Y
[***].
[***].
2. PRODUCT PRICE ([***] UNITS/YEAR)
Product price (PP) = [***] x PC
3. SPARE PART PRICES
Prices according to Scan Coin's standard export price list for
subsidiaries.
4. "Net contribution" according to Section 3.4 is to be defined as [***] of
Product Price (PP).
1. *CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
ATTACHMENT 4
CONDITIONS OF DELIVERY
1. GENERAL
These terms shall apply on every delivery of products from Scan Coin to the
purchaser, unless otherwise specifically agreed upon in writing between
Scan Coin and the purchaser.
2. ORDER AND CONFIRMATION OF ORDER
Scan Coin will confirm an order from the purchaser by written confirmation.
Objections against Scan Coin's confirmation of order must be made without
delay.
3. TRADING TERMS
All trading terms used in orders and/or confirmations of order will be
construed in accordance with Incoterms 1990 as amended. If no trade term
is specifically agreed upon the delivery shall be Ex Works.
4. PRODUCT INFORMATION
Information given by Scan Coin in brochures and otherwise is binding on
Scan Coin only when specific reference to such information is made in the
confirmation of an order.
5. DRAWINGS AND TECHNICAL DOCUMENTATION
Any drawings and technical documents submitted by Scan Coin to the
purchaser prior or subsequent to the formation of the contract remain the
exclusive property of Scan Coin. They may not, without Scan Coin's prior
written approval, be utilized by the purchaser or copied, reproduced,
transmitted or otherwise communicated to a third party.
1. *CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
6. PACKING
The sales price includes packing, sufficient to protect the products under
normal conditions.
7. PART DELIVERY
Any portion of a confirmed order of the products may be shipped as soon as
completed at the plant, and payment for any portion so shipped, shall
become due in accordance with the Terms of Payment, provided that the
purchaser agrees to receive the part delivery. Scan Coin will pay for any
additional shipping and handling charges incurred due to the part delivery.
8. PENALTY
If not other agreement has been made, penalty for late delivery (part
delivery) shall be paid by Scan Coin at a rate of two (2)% per thirty (30)
days delay.
The penalty shall be calculated on the basis of the price of the products
delayed.
The total sum of penalties for late deliveries shall not exceed five (5)%
of the price of the products delayed.
Should the purchaser according to point 7 chose not to take part delivery
no penalty shall be paid by Scan Coin related to the offered part delivery.
In addition to the above, the purchaser is not entitled to any compensation
for damage in case of late delivery.
2306L/EE
2. *CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
ATTACHMENT 5
93-04-28
TECHNICAL SPECIFICATION OF THE "PRODUCT" AND DEFINITION OF THE RESPONSIBILITY
FOR THE FUNCTION OF SOFTWARE/HARDWARE
A. TECHNICAL SPECIFICATION
[***]
The CAM unit to be used in the "Machine" is a [***] with the following
modifications:
- - [***]
- - [***]
- - [***]
- - [***]
- - [***]
- - [***]
- - [***]
[***]
Same as [***] but with the [***] replaced by [***].
OUTLET MECHANISM
The [***] shall feed coins from the CAM unit (either [***]) into [***] according
to the following arrangement:
- -----------------------------------------------------------------------------
[***] [***] [***] [***] [***] [***] [***] [***]
- -----------------------------------------------------------------------------
[***] [***] [***] [***] [***] [***] [***] [***]
- -----------------------------------------------------------------------------
[***]
1. *CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
ATTACHMENT 5
93-04-28
B. FUNCTIONAL RESPONSIBILITY FOR HARDWARE/SOFTWARE
SCAN COIN have functional responsibility for the following functions:
To be agreed upon separately
SKYDECK have functional responsibility for the following functions:
To be agreed upon separately
2. *CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
ATTACHMENT 6
93-04-28
SPECIFICATION OF R&D COSTS
Referring to the definition of project phases in Attachment 7, the following
specification of R&D costs is made:
- PROTOTYPE AND O-SERIES
PHASE I: Prestudy phase: [***]
PHASE II & III: Design, prototype and testing phases [***]
PHASE IV: Manufacturing phase [***]
TOTAL for Phase I - IV [***]
- SERIAL PRODUCTION, TOTAL [***]
- TOTAL PROJECT COST [***]
*CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
SKYDECK COIN EXCHANGE UNIT
PROJECT TIME SCHEDULE FOR SCAN COIN DELIVERIES
Attachment 7
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
April May June July August September
- ----------------------------------------------------------------------------------------------------------------------
[***] [***] [***] [***] [***] [***]
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Project start
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Phase II: Design phase
- ----------------------------------------------------------------------------------------------------------------------
A. [***]
- ----------------------------------------------------------------------------------------------------------------------
[***]
- ----------------------------------------------------------------------------------------------------------------------
[***]
- ----------------------------------------------------------------------------------------------------------------------
[***]
- ----------------------------------------------------------------------------------------------------------------------
[***]
- ----------------------------------------------------------------------------------------------------------------------
B. [***]
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Phase III: Prototype and test phase
- ----------------------------------------------------------------------------------------------------------------------
Parts ordering
- ----------------------------------------------------------------------------------------------------------------------
Parts delivery, inspection and modification
- ----------------------------------------------------------------------------------------------------------------------
Assembly of three prototypes
- ----------------------------------------------------------------------------------------------------------------------
Scan Coin laboratory tests and modifications
- ----------------------------------------------------------------------------------------------------------------------
Shipping of two prototypes
- ----------------------------------------------------------------------------------------------------------------------
Revision of drawings
- ----------------------------------------------------------------------------------------------------------------------
Skydeck assembly
- ----------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
October November December January February
- ---------------------------------------------------------------------------------------------------------
[***] [***] [***] [***] [***]
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Project start
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Phase II: Design phase
- ---------------------------------------------------------------------------------------------------------
A. [***]
- ---------------------------------------------------------------------------------------------------------
[***]
- ---------------------------------------------------------------------------------------------------------
[***]
- ---------------------------------------------------------------------------------------------------------
[***]
- ---------------------------------------------------------------------------------------------------------
[***]
- ---------------------------------------------------------------------------------------------------------
B. [***]
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Phase III: Prototype and test phase
- ---------------------------------------------------------------------------------------------------------
Parts ordering
- ---------------------------------------------------------------------------------------------------------
Parts delivery, inspection and modification
- ---------------------------------------------------------------------------------------------------------
Assembly of three prototypes
- ---------------------------------------------------------------------------------------------------------
Scan Coin laboratory tests and modifications
- ---------------------------------------------------------------------------------------------------------
Shipping of two prototypes
- ---------------------------------------------------------------------------------------------------------
Revision of drawings
- ---------------------------------------------------------------------------------------------------------
Skydeck assembly
- ---------------------------------------------------------------------------------------------------------
</TABLE>
1. *CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
April May June July August September
- ----------------------------------------------------------------------------------------------------------------------
[***] [***] [***] [***] [***] [***]
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Skydeck field test
- ----------------------------------------------------------------------------------------------------------------------
Skydeck decision
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Phase IV: Manufacturing phase ([***])
- ----------------------------------------------------------------------------------------------------------------------
Design changes
- ----------------------------------------------------------------------------------------------------------------------
Parts ordering
- ----------------------------------------------------------------------------------------------------------------------
Parts delivery and inspection
- ----------------------------------------------------------------------------------------------------------------------
Assembly
- ----------------------------------------------------------------------------------------------------------------------
Shipping of batch 1, [***]
- ----------------------------------------------------------------------------------------------------------------------
Shipping of batch 2, [***]
- ----------------------------------------------------------------------------------------------------------------------
Shipping of batch 3, [***]
- ----------------------------------------------------------------------------------------------------------------------
Shipping of batch 4, [***]
- ----------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
October November December January February
- ---------------------------------------------------------------------------------------------------------
[***] [***] [***] [***] [***]
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Skydeck field test
- ---------------------------------------------------------------------------------------------------------
Skydeck decision
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Phase IV: Manufacturing phase ([***])
- ---------------------------------------------------------------------------------------------------------
Design changes
- ---------------------------------------------------------------------------------------------------------
Parts ordering
- ---------------------------------------------------------------------------------------------------------
Parts delivery and inspection
- ---------------------------------------------------------------------------------------------------------
Assembly
- ---------------------------------------------------------------------------------------------------------
Shipping of batch 1, [***]
- ---------------------------------------------------------------------------------------------------------
Shipping of batch 2, [***]
- ---------------------------------------------------------------------------------------------------------
Shipping of batch 3, [***]
- ---------------------------------------------------------------------------------------------------------
Shipping of batch 4, [***]
- ---------------------------------------------------------------------------------------------------------
</TABLE>
2. *CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
FORECAST, PLACEMENT OF PURCHASE ORDERS ATTACHMENT 8
93-04-09
[***]
1. *CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
AMENDMENT TO AGREEMENT
entered April 30, 1993, with amendments to agreement entered September 1, 1994,
by and between Scan Coin AB and Coinstar Inc. ("the Agreement").
____________________________
Scan Coin AB ("Scan Coin") and the Coinstar, Inc. ("Coinstar") have now agreed
that the Clauses 2.2, 2.3 and 3.3. in the Agreement shall have the following
wording.
2.2 "Machine" shall mean the coin deposit machine (self service) with or
without dispensing discount coupons to customers in or in connection with
retail establishments. The machine is developed by Coinstar.
2.3 "Territory" shall mean
(i) [***] in relation with the Machine with dispensing discount
coupons.
(ii) [***] in relation with the machine without dispensing discount
coupons
3.3 Scan Coin undertakes, not to sell the Products to customers of whom Scan
Coin knows that they intend to use the Products
- within the [***] in coin deposit machines (self service), owned or
handled by other than Coinstar and where the customer's main target group
is retail establishments
- within [***] in coin deposit machines (self services) with dispensing
discount coupons to customers in or in connection with retail
establishment developed owned or handled by other than Coinstar. This
obligation does not restrict Scan Coin to sell the Products as part of
Scan Coin's normal product range. However, Scan Coin undertakes in the
Territory not to sell without Coinstar's approval, any Scan Coin self
service product together with the improvements and developments
according to Clause 6.1,
1. *CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
excluding the [***], which compete with the machine. Such approval
shall not be unreasonably withheld.
____________________________
Clause 20.2 in the Agreement regarding Arbitration is applicable on this
amendment to the Agreement. Except for the Clauses 2.2, 2.3 and 3.3 all other
contractual obligations in the Agreement are unchanged.
____________________________
In witness whereof, the parities have executed this amendment to the Agreement
in duplicate, each party taking one copy, the last day and year written below.
Date 15 February 1995 Date 15 February 1995
SCAN COIN AB COINSTAR, INC.
/s/ Jack Karlsson /s/ Jens H. Molbak
- ---------------------------- -----------------------------------
Jack Karlsson Jens H. Molbak
2. *CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
AMENDMENT TO AGREEMENT
entered April 30, 1993, by and between San Coin AB and the Skydeck Corporation
("the Agreement").
____________________________
The Skydeck Corporation has after the entering of the Agreement changed its
business name and is now carrying out its business under the name Coinstar, Inc.
at the address 13231 S.E. 36th Street, Suite 200, Bellevue, WA 98006.
Scan Coin AB ("Scan Coin") and the Coinstar, Inc. ("Coinstar") have now agreed
that the minimum delivery quantities and the duration of the Agreement shall be
modified and that the Clauses 3.4 and 18.1 in the Agreement therefore shall have
the following wording.
3.4 Coinstar has estimated to order and take deliveries of the following
minimum quantities of units of the Product during the term of the
Agreement.
Year Units of the Product
---- --------------------
1993 [***] (already completed)
1994 [***] (already ordered)
1995 [***]
1996 [***]
1997 [***]
1998 [***]
1999-01-01--1999-06-30 [***]
-----
TOTAL [***]
Should actual orders and deliveries of units of the Product for one
year exceed estimated minimum quantities such excess units of the
Product shall be credited Coinstar against the following year's minimum
quantity. Any delayed delivery from Scan Coin shall adjust the timing
of the said minimum quantities accordingly.
1. *CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
Should Coinstar not order and take deliveries according to above
mentioned estimated minimum quantities of units of the Product,
Coinstar's exclusivity granted in Clauses 3.1 and 3.3 is
terminated without notice and Scan Coin is free to sell the Product to
any other third party irrespectively of the customer's use of the
Product.
Coinstar is entitled to retain its exclusivity according to Clauses 3.1
and 3.3 by compensating Scan Coin for the loss of its net contribution
as defined in Attachment 3, calculated on the difference in said
estimated quantities and actual delivered quantity of the Product for
the calendar year (and for 1999 its first 6 months). Such compensation
to Scan Coin shall be paid by Coinstar on March 1 at the latest,
following the year under which the minimum quantity has not been met.
18. DURATION OF THE AGREEMENT
18.1 This Agreement becomes effective on the date first set forth on page 1
above and remains effective until either party terminates this Agreement
with six (6) months written notice, provided that such termination shall
never become effective before June 30, 1999.
____________________________
Clause 20.2 in the Agreement regarding Arbitration is applicable on this
amendment to the Agreement. Except for the Clauses 3.4 and 18.1 all other
contractual obligations in the Agreement are unchanged.
____________________________
In witness whereof, the parties have executed this amendment to the Agreement in
duplicate, each party taking one copy, the last day and year written below.
Date 10 August 1994 Date 1 September 1994
SCAN COIN AB COINSTAR, INC.
/s/ Jack Karlsson /s/ Jens H. Molbak
- --------------------------- ---------------------------------
Jack Karlsson Jens H. Molbak
2. *CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
EXHIBIT 11.1
COINSTAR, INC.
COMPUTATION OF EARNINGS PER SHARE
Calculations of pro forma loss per share reported in this Registration
Statement on Form S-1 for the periods presented are based on the following:
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, 1996 MARCH 31, 1996 MARCH 31, 1997
------------------ -------------- --------------
<S> <C> <C> <C>
PRO FORMA:
Weighted average shares outstanding.......................... 984,012 984,012 984,012
Effect of stock warrants to be exercised..................... 700,165 700,165 700,165
Effect of convertible preferred shares....................... 8,988,964 8,988,964 8,988,964
Effect of stock warrants outstanding......................... 1,750 1,750 1,750
Effect of stock options outstanding.......................... 252,592 252,592 252,592
------------------ -------------- --------------
Pro forma weighted average common and equivalent shares
outstanding................................................ 10,927,483 10,927,483 10,927,483
------------------ -------------- --------------
------------------ -------------- --------------
</TABLE>
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in Amendment No. 2 to the Registration Statement No.
333-26843 of Coinstar, Inc. on Form S-1 of our report dated February 14, 1997
(May 28, 1997, as to Notes 1, 2 and 9), appearing in the Prospectus, which is
part of this Registration Statement, as amended. We also consent to the
reference to our Firm under the headings "Selected Financial Data" and "Experts"
in such Prospectus.
/s/ DELOITTE & TOUCHE LLP
Seattle, Washington
June 20, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 MAR-31-1997
<CASH> 23,867,763 16,301,302
<SECURITIES> 32,441,912 31,882,909
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 57,174,675 49,620,244
<PP&E> 27,780,317 35,449,283
<DEPRECIATION> (5,321,063) (6,929,794)
<TOTAL-ASSETS> 82,531,106 81,538,470
<CURRENT-LIABILITIES> 10,380,525 15,035,276
<BONDS> 0 0
24,972,084 24,972,084
4,231,809 4,321,809
<COMMON> 18,396 93,727
<OTHER-SE> (26,226,644) (33,774,563)
<TOTAL-LIABILITY-AND-EQUITY> 82,531,106 81,538,470
<SALES> 8,312,080 3,995,024
<TOTAL-REVENUES> 8,312,080 3,995,024
<CGS> 0 0
<TOTAL-COSTS> 22,217,604 9,732,685
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 2,661,374 2,344,068
<INCOME-PRETAX> (15,718,704) (7,501,691)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (15,718,704) (7,501,691)
<DISCONTINUED> 0 0
<EXTRAORDINARY> (248,631) 0
<CHANGES> 0 0
<NET-INCOME> (15,967,335) (7,501,691)
<EPS-PRIMARY> (1.46) (0.69)
<EPS-DILUTED> (1.46) (0.69)
</TABLE>
