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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15( ) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
FOR THREE MONTH PERIOD ENDED SEPTEMBER 30, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15( ) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-22555
------------------------
COINSTAR, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 94-3156448
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1800 114TH AVENUE SE, BELLEVUE,
WASHINGTON 98004
(Address of principal executive (Zip Code)
offices)
</TABLE>
(425) 943-8000
(Registrant's telephone number, including area code)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
------------------------
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
<TABLE>
<S> <C>
CLASS OUTSTANDING AT OCTOBER 31, 1998
Common Stock, $0.001 par value 15,215,092
</TABLE>
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COINSTAR, INC.
AND SUBSIDIARY
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of September 30, 1998
(unaudited) and December 31, 1997......................... 3
Consolidated Statements of Operations for the nine and three
month periods ended September 30, 1998 and 1997
(unaudited)............................................... 4
Consolidated Statement of Stockholders' Equity (Deficit) for
the nine month period ended September 30, 1998
(unaudited)............................................... 5
Consolidated Statements of Cash Flows for the nine month
periods ended September 30, 1998 and 1997 (unaudited)..... 6
Notes to Consolidated Financial Statements for the nine
month periods ended September 30, 1998 and 1997........... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 26
Item 2. Changes in Securities and Use of Proceeds................... 26
Item 5. Other Information........................................... 26
Item 6. Exhibits and Reports on Form 8-K............................ 29
SIGNATURES.......................................................... 31
EXHIBIT INDEX....................................................... 32
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COINSTAR, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................ $ 28,496,297 $ 20,199,914
Short-term investments available for sale........ 12,663,841 36,603,474
Prepaid expenses and other current assets........ 1,264,739 1,021,349
------------- ------------
Total current assets........................... 42,424,877 57,824,737
PROPERTY AND EQUIPMENT
Coinstar units................................... 69,161,438 51,002,230
Computers........................................ 3,053,106 2,792,326
Office furniture and equipment................... 1,181,889 1,153,974
Leased vehicles.................................. 1,564,562 1,014,873
Leasehold improvements........................... 437,593 366,090
Coinstar components.............................. 48,935 110,024
------------- ------------
75,447,523 56,439,517
Accumulated depreciation......................... (22,696,575) (13,511,235)
------------- ------------
52,750,948 42,928,282
OTHER ASSETS....................................... 2,543,800 2,792,875
------------- ------------
TOTAL.............................................. $ 97,719,625 $103,545,894
------------- ------------
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable................................. $ 3,565,599 $ 3,238,069
Accrued liabilities.............................. 23,832,805 18,253,065
Current portion of long-term debt and capital
lease obligations.............................. 1,761,596 1,612,451
------------- ------------
Total current liabilities...................... 29,160,000 23,103,585
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS....... 83,933,696 77,333,005
COMMITMENTS AND CONTINGENCIES (Notes 3 & 4)
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock..................................... 61,855,991 61,039,848
Contributed capital for warrants................. 513,584 513,584
Accumulated deficit.............................. (77,743,646) (58,444,128)
------------- ------------
Total stockholders equity (deficit)............ (15,374,071) 3,109,304
------------- ------------
TOTAL.............................................. $ 97,719,625 $103,545,984
------------- ------------
------------- ------------
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
COINSTAR, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTH PERIODS ENDED THREE MONTH PERIODS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- -------------------------
1998 1997 1998 1997
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
REVENUE........................................... $ 32,871,162 $ 17,050,337 $ 13,576,423 $ 7,761,755
EXPENSES:
Direct operating................................ 19,106,961 12,691,275 7,141,117 5,275,623
Regional sales and marketing.................... 2,701,062 2,399,701 930,366 797,875
Product research and development................ 3,606,286 4,717,497 867,436 1,637,201
Selling, general, and administrative............ 10,533,289 7,826,712 3,531,109 2,669,422
Depreciation and amortization................... 9,567,959 6,139,623 3,634,837 2,297,085
------------ ------------ ------------ -----------
Loss from operations.............................. (12,644,395) (16,724,471) (2,528,442) (4,915,451)
OTHER INCOME (EXPENSE):
Interest income................................. 1,160,937 1,730,488 273,469 710,206
Interest expense................................ (7,989,521) (7,258,108) (2,757,830) (2,499,432)
Other Income.................................... 161,671 58,787
------------ ------------ ------------ -----------
NET LOSS.......................................... $(19,311,308) $(22,252,091) $ (4,954,016) $(6,704,103)
------------ ------------ ------------ -----------
Net loss per share, basic and diluted........... $ (1.28) $ (1.96) $ (0.33) $ (0.47)
------------ ------------ ------------ -----------
Weighted average shares outstanding, basic and
diluted....................................... 15,128,270 11,370,787 15,187,244 14,199,582
------------ ------------ ------------ -----------
------------ ------------ ------------ -----------
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
COINSTAR, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
WARRANTS
COMMON STOCK -----------
------------------------ CONTRIBUTED ACCUMULATED
SHARES AMOUNT FOR CAPITAL DEFICIT TOTAL
----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE, January 1, 1998.......................... 15,034,629 $61,039,848 $513,584 $(58,444,128) $ 3,109,304
Issuance of shares under employee stock purchase
plan............................................ 98,239 738,968 738,968
Exercise of stock options......................... 78,006 40,550 40,550
Non-cash stock-based compensation................. 4,218 36,625 36,625
Unrealized gain on short-term investments
available for sale.............................. 11,924 11,924
Unrealized loss on foreign currency translation... (134) (134)
Net loss.......................................... (19,311,308) (19,311,308)
----------- ----------- ----------- ------------ ------------
BALANCE, September 30, 1998....................... 15,215,092 $61,855,991 $513,584 $(77,743,646) $(15,374,071)
----------- ----------- ----------- ------------ ------------
----------- ----------- ----------- ------------ ------------
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
COINSTAR, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTH PERIODS
ENDED SEPTEMBER 30,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss............................................ $(19,311,308) $(22,252,091)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and amortization..................... 9,397,861 6,139,623
Debt discount amortization........................ 7,615,632 6,781,166
Accrued investment income......................... 428,949 (338,627)
Non-cash stock-based compensation................. 36,625 --
Unrealized gain on cash equivalents............... 5,572 --
Unrealized loss on foreign currency............... (134) --
Cash provided (used) by changes in operating
assets and liabilities:
Prepaid expenses and other current assets....... (243,390) (520,125)
Other assets.................................... 2,592 (477,784)
Accounts payable................................ 327,530 2,187,017
Accrued liabilities............................. 5,601,777 8,224,676
------------ ------------
Net cash provided/(used) by operating activities.... 3,861,706 (256,145)
INVESTING ACTIVITIES:
Purchase of short-term investments.................. (24,258,982) (28,260,720)
Sale of short-term investments...................... 47,776,019 32,007,105
Purchase of fixed assets............................ (18,582,947) (23,432,182)
Proceeds from sale of equipment..................... 2,247 --
------------ ------------
Net cash provided/(used) by investing activities.... 4,936,337 (19,685,797)
FINANCING ACTIVITIES:
Principal payments on long-term debt................ (1,281,178) (662,220)
Net proceeds from issuance of common stock.......... 28,042,873
Proceeds from exercise of stock options and employee
stock purchase plan............................... 779,518 77,481
Contributed capital for warrants.................... -- 1,262,275
------------ ------------
Net cash provided/(used) by financing activities.... $ (501,660) $ 28,720,409
------------ ------------
INCREASE IN CASH AND CASH EQUIVALENTS............... $ 8,296,383 $ 8,778,467
CASH AND CASH EQUIVALENTS:
Beginning of period............................... $ 20,199,914 $ 23,867,763
------------ ------------
End of period..................................... $ 28,496,297 $ 32,646,230
------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest.......... $ 384,814 $ 511,674
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING
ACTIVITIES:
Purchase of vehicles financed by capital lease
obligation...................................... $ 435,176 $ 640,357
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
COINSTAR, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The unaudited consolidated financial statements of
Coinstar, Inc. and its newly formed subsidiary Coinstar International, Inc.
(collectively, the "Company") included herein reflect all adjustments,
consisting only of normal recurring adjustments which, in the opinion of
management, are necessary to present fairly the Company's financial position,
results of operations and cash flows for the periods presented.
These financial statements have been prepared by the Company pursuant to the
rules and regulations of the Securities and Exchange Commission (the "SEC").
Certain information and footnote disclosures, normally included in financial
statements prepared in accordance with generally accepted accounting principles,
have been omitted pursuant to such SEC rules and regulations. These financial
statements should be read in conjunction with the Company's audited financial
statements and the accompanying notes included in the Company's Form 10-K for
the year ended December 31, 1997 filed with the SEC. The results of operations
for the three month and nine month periods ended September 30, 1998 are not
necessarily indicative of the results to be expected for any subsequent quarter
or for the entire fiscal year.
PRINCIPLES OF CONSOLIDATION: The financial statements include the accounts
of Coinstar, Inc. and its wholly owned subsidiary Coinstar International, Inc.,
which was formed for the purpose of exploring the expansion of the Coinstar
network internationally.
NEW ACCOUNTING PRONOUNCEMENTS: The Accounting Standards Executive Committee
of the American Institute of Certified Public Accountants issued Statement of
Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use," on March 4, 1998. This SOP is effective for the
Company's year ending December 31, 1999 and requires certain of the Company's
product research and development expenses related to development of software for
internal use to be capitalized. The Company is currently evaluating the effects
of this Statement, and management is uncertain as to the impact of its adoption
on the financial statements, taken as a whole.
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," were also recently issued and are effective
for the Company's year ending December 31, 1998. The Company is currently
evaluating the effects of these Standards, however, management believes the
impact of adoption will not be material to the financial statements, taken as a
whole.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") 133, "Accounting for Derivative
Instruments and Hedging Activities." This pronouncement requires an entity to
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The Company is
currently evaluating the effects of this Standard, however, management believes
the impact of adoption will not be material to the financial statements, taken
as a whole. SFAS 133 is effective for fiscal years beginning after June 15,
1999.
NOTE 2: LETTERS OF CREDIT
As of September 30, 1998 the Company had outstanding secured irrevocable
letters of credit with a bank which totaled $3.7 million. These letters of
credit, which expire between December 1998 and June 1999, collateralize the
Company's obligations to third parties. As of September 30, 1998, no amounts
were outstanding under these letters of credit.
7
<PAGE>
COINSTAR, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
NOTE 3: LEGAL PROCEEDINGS
On June 18, 1997, the Company filed in the United States District Court,
Northern District of California against CoinBank Automated Systems, Inc.
("CoinBank"), one of its competitors, a complaint for infringement of one of the
Company's United States patents (the "Patent Infringement Claim"). On June 27,
1997, CoinBank answered the Patent Infringement Claim and counterclaimed for
declaration of non-infringement, invalidity and unenforceability of the subject
patent, and filed a claim for breach of warranty against Scan Coin AB ("Scan
Coin"). The claim against Scan Coin has been dismissed by agreement of the
parties. On January 26, 1998, the court, in response to cross motions for
summary judgment filed by both parties, held that certain of CoinBank's devices
did not infringe on the subject patent, and that there remained a question of
fact as to the infringement of other devices. On October 27, 1998, the Company
added its most recently issued patent to the pending litigation by agreement of
the parties. There can be no assurance that the Company will prevail in such
Patent Infringement Claim or on any claim that may be filed by CoinBank against
the Company, or that as a result of such Patent Infringement Claim, the
Company's patent will not be limited in scope or found to be invalid.
NOTE 4: NEW COIN COUNTING TECHNOLOGY
The Company has invented and introduced new proprietary coin counting
technology that is capable of being used in the Coinstar units. The Company
previously purchased the coin counter components of the Coinstar unit solely
from Scan Coin, pursuant to an agreement that may be terminated by either party
with six months notice at any time on or after June 30, 1999. In March 1997, the
Company entered into a non-binding letter of intent with Scan Coin for a new
agreement. Subsequently Scan Coin indicated that the use of any coin counter in
the Coinstar units other than the coin counting device supplied by Scan Coin
prior to June 30, 1999 would violate the prior supply agreement between Scan
Coin and the Company. Scan Coin also reserved the right to assert ownership of
any of the Company's intellectual property that can be deemed an improvement or
development of Scan Coin's intellectual property. The Company believes that the
pertinent sections of the agreements with Scan Coin have been superseded through
course of dealing. Moreover, the Company believes that Scan Coin has no claim on
any of the Company's intellectual property. The Company has evaluated Scan
Coin's claims and believes they are without merit. However, the Company believes
that even if it is determined that the prior supply agreements are effective and
the Company's use of the new coin counting technology violates these agreements,
an amount that may compensate Scan Coin's claims under the agreements, would not
be material to the Company's business. Accordingly, the Company responded to
Scan Coin, declaring that it does not agree with Scan Coin's claims related to
the agreements, and that Scan Coin has no valid claim on any Company owned or
licensed intellectual property. On September 8, 1998 Scan Coin informed the
Company that the Company was in breach of the original agreement and that the
Company had thirty (30) days to cure the default. Scan Coin also restated its
claim to certain intellectual property owned by the Company. The Company
responded on September 16, 1998 indicating that the Company repudiates all
claims made by Scan Coin in its letter. The Company will continue to attempt to
settle this dispute amicably with Scan Coin.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THE DISCUSSION IN THIS FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS
REGARDING THE COMPANY, ITS BUSINESS, PROSPECTS AND RESULTS OF OPERATIONS THAT
INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL BUSINESS, PROSPECTS AND
RESULTS OF OPERATIONS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED HEREIN AS WELL AS THOSE DISCUSSED UNDER THE CAPTION
"RISK FACTORS" HEREIN AND IN THE COMPANY'S FORM 10-K FOR THE YEAR ENDED DECEMBER
31, 1997 AND QUARTERLY REPORTS ON FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31,
1998 AND SIX MONTHS ENDED JUNE 30, 1998. READERS ARE CAUTIONED NOT TO PLACE
UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH REFLECT MANAGEMENT'S
ANALYSIS ONLY AS OF THE DATE HEREOF. THE COMPANY UNDERTAKES NO OBLIGATION TO
PUBLICLY RELEASE THE RESULTS OF ANY REVISION TO THESE FORWARD-LOOKING STATEMENTS
WHICH MAY BE MADE TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO
REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS. READERS ARE URGED TO CAREFULLY
REVIEW AND CONSIDER THE VARIOUS DISCLOSURES MADE BY THE COMPANY IN THIS REPORT
AND IN THE COMPANY'S OTHER REPORTS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION THAT ATTEMPT TO ADVISE INTERESTED PARTIES OF THE RISKS AND FACTORS
AND MAY AFFECT THE COMPANY'S BUSINESS, PROSPECTS AND RESULTS OF OPERATIONS.
OVERVIEW
The Company develops, owns and operates a network of automated, self-service
coin counting and processing machines that provides consumers with a convenient
means to convert loose coins into cash. The Company began field testing of a
prototype unit in 1992 and commercial installation of units in supermarkets in
1994. The Company has increased its store installation base every year and as of
September 30, 1998 had an installed base of 4,437 units located in supermarkets,
financial institutions and mass merchants in 57 regional markets across the
United States.
Beginning in 1995, the Company has devoted significant resources to building
a sales and marketing organization, adding administrative personnel and
developing the network systems and infrastructure to support the rapid growth of
its installed base of units. The cost of this expansion and the significant
depreciation expense of its installed network have resulted in significant
operating losses to date and an accumulated stockholders' deficit of $77.7
million as of September 30, 1998. The continued rapid expansion of its installed
base is expected to result in continued increases in the number of employees,
marketing and field service personnel expenses in new regions and general and
administrative expenses related to the ongoing development of information
systems to support future growth. Consequently, the Company expects to incur
operating losses in the future. To date, the Company has funded its operating
losses and capital expenditure requirements through the private sale of equity
and, in October 1996, the sale of the Company's 13% Senior Subordinated Discount
Notes due at maturity in 2006 (the "Notes") for net proceeds of $62.9 million,
and the Company's initial public offering of 3.0 million shares of Common Stock
for net proceeds of $28.4 million.
The Company currently derives substantially all its revenues from coin
processing services generated by its installed base of Coinstar units located in
supermarket chains in 33 states across the country. The Company generates
revenues based on a processing fee, generally 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 as awareness levels
of the service increases, driving initial trial and repeat usage for the
service. The Company believes that coin processing volumes per unit may also be
affected by other factors such as public relations, advertising and other
activities that promote awareness of the units, as well as the amount of
consumer traffic in the stores in which the units are located and seasonality.
Given the Company's limited operating history, there can be no assurance,
however, that unit volumes will continue to increase as a function of the time
the unit is in operation, or that unit volumes will be affected by such
9
<PAGE>
other factors. The Company expects that as it continues to aggressively expand
installations relative to the size of its installed base, the average revenue
per unit may decrease even as the per unit dollar volume of mature units
increases.
The Company established a wholly-owned subsidiary, Coinstar International,
Inc. ("Coinstar International"), in March 1998 to explore expanding the
Company's operations internationally. At the present time, Coinstar
International is piloting a three store test in Canada to determine the
viability of the Canadian market for the Coinstar service and investigating the
viability of the Coinstar service in certain European countries.
Direct operating expenses are comprised of the regional expenses associated
with Coinstar unit operations and support and consist primarily of coin pickup
and processing, field operations support and related expenses, and retail
operations support. Coin pickup and processing costs, which represent a major
portion of direct operating expenses, vary based on the level of total coin
processing volume and the density of the units within a region. The Company
believes that while coin pickup and processing costs are variable based on units
in service and coin volume generated, economies related to these direct expense
components can be achieved through increasing the density of units in operation
in regional markets. Field service operations and related expenses vary
depending on the number of geographic regions in which Coinstar units are
located and the density of the units within a region. Regional sales and
marketing expenses are comprised of ongoing marketing, advertising and public
relations efforts in existing market regions and startup marketing expenses
incurred to launch the Coinstar service in new regional markets. Product
research and development expense consists of the development costs of the
Coinstar unit software, network applications, Coinstar unit sustaining
engineering and new product development. Selling, general and administrative
expenses are comprised of management compensation, administrative support for
field operations, the customer service center, sales and marketing support,
systems and engineering support, computer network operations, and accounting,
human resources and occupancy expenses. Depreciation and amortization consists
primarily of depreciation charges on Coinstar units and, to a lesser extent,
depreciation on furniture and fixtures, automobiles, computer equipment and
amortization of intangibles. Other income consists of rental income from a
sublease of unused office space.
The Company expects to continue to evaluate new marketing and promotional
programs to increase the breadth and rate of customer utilization of its service
and to engage in systems and product research and development. The Company
intends to continue to invest in sales and marketing and product research and
development, which is expected to negatively impact its operating results. The
Company believes that its future revenue growth, operating margin gains and
profitability will be dependent upon the penetration of its installed base with
retail distribution partners in existing markets, expansion and penetration of
installations in new market regions and successful ongoing marketing and
promotional activities to sustain the growth in unit coin volume over time.
Given the Company's limited operating history, unpredictability of the timing of
installations with retail distribution partners and the resulting revenues, and
the continued market acceptance of the Company's service by consumers and retail
distribution partners, the Company's operating results for any quarter are
subject to significant variation, and the Company believes that period-to-period
comparisons of its results of operations are not necessarily meaningful and
should not be relied upon as indications of future performance.
RESULTS OF OPERATIONS
THREE MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
REVENUE
Revenue increased to $13.6 million in the three month period ended September
30, 1998 from $7.8 million in the comparable 1997 period. The increase was due
principally to the increase in the number of Coinstar units in service during
the three month period and the increase in the volume of coins processed by the
units in service during this period. The installed base of Coinstar units
increased to 4,437 as of September 30, 1998 from 2,735 units as of September 30,
1997. During the third quarter of 1998,
10
<PAGE>
405 units were installed compared to 400 for the same period in 1997. The dollar
value of coins processed in the third quarter of 1998 increased to $181.0
million compared to $103.4 million in the comparable 1997 period.
DIRECT OPERATING EXPENSES
Direct operating expenses increased to $7.1 million in the three month
period ended September 30, 1998 from $5.3 million in the comparable 1997 period.
The increase in direct operating expenses was primarily attributable to
increased coin pickup and processing costs as a result of the increased dollar
volumes processed by the network and the increase in field service personnel
expenses associated with the hiring and training of new field service personnel
to support the Company's growth and its expansion into 8 new regions as of
September 30, 1998. Direct operating expense as a percentage of revenue
decreased to 52.6% for the three month period ended September 30, 1998 from
68.0% in the comparable 1997 period. The Company anticipates that direct
operating expense will continue to increase as the number of installed units
increases. However, direct operating expenses as a percentage of revenue are
expected to decrease as (i) coin pickup and processing cost economies from
regional densities and alternate coin pickup methods are realized, (ii) field
service expenses decrease as a percentage of revenue as the Company increases
its density in its existing markets, and (iii) the Company integrates its new
coin counting technology into the network, which is expected to increase the
productivity of the Company's field service organization.
REGIONAL SALES AND MARKETING
Regional sales and marketing expense increased to $930,000 in the three
month period ended September 30, 1998 from $798,000 in the comparable 1997
period. This increase was primarily attributable to the expanded number of
regions served by the Coinstar network and an increase in the use of television
advertising to stimulate awareness and trial of the Coinstar service. In
addition, as a percentage of revenue, the Company expects regional sales and
marketing costs to decrease over the year ending 1998 compared with the year
ending 1997.
PRODUCT RESEARCH AND DEVELOPMENT
Product research and development expenses decreased to $867,000 in the three
month period ended September 30, 1998 compared to $1.6 million in the comparable
1997 period. The decrease in product research and development costs reflects the
decrease in expenditures associated with the completion of the development of
the new coin counting technology. While the Company currently expenses all
product research and development costs, a portion may be capitalized in the
future.
SELLING, GENERAL, AND ADMINISTRATIVE
Selling, general, and administrative expense increased to $3.5 million in
the three month period ended September 30, 1998 from $2.7 million in the
comparable 1997 period. The principal component of such expenses was personnel
compensation and the period-to-period increase reflects an investment in higher
staffing levels to support the Company's rapid growth and expansion.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased to $3.6 million in the three
month period ended September 30, 1998 from $2.3 million in the comparable 1997
period. The increase was primarily due to the increase in the installed base of
Coinstar units. 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.
11
<PAGE>
OTHER INCOME AND EXPENSE
The Company generated other income of $59,000 in the three month period
ended September 30, 1998 due to the subleasing of excess office space. The
Company expects to maintain this income source until the year 2000, as this
sublease agreement has a two year term.
Interest income decreased to $273,000 in the three month period ended
September 30, 1998 from $710,000 in the comparable 1997 period. The decrease in
interest income is attributed to a reduction in invested cash balances resulting
from the sale of certain short-term investments to finance the installation of
Coinstar units during the period.
Interest expense increased to $2.8 million in the three month period ended
September 30, 1998 from $2.5 million in the comparable 1997 period. The increase
was primarily due to the accretion of the Notes. No cash interest payments are
due on the Notes until April 2000.
NET LOSS
Net loss decreased to $5.0 million in the three month period ended September
30, 1998 from $6.7 million in the comparable 1997 period. The decrease in the
net loss primarily was due to an increase in the Company's contribution margin
combined with a reduction in the rate of growth of expenses. As a result, the
improvement in net income reflects improved operating leverage of the Coinstar
network. In the longer term, the Company expects that it will not be required to
add as much infrastructure as it has in the past to support its installed base
and as a result expects to achieve profitability as its direct contribution
margin from its larger base of installed units grows proportionately faster than
its expenses. There can be no assurance, however, that the Company will install
a sufficient number of units or obtain sufficient market acceptance to allow the
Company to achieve or sustain profitability.
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
REVENUE
Revenue increased to $32.9 million in the first nine months of 1998 from
$17.1 million in the comparable 1997 period. The increase was due principally to
the increase in the number of Coinstar units in service during the 1998 period
and the increase in the volume of coins processed by the units in service during
this period. The installed base of Coinstar units increased to 4,437 as of
September 30, 1998 from 2,735 units as of September 30, 1997. The dollar value
of coins processed increased to $437.5 million during the 1998 period from
$226.8 million in the comparable 1997 period.
DIRECT OPERATING EXPENSES
Direct operating expenses increased to $19.1 million in the first nine
months of 1998 from $12.7 million in the comparable 1997 period. The increase in
direct operating expenses was primarily attributable to increased coin pickup
and processing costs, as a result of the increased dollar volumes processed by
the network and the increase in field service personnel expenses associated with
the hiring and training of new field service personnel to support the Company's
accelerated growth and its expansion into 17 new regional markets as of
September 30, 1998. Direct operating expenses as a percentage of revenue
decreased to 58.1% in the 1998 period from 74.4% in the comparable 1997 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 and alternate coin pick-up
methods are realized, (ii) field service expenses decrease as a percentage of
revenue as the Company increases its density in its existing markets, and (iii)
the Company integrates its new coin counting technology into the network, which
is expected to increase the productivity of the Company's field service
organization.
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<PAGE>
REGIONAL SALES AND MARKETING
Regional sales and marketing expenses increased to $2.7 million in the first
nine months of 1998 from $2.4 million in the comparable 1997 period. The
increase in regional marketing expense was the result of an increased level of
television advertising, offset partially by a decrease in new market launches
and promotional activity. In addition, as a percentage of revenue, the Company
expects regional sales and marketing costs to decrease over the year ending
December 31, 1998 compared with the year ended December 31, 1997.
PRODUCT RESEARCH AND DEVELOPMENT
Product research and development expenses decreased to $3.6 million in the
first nine months of 1998 from $4.7 million in the comparable 1997 period. The
decrease in product research and development costs reflects the decrease in
expenditures associated with the completion of the development of the new coin
counting technology. While the Company currently expenses all product research
and development costs, a portion may be capitalized in the future.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expense increased to $10.5 million in
the first nine months of 1998 from $7.8 million in the comparable 1997 period.
The principal component of such expenses was personnel compensation and the
period-to-period 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 $9.6 million in the first
nine months of 1998 from $6.1 million in the comparable 1997 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.
OTHER INCOME AND EXPENSE
The Company generated other income of $162,000 in the nine month period
ended September 30, 1998 due to the subleasing of excess office space. The
Company expects to maintain this income source until the year 2000, as this
sublease agreement has a two year term.
Interest income decreased to $1.2 million in the nine month period ended
September 30, 1998 from $1.7 million in the comparable 1997 period. The decrease
in interest income is attributed to a reduction in invested cash balances
resulting from the sale of certain short-term investments to finance the
installation of Coinstar units during the period.
Interest expense increased to $8.0 million in the nine month period ended
September 30, 1998 from $7.3 million in the comparable 1997 period. The increase
was primarily due to the accretion of the Notes. No cash interest payments are
due on the Notes until April 2000.
NET LOSS
Net loss decreased to $19.3 million in the first nine months of 1998 from
$22.3 million in the comparable 1997 period. The decrease in the net loss
primarily was due to an increase in the Company's contribution margin combined
with a reduction in the rate of growth of expenses. As a result, the improvement
in net income reflects improved operating leverage of the Coinstar network. In
the longer term, the Company expects that it will not be required to add as much
infrastructure as it has in the past to support its installed base and as a
result expects to achieve profitability as its direct contribution margin from
its larger base of installed units grows proportionately faster than its
expenses. There can be no
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<PAGE>
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.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998, the Company had cash and cash equivalents of $28.5
million, short-term investments of $12.7 million and working capital of $13.3
million. Cash and cash equivalents include $19.3 million of funds in transit,
which represent amounts being processed by armored car carriers or residing in
Coinstar units. Net cash provided by operating activities was $4.0 million for
the nine month period ended September 30, 1998 and net cash used was $256,000
for the comparable period in 1997. The principal source of cash was provided by
depreciation, other non-cash items, an increase in accounts payable and accrued
liabilities, offset by net operating losses and an increase in other prepaid
expenses.
Net cash provided by investing activities was $4.9 million for the nine
month period ended September 30, 1998 and net cash used was $19.7 million for
the comparable period in 1997. The primary source of cash was the normal
redemption of short-term investments offset by the purchase of fixed assets and
cash equivalent securities. Capital expenditures during the nine month period
ended September 30, 1998 and the comparable period in 1997 were $18.6 million
and $23.4 million, respectively. The majority of capital expenditures consist of
the manufacturing of Coinstar units.
Net cash used by financing activities was $502,000 for the nine month period
ended September 30, 1998 and net cash provided by financing activities for the
comparable period in 1997 was $28.7 million. The principal use of cash was to
repay long-term debt offset by proceeds from the exercise of stock options and
the employee stock purchase plan.
As of September 30, 1998 the Company had outstanding secured irrevocable
letters of credit with a bank in the amount of $3.7 million. These letters of
credit, which expires between December 1998 and June 1999, collateralize the
Company's obligations to third parties. As of September 30, 1998, no amounts
were outstanding under the letters of credit.
Since July 1998, the Company has received four nonbinding revolving credit
proposals from third-party lenders which would provide financing to the Company
for general corporate working capital and the manufacturing of additional
Coinstar units. These proposals would provide between $15.0 and $40.0 million in
revolving credit for up to a three year period at a floating rate of interest
and be secured by certain Company assets. The Company is in the process of
evaluating these proposals and continues to explore other financing facilities
to determine which would be the most appropriate to meet the current and future
liquidity requirements of the Company. The Company expects to close a credit
proposal by the end of the fourth quarter of 1998.
The Company believes existing cash equivalents, short-term investments, and
the consummation of a credit proposal will be sufficient to fund its cash
requirements and capital expenditure needs for the continued expansion of the
domestic Coinstar network at the recent installation rate for at least the next
twelve months. The extent of additional financing needed will depend on the
success of the Company's business. If the Company significantly increases
installations beyond planned levels or if unit coin processing volumes generated
are lower than historical levels, the Company's cash needs will be increased.
The Company's future capital requirements will depend on a number of factors,
including the timing and number of unit installations, the type and scope of
service enhancements, the level of market acceptance of the Company's service
and the feasibility of international expansion. In addition, beginning in April
2000, the Company will have debt service obligations under the Notes that were
issued in October 1996 of over $12 million per year, in equal semi-annual
payments, until October 2006, at which time the principal amount of the Notes
($95.0 million) will be due. See "Risk Factors Uncertainty of Future Operating
Results; Fluctuations in Quarterly Operating Results; and Substantial Leverage
and Ability to Service Debt."
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<PAGE>
QUARTERLY FINANCIAL RESULTS
The following table sets forth selected unaudited quarterly financial
information and operating data for the last eight quarters. This information has
been prepared on the same basis as the Company's unaudited consolidated
financial statements and includes, in the opinion of management, all normal and
recurring adjustments that management considers necessary for a fair statement
of the quarterly results for the periods. The operating results and data for any
quarter are not necessarily indicative of the results for future periods.
<TABLE>
<CAPTION>
THREE MONTH PERIODS ENDED
---------------------------------------------------
SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31,
1998 1998 1998 1997
------------- -------- --------- ------------
(DOLLARS IN THOUSANDS, EXCEPT UNIT AND PER UNIT
DATA)
<S> <C> <C> <C> <C>
Statements of Operations Data:
Revenue................................................ $ 13,576 $ 10,472 $ 8,823 $ 7,957
Expenses:
Direct operating..................................... 7,141 6,142 5,823 5,208
Regional sales and marketing......................... 930 854 917 689
Product research and development..................... 867 1,329 1,410 1,644
Selling, general and administrative.................. 3,531 3,726 3,276 3,252
Depreciation and amortization........................ 3,635 3,120 2,813 2,539
Loss from operations................................... $ (2,528) $ (4,699) $ (5,416) $ (5,375)
Other Data:
Number of new Coinstar units installed during the
period............................................... 405 501 327 469
Installed base of Coinstar units at end of period...... 4,437 4,032 3,531 3,204
Average age of network for the period (months)......... 15.8 14.8 13.4 11.7
Number of regional markets............................. 57 49 42 40
Dollar value of coins processed........................ $180,600 $139,227 $117,298 $105,692
Direct contribution(1)................................. $ 6,435 $ 4,330 $ 3,000 $ 2,749
Annualized revenue per average installed unit(2)....... $ 12,703 $ 11,195 $ 10,597 $ 10,907
Annualized direct contribution per average installed
unit(1)(2)........................................... $ 6,021 $ 4,568 $ 3,601 $ 3,768
International development costs (3).................... $ 116 $ 241 $ 28
<CAPTION>
SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31,
1997 1997 1997 1996
------------- -------- --------- ------------
<S> <C> <C> <C> <C>
Statements of Operations Data:
Revenue................................................ $ 7,762 $ 5,294 $ 3,995 $ 3,349
Expenses:
Direct operating..................................... 5,276 3,966 3,450 2,940
Regional sales and marketing......................... 798 972 630 494
Product research and development..................... 1,637 1,640 1,441 1,533
Selling, general and administrative.................. 2,669 2,630 2,528 1,987
Depreciation and amortization........................ 2,297 2,158 1,684 1,741
Loss from operations................................... $ (4,915) $(6,072) $(5,738) $(5,346)
Other Data:
Number of new Coinstar units installed during the
period............................................... 400 406 428 292
Installed base of Coinstar units at end of period...... 2,735 2,335 1,929 1,501
Average age of network for the period (months)......... 10.6 9.3 8.3 7.0
Number of regional markets............................. 35 33 27 23
Dollar value of coins processed........................ $103,442 $70,626 $52,724 $44,841
Direct contribution(1)................................. $ 2,486 $ 1,328 $ 545 $ 409
Annualized revenue per average installed unit(2)....... $ 12,284 $ 9,939 $ 9,433 $ 9,623
Annualized direct contribution per average installed
unit(1)(2)........................................... $ 3,935 $ 2,494 $ 1,287 $ 1,175
International development costs (3)....................
</TABLE>
- ------------------------
(1) Direct contribution (loss) is defined as revenue less direct operating
expenses. The Company uses direct contribution (loss) as a measure of
operating performance to assist in understanding its operating results.
Direct contribution (loss) is not a measure of financial performance under
GAAP and should not be considered in isolation or an alternative to gross
margin, income (loss) from operations, net income (loss), or any other
measure of performance under GAAP.
(2) Based on monthly averages of units in operation over the applicable period.
(3) International development costs represent the costs incurred by Coinstar
International related to the exploration of the international expansion. All
costs related to international development (such as market research and
travel) are expensed as incurred in accordance with the American Institute
of Certified Public Accountants Statement of Position ("SOP") 98-5,
"Reporting on the Costs of Start-Up Activities," issued on April 3, 1998.
Based on its limited operating history, the Company believes that coin
processing volumes have been affected by seasonality; in particular coin
processing volumes are lower in the months of January, February, September and
October. There can be no assurance, however, that such seasonal trends will
continue. Any projections of future seasonality are inherently uncertain due to
the Company's limited operating history, and due to the lack of comparable
companies engaged in the coin processing business.
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<PAGE>
In addition to fluctuations in revenue resulting from factors affecting
customer usage, timing of unit installations will result in significant
fluctuations in quarterly results. The rate of installations does not follow a
regular pattern, as it depends principally on installation schedules determined
by agreements between the Company and its retail distribution partners, variable
length of partner trial periods and the planned coordination of multiple partner
installations in a given geographic region.
Quarterly losses from operations during the periods presented were the
result of higher direct operating expenses associated with the significant
increase in the Company's installed base, higher depreciation and amortization
expense from the expansion of the installed base and the significantly higher
level of systems infrastructure and management personnel to support the
Company's accelerated growth. The Company expects to continue to incur
substantial operating losses from operations as the Company continues to
increase its installed base of Coinstar units.
NEW ACCOUNTING PRONOUNCEMENTS
The Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants issued Statement of Position ("SOP") 98-5,
"Reporting on the Costs of Start-up Activities," on April 3, 1998. The Company
has adopted this SOP effective for the fiscal year ending December 31, 1998.
Management believes the impact of the adoption of this SOP will not be material
to the financial statements, taken as a whole.
The Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants issued Statement of Position ("SOP") 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," on March 4, 1998. This SOP is effective for the Company's fiscal
year ending December 31, 1999 and requires certain of the Company's product
research and development expenses related to development of software for
internal use to be capitalized. The Company is currently evaluating the effects
of this SOP, and management is uncertain as to the impact of its adoption on the
financial statements, taken as a whole.
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," were also recently issued and are effective
for the Company's fiscal year ending December 31, 1998. The Company is currently
evaluating the effects of these Standards, however, management believes the
impact of adoption will not be material to the financial statements, taken as a
whole.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") 133, "Accounting for Derivative
Instruments and Hedging Activities." This pronouncement requires an entity to
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The Company is
currently evaluating the effects of this Standard, however, management believes
the impact of adoption will not be material to the financial statements, taken
as a whole. SFAS 133 is effective for fiscal years beginning after June 15,
1999.
EFFECTS OF YEAR 2000 ON THE COMPUTER PROGRAMS AND SYSTEMS
Many currently installed computer systems and software programs were
designed to use only a two-digit date field. These date code fields will need to
accept four digit entries to distinguish 21st century dates from 20th century
dates. Until the date fields are updated, the systems and programs could fail or
give erroneous results when referencing dates following December 31, 1999. Such
failure or errors could occur prior to the actual change in century. The Company
relies on computer applications for its coin processing machines and to manage
and monitor its accounting and administrative functions ("Internal Operating
Systems"). Such failure or malfunction could cause disruption of operations,
including among other things a temporary inability to process transactions or
engage in normal business activities. In addition, the Company's retail
distribution partners, suppliers and service providers (including financial
institutions) are reliant upon computer applications, some of which may contain
software that may fail or give erroneous
16
<PAGE>
results as a result of the upcoming change in century, with respect to functions
that materially affect their interactions with the Company. Failure or
malfunction of the Company's retail distribution partner's, suppliers or service
providers which could have a material adverse impact on the Company's business,
financial condition and results of operations and on its ability to achieve
sufficient cash flow service to its indebtedness.
During the second and third quarters of 1998, the Company undertook a
program to identify, test, and evaluate the Internal Operating Systems to
determine the impact of the year 2000 on these systems. These tests involved
simulating transactional activity before, during and after the various impacted
dates and assessing the results to ensure the proper handling of the information
by the internal operating system. As a result of these tests performed on the
Internal Operating Systems, the Company does not believe its computer systems or
applications currently in use will be materially adversely affected by the
upcoming change in century.
The Company is in the process of assessing the impact of the year 2000 on
its retail distribution partners, suppliers, and service providers. The Company
expects to complete the review of these customers and providers by the end of
the first quarter 1999. As the Company completes the review, management will be
able to identify and understand the risks that exist and the remedial actions
the Company may need to take to minimize those risks.
To date, the Company has not incurred any material costs associated with the
review of its internal systems. The Company does not expect any material costs
will be incurred to complete its review of retail distribution partner,
suppliers, or service providers.
RISK FACTORS
IN EVALUATING THE COMPANY'S BUSINESS, PROSPECTS AND RESULTS OF OPERATIONS,
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS IN
ADDITION TO THE OTHER INFORMATION PRESENTED IN THIS REPORT AND IN THE COMPANY'S
OTHER REPORTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION THAT ATTEMPT TO
ADVISE INTERESTED PARTIES OF THE RISKS AND FACTORS THAT MAY AFFECT THE COMPANY'S
BUSINESS, PROSPECTS AND RESULTS OF OPERATIONS.
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 1996, 1997 and the nine month period ended
September 30, 1998 was $16.0 million, $29.6 million and $19.3 million,
respectively. As of September 30, 1998, the Company had an accumulated deficit
of $77.7 million. Operating losses to date have resulted primarily from expenses
incurred in the development, marketing and operation of the Coinstar units,
expansion and maintenance of the network, administrative and occupancy expenses
at the Company's headquarters, and depreciation and amortization. The Company
expects to continue to incur operating losses and negative cash flow from
operating and investing activities as it continues to increase its installed
base of Coinstar units.
LIMITED OPERATING HISTORY. After several years of development, the Company
commenced commercial deployment of Coinstar units in 1994 and placed
approximately 94% of the installed base in 1996, 1997, and the nine month period
ended September 30, 1998. Prospective investors, therefore, have limited
historical financial information on which to base an evaluation of the Company's
performance. The Company's prospects must be considered in light of the risks,
expenses and difficulties frequently encountered by companies in an early stage
of development, particularly companies in new or rapidly evolving markets. There
can be no assurance that the Company will install a sufficient number of its
Coinstar units or obtain sufficient market acceptance to allow the Company to
achieve or sustain profitability, or generate sufficient cash flow to meet the
Company's capital and operating expenses and debt service obligations.
UNCERTAINTY OF FUTURE OPERATING RESULTS. Substantially all of the Company's
revenue has been, and the Company believes will continue to be, derived from the
processing fees charged for the Company's coin
17
<PAGE>
processing service. Prior growth rates in the Company's revenue should not be
considered indicative of future operating results. The timing and amount of
future revenues will depend almost entirely on the Company's ability to obtain
new agreements with potential retail distribution partners for the installation
of Coinstar units, the successful deployment and operation of the Company's coin
processing network, and customer utilization of the service. Future operating
results will depend upon many factors, including the Company's success in
deploying a substantial number of additional units, the consumer demand for the
Company's coin processing service, the level of product and price competition,
the Company's success in expanding its network and managing the growth of such
network, the ability of the Company to develop and market product enhancements,
the timing of product enhancements, activities of and acquisitions by
competitors, the ability to hire additional employees and the timing of such
hiring and the ability to control costs. Fluctuations in the volume and value of
coins processed and the rate of unit installations have caused and may continue
to cause material fluctuations in the Company's operating results, particularly
on a quarterly basis. Quarterly revenue and operating results, therefore, depend
on the volume and mix of coins processed and the rate of unit installations
during the quarter, all of which are difficult to forecast.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. The customer utilization of
the Company's coin processing service varies substantially from unit to unit,
making the Company's revenues difficult to forecast. Customer utilization is
affected by the timing and success of promotions by the Company and its retail
distribution partners, age of the installed unit, adverse weather conditions and
other factors, many of which are not in the Company's control. Based on its
limited operating history, the Company believes that coin processing volumes are
affected by seasonality; in particular the Company believes that on a relative
basis coin processing volumes have been lower in the months of January,
February, September and October. There can be no assurance, however, that such
seasonal trends will continue. Any projections of future seasonality are
inherently uncertain due to the Company's limited operating history, and due to
the lack of comparable companies engaged in the coin processing business. As a
result of these and other factors, revenue for any quarter is subject to
significant variation, and the Company believes that period-to-period
comparisons of its results of operations are not necessarily meaningful and
should not be relied upon as indications of future performance. Because the
Company's operating expenses are based on anticipated revenue trends and because
a large percentage of the Company's expenses are relatively fixed, revenue
variability could cause significant variations in operating results from quarter
to quarter and could result in significant losses. To the extent such expenses
precede, or are not subsequently followed by, increased revenue, the Company's
operating results would be materially adversely affected. Due to all of the
foregoing factors, it is likely that in some future quarter the Company's
operating results will be below the expectations of public market analysts and
investors. In such event, the price of the Company's Common Stock would likely
be materially adversely affected. Fluctuations in operating results may also
result in volatility in the price of the Company's Common Stock.
SUBSTANTIAL LEVERAGE AND ABILITY TO SERVICE DEBT. The Company had
outstanding indebtedness as of September 30, 1998 of $85.7 million, which
included $83.0 million of the Notes. The Notes will accrete to $95.0 million by
October 1999. The Company must begin paying cash interest on the Notes in April
2000. Beginning at that time, the Company will have debt service obligations of
over $12.0 million per year until October 2006 when the principal amount of
$95.0 million will be due. The Company's capital expenditures will increase
significantly upon the continued expansion of the Coinstar network, and the
Company expects that its operating cash flow will be insufficient to finance
capital expenditures over the next several years. The ability of the Company to
meet its debt service requirements will depend upon achieving significant and
sustained growth in the Company's cash flow, which will be affected by its
success in implementing its business strategy, prevailing economic conditions
and financial, business and other factors, certain of which are beyond the
Company's control. Accordingly, there can be no assurance as to whether or when
the Company's operations will generate positive cash flow or become profitable
or whether the Company will at any time have sufficient resources to meet its
debt service obligations. If the Company is unable to generate sufficient cash
flow to service its indebtedness, it will have to reduce or delay planned
capital expenditures, sell assets, restructure or refinance its indebtedness or
seek additional equity capital. There
18
<PAGE>
can be no assurance that any of these strategies could be effected on
satisfactory terms, if at all, particularly in light of the Company's high
levels of indebtedness. In addition, the degree to which the Company is
leveraged could have significant consequences, including, but not limited to,
the following: (i) the Company's ability to obtain additional financing in the
future for working capital, capital expenditures, product research and
development, acquisitions, and other general corporate purposes may be
materially limited or impaired, (ii) a substantial portion of the Company's cash
flow from operations may need to be dedicated to the payment of principal and
interest on its indebtedness and therefore not available to finance the
Company's business and (iii) the Company's high degree of leverage may make it
more vulnerable to economic downturns, may limit its ability to withstand
competitive pressures and may reduce its flexibility in responding to changing
business and economic conditions.
COMPETITION. The Company believes that it is the first company to provide a
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 150 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. Moreover, the Company may face direct
competition from Scan Coin, or other third parties to whom Scan Coin may sell
its coin counting device, as a result of the Company's intention to discontinue
its supply arrangement with Scan Coin. See "Risk Factors-Introduction of New
Coin Counting Technology." 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.
DEPENDENCE ON CONTINUED MARKET ACCEPTANCE BY CONSUMERS AND RETAIL
DISTRIBUTION PARTNERS. The Company is substantially dependent on continued
market acceptance of its coin processing service by consumers and its retail
distribution partners, which have been primarily supermarket chains. The self-
service coin processing market is relatively new and evolving; accordingly, it
is difficult to predict the future growth rate and size of this market. There
can be no assurance that the Company will be successful in achieving the
large-scale adoption of its coin processing service. While the Company's
existing installed base of Coinstar units has been well received by both retail
distribution partners and customers to date, there can be no assurance that the
operating results of the installed units will continue to be favorable or past
results will be indicative of future market acceptance of the Company's service.
The Company believes that market acceptance of the Coinstar unit is dependent on
the consumer's perception that the units are convenient, easy to use and
reliable. Even if the Company is successful in promoting awareness of the
Coinstar unit among consumers, there can be no assurance that such consumers
will utilize the Coinstar units in sufficient volume to make the Company
profitable. In addition, market acceptance and ongoing
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use of the Coinstar service may be adversely affected by the increasing use of
alternatives to coin and currency transactions such as credit and debit cards,
checks, wire transfers, smart cards and other forms of electronic payment.
Market acceptance of the Coinstar units is also dependent on the willingness
of potential retail distribution partners to have the units installed in their
stores. The Company believes that market acceptance by potential retail
distribution partners will be dependent on its ability to demonstrate the
utility of the Coinstar unit as a customer service and as a means to provide
other tangible benefits, including increased customer traffic and the promotion
of store sales or service. There can be no assurance, however, that potential
retail distribution partners will be willing to place Coinstar units in their
locations or that, once installed, Coinstar units will obtain market acceptance
from consumers. Market acceptance and the Company's revenues may also be
affected by the availability and success of coin processing services offered by
competitors. In the event the Company's service does not achieve market
acceptance or does so less rapidly than expected or the Company's contracts with
one or more of its retail distribution partners is terminated, the Company and
its results of operations, including its ability to achieve sufficient cash flow
to service its indebtedness and achieve profitability, will be materially
adversely affected. Moreover, the Company intends to increase its deployment of
Coinstar units in the international market. However, the Company has not entered
certain international markets or fully penetrated other such markets and there
can be no assurance that initial or further deployment in such markets would be
successful.
POSSIBLE TERMINATION OF RETAIL DISTRIBUTION PARTNER AGREEMENTS. The Company
is substantially dependent upon its ability to enter into agreements with retail
distribution partners for the installation of its Coinstar units. In addition,
the Company generally has separate agreements with each of its retail
distribution partners, providing for the Company's exclusive right to provide
coin processing services in their retail locations. These contracts generally
have terms ranging from two to three years and are generally terminable by
either party with advance notice of at least 90 days. In addition, Coinstar
units in service in several supermarket chains account for a significant portion
of the Company's revenue. In the quarter ended September 30, 1998, Coinstar
units in service in two supermarket chains accounted for approximately 38.5% of
the Company's revenue. The units in service in these two chains, Fred Meyer Inc.
and The Kroger Co., accounted for approximately 19.9% and 18.6%, respectively,
of the Company's revenue in 1998. On October 19, 1998, The Kroger Co. and Fred
Meyer Inc. announced that they entered into a definitive merger agreement. The
termination of any one or more of the Company's contracts with its retail
distribution partners could have a material adverse effect on the Company's
business, financial condition, results of operations and on its ability to
achieve sufficient cash flow to service its indebtedness.
MANAGEMENT OF GROWTH. The Company has experienced rapid growth and intends
to continue to aggressively expand its operations. The growth in the size and
scale of the Company's business has placed and is expected to continue to place
significant demands on its operational, administrative and financial personnel
and operating systems. Additional planned expansion by the Company may further
strain management and other resources. The Company's ability to manage growth
effectively will depend on its ability to improve its operating systems, to
expand, train and manage its employee base and to develop additional
manufacturing and service capacity. In particular, the Company will be required
to rapidly expand its operating systems and processes in order to support the
projected installations of Coinstar units and the potential addition of
value-added services. In addition, the Company will be required to establish
relationships with additional third-party service providers. There can be no
assurance that the Company will be able to effectively manage the expansion of
its operations, or that the Company's systems, procedures or controls will be
adequate to support the Company's operations or that Company management will be
able to achieve and manage the installations currently projected. If the Company
is unable to manage growth effectively, the Company's business, financial
condition and results of operations and its ability to achieve sufficient cash
flow to service its indebtedness will be materially adversely affected.
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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.
INTRODUCTION OF NEW COIN COUNTING TECHNOLOGY. The Company has invented and
is in the process of introducing new proprietary coin counting technology that
is capable of being used in the Coinstar units. The new coin counting component
is manufactured by SeaMed Corporation ("SeaMed"). The Company previously
purchased the coin counter components of the Coinstar unit solely from Scan
Coin, pursuant to an agreement that may be terminated by either party with six
months notice at any time on or after June 30, 1999. In March 1997, the Company
entered into a non-binding letter of intent with Scan Coin for a new agreement.
Subsequently, Scan Coin indicated that the use of any coin counter in the
Coinstar units other than the coin counting device supplied by Scan Coin prior
to June 30, 1999 would violate the prior supply agreement between Scan Coin and
the Company. Scan Coin also reserved the right to assert ownership of any of the
Company's intellectual property that can be deemed an improvement or development
of Scan Coin's intellectual property. The Company believes that the pertinent
sections of the agreements with Scan Coin have been superseded through course of
dealing. Moreover, the Company believes that Scan Coin has no claim on any of
the Company's intellectual property. The Company has evaluated Scan Coin's
claims and believes they are without merit. However, the Company believes that
even if it is determined that the prior supply agreements are still effective
and the Company's use of the new coin counting technology violates these
agreements, an amount that may compensate Scan Coin's claims under the
agreements would not be material to the Company's business. Accordingly, the
Company responded to Scan Coin, declaring that it does not agree with Scan
Coin's claims related to the agreements, and that Scan Coin has no valid claim
on any Company owned or licensed intellectual property. On September 8, 1998,
Scan Coin informed the Company that the Company was in breach of the original
agreement and that the Company had thirty (30) days to cure the default. Scan
Coin also restated its claim to certain intellectual property owned by the
Company. The Company responded on September 16, 1998 indicating that the Company
repudiates all claims made by Scan Coin in its letter. The Company will continue
to attempt to settle this dispute amicably with Scan Coin. There can be no
assurance that the Company will be able to resolve the dispute with Scan Coin,
nor can there be any assurance that if litigation commences, the Company will
prevail. Failure to prevail in litigation may result in a payment of monetary
damages, the forfeiture of certain intellectual property rights, or both, each
of which, individually, in the event of its occurrence, could have a material
adverse effect on the Company's business, financial condition and results of
operations and on its ability to achieve sufficient cash flow to service its
indebtedness.
The Company still requires spare parts for the Scan Coin supplied coin
counters. The Company believes, if all pending parts orders from Scan Coin are
received, that it currently has enough parts to meet demand through the end of
1998. However, there can be no assurance the dispute with Scan Coin will not
effect Scan Coin's decision to fill such orders or others in the future. The
Company believes it can purchase many of these parts from third party suppliers.
However, there can be no assurance that the Company will be able to source all
necessary parts from outside suppliers for the Scan Coin coin counters on a
timely basis, if at all. Failure to secure necessary parts on a timely basis may
result in a slowdown of installations, or in machine downtime.
There can be no assurance that the transition to the Company's proprietary
coin counting technology will proceed on schedule, or that there will be no
conversion problems. The coin counter is a complex mechanical and electronic
device that is difficult to manufacture. In addition, implementation of the new
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device will require the distribution of parts, the retraining of Company
personnel, and the retraining of third party personnel that help service the
Coinstar units. There can be no assurance that these tasks can be completed
without delay, nor can there be any assurance that SeaMed will be able to
produce the device in the required quantities or in a timely manner. Any such
delay or problems may result in machine downtime, or a delay, or cessation of
installations for an indeterminate period, each of which, individually, in the
event of its occurrence, could have a material adverse effect on the Company's
business, financial condition and results of operations and on its ability to
achieve sufficient cash flow to service its indebtedness. See "Risk Factors
Reliance on Third Party Manufacturers and Service Providers".
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 will be able to produce sufficient units
to meet projected demand, there can be no assurance that SeaMed or other
manufacturers will be able to meet the Company's manufacturing needs in a
satisfactory and timely manner. In the event of an unanticipated increase in
demand for Coinstar unit installations by retail distribution partners, the
Company may be unable to meet such demand due to manufacturing constraints.
Although the Company has a contract with SeaMed, it does not have a long-term
obligation to continue the manufacture of the Coinstar unit or its components.
Further, SeaMed is principally engaged in the manufacture of electronic medical
instruments for medical technology companies. The Company believes that it is
SeaMed's only material non-medical customer. As such, the Company faces an
increased risk that SeaMed may choose to focus exclusively on manufacturing its
medical products and cease making the Company's products. Should SeaMed cease
providing services, the Company would be required to locate and qualify
additional suppliers. There can be no assurance that the Company would be able
to locate alternate manufacturers on a timely basis. The Company's reliance on
third-party manufacturers involves a number of additional risks, including the
absence of guaranteed capacity and reduced control over delivery schedules,
quality assurance, production yields and costs. There can be no assurance that
the manufacturing capability of such third-party manufacturers will successfully
address the Company's needs. In the event the Company is unable to retain such
manufacturing on commercially reasonable terms, its business, financial
condition and results of operation and its ability to achieve sufficient cash
flow to service its indebtedness will be materially adversely affected.
The Company relies on third-party service providers for substantial support
and service efforts that the Company currently does not provide directly. In
particular, the Company contracts with armored carriers and other third party
providers to arrange for the pick-up, processing and deposit of coins. The
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.
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
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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 retail 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 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.
DEPENDENCE ON KEY PERSONNEL AND NEED TO HIRE ADDITIONAL PERSONNEL. The
Company's performance is substantially dependent on the performance of its
executive officers and key employees and its long term success will depend on
its ability to recruit, retain and motivate highly skilled personnel. All of the
Company's executive officers and employees are employed on an at-will basis. The
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 the Chief Executive Officer in
the amount of $2.0 million.
UNCERTAINTY OF PROTECTION OF PATENTS AND PROPRIETARY RIGHTS. The Company's
future success depends, in part, on its ability to protect its intellectual
property and maintain the proprietary nature of its technology through a
combination of patents, licenses and other intellectual property arrangements,
without infringing the proprietary rights of third parties. In October 1996,
April 1997, May 1998, and September 1998, the Company was issued United States
patents relating to removing debris from coins processed in a self-service
environment and other aspects of self-service coin processing. These patents
will expire in October 2013, April 2014, May 2015, and April 2014 respectively.
Sufficient debris removal is important to reducing clogging and malfunctioning.
Reducing these problems and the associated downtime improves unit availability
for customer use and reduces the amount of time that Company or retail
distribution partner personnel must spend attending to the unit, both of which
are important features of operating in a self-service environment. No assurance
can be given that any patents from any pending patent applications or from any
future patent applications will be issued, that any of the Company's patents
will be held valid if
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subsequently challenged or that others will not claim rights in or ownership of
the patents and other proprietary rights held by the Company. Moreover, there
can be no assurance that any patents issued to the Company will not be
challenged, invalidated or circumvented, or that the rights granted thereunder
will provide proprietary protection to the Company. Despite the Company's
efforts to safeguard and maintain its proprietary rights, there can be no
assurance that the Company will be successful in doing so or that the Company's
competitors will not independently develop or patent technologies that are
substantially equivalent or superior to the Company's technologies.
On June 18, 1997, the Company filed suit in the United States District
Court, Northern District of California against CoinBank Automated Systems, Inc.
("CoinBank"), one of its competitors, a complaint for infringement of one of the
Company's United States patents (the "Patent Infringement Claim"). On June 27,
1997, CoinBank answered the Patent Infringement Claim and counterclaimed for
declaration of non-infringement, invalidity and unenforceability of the subject
patent, and filed a claim for breach of warranty against Scan Coin. The claim
against Scan Coin has been dismissed by agreement of the parties. On January 26,
1998, the court, in response to cross motions for summary judgment filed by both
parties, held that certain of CoinBank's devices did not infringe on the subject
patent, and that there remained a question of fact as to the infringement of
other devices. On October 27, 1998 the Company added its most recently issued
patent to the pending litigation by agreement of the parties. There can be no
assurance that the Company will prevail in such Patent Infringement Claim or on
any claim that may be filed by CoinBank against the Company or that as a result
of such Patent Infringement Claim, the Company's patent will not be limited in
scope or found to be invalid.
Since patent applications in the United States are not publicly disclosed
until the patent is issued, applications may have been filed by others which, if
issued as patents, could cover the Company's products. The Company is subject to
the risk of claims and litigation alleging infringement of the intellectual
property rights of others. There can be no assurance that others will not assert
infringement or misappropriation claims against the Company in the future based
on patents, copyrights or trade secrets or that such claims will not be
successful. The Company could incur substantial costs in defending itself and
its retail distribution partners against any such claims, regardless of the
merits of such claims. Parties making such claims may be able to obtain
injunctive or other equitable relief which could effectively block the Company's
ability to provide its coin processing service and use the processing equipment
in the United States and abroad, and could result in an award of substantial
damages. In the event of a successful claim of infringement, the Company may
need or be required to obtain one or more licenses from, and/or grant one or
more licenses to, others. There can be no assurance that the Company could
obtain necessary licenses from others at a reasonable cost or at all. The
defense of any lawsuit could result in time-consuming and expensive litigation,
damages, license fees, royalty payments, diversion of the attention of key
personnel and restrictions on or the termination of the Company's ability to
provide its coin processing service and use the processing equipment, any of
which could have a material adverse effect on the Company's business, financial
condition and results of operations and on its ability to achieve sufficient
cash flow to service its indebtedness. The Company also relies on trade secrets
to develop and maintain its competitive position. Although the Company protects
its proprietary technology in part by confidentiality agreements with its
employees, consultants and corporate partners, there can be no assurance that
these agreements will not be breached, that the Company will have adequate
remedies for any breach or that the Company's trade secrets will not otherwise
become known or be discovered independently by its competitors.
RAPID TECHNOLOGICAL CHANGE. The self-service coin processing market is
relatively new and evolving. As such, the Company anticipates that, as the
market matures, it will be subject to technological change, new services and
product enhancements, particularly as the Company expands its service offerings.
Accordingly, the Company's success may depend in part upon its ability to
develop product enhancements and new services that keep pace with continuing
changes in technology and consumer preferences while remaining price
competitive. There can be no assurance, however, that the Company would be
successful
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in developing such product enhancements or new services, that it will be able to
introduce such products or services on a timely basis or that any such product
enhancements or new services will be successful in the marketplace. The
Company's failure to develop technological improvements or to adapt its products
and services to technological change on a timely basis could, over time, have a
material adverse effect on the Company's business, financial condition and
results of operations and on its ability to achieve sufficient cash flow to
service its indebtedness.
POTENTIAL VOLATILITY OF STOCK PRICE. The Company's Common Stock price has
fluctuated substantially since its initial public offering in July 1997. There
can be no assurance that the market price of the Company's Common Stock will not
decline further or continue to fluctuate. Announcements of technological
innovations or new products or services by the Company or its competitors, the
termination of one or more retail distribution contracts, release of reports,
changes in or failure of the Company to meet financial estimates by securities
analysts, industry developments, market acceptance of the Coinstar service by
retail distribution partners and consumers, economic and other external factors,
as well as period-to-period fluctuations in the Company's financial results, may
have a significant and adverse impact on the market price of the Common Stock.
In addition, the securities markets have from time to time experienced
significant price and volume fluctuations that are unrelated to the operating
performance of particular companies. These market fluctuations may also
materially and adversely affect the market price of the Company's Common Stock.
UNCERTAINTY OF EFFECTS OF YEAR 2000 ON COMPUTER PROGRAMS AND SYSTEMS. Many
currently installed computer systems and software programs were designed to use
only a two-digit date field. These date code fields will need to accept four
digit entries to distinguish 21st century dates from 20th century dates. Until
the date fields are updated, the systems and programs could fail or give
erroneous results when referencing dates following December 31, 1999. Such
failure or errors could occur prior to the actual change in century. The Company
relies on computer applications for its coin processing machines and to manage
and monitor its accounting and administrative functions. Such failure or
malfunction could cause disruptions of operations, including among other things
a temporary inability to process transactions or engage in normal business
activities. In addition, the Company's retail distribution partners, suppliers
and service providers (including financial institutions) are reliant upon
computer applications, some of which may contain software that may fail or give
erroneous results as a result of the upcoming change in century, with respect to
functions that materially affect their interactions with the Company. While the
Company does not believe its computer systems or applications currently in use
will be adversely affected by the upcoming change in century, the Company has
not made an assessment as to whether any of its retail distribution partners,
suppliers or service providers will be so affected. Failure or malfunction of
the Company's software or that of its retail distribution partners, suppliers or
service providers could have a material adverse impact on the Company's
business, financial condition and results of operations and on its ability to
achieve sufficient cash flow service to its indebtedness.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 18, 1997, the Company filed in the United States District Court,
Northern District of California against CoinBank Automated Systems, Inc.
("CoinBank"), one of its competitors, a complaint for infringement of one of the
Company's United States patents (the "Patent Infringement Claim"). On June 27,
1997, CoinBank answered the Patent Infringement Claim and counterclaimed for
declaration of non-infringement, invalidity and unenforceability of the subject
patent, and filed a claim for breach of warranty against Scan Coin AB. The claim
against Scan Coin AB has been dismissed by agreement of the parties. On January
26, 1998, the court, in response to cross motions for summary judgment filed by
both parties, held that certain of CoinBank's devices did not infringe on the
subject patent, and that there remained a question of fact as to the
infringement of other devices. On October 27, 1998, the Company added its most
recently patent issued to the pending litigation by agreement of the parties.
There can be no assurance that the Company will prevail in such Patent
Infringement Claim or on any claim that may be filed by CoinBank against the
Company, or that as a result of such Patent Infringement Claim, the Company's
patent will not be limited in scope of found to be invalid.
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
The effective date of the Company's first registration statement, filed on
Form S-1 under the Securities Act of 1993, as amended (Registration No.
333-26843), was July 2, 1997 (the "Registration Statement"). The class of
securities registered was Common Stock. The offering commenced on July 2, 1997
and all securities were sold in the offering. The managing underwriters were
Smith Barney Inc. and Hambrecht & Quist.
Pursuant to the Registration Statement, the Company sold 3,000,000 shares of
its Common Stock for its own account, for an aggregate offering price of
$31,500,000. The Company incurred expenses of approximately $2,837,544, of which
$1,957,125 represented underwriting discounts and commissions and $880,419
represented estimated other expenses, of which expenses $50,149 represented
direct or indirect payments to an affiliate of the Company. The net offering
proceeds to the issuer after total expenses was $28,662,456.
During the second quarter of 1998, the Company began to disburse proceeds
for the initial public offering. To date, offering proceeds were used as
follows: (i) approximately $10.5 million for capital expenditures and working
capital in connection with the continued expansion of the Coinstar network, (ii)
approximately $300,000 for product research and development to enhance the
Coinstar unit and the coin processing network; and (iii) approximately $300,000
for general corporate purposes.
The remaining net proceeds have been invested in short term securities. The
use of the proceeds from the offering does not represent a material change in
the use of proceeds described in the prospectus included as part of the
Registration Statement.
ITEM 5. OTHER INFORMATION
(A) Pursuant to the Company's bylaws, stockholders who wish to bring matters
or propose nominees for director at the Company's 1999 Annual Meeting of
Stockholders must provide specified information to the Company between 60 and 90
days prior to the first anniversary of the 1998 Annual Meeting of Stockholders,
which was held on June 4, 1998 (unless such matters are included in the
Company's proxy statement pursuant to Rule 14a-8 under the Securities Exchange
Act of 1934, as amended).
(B) On November 12, 1998 the Company's Board of Directors approved the
adoption of a Share Purchase Rights Plan (the "Plan"). Terms of the Plan provide
for a dividend distribution of one preferred share purchase right (a "Right")
for each outstanding share of common stock, par value $.001 per share (the
"Common Shares"), of the Company. The dividend is payable on November 30, 1998
(the "Record
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Date") to the stockholders of record on that date. Each Right entitles the
registered holder to purchase from the Company one one-hundredth of a share of
Series A Junior Participating Preferred Stock, par value $.001 per share (the
"Preferred Shares"), at a price of $45 per one one-hundredth of a Preferred
Share (the "Purchase Price"), subject to adjustment. Each one one-hundredth
Preferred Share has designations and powers, preferences and rights, and the
qualifications, limitations and restrictions which make its value approximately
equal to the value of a Common Share. The description and terms of the Rights
are set forth in a Rights Agreement (the "Rights Agreement"), dated as of
November 12, 1998 entered into between the Company and American Securities
Transfer & Trust, Inc., as Rights Agent (the "Rights Agent").
Initially, the Rights will be evidenced by the stock certificates
representing the Common Shares then outstanding, and no separate Right
Certificates, as defined, will be distributed. Until the earlier to occur of (i)
the date of a public announcement that a person, entity or group of affiliated
or associated persons have acquired beneficial ownership of 20% or more of the
outstanding Common Shares (an "Acquiring Person") or (ii) 10 business days (or
such later date as may be determined by action of the Board of Directors prior
to such time as any person or entity becomes an Acquiring Person) following the
commencement of, or announcement of an intention to commence, a tender offer or
exchange offer the consummation of which would result in any person or entity
becoming an Acquiring Person (the earlier of such dates being called the
"Distribution Date"), the Rights will be evidenced, with respect to any of the
Common Share certificates outstanding as of the Record Date, by such Common
Share certificate with or without a copy of the Summary of Rights, which is
included in the Rights Agreement as Exhibit C thereof (the "Summary of Rights").
Until the Distribution Date, the Rights will be transferable with and only
with the Common Shares. Until the Distribution Date (or earlier redemption or
expiration of the Rights), new Common Share certificates issued after the Record
Date, upon transfer or new issuance of Common Shares, will contain a notation
incorporating the Rights Agreement by reference. Until the Distribution Date (or
earlier redemption or expiration of the Rights), the surrender or transfer of
any certificates for Common Shares outstanding as of the Record Date, even
without such notation or a copy of the Summary of Rights being attached thereto,
will also constitute the transfer of the Rights associated with the Common
Shares represented by such certificate. As soon as practicable following the
Distribution Date, separate certificates evidencing the Rights ("Right
Certificates") will be mailed to holders of record of the Common Shares as of
the close of business on the Distribution Date and such separate Right
Certificates alone will evidence the Rights.
The Rights are not exercisable until the Distribution Date. The Rights will
expire on November 12, 2008 (the "Final Expiration Date"), unless the Rights are
earlier redeemed or exchanged by the Company, in each case, as described below.
The Purchase Price payable, and the number of Preferred Shares or other
securities or other property, upon exercise of the Rights are subject to
adjustment from time to time to prevent dilution (i) in the event of a stock
dividend on, or a subdivision, combination or reclassification of, the Preferred
Shares, (ii) upon the grant to holders of the Preferred Shares of certain rights
or warrants to subscribe for or purchase Preferred Shares at a price, or
securities convertible into Preferred Shares with a conversion price, less than
the then current market price of the Preferred Shares or (iii) upon the
distribution to holders of the Preferred Shares of evidences of indebtedness or
assets (excluding regular periodic cash dividends paid out of earnings or
retained earnings or dividends payable in Preferred Shares) or of subscription
rights or warrants (other than those referred to above). The exercise of Rights
for Preferred Shares is at all times subject to the availability of a sufficient
number of authorized but unissued Preferred Shares.
The number of outstanding Rights and the number of one one-hundredths of a
Preferred Share issuable upon exercise of each Right are also subject to
adjustment in the event of a stock split of the Common Shares or a stock
dividend on the Common Shares payable in Common Shares or subdivisions,
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consolidations or combinations of the Common Shares occurring, in any case,
prior to the Distribution Date.
Preferred Shares purchasable upon exercise of the Rights will not be
redeemable. Each Preferred Share will be entitled to a minimum preferential
quarterly dividend payment of $1.00 but will be entitled to an aggregate
dividend of 100 times the dividend declared per Common Share. In the event of
liquidation, the holders of the Preferred Shares would be entitled to a minimum
preferential liquidation payment of $100 per share, but would be entitled to
receive an aggregate payment equal to 100 times the payment made per Common
Share. Each Preferred Share will have 100 votes, voting together with the Common
Shares. Finally, in the event of any merger, consolidation or other transaction
in which Common Shares are exchanged, each Preferred Share will be entitled to
receive 100 times the amount of consideration received per Common Share. These
rights are protected by customary anti-dilution provisions. Because of the
nature of the Preferred Shares' dividend and liquidation rights, the value of
one one-hundredth of a Preferred Share should approximate the value of one
Common Share. The Preferred Shares would rank junior to any other series of the
Company's preferred stock.
In the event that any person or group of affiliated or associated persons
becomes an Acquiring Person, proper provision shall be made so that each holder
of a Right, other than Rights beneficially owned by the Acquiring Person and its
associates and affiliates (which will thereafter be void), will for a 60-day
period have the right to receive upon exercise that number of Common Shares
having a market value of two times the exercise price of the Right (or, if such
number of shares is not and cannot be authorized, the Company may issue
Preferred Shares, cash, debt, stock or a combination thereof in exchange for the
Rights). This right will terminate 60 days after the date on which the Rights
become nonredeemable (as described below), unless there is an injunction or
similar obstacle to exercise of the Rights, in which event this right will
terminate 60 days after the date on which the Rights again become exercisable.
Generally, under the Plan, an "Acquiring Person" shall not be deemed to
include (i) the Company, (ii) a subsidiary of the Company, (iii) any employee
benefit or compensation plan of the Company, or (iv) any entity holding Common
Shares for or pursuant to the terms of any such employee benefit or compensation
plan. In addition, except under limited circumstances, no person or entity shall
become an Acquiring Person as the result of the acquisition of Common Shares by
the Company which, by reducing the number of shares outstanding, increases the
proportionate number of shares beneficially owned by such person or entity to
20% or more of the Common Shares then outstanding. Further, except under certain
circumstances, no person shall become an Acquiring Person due to the acquisition
of Common Shares directly from the Company.
In the event that the Company is acquired in a merger or other business
combination transaction or 50% or more of its consolidated assets or earning
power are sold to an Acquiring Person, its associates or affiliates or certain
other persons in which such persons have an interest, proper provision will be
made so that each holder of a Right will thereafter have the right to receive,
upon the exercise thereof at the then current exercise price of the Right, that
number of shares of common stock of the acquiring company which at the time of
such transaction will have a market value of two times the exercise price of the
Right.
At any time after an Acquiring Person becomes an Acquiring Person and prior
to the acquisition by such Acquiring Person of 50% or more of the outstanding
Common Shares, the Board of Directors of the Company may exchange the Rights
(other than Rights owned by such person or group which have become void), in
whole or in part, at an exchange ratio of one Common Share, or one one-hundredth
of a Preferred Share, per Right (or, at the election of the Company, the Company
may issue cash, debt, stock or a combination thereof in exchange for the
Rights), subject to adjustment.
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least 1% in
such Purchase Price. No fractional Preferred Shares will be issued (other than
fractions which are integral multiples of the number of one one-hundredths of a
Preferred Share issuable upon the exercise of one Right, which may, at the
election of the Company, be
28
<PAGE>
evidenced by depository receipts), and in lieu thereof, an adjustment in cash
will be made based on the market price of the Preferred Shares on the last
trading day prior to the date of exercise.
At any time prior to the earlier of (i) the day of the first public
announcement that a person has become an Acquiring Person or (ii) the Final
Expiration Date, the Board of Directors of the Company may redeem the Rights in
whole, but not in part, at a price of $.001 per Right (the "Redemption Price").
Following the expiration of the above periods, the Rights become nonredeemable.
Immediately upon any redemption of the Rights, the right to exercise the Rights
will terminate and the only right of the holders of Rights will be to receive
the Redemption Price.
The terms of the Rights may be amended by the Board of Directors of the
Company without the consent of the holders of the Rights, except that from and
after such time as the rights are distributed no such amendment may adversely
affect the interest of the holders of the Rights excluding the interests of an
Acquiring Person.
Until a Right is exercised, the holder thereof, as such, will have no rights
as a stockholder of the Company, including, without limitation, the right to
vote or to receive dividends.
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the Company
on terms not approved by the Company's Board of Directors. The Rights should not
interfere with any merger or other business combination approved by the Board of
Directors since the Rights may be amended to permit such acquisition or redeemed
by the Company at $.001 per Right prior to the earliest of (i) the time that a
person or group has acquired beneficial ownership of 20% or more of the Common
Shares or (ii) the final expiration date of the rights.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------- -----------------------------------------------------------------
<S> <C>
3.1(1) Amended and Restated Certificate of Incorporation of the
Registrant in effect after the closing of the Initial Public
Offering.
3.2(1) Amended and Restated Bylaws of the Registrant.
4.1 Reference is made to Exhibits 3.1 through 3.2.
4.2(1) Specimen Stock Certificate.
4.3(1) Second Amended and Restated Investor Rights Agreement, dated
August 27, 1996, between the Registrant and certain investors,
as amended October 22, 1996.
4.4(1) Indenture between Registrant and The Bank of New York dated
October 1, 1996.
4.5(1) Warrant Agreement between Registrant and The Bank of New York
dated October 22, 1996.
4.6(1) Notes Registration Rights Agreement between Registrant and Smith
Barney Inc. dated October 22, 1996.
4.7(1) Warrant Registration Rights Agreement between Registrant and
Smith Barney Inc. dated October 22, 1996.
4.8(1) Specimen 13% Senior Discount Note Due 2006
4.9 Rights Agreement dated as of November 12, 1998 between Registrant
and American Securities Transfer and Trust, Inc.
4.10 Registrant's Certificate of Designation of Series A Preferred
Stock
Reference is made to Exhibit A of Exhibit 4.9
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------- -----------------------------------------------------------------
<S> <C>
4.11 Form of Rights Certificate
Reference is made to Exhibit B of Exhibit 4.9
10.1(1) Registrant's 1997 Equity Incentive Plan.
10.2(1) Registrant's 1997 Employee Stock Purchase Plan.
10.3(1) Registrant's 1997 Non-Employee Directors' Stock Option Plan.
10.4(1) Form of Indemnity Agreement between the Registrant and its
executive officers and directors.
10.5(1) Series E Preferred Stock and Warrant Purchase Agreement between
Registrant and Acorn Ventures, Inc., dated August 27, 1996.
10.6(1) Office Building Lease between Registrant and Factoria Heights
dated June 1, 1994, as amended on January 24, 1997.
10.7(1) Sublease between Registrant and Maruyama U.S., Inc. dated January
15, 1997.
10.8(1) Lease agreement between Registrant and Spieker Properties, L.P.
dated January 29, 1997.
10.9(1) Lease agreement between Registrant and Spieker Properties, L.P.
dated January 29, 1997.
10.10(2) Manufacturing Agreement between Registrant and SeaMed Corporation
dated May 14, 1998.
10.11+(1) Letter of Intent between Registrant and Scan Coin AB dated March
5, 1997.
10.12+(1) Agreement between Registrant and Scan Coin AB dated April 30,
1993, as amended.
10.13(1) Purchase Agreement between Registrant and Smith Barney Inc. dated
October 22, 1996.
11.1 Computation of Earnings Per Share.
27.1 Financial Data Schedule.
</TABLE>
- ------------------------
(1) Filed as an Exhibit to the Registrant's Registration Statement on Form S-4
(No. 333-33233)
(2) Filed as an Exhibit to the Registrant's Quarterly Report on Form 10-Q for
the Quarter Ended June 30, 1998.
+ Certain confidential portions deleted pursuant to Order Granting Application
Under the Securities Act of 1933, as amended, and Rule 406 thereunder
respecting Confidential Treatment.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended September 30,
1998.
Items 3, 4 and 5 are not applicable and have been omitted.
30
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C>
COINSTAR, INC.
(Registrant)
Date: November 13, 1998 /s/ KIRK A. COLLAMER
--------------------------------------
Kirk A. Collamer
VICE PRESIDENT AND CHIEF FINANCIAL
OFFICER
</TABLE>
31
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------- -----------------------------------------------------------------
<S> <C> <C>
3.1(1) Amended and Restated Certificate of Incorporation of the
Registrant in effect after the closing of the Initial Public
Offering.
3.2(1) Amended and Restated Bylaws of the Registrant.
4.1 Reference is made to Exhibits 3.1 through 3.2.
4.2(1) Specimen Stock Certificate.
4.3(1) Second Amended and Restated Investor Rights Agreement, dated
August 27, 1996, between the Registrant and certain investors,
as amended October 22, 1996.
4.4(1) Indenture between Registrant and The Bank of New York dated
October 1, 1996.
4.5(1) Warrant Agreement between Registrant and The Bank of New York
dated October 22, 1996.
4.6(1) Notes Registration Rights Agreement between Registrant and Smith
Barney Inc. dated October 22, 1996.
4.7(1) Warrant Registration Rights Agreement between Registrant and
Smith Barney Inc. dated October 22, 1996.
4.8(1) Specimen 13% Senior Discount Note Due 2006
4.9 Rights Agreement dated as of November 12, 1998 between Registrant
and American Securities Transfer and Trust, Inc.
4.10 Registrant's Certificate of Designation of Series A Preferred
Stock
Reference is made to Exhibit A of Exhibit 4.9
4.11 Form of Rights Certificate
Reference is made to Exhibit B of Exhibit 4.9
10.1(1) Registrant's 1997 Equity Incentive Plan.
10.2(1) Registrant's 1997 Employee Stock Purchase Plan.
10.3(1) Registrant's 1997 Non-Employee Directors' Stock Option Plan.
10.4(1) Form of Indemnity Agreement between the Registrant and its
executive officers and directors.
10.5(1) Series E Preferred Stock and Warrant Purchase Agreement between
Registrant and Acorn Ventures, Inc., dated August 27, 1996.
10.6(1) Office Building Lease between Registrant and Factoria Heights
dated June 1, 1994, as amended on January 24, 1997.
10.7(1) Sublease between Registrant and Maruyama U.S., Inc. dated January
15, 1997.
10.8(1) Lease agreement between Registrant and Spieker Properties, L.P.
dated January 29, 1997.
10.9(1) Lease agreement between Registrant and Spieker Properties, L.P.
dated January 29, 1997.
10.10(2) Manufacturing Agreement between Registrant and SeaMed Corporation
dated May 14, 1998.
10.11+(1) Letter of Intent between Registrant and Scan Coin AB dated March
5, 1997.
10.12+(1) Agreement between Registrant and Scan Coin AB dated April 30,
1993, as amended.
10.13(1) Purchase Agreement between Registrant and Smith Barney Inc. dated
October 22, 1996.
11.1 Computation of Earnings Per Share.
27.1 Financial Data Schedule.
</TABLE>
- ------------------------
(1) Filed as an Exhibit to the Registrant's Registration Statement on Form S-4
(No. 333-33233)
(2) Filed as an Exhibit to the Registrant's Quarterly Report on Form 10-Q for
the Quarter Ended June 30, 1998.
+ Certain confidential portions deleted pursuant to Order Granting Application
Under the Securities Act of 1933, as amended, and Rule 406 thereunder
respecting Confidential Treatment.
32
<PAGE>
EXHIBIT 11.1
COINSTAR, INC.
COMPUTATION OF EARNINGS PER SHARE
Calculations of net loss per share are based on the following:
<TABLE>
<CAPTION>
NINE MONTH PERIODS THREE MONTH PERIODS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------- ----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Weighted average common and
equivalent shares
outstanding................... 15,128,270 11,370,787 15,187,244 14,199,582
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
COINSTAR, INC.
AND
AMERICAN SECURITIES TRANSFER & TRUST, INC.
AS RIGHTS AGENT
RIGHTS AGREEMENT
DATED AS OF NOVEMBER 12, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
RIGHTS AGREEMENT
THIS RIGHTS AGREEMENT ("Agreement"), dated as of November 12, 1998, between
COINSTAR INC., a Delaware corporation (the "Company"), and AMERICAN SECURITIES
TRANSFER & TRUST, INC. ("Rights Agent").
The Board of Directors of the Company has authorized and declared a
dividend of one preferred share purchase right (a "Right") for each Common Share
(as such term is hereinafter defined) outstanding at the close of business on
November 30, 1998 (the "Record Date"), each Right representing the right to
purchase one one-hundredth of a Preferred Share (as such term is hereinafter
defined), upon the terms and subject to the conditions herein set forth, and has
further authorized and directed the issuance of one Right with respect to each
Common Share that shall become outstanding between the Record Date and the
earliest to occur of the Distribution Date, the Redemption Date and the Final
Expiration Date (as such terms are hereinafter defined); PROVIDED, HOWEVER, that
Rights may be issued with respect to Common Shares that shall become outstanding
after the Distribution Date and prior to the earlier of the Redemption Date and
the Final Expiration Date in accordance with the provisions of Section 22
hereof.
Accordingly, in consideration of the premises and the mutual agreements
herein set forth, the parties hereby agree as follows:
1.
<PAGE>
SECTION 1. CERTAIN DEFINITIONS. For purposes of this Agreement, the
following terms have the meanings indicated:
(a) "ACQUIRING PERSON" shall mean any Person (as such term is hereinafter
defined) who or which, together with all Affiliates and Associates (as such
terms are hereinafter defined) of such Person, shall be the Beneficial Owner (as
such term is hereinafter defined) of 20% or more of the Common Shares then
outstanding. Notwithstanding the foregoing, (A) the term Acquiring Person shall
not include (i) the Company, (ii) any Subsidiary (as such term is hereinafter
defined) of the Company, (iii) any employee benefit or compensation plan of the
Company or any Subsidiary of the Company, (iv) any entity holding Common Shares
for or pursuant to the terms of any such employee benefit or compensation plan,
and (B) no Person shall become an "Acquiring Person" either (x) as the result of
an acquisition of Common Shares by the Company which, by reducing the number of
shares outstanding, increases the proportionate number of shares beneficially
owned by such Person to 20% or more of the Common Shares then outstanding;
PROVIDED, HOWEVER, that if a Person shall become the Beneficial Owner of 20% or
more of the Common Shares then outstanding by reason of share purchases by the
Company and shall, following written notice from, or public disclosure by the
Company of such share purchases by the Company, become the Beneficial Owner of
any additional Common Shares without the prior consent of the Company and shall
then Beneficially Own more than 20% of the Common Shares then outstanding, then
such Person shall be deemed to be an "Acquiring Person," or (y) as the result of
the acquisition of Common Shares directly from the Company, PROVIDED, HOWEVER,
that if a Person shall become the Beneficial Owner of 20% or more of the Common
Shares then outstanding by reason of share purchases directly from the Company
and shall, after that date, become Beneficial Owner of any addition Common
Shares without the prior written consent of the Company and shall then
Beneficially Own more than 20% of the Common Shares then outstanding, then such
Person shall be deemed to be an "Acquiring Person" or (z) if the Board of
Directors determines in good faith that a Person who would otherwise be an
"Acquiring Person," as defined pursuant to the foregoing provisions of this
paragraph (a), has become such inadvertently, and such Person divests, as
promptly as practicable (as determined in good faith by the Board of Directors),
but in any event within five Business Days, following receipt of written notice
from the Company of such event, of Beneficial Ownership of a sufficient number
of Common Shares so that such Person would no longer be an Acquiring Person, as
defined pursuant to the foregoing provisions of this paragraph (a), then such
Person shall not be deemed to be an "Acquiring Person" for any purposes of this
Agreement.
(b) "AFFILIATE" and "ASSOCIATE" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as in
effect on the date of this Agreement, PROVIDED, HOWEVER, that the limited
partners of a limited partnership shall not be deemed to be Associates of such
limited partnership solely by virtue of their limited partnership interests.
(c) A Person shall be deemed the "BENEFICIAL OWNER" of and shall be deemed
to "beneficially own" any securities:
(i) which such Person or any of such Person's Affiliates or
Associates is deemed to beneficially own, within the meaning of Rule 13d-3 of
the General Rules and Regulations under the Exchange Act as in effect on the
date of this Rights Agreement;
2.
<PAGE>
(ii) which such Person or any of such Person's Affiliates or
Associates has (A) the right to acquire (whether such right is exercisable
immediately or only after the passage of time) pursuant to any agreement,
arrangement or understanding (other than customary agreements with and between
underwriters and selling group members with respect to a bona fide public
offering of securities), or upon the exercise of conversion rights, exchange
rights, rights (other than these Rights), warrants or options, or otherwise;
PROVIDED, HOWEVER, that a Person shall not be deemed the Beneficial Owner of, or
to beneficially own, securities tendered pursuant to a tender or exchange offer
made by or on behalf of such Person or any of such Person's Affiliates or
Associates until such tendered securities are accepted for purchase or exchange;
or (B) the right to vote pursuant to any agreement, arrangement or
understanding; PROVIDED, HOWEVER, that a Person shall not be deemed the
Beneficial Owner of, or to beneficially own, any security if the agreement,
arrangement or understanding to vote such security (1) arises solely from a
revocable proxy or consent given to such Person in response to a public proxy or
consent solicitation made pursuant to, and in accordance with, the applicable
rules and regulations promulgated under the Exchange Act and (2) is not also
then reportable on Schedule 13D under the Exchange Act (or any comparable or
successor report); or
(iii) which are beneficially owned, directly or indirectly, by any
other Person with which such Person or any of such Person's Affiliates or
Associates has any agreement, arrangement or understanding (other than customary
agreements with and between underwriters and selling group members with respect
to a bona fide public offering of securities) for the purpose of acquiring,
holding, voting (except to the extent contemplated by the proviso to Section
1(c)(ii)(B) hereof) or disposing of any securities of the Company, PROVIDED,
HOWEVER, an agreement, arrangement or understanding for purposes of this Section
1(c)(iii) shall not be deemed to include actions, including any agreement,
arrangement or understanding, or statements by any member of the Company's Board
of Directors on the date of this Agreement, any subsequent directors of the
Company (the "Successor Directors") who have been nominated by a majority of
directors who are directors as o the date of this Agreement or who are Successor
Directors, or by any Person of whom such a director is an Affiliate or
Associate, provided, however that this exception shall not apply to a particular
Person or Persons if and to the extent that such Person or Persons, after the
date of this Agreement, acquires Beneficial Ownership of more than an additional
5% of the then outstanding Common Shares of the Company unless (A) the shares
are acquired directly from the Company or as part of an employee benefit or
compensation plan of the Company or a subsidiary of the Company or (B) the
Person establishes to the satisfaction of the directors of the Company that it
is acting on its own behalf and not in concert with any other Person and will
not, upon completion of any purchases, be the Beneficial Owner of 20% or more of
the outstanding Common Shares.
Notwithstanding anything in this definition of Beneficial Ownership to the
contrary, the phrase, "then outstanding," when used with reference to a Person's
Beneficial Ownership of securities of the Company, shall mean the number of such
securities then issued and outstanding together with the number of such
securities not then actually issued and outstanding which such Person would be
deemed to own beneficially hereunder.
(d) "BUSINESS DAY" shall mean any day other than a Saturday, a Sunday, or
a day on which banking institutions in the State of California are authorized or
obligated by law or executive order to close.
3.
<PAGE>
(e) "CLOSE OF BUSINESS" on any given date shall mean 5:00 p.m., Pacific
Time, on such date; PROVIDED, HOWEVER, that if such date is not a Business Day
it shall mean 5:00 p.m., Pacific Time, on the next succeeding Business Day.
(f) "COMMON SHARES" shall mean the shares of common stock, par value $.001
per share, of the Company; PROVIDED, HOWEVER, that, "Common Shares," when used
in this Agreement in connection with a specific reference to any Person other
than the Company, shall mean the capital stock (or equity interest) with the
greatest voting power of such other Person or, if such other Person is a
Subsidiary of another Person, the Person or Persons which ultimately control
such first-mentioned Person.
(g) "DISTRIBUTION DATE" shall have the meaning set forth in Section 3
hereof.
(h) "FINAL EXPIRATION DATE" shall have the meaning set forth in Section 7
hereof.
(i) "INTERESTED STOCKHOLDER" shall mean any Acquiring Person or any
Affiliate or Associate of an Acquiring Person or any other Person in which any
such Acquiring Person, Affiliate or Associate has an interest, or any other
Person acting directly or indirectly on behalf of or in concert with any such
Acquiring Person, Affiliate or Associate.
(j) "PERSON" shall mean any individual, firm, corporation or other entity,
and shall include any successor (by merger or otherwise) of such entity.
(k) "PREFERRED SHARES" shall mean shares of Series A Junior Participating
Preferred Stock, par value $.001 per share, of the Company having the
designations and the powers, preferences and rights, and the qualifications,
limitations and restrictions set forth in the Form of Certificate of Designation
attached to this Agreement as Exhibit A.
(l) "PURCHASE PRICE" shall have the meaning set forth in Section 7(b)
hereof.
(m) "REDEMPTION DATE" shall have the meaning set forth in Section 7
hereof.
(n) "SHARES ACQUISITION DATE" shall mean the first date of public
announcement by the Company or an Acquiring Person that an Acquiring Person has
become such provided, however that, if such Person is determined not to have
become an Acquiring Person pursuant to clause (z) of Subsection 1(a)(B) hereof,
then no Shares Acquisition Date shall be deemed to have occurred.
(o) "SUBSIDIARY" of any Person shall mean any corporation or other entity
of which a majority of the voting power of the voting equity securities or
equity interest is owned, directly or indirectly, by such Person.
(p) "TRANSACTION" shall mean any merger, consolidation or sale of assets
described in Section 13(a) hereof or any acquisition of Common Shares which
would result in a Person becoming an Acquiring Person or a Principal Party (as
such term is hereinafter defined).
(q) "TRANSACTION PERSON" with respect to a Transaction shall mean (i) any
Person who (x) is or will become an Acquiring Person or a Principal Party (as
such term is hereinafter defined) if the Transaction were to be consummated and
(y) directly or indirectly proposed or
4.
<PAGE>
nominated a director of the Company which director is in office at the time of
consideration of the Transaction, or (ii) an Affiliate or Associate of such a
Person.
SECTION 2. APPOINTMENT OF RIGHTS AGENT. The Company hereby appoints the
Rights Agent to act as agent for the Company in accordance with the terms and
conditions hereof, and the Rights Agent hereby accepts such appointment. The
Company may from time to time appoint such co-Rights Agents as it may deem
necessary or desirable.
SECTION 3. ISSUE OF RIGHT CERTIFICATES.
(a) Until the earlier of (i) the Shares Acquisition Date or (ii) the tenth
Business Day (or such later date as may be determined by action of the Board of
Directors prior to such time as any Person becomes an Acquiring Person) after
the date of the commencement (determined in accordance with Rule 14d-2 under the
Exchange Act) by any Person (other than the Company, any Subsidiary of the
Company, any employee benefit plan of the Company or of any Subsidiary of the
Company or any entity holding Common Shares for or pursuant to the terms of any
such plan) of, or of the first public announcement of the intention of any
Person (other than the Company, any Subsidiary of the Company, any employee
benefit plan of the Company or of any Subsidiary of the Company or any entity
holding Common Shares for or pursuant to the terms of any such plan) to
commence, a tender or exchange offer (which intention to commence remains in
effect for five Business Days after such announcement), the consummation of
which would result in any Person becoming an Acquiring Person (including any
such date which is after the date of this Agreement and prior to the issuance of
the Rights, the earlier of such dates being herein referred to as the
"Distribution Date"), (x) the Rights will be evidenced by the certificates for
Common Shares registered in the names of the holders thereof (which certificates
shall also be deemed to be Right Certificates) and not by separate Right
Certificates, and (y) the Rights (and the right to receive Right Certificates
therefor) will be transferable only in connection with the transfer of Common
Shares. As soon as practicable after the Distribution Date, the Company will
prepare and execute, the Rights Agent will countersign, and the Company will
send or cause to be sent (and the Rights Agent will, if requested, send) by
first-class, insured, postage-prepaid mail, to each record holder of Common
Shares as of the Close of Business on the Distribution Date, at the address of
such holder shown on the records of the Company, a Right Certificate, in
substantially the form of Exhibit B hereto (a "Right Certificate"), evidencing
one Right for each Common Share so held, subject to the adjustment provisions of
Section 11 of this Rights Agreement. As of the Distribution Date, the Rights
will be evidenced solely by such Right Certificates.
(b) On the Record Date, or as soon as practicable thereafter, the Company
will send (directly or through the Rights Agent or its transfer agent) a copy of
a Summary of Rights to Purchase Preferred Shares, in substantially the form of
Exhibit C hereto (the "Summary of Rights"), by first-class, postage-prepaid
mail, to each record holder of Common Shares as of the Close of Business on the
Record Date, at the address of such holder shown on the records of the Company.
With respect to certificates for Common Shares outstanding as of the Record
Date, until the Distribution Date, the Rights will be evidenced by such
certificates registered in the names of the holders thereof. Until the
Distribution Date (or the earlier of the Redemption Date and the Final
Expiration Date), the surrender for transfer of any certificate for Common
Shares outstanding on the Record Date shall also constitute the transfer of the
Rights associated with the Common Shares represented thereby.
5.
<PAGE>
(c) Certificates for Common Shares which become outstanding (including,
without limitation, reacquired Common Shares referred to in the last sentence of
this paragraph (c)) after the Record Date but prior to the earliest of the
Distribution Date, the Redemption Date or the Final Expiration Date shall have
impressed on, printed on, written on or otherwise affixed to them the following
legend:
This certificate also evidences and entitles the holder hereof to certain
rights as set forth in a Rights Agreement between Coinstar, Inc. (the "Company")
and American Securities Transfer & Trust, Inc. as Rights Agent (the "Rights
Agent"), dated as of November 12, 1998, as amended from time to time (the
"Rights Agreement"), the terms of which are hereby incorporated herein by
reference and a copy of which is on file at the principal executive offices of
the Company. Under certain circumstances, as set forth in the Rights Agreement,
such Rights will be evidenced by separate certificates and will no longer be
evidenced by this certificate. The Company will mail to the holder of this
certificate a copy of the Rights Agreement without charge after receipt of a
written request therefor. As described in the Rights Agreement, Rights issued
to any Person who becomes an Acquiring Person or an Affiliate or Associate
thereof (as defined in the Rights Agreement) and certain related persons,
whether currently held by or on behalf of such Person or by any subsequent
holder, shall become null and void.
With respect to such certificates containing the foregoing legend, until
the Distribution Date, the Rights associated with the Common Shares represented
by such certificates shall be evidenced by such certificates alone, and the
surrender for transfer of any such certificate shall also constitute the
transfer of the Rights associated with the Common Shares represented thereby.
In the event that the Company purchases or acquires any Common Shares after the
Record Date but prior to the Distribution Date, any Rights associated with such
Common Shares shall be deemed canceled and retired so that the Company shall not
be entitled to exercise any Rights associated with the Common Shares which are
no longer outstanding. Notwithstanding this Section 3(c), the omission of a
legend shall not affect the enforceability of any part of this Rights Agreement
or the rights of any holder of the Rights.
SECTION 4. FORM OF RIGHT CERTIFICATES.
(a) The Right Certificates (and the form of election to purchase Preferred
Shares, the form of assignment and the form of certification to be printed on
the reverse thereof) shall be substantially the same as Exhibit B hereto and may
have such marks of identification or designation and such legends, summaries or
endorsements printed thereon as the Company may deem appropriate and as are not
inconsistent with the provisions of this Agreement, or as may be required to
comply with any applicable law or with any rule or regulation made pursuant
thereto or with any rule or regulation of any stock exchange on which the Rights
may from time to time be listed, or to conform to usage. Subject to the
provisions of Sections 7,11 and 22 hereof, the Right Certificates shall entitle
the holders thereof to purchase such number of one one-hundredths of a Preferred
Share as shall be set forth therein at the price per one one-hundredth of a
Preferred Share set forth therein (the "Purchase Price"), but the number of such
one one-hundredths of a Preferred Share and the Purchase Price shall be subject
to adjustment as provided herein.
(b) Any Right Certificate issued pursuant to Section 3(a) or Section 22
hereof that represents Rights which are null and void pursuant to Section
11(a)(ii) hereof and any Right
6.
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Certificate issued pursuant to Section 6 or Section 11 hereof upon transfer,
exchange, replacement or adjustment of any other Right Certificate referred to
in this sentence, shall contain (to the extent feasible) the following legend:
The Rights represented by this Right Certificate are or were beneficially
owned by a Person who was or became an Acquiring Person or an Affiliate or
Associate of an Acquiring Person (as such terms are defined in the Rights
Agreement). Accordingly, this Right Certificate and the Rights represented
hereby are null and void.
The provisions of Section 11(a)(ii) hereof shall be operative whether or
not the foregoing legend is contained on any such Right Certificate.
SECTION 5. COUNTERSIGNATURE AND REGISTRATION. The Right Certificates shall
be executed on behalf of the Company by its Chairman of the Board, its Chief
Executive Officer, its President, its Vice Chairman of the Board, its Chief
Financial Officer, or any of its Vice Presidents, either manually or by
facsimile signature, shall have affixed thereto the Company's seal or a
facsimile thereof, and shall be attested by the Secretary or an Assistant
Secretary of the Company, either manually or by facsimile signature. The Right
Certificates shall be manually countersigned by the Rights Agent and shall not
be valid for any purpose unless countersigned. In case any officer of the
Company who shall have signed any of the Right Certificates shall cease to be
such officer of the Company before countersignature by the Rights Agent and
issuance and delivery by the Company, such Right Certificates, nevertheless, may
be countersigned by the Rights Agent and issued and delivered by the Company
with the same force and effect as though the person who signed such Right
Certificates had not ceased to be such officer of the Company; and any Right
Certificate may be signed on behalf of the Company by any person who, at the
actual date of the execution of such Right Certificate, shall be a proper
officer of the Company to sign such Right Certificate, although at the date of
the execution of this Agreement any such person was not such an officer.
Following the Distribution Date, the Rights Agent will keep or cause to be
kept, at its office designated for such purpose, books for registration and
transfer of the Right Certificates issued hereunder. Such books shall show the
names and addresses of the respective holders of the Right Certificates, the
number of Rights evidenced on its face by each of the Right Certificates and the
date of each of the Right Certificates.
SECTION 6. TRANSFER, SPLIT UP, COMBINATION AND EXCHANGE OF RIGHT
CERTIFICATES; MUTILATED, DESTROYED, LOST OR STOLEN RIGHT CERTIFICATES. Subject
to the provisions of Section 11(a)(ii), Section 14 and Section 24 hereof, at any
time after the Close of Business on the Distribution Date, and at or prior to
the Close of Business on the earlier of the Redemption Date or the Final
Expiration Date, any Right Certificate or Right Certificates may be transferred,
split up, combined or exchanged for another Right Certificate or Right
Certificates, entitling the registered holder to purchase a like number of one
one-hundredths of a Preferred Share as the Right Certificate or Right
Certificates surrendered then entitled such holder to purchase. Any registered
holder desiring to transfer, split up, combine or exchange any Right Certificate
or Right Certificates shall make such request in writing delivered to the Rights
Agent, and shall surrender the Right Certificate or Right Certificates to be
transferred, split up, combined or exchanged at the office of the Rights Agent
designated for such purpose. Neither the Rights Agent nor the Company shall be
obligated to take any action whatsoever with respect
7.
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to the transfer of any such surrendered Right Certificate until the registered
holder shall have completed and signed the certificate contained in the form
of assignment on the reverse side of such Right Certificate and shall have
provided such additional evidence of the identity of the Beneficial Owner (or
former Beneficial Owner) or Affiliates or Associates thereof as the Company
shall reasonably request. Thereupon the Rights Agent shall, subject to Section
11(a)(ii), Section 14 and Section 24 hereof, countersign and deliver to the
person entitled thereto a Right Certificate or Right Certificates, as the case
may be, as so requested. The Company may require payment of a sum sufficient
to cover any tax or governmental charge that may be imposed in connection with
any transfer, split up, combination or exchange of Right Certificates.
Upon receipt by the Company and the Rights Agent of evidence reasonably
satisfactory to them of the loss, theft, destruction or mutilation of a Right
Certificate, and, in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to them, and, at the Company's request,
reimbursement to the Company and the Rights Agent of all reasonable expenses
incidental thereto, and upon surrender to the Rights Agent and cancellation of
the Right Certificate if mutilated, the Company will issue, execute and deliver
a new Right Certificate of like tenor to the Rights Agent for countersignature
and delivery to the registered holder in lieu of the Right Certificate so lost,
stolen, destroyed or mutilated.
Notwithstanding any other provisions hereof, the Company and the Rights
Agent may amend this Rights Agreement to provide for uncertificated Rights in
addition to or in place of Rights evidenced by Rights Certificates.
SECTION 7. EXERCISE OF RIGHTS; PURCHASE PRICE; EXPIRATION DATE OF RIGHTS.
(a) The registered holder of any Right Certificate may exercise the Rights
evidenced thereby (except as otherwise provided herein) in whole or in part at
any time after the Distribution Date upon surrender of the Right Certificate,
with the form of election to purchase on the reverse side thereof duly executed,
to the Rights Agent at the office of the Rights Agent designated for such
purpose, together with payment of the Purchase Price for each one one-hundredth
of a Preferred Share (or such other number of shares or other securities) as to
which the Rights are exercised, at or prior to the earliest of (i) the Close of
Business on November 12, 2008 (the "Final Expiration Date"), (ii) the time at
which the Rights are redeemed as provided in Section 23 hereof (the "Redemption
Date"), or (iii) the time at which such Rights are exchanged as provided in
Section 24 hereof.
(b) The purchase price (the "Purchase Price") for each one one-hundredth
of a Preferred Share pursuant to the exercise of a Right shall initially be
$45 and shall be subject to adjustment from time to time as provided in
Sections 11 and 13 hereof and shall be payable in lawful money of the United
States of America in accordance with paragraph (c) below.
(c) Upon receipt of a Right Certificate representing exercisable Rights,
with the form of election to purchase duly executed, accompanied by payment of
the Purchase Price for the shares to be purchased and an amount equal to any
applicable transfer tax required to be paid by the holder of such Right
Certificate in accordance with Section 9 hereof by certified check, cashier's
check, bank draft or money order payable to the order of the Company, the Rights
Agent shall thereupon promptly (i) (A) requisition from any transfer agent for
the Preferred
8.
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Shares certificates for the number of Preferred Shares to be purchased and the
Company hereby irrevocably authorizes its transfer agent to comply with all
such requests, or (B) if the Company, in its sole discretion, shall have
elected to deposit the Preferred Shares issuable upon exercise of the Rights
hereunder into a depository, requisition from the depositary agent depositary
receipts representing such number of one one-hundredths of a Preferred Share
as are to be purchased (in which case certificates for the Preferred Shares
represented by such receipts shall be deposited by the transfer agent with the
depositary agent) and the Company hereby directs the depositary agent to
comply with such request, (ii) when appropriate, requisition from the Company
the amount of cash to be paid in lieu of issuance of fractional shares in
accordance with Section 14 hereof, (iii) after receipt of such certificates or
depositary receipts, cause the same to be delivered to or upon the order of
the registered holder of such Right Certificate, registered in such name or
names as may be designated by such holder and (iv) when appropriate, after
receipt, deliver such cash to or upon the order of the registered holder of
such Right Certificate. In the event that the Company is obligated to issue
securities of the Company other than Preferred Shares (including Common
Shares) of the Company pursuant to Section 11(a) hereof, the Company will make
all arrangements necessary so that such other securities are available for
distribution by the Rights Agent, if and when appropriate.
In addition, in the case of an exercise of the Rights by a holder pursuant
to Section 11(a)(ii) hereof, the Rights Agent shall return such Right
Certificate to the registered holder thereof after imprinting, stamping or
otherwise indicating thereon that the rights represented by such Right
Certificate no longer include the rights provided by Section 11(a)(ii) hereof,
and, if fewer than all the Rights represented by such Right Certificate were so
exercised, the Rights Agent shall indicate on the Right Certificate the number
of Rights represented thereby which continue to include the rights provided by
Section 11(a)(ii) hereof.
(d) In case the registered holder of any Right Certificate shall exercise
fewer than all the Rights evidenced thereby, a new Right Certificate evidencing
Rights equivalent to the Rights remaining unexercised shall be issued by the
Rights Agent to the registered holder of such Right Certificate or to his duly
authorized assigns, subject to the provisions of Section 14 hereof.
(e) The Company covenants and agrees that it will cause to be reserved and
kept available out of its authorized and unissued Preferred Shares or any
Preferred Shares held in its treasury, the number of Preferred Shares that will
be sufficient to permit the exercise in full of all outstanding Rights in
accordance with this Section 7.
(f) Notwithstanding anything in this Agreement to the contrary, neither
the Rights Agent nor the Company shall be obligated to undertake any action with
respect to a registered holder upon the occurrence of any purported exercise as
set forth in this Section 7 unless such registered holder shall have (i)
completed and signed the certification following the form of election to
purchase set forth on the reverse side of the Rights Certificate surrendered for
such exercise and (ii) provided such additional evidence of the identity of the
Beneficial Owner (or former Beneficial Owner) or Affiliates or Associates
thereof as the Company shall reasonably request.
SECTION 8. CANCELLATION AND DESTRUCTION OF RIGHT CERTIFICATES. All Right
Certificates surrendered for the purpose of exercise, transfer, split up,
combination or exchange shall, if surrendered to the Company or to any of its
agents, be delivered to the Rights Agent for
9.
<PAGE>
cancellation or in canceled form, or, if delivered or surrendered to the
Rights Agent, shall be canceled by it, and no Right Certificates shall be
issued in lieu thereof except as expressly permitted by any of the provisions
of this Agreement. The Company shall deliver to the Rights Agent for
cancellation and retirement, and the Rights Agent shall so cancel and retire,
any other Right Certificate purchased or acquired by the Company otherwise
than upon the exercise thereof. The Rights Agent shall deliver all canceled
Right Certificates to the Company, or shall, at the written request of the
Company, destroy such canceled Right Certificates, and in such case shall
deliver a certificate of destruction thereof to the Company.
SECTION 9. AVAILABILITY OF PREFERRED SHARES. The Company covenants and
agrees that so long as the Preferred Shares (and, after the time a person
becomes an Acquiring Person, Common Shares or any other securities) issuable
upon the exercise of the Rights may be listed on any national securities
exchange or quotation system, the Company shall use its best efforts to cause,
from and after such time as the Rights become exercisable, all shares reserved
for such issuance to be listed on such exchange or quotation system upon
official notice of issuance upon such exercise.
The Company covenants and agrees that it will take all such action as may
be necessary to ensure that all Preferred Shares (or Common Shares and other
securities, as the case may be) delivered upon exercise of Rights shall, at the
time of delivery of the certificates for such Preferred Shares (subject to
payment of the Purchase Price), be duly and validly authorized and issued and
fully paid and nonassessable shares or other securities.
The Company further covenants and agrees that it will pay when due and
payable any and all federal and state transfer taxes and charges which may be
payable in respect of the issuance or delivery of the Right Certificates or of
any Preferred Shares upon the exercise of Rights. The Company shall not,
however, be required to pay any transfer tax which may be payable in respect of
any transfer or delivery of Right Certificates to a person other than, or the
issuance or delivery of certificates or depositary receipts for the Preferred
Shares in a name other than that of, the registered holder of the Right
Certificate evidencing Rights surrendered for exercise or to issue or to deliver
any certificates or depositary receipts for Preferred Shares upon the exercise
of any Rights until any such tax shall have been paid (any such tax being
payable by the holder of such Right Certificate at the time of surrender) or
until it has been established to the Company's reasonable satisfaction that no
such tax is due.
As soon as practicable after the Shares Acquisition Date, the Company shall
use its best efforts to:
(i) prepare and file a registration statement under the Securities
Act of 1933, as amended (the "Act"), with respect to the Rights and the
securities purchasable upon exercise of the Rights on an appropriate form, will
use its best efforts to cause such registration statement to become effective as
soon as practicable after such filing and will use its best efforts to cause
such registration statement to remain effective (with a prospectus at all times
meeting the requirements of the Act) until the Final Expiration Date; and
(ii) use its best efforts to qualify or register the Rights and the
securities purchasable upon exercise of the Rights under the blue sky laws of
such jurisdictions as may be necessary or appropriate.
10.
<PAGE>
SECTION 10. PREFERRED SHARES RECORD DATE. Each person in whose name any
certificate for Preferred Shares or other securities is issued upon the exercise
of Rights shall for all purposes be deemed to have become the holder of record
of the Preferred Shares or other securities represented thereby on, and such
certificate shall be dated, the date upon which the Right Certificate evidencing
such Rights was duly surrendered with the forms of election and certification
duly executed and payment of the Purchase Price (and any applicable transfer
taxes) was made; PROVIDED, HOWEVER, that if the date of such surrender and
payment is a date upon which the Preferred Shares or other securities transfer
books of the Company are closed, such person shall be deemed to have become the
record holder of such shares on, and such certificate shall be dated, the next
succeeding Business Day on which the Preferred Shares or other securities
transfer books of the Company are open. Prior to the exercise of the Rights
evidenced thereby, the holder of a Right Certificate, as such, shall not be
entitled to any rights of a holder of Preferred Shares for which the Rights
shall be exercisable, including, without limitation, the right to vote, to
receive dividends or other distributions or to exercise any preemptive rights,
and shall not be entitled to receive any notice of any proceedings of the
Company, except as provided herein.
SECTION 11. ADJUSTMENT OF PURCHASE PRICE, NUMBER OF SHARES OR NUMBER OF
RIGHTS. The Purchase Price, the number of Preferred Shares covered by each
Right and the number of Rights outstanding are subject to adjustment from time
to time as provided in this Section 11.
(a)
(i) In the event the Company shall at any time after the date of this
Agreement (A) declare a dividend on the Preferred Shares payable in Preferred
Shares, (B) subdivide the outstanding Preferred Shares, (C) combine the
outstanding Preferred Shares into a smaller number of Preferred Shares or (D)
issue any shares of its capital stock in a reclassification of the Preferred
Shares (including any such reclassification in connection with a consolidation
or merger in which the Company is the continuing or surviving corporation),
except as otherwise provided in this Section 11(a), the Purchase Price in effect
at the time of the record date for such dividend or of the effective date of
such subdivision, combination or reclassification, and the number and kind of
shares of capital stock issuable on such date, shall be proportionately adjusted
so that the holder of any Right exercised after such time shall be entitled to
receive the aggregate number and kind of shares of capital stock which, if such
Right had been exercised immediately prior to such date and at a time when the
Preferred Shares transfer books of the Company were open, such holder would have
owned upon such exercise and been entitled to receive by virtue of such
dividend, subdivision, combination or reclassification; PROVIDED, HOWEVER, that
in no event shall the consideration to be paid upon the exercise of one Right be
less than the aggregate par value of the shares of capital stock of the Company
issuable upon exercise of one Right. If an event occurs which would require an
adjustment under both Section 11(a)(i) and Section 11(a)(ii) hereof, the
adjustment provided for in this Section 11(a)(i) shall be in addition to, and
shall be made prior to any adjustment required pursuant to Section 11(a)(ii)
hereof.
(ii) Subject to Section 24 hereof and the provisions of the next
paragraph of this Section 11(a)(ii), in the event any Person shall become an
Acquiring Person, each holder of a Right shall, for a period of 60 days after
the later of such time any Person becomes an Acquiring
11.
<PAGE>
Person or the effective date of an appropriate registration statement under
the Act pursuant to Section 9 hereof (provided, however that, if at any time
prior to the expiration or termination of the Rights there shall be a
temporary restraining order, a preliminary injunction, an injunction, or
temporary suspension by the Board of Directors, or similar obstacle to
exercise of the Rights (the "Injunction") which prevents exercise of the
Rights, a new 60-day period shall commence on the date the Injunction is
removed), have a right to receive, upon exercise thereof at a price equal to
the then current Purchase Price multiplied by the number of one one-hundredths
of a Preferred Share for which a Right is then exercisable, in accordance with
the terms of this Agreement and in lieu of Preferred Shares, such number of
Common Shares as shall equal the result obtained by (A) multiplying the then
current Purchase Price by the number of one one-hundredths of a Preferred
Share for which a Right is then exercisable and dividing that product by (B)
50% of the then current per share market price of the Common Shares
(determined pursuant to Section 11(d) hereof) on the date such Person became
an Acquiring Person; PROVIDED, HOWEVER, that if the transaction that would
otherwise give rise to the foregoing adjustment is also subject to the
provisions of Section 13 hereof, then only the provisions of Section 13 hereof
shall apply and no adjustment shall be made pursuant to this Section
11(a)(ii). In the event that any Person shall become an Acquiring Person and
the Rights shall then be outstanding, the Company shall not take any action
which would eliminate or diminish the benefits intended to be afforded by the
Rights.
Notwithstanding anything in this Agreement to the contrary, from and after
the time any Person becomes an Acquiring Person, any Rights beneficially owned
by (i) such Acquiring Person or an Associate or Affiliate of such Acquiring
Person, (ii) a transferee of such Acquiring Person (or of any such Associate or
Affiliate) who becomes a transferee after the Acquiring Person became such, or
(iii) a transferee of such Acquiring Person (or of any such Associate or
Affiliate) who becomes a transferee prior to or concurrently with the Acquiring
Person's becoming such and receives such Rights pursuant to either (A) a
transfer (whether or not for consideration) from the Acquiring Person to holders
of equity interests in such Acquiring Person or to any Person with whom the
Acquiring Person has any continuing agreement, arrangement or understanding
regarding the transferred Rights or (B) a transfer which the Board of Directors
of the Company has determined is part of a plan, arrangement or understanding
which has as a primary purpose or effect the avoidance of this Section
11(a)(ii), shall become null and void without any further action and no holder
of such Rights shall have any rights whatsoever with respect to such Rights,
whether under any provision of this Agreement or otherwise. The Company shall
use all reasonable efforts to insure that the provisions of this Section
11(a)(ii) and Section 4(b) hereof are complied with, but shall have no liability
to any holder of Right Certificates or other Person as a result of its failure
to make any determinations with respect to an Acquiring Person or its
Affiliates, Associates or transferees hereunder. No Right Certificate shall be
issued at any time upon the transfer of any Rights to an Acquiring Person whose
Rights would be void pursuant to the preceding sentence or any Associate or
Affiliate thereof or to any nominee of such Acquiring Person, Associate or
Affiliate; and any Right Certificate delivered to the Rights Agent for transfer
to an Acquiring Person whose Rights would be void pursuant to the preceding
sentence shall be canceled.
(iii) In lieu of issuing Common Shares in accordance with Section
11(a)(ii) hereof, the Company may, if a majority of the Board of Directors then
in office determines that such action is necessary or appropriate and not
contrary to the interests of holders of Rights, elect to (and, in the event that
the Board of Directors has not exercised the exchange right contained in
12.
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Section 24(c) hereof and there are not sufficient treasury shares and
authorized but unissued Common Shares to permit the exercise in full of the
Rights in accordance with the foregoing subparagraph (ii), the Company shall)
take all such action as may be necessary to authorize, issue or pay, upon the
exercise of the Rights, cash (including by way of a reduction of the Purchase
Price), property, Common Shares, other securities or any combination thereof
having an aggregate value equal to the value of the Common Shares which
otherwise would have been issuable pursuant to Section 11(a)(ii) hereof, which
aggregate value shall be determined by a nationally recognized investment
banking firm selected by a majority of the Board of Directors then in office.
For purposes of the preceding sentence, the value of the Common Shares shall
be determined pursuant to Section 11(d) hereof. Any such election by the
Board of Directors must be made within 60 days following the date on which the
event described in Section 11(a)(ii) hereof shall have occurred. Following
the occurrence of the event described in Section 11(a)(ii) hereof, a majority
of the Board of Directors then in office may suspend the exercisability of the
Rights for a period of up to 60 days following the date on which the event
described in Section 11(a)(ii) hereof shall have occurred to the extent that
such directors have not determined whether to exercise their rights of
election under this Section 11(a)(iii). In the event of any such suspension,
the Company shall issue a public announcement stating that the exercisability
of the Rights has been temporarily suspended.
(b) In case the Company shall fix a record date for the issuance of
rights, options or warrants to all holders of Preferred Shares entitling them
(for a period expiring within 45 calendar days after such record date) to
subscribe for or purchase Preferred Shares (or shares having the same
designations and the powers, preferences and rights, and the qualifications,
limitations and restrictions as the Preferred Shares ("equivalent preferred
shares")) or securities convertible into Preferred Shares or equivalent
preferred shares at a price per Preferred Share or equivalent preferred share
(or having a conversion price per share, if a security convertible into
Preferred Shares or equivalent preferred shares) less than the then current per
share market price of the Preferred Shares (as such term is hereinafter defined)
on such record date, the Purchase Price to be in effect after such record date
shall be determined by multiplying the Purchase Price in effect immediately
prior to such record date by a fraction, the numerator of which shall be the
number of Preferred Shares outstanding on such record date plus the number of
Preferred Shares which the aggregate offering price of the total number of
Preferred Shares and/or equivalent preferred shares so to be offered (and/or the
aggregate initial conversion price of the convertible securities so to be
offered) would purchase at such current market price and the denominator of
which shall be the number of Preferred Shares outstanding on such record date
plus the number of additional Preferred Shares and/or equivalent preferred
shares to be offered for subscription or purchase (or into which the convertible
securities so to be offered are initially convertible); PROVIDED, HOWEVER, that
in no event shall the consideration to be paid upon the exercise of one Right be
less than the aggregate par value of the shares of capital stock of the Company
issuable upon exercise of one Right. In case such subscription price may be
paid in a consideration part or all of which shall be in a form other than cash,
the value of such consideration shall be as determined in good faith by the
Board of Directors of the Company, whose determination shall be described in a
statement filed with the Rights Agent. Preferred Shares owned by or held for
the account of the Company shall not be deemed outstanding for the purpose of
any such computation. Such adjustment shall be made successively whenever such
a record date is fixed; and in the event that such rights, options or warrants
are not so issued, the Purchase Price shall be adjusted to be the Purchase Price
which would then be in effect if such record date had not been fixed.
13.
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(c) In case the Company shall fix a record date for the making of a
distribution to all holders of the Preferred Shares (including any such
distribution made in connection with a consolidation or merger in which the
Company is the continuing or surviving corporation) of evidences of indebtedness
or assets (other than a regular quarterly cash dividend or a dividend payable in
Preferred Shares) or subscription rights or warrants (excluding those referred
to in Section 11(b) hereof), the Purchase Price to be in effect after such
record date shall be determined by multiplying the Purchase Price in effect
immediately prior to such record date by a fraction, the numerator of which
shall be the then current per share market price of the Preferred Shares (as
such term is hereinafter defined) on such record date, less the fair market
value (as determined in good faith by the Board of Directors of the Company,
whose determination shall be described in a statement filed with the Rights
Agent) of the portion of the assets or evidences of indebtedness so to be
distributed or of such subscription rights or warrants applicable to one
Preferred Share and the denominator of which shall be such current per share
market price of the Preferred Shares; PROVIDED, HOWEVER, that in no event shall
the consideration to be paid upon the exercise of one Right be less than the
aggregate par value of the shares of capital stock of the Company to be issued
upon exercise of one Right. Such adjustments shall be made successively
whenever such a record date is fixed; and in the event that such distribution is
not so made, the Purchase Price shall again be adjusted to be the Purchase Price
which would then be in effect if such record date had not been fixed.
(d)
(i) For the purpose of any computation hereunder, the "current per
share market price" of any security (a "Security" for the purpose of this
Section 11(d)(i)) on any date shall be deemed to be the average of the daily
closing prices per share of such Security for the 30 consecutive Trading Days
(as such term is hereinafter defined) immediately prior to such date; PROVIDED,
HOWEVER, that in the event that the current per share market price of the
Security is determined during a period following the announcement by the issuer
of such Security of (A) a dividend or distribution on such Security payable in
shares of such Security or securities convertible into such shares, or (B) any
subdivision, combination or reclassification of such Security or securities
convertible into such shares, or (C) any subdivision, combination or
reclassification of such Security and prior to the expiration of 30 Trading Days
after the ex-dividend date for such dividend or distribution, or the record date
for such subdivision, combination or reclassification, then, and in each such
case, the current per share market price shall be appropriately adjusted to
reflect the current market price per share equivalent of such Security. The
closing price for each day shall be the last sale price, regular way, or, in
case no such sale takes place on such day, the average of the closing bid and
asked prices, regular way, in either case as reported in the principal
consolidated transaction reporting system with respect to securities listed or
admitted to trading on the New York Stock Exchange or, if the Security is not
listed or admitted to trading on the New York Stock Exchange, as reported in the
principal consolidated transaction reporting system with respect to securities
listed on the principal national securities exchange on which the Security is
listed or admitted to trading or as reported on the Nasdaq National Market or,
if the Security is not listed or admitted to trading on any national securities
exchange or reported on the Nasdaq National Market, the last quoted price or, if
not so quoted, the average of the high bid and low asked prices in the
over-the-counter market, as reported by the National Association of Securities
Dealers, Inc. Automated Quotations System ("Nasdaq") or such other system then
in use, or, if on any such date the Security is not quoted by any such
organization, the average of the closing bid and asked prices as furnished by a
14.
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professional market maker making a market in the Security selected by the Board
of Directors of the Company or, if on any such date no professional market maker
is making a market in the Security, the price as determined in good faith by the
Board of Directors. The term "Trading Day" shall mean a day on which the
principal national securities exchange on which the Security is listed or
admitted to trading is open for the transaction of business or, if the Security
is not listed or admitted to trading on any national securities exchange, a
Business Day.
(ii) For the purpose of any computation hereunder, the "current per
share market price" of the Preferred Shares shall be determined in accordance
with the method set forth in Section 11(d)(i) hereof. If the Preferred Shares
are not publicly traded, the "current per share market price" of the Preferred
Shares shall be conclusively deemed to be the current per share market price of
the Common Shares as determined pursuant to Section 11(d)(i) hereof
(appropriately adjusted to reflect any stock split, stock dividend or similar
transaction occurring after the date hereof) multiplied by one hundred. If
neither the Common Shares nor the Preferred Shares are publicly held or so
listed or traded, "current per share market price" shall mean the fair value per
share as determined in good faith by the Board of Directors of the Company,
whose determination shall be described in a statement filed with the Rights
Agent.
(e) No adjustment in the Purchase Price shall be required unless such
adjustment would require an increase or decrease of at least 1% in the Purchase
Price; PROVIDED, HOWEVER, that any adjustments which by reason of this Section
11(e) are not required to be made shall be carried forward and taken into
account in any subsequent adjustment. All calculations under this Section 11
shall be made to the nearest cent or to the nearest one one-hundredth of a
Preferred Share or one ten-thousandth of any other share or security as the case
may be. Notwithstanding the first sentence of this Section 11(e), any
adjustment required by this Section 11 shall be made no later than the earlier
of (i) three years from the date of the transaction which requires such
adjustment or (ii) the date of the expiration of the right to exercise any
Rights.
(f) If as a result of an adjustment made pursuant to Section 11(a) hereof,
the holder of any Right thereafter exercised shall become entitled to receive
any shares of capital stock of the Company other than Preferred Shares,
thereafter the number of such other shares so receivable upon exercise of any
Right shall be subject to adjustment from time to time in a manner and on terms
as nearly equivalent as practicable to the provisions with respect to the
Preferred Shares contained in Sections 11(a) through 11(c) hereof, inclusive,
and the provisions of Sections 7, 9, 10, 13 and 14 hereof with respect to the
Preferred Shares shall apply on like terms to any such other shares.
(g) All Rights originally issued by the Company subsequent to any
adjustment made to the Purchase Price hereunder shall evidence the right to
purchase, at the adjusted Purchase Price, the number of one one-hundredths of a
Preferred Share purchasable from time to time hereunder upon exercise of the
Rights, all subject to further adjustment as provided herein.
(h) Unless the Company shall have exercised its election as provided in
Section 11(i) hereof, upon each adjustment of the Purchase Price as a result of
the calculations made in Section 11(b) and Section 11(c) hereof, each Right
outstanding immediately prior to the making of such adjustment shall thereafter
evidence the right to purchase, at the adjusted Purchase Price, that number of
one one-hundredths of a Preferred Share (calculated to the nearest one
one-millionth of a Preferred Share) obtained by (i) multiplying (x) the number
of one one-hundredths
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of a Preferred Share covered by a Right immediately prior to this adjustment
by (y) the Purchase Price in effect immediately prior to such adjustment of
the Purchase Price and (ii) dividing the product so obtained by the Purchase
Price in effect immediately after such adjustment of the Purchase Price.
(i) The Company may elect on or after the date of any adjustment of the
Purchase Price to adjust the number of Rights, in substitution for any
adjustment in the number of one one-hundredths of a Preferred Share purchasable
upon the exercise of a Right. Each of the Rights outstanding after such
adjustment of the number of Rights shall be exercisable for the number of one
one-hundredths of a Preferred Share for which a Right was exercisable
immediately prior to such adjustment. Each Right held of record prior to such
adjustment of the number of Rights shall become that number of Rights
(calculated to the nearest one ten-thousandth) obtained by dividing the Purchase
Price in effect immediately prior to adjustment of the Purchase Price by the
Purchase Price in effect immediately after adjustment of the Purchase Price.
The Company shall make a public announcement of its election to adjust the
number of Rights, indicating the record date for the adjustment, and, if known
at the time, the amount of the adjustment to be made. This record date may be
the date on which the Purchase Price is adjusted or any day thereafter, but, if
the Right Certificates have been issued, shall be at least 10 days later than
the date of the public announcement. If Right Certificates have been issued,
upon each adjustment of the number of Rights pursuant to this Section 11(i), the
Company shall, as promptly as practicable, cause to be distributed to holders of
record of Right Certificates on such record date Right Certificates evidencing,
subject to Section 14 hereof, the additional Rights to which such holders shall
be entitled as a result of such adjustment, or, at the option of the Company,
shall cause to be distributed to such holders of record in substitution and
replacement for the Right Certificates held by such holders prior to the date of
adjustment, and upon surrender thereof, if required by the Company, new Right
Certificates evidencing all the Rights to which such holders shall be entitled
after such adjustment. Right Certificates so to be distributed shall be issued,
executed and countersigned in the manner provided for herein and shall be
registered in the names of the holders of record of Right Certificates on the
record date specified in the public announcement.
(j) Irrespective of any adjustment or change in the Purchase Price or the
number of one one-hundredths of a Preferred Share issuable upon the exercise of
the Rights, the Right Certificates theretofore and thereafter issued may
continue to express the Purchase Price and the number of one one-hundredths of a
Preferred Share which were expressed in the initial Right Certificates issued
hereunder.
(k) Before taking any action that would cause an adjustment reducing the
Purchase Price below one one-hundredth of the then par value, if any, of the
Preferred Shares issuable upon exercise of the Rights, the Company shall take
any corporate action which may, in the opinion of its counsel, be necessary in
order that the Company may validly and legally issue fully paid and
nonassessable Preferred Shares at such adjusted Purchase Price.
(l) In any case in which this Section 11 shall require that an adjustment
in the Purchase Price be made effective as of a record date for a specified
event, the Company may elect to defer until the occurrence of such event the
issuing to the holder of any Right exercised after such record date of the
Preferred Shares and other capital stock or securities of the Company, if any,
issuable upon such exercise on the basis of the Purchase Price in effect prior
to
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such adjustment; PROVIDED, HOWEVER, that the Company shall deliver to such
holder a due bill or other appropriate instrument evidencing such holder's
right to receive such additional shares upon the occurrence of the event
requiring such adjustment.
(m) The Company covenants and agrees that, after the Distribution Date, it
will not, except as permitted by Section 23 or Section 27 hereof, take (or
permit any Subsidiary to take) any action the purpose of which is to, or if at
the time such action is taken it is reasonably foreseeable that the effect of
such action is to, materially diminish or eliminate the benefits intended to be
afforded by the Rights. Any such action taken by the Company during any period
after any Person becomes an Acquiring Person but prior to the Distribution Date
shall be null and void unless such action could be taken under this Section
11(m) from and after the Distribution Date.
(n) Anything in this Section 11 to the contrary notwithstanding, the
Company shall be entitled to make such reductions in the Purchase Price, in
addition to those adjustments expressly required by this Section 11, as and to
the extent that it in its sole discretion shall determine to be advisable in
order that any consolidation or subdivision of the Preferred Shares, issuance
wholly for cash of any Preferred Shares at less than the current market price,
issuance wholly for cash of Preferred Shares or securities which by their terms
are convertible into or exchangeable for Preferred Shares, dividends on
Preferred Shares payable in Preferred Shares or issuance of rights, options or
warrants referred to hereinabove in Section 11(b), hereafter made by the Company
to holders of its Preferred Shares shall not be taxable to such stockholders.
(o) In the event that at any time after the date of this Agreement and
prior to the Distribution Date, the Company shall (i) declare or pay any
dividend on the Common Shares payable in Common Shares or (ii) effect a
subdivision, combination or consolidation of the Common Shares (by
reclassification or otherwise than by payment of dividends in Common Shares)
into a greater or lesser number of Common Shares, then in any such case (A) the
number of one one-hundredths of a Preferred Share purchasable after such event
upon proper exercise of each Right shall be determined by multiplying the number
of one one-hundredths of a Preferred Share so purchasable immediately prior to
such event by a fraction, the numerator of which is the number of Common Shares
outstanding immediately before such event and the denominator of which is the
number of Common Shares outstanding immediately after such event, and (B) each
Common Share outstanding immediately after such event shall have issued with
respect to it that number of Rights which each Common Share outstanding
immediately prior to such event had issued with respect to it. The adjustments
provided for in this Section 11(o) shall be made successively whenever such a
dividend is declared or paid or such a subdivision, combination or consolidation
is effected.
(p) The exercise of Rights under Section 11(a)(ii) hereof shall only
result in the loss of rights under Section 11(a)(ii) hereof to the extent so
exercised and shall not otherwise affect the rights represented by the Rights
under this Agreement, including the rights represented by Section 13 hereof.
SECTION 12. CERTIFICATE OF ADJUSTED PURCHASE PRICE OR NUMBER OF SHARES.
Whenever an adjustment is made as provided in Sections 11 and 13 hereof, the
Company shall promptly (a) prepare a certificate setting forth such adjustment,
and a brief statement of the facts accounting for such adjustment, (b) file with
the Rights Agent and with each transfer agent for
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the Common Shares or the Preferred Shares a copy of such certificate and (c)
mail a brief summary thereof to each holder of a Right Certificate in
accordance with Section 25 hereof. The Rights Agent shall be fully protected
in relying on any such certificate and on any adjustment therein contained and
shall not be deemed to have knowledge of any adjustment unless and until it
shall have received such certificate.
SECTION 13. CONSOLIDATION, MERGER OR SALE OR TRANSFER OF ASSETS OR EARNING
POWER.
(a) In the event that, following the Shares Acquisition Date or, if a
Transaction is proposed, the Distribution Date, directly or indirectly (x) the
Company shall consolidate with, or merge with and into, any Interested
Stockholder, or if in such merger or consolidation all holders of Common Stock
are not treated alike, any other Person, (y) any Interested Person, or if in
such merger or consolidation all holders of Common Stock are not treated alike,
any other Person shall consolidate with the Company, or merge with and into the
Company, and the Company shall be the continuing or surviving corporation of
such merger (other than, in the case of either transaction described in (x) or
(y), a merger or consolidation which would result in all of the voting power
represented by the securities of the Company outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or by being
converted into securities of the surviving entity) all of the voting power
represented by the securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation and the holders of
such securities not having changed as a result of such merger or consolidation),
or (z) the Company shall sell, mortgage or otherwise transfer (or one or more of
its subsidiaries shall sell, mortgage or otherwise transfer), in one or more
transactions, assets or earning power aggregating more than 50% of the assets or
earning power of the Company and its subsidiaries (taken as a whole) to any
Interested Stockholder or Stockholders, or if in such transaction all holders of
Common Stock are not treated alike, any other Person, (other than the Company or
any Subsidiary of the Company in one or more transactions each of which
individually and the aggregate does not violate Section 13(d) hereof) then, and
in each such case, proper provision shall be made so that (i) each holder of a
Right, subject to Section 11(a)(ii) hereof, shall have the right to receive,
upon the exercise thereof at a price equal to the then current Purchase Price
multiplied by the number of one one-hundredths of a Preferred Share for which a
Right is then exercisable in accordance with the terms of this Agreement and in
lieu of Preferred Shares, such number of freely tradeable Common Shares of the
Principal Party (as such term is hereinafter defined), free and clear of liens,
rights of call or first refusal, encumbrances or other adverse claims, as shall
be equal to the result obtained by (A) multiplying the then current Purchase
Price by the number of one one-hundredths of a Preferred Share for which a Right
is then exercisable (without taking into account any adjustment previously made
pursuant to Section 11(a)(ii) hereof) and dividing that product by (B) 50% of
the then current per share market price of the Common Shares of such Principal
Party (determined pursuant to Section 11(d) hereof) on the date of consummation
of such consolidation, merger, sale or transfer; (ii) such Principal Party shall
thereafter be liable for, and shall assume, by virtue of such consolidation,
merger, sale or transfer, all the obligations and duties of the Company pursuant
to this Agreement; (iii) the term "Company" shall thereafter be deemed to refer
to such Principal Party, it being specifically intended that the provisions of
Section 11 hereof shall apply to such Principal Party; and (iv) such Principal
Party shall take such steps (including, but not limited to, the reservation of a
sufficient number of shares of its Common Shares in accordance with Section 9
hereof) in connection with such consummation as may be necessary to assure that
the provisions hereof
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shall thereafter be applicable, as nearly as reasonably may be, in relation to
its Common Shares thereafter deliverable upon the exercise of the Rights.
(b) "Principal Party" shall mean:
(i) in the case of any transaction described in clause (x) or (y) of
the first sentence of Section 13(a) hereof, the Person that is the issuer of any
securities into which Common Shares are converted in such merger or
consolidation, and if no securities are so issued, the Person that is the other
party to the merger or consolidation (or, if applicable, the Company, if it is
the surviving corporation); and
(ii) in the case of any transaction described in clause (z) of the
first sentence of Section 13(a) hereof, the Person that is the party receiving
the greatest portion of the assets or earning power transferred pursuant to such
transaction or transactions;
PROVIDED, HOWEVER, that in any case, (1) if the Common Shares of such Person are
not at such time and have not been continuously over the preceding 12-month
period registered under Section 12 of the Exchange Act, and such Person is a
direct or indirect subsidiary or Affiliate of another Person the Common Shares
of which are and have been so registered, "Principal Party" shall refer to such
other Person; (2) if such Person is a subsidiary, directly or indirectly, or
Affiliate of more than one Person, the Common Shares of two or more of which are
and have been so registered, "Principal Party" shall refer to whichever of such
Persons is the issuer of the Common Shares having the greatest aggregate market
value; and (3) if such Person is owned, directly or indirectly, by a joint
venture formed by two or more Persons that are not owned, directly or
indirectly, by the same Person, the rules set forth in (1) and (2) above shall
apply to each of the chains of ownership having an interest in such joint
venture as if such party were a "subsidiary" of both or all of such joint
venturers and the Principal Parties in each such chain shall bear the
obligations set forth in this Section 13 in the same ratio as their direct or
indirect interests in such Person bear to the total of such interests.
(c) The Company shall not consummate any such consolidation, merger, sale
or transfer unless the Principal Party shall have a sufficient number of
authorized Common Shares that have not been issued or reserved for issuance to
permit the exercise in full of the Rights in accordance with this Section 13 and
unless prior thereto the Company and each Principal Party and each other Person
who may become a Principal Party as a result of such consolidation, merger, sale
or transfer shall have (i) executed and delivered to the Rights Agent a
supplemental agreement providing for the terms set forth in paragraphs (a) and
(b) of this Section 13 and (ii) prepared, filed and had declared and remain
effective a registration statement under the Act on the appropriate form with
respect to the Rights and the securities exercisable upon exercise of the Rights
and further providing that, as soon as practicable after the date of any
consolidation, merger, sale or transfer of assets mentioned in paragraph (a) of
this Section 13, the Principal Party at its own expense will:
(i) cause the registration statement under the Act with respect to
the Rights and the securities purchasable upon exercise of the Rights on an
appropriate form to remain effective (with a prospectus at all times meeting the
requirements of the Act) until the Final Expiration Date;
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(ii) use its best efforts to qualify or register the Rights and the
securities purchasable upon exercise of the Rights under the blue sky laws of
such jurisdictions as may be necessary or appropriate;
(iii) list the Rights and the securities purchasable upon exercise
of the Rights on each national securities exchange on which the Common Shares
were listed prior to the consummation of the Business Combination or on the
Nasdaq National Market if the Common Shares were listed on the Nasdaq National
Market or, if the Common Shares were not listed on a national securities
exchange or the Nasdaq National Market prior to the consummation of the Business
Combination, on a national securities exchange or the Nasdaq National Market;
and
(iv) deliver to holders of the Rights historical financial statements
for the Principal Party and each of its Affiliates which comply in all material
respects with the requirements for registration on Form 10 under the Exchange
Act.
The provisions of this Section 13 shall similarly apply to successive
mergers or consolidations or sales or other transfers.
(d) After the Distribution Date, the Company covenants and agrees that it
shall not (i) consolidate with, (ii) merge with or into, or (iii) sell or
transfer to, in one or more transactions, assets or earning power aggregating
more than 50% of the assets or earning power of the Company and its subsidiaries
taken as a whole, any other Person (other than a Subsidiary of the Company in a
transaction which does not violate Section 11(m) hereof), if (x) at the time of
or after such consolidation, merger or sale there are any charter or bylaw
provisions or any rights, warrants or other instruments or securities
outstanding, agreements in effect or any other action taken which would diminish
or otherwise eliminate the benefits intended to be afforded by the Rights or (y)
prior to, simultaneously with or immediately after such consolidation, merger or
sale, the stockholders of the Person who constitutes, or would constitute, the
"Principal Party" for purposes of Section 13(a) hereof shall have received a
distribution of Rights previously owned by such Person or any of its Affiliates
and Associates. The Company shall not consummate any such consolidation,
merger, sale or transfer unless prior thereto the Company and such other Person
shall have executed and delivered to the Rights Agent a supplemental agreement
evidencing compliance with this Section 13(d).
SECTION 14. FRACTIONAL RIGHTS AND FRACTIONAL SHARES.
(a) The Company shall not be required to issue fractions of Rights or to
distribute Right Certificates which evidence fractional Rights. In lieu of such
fractional Rights, there shall be paid to the registered holders of the Right
Certificates with regard to which such fractional Rights would otherwise be
issuable, an amount in cash equal to the same fraction of the current market
value of a whole Right. For the purposes of this Section 14(a), the current
market value of a whole Right shall be the closing price of the Rights for the
Trading Day immediately prior to the date on which such fractional Rights would
have been otherwise issuable. The closing price for any day shall be the last
sale price, regular way, or, in case no such sale takes place on such day, the
average of the closing bid and asked prices, regular way, in either case as
reported in the principal consolidated transaction reporting system with respect
to securities listed or admitted to trading on the New York Stock Exchange or,
if the Rights are not listed or admitted to trading on the New York Stock
Exchange, as reported in the principal consolidated transaction reporting
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system with respect to securities listed on the principal national securities
exchange on which the Rights are listed or admitted to trading or as reported
on the Nasdaq National Market or, if the Rights are not listed or admitted to
trading on any national securities exchange or reported on the Nasdaq National
Market, the last quoted price or, if not so quoted, the average of the high
bid and low asked prices in the over-the-counter market, as reported by Nasdaq
or such other system then in use or, if on any such date the Rights are not
quoted by any such organization, the average of the closing bid and asked
prices as furnished by a professional market maker making a market in the
Rights selected by the Board of Directors of the Company. If on any such date
no such market maker is making a market in the Rights, the fair value of the
Rights on such date as determined in good faith by the Board of Directors of
the Company shall be used.
(b) The Company shall not be required to issue fractions of Preferred
Shares (other than fractions which are integral multiples of one one-hundredth
of a Preferred Share) upon exercise of the Rights or to distribute certificates
which evidence fractional Preferred Shares (other than fractions which are
integral multiples of one one-hundredth of a Preferred Share). Fractions of
Preferred Shares in integral multiples of one one-hundredth of a Preferred Share
may, at the election of the Company, be evidenced by depositary receipts;
PROVIDED, HOWEVER, that holders of such depositary receipts shall have all of
the designations and the powers, preferences and rights, and the qualifications,
limitations and restrictions to which they are entitled as beneficial owners of
the Preferred Shares represented by such depositary receipts. In lieu of
fractional Preferred Shares that are not integral multiples of one one-hundredth
of a Preferred Share, the Company shall pay to the registered holders of Right
Certificates at the time such Rights are exercised as herein provided an amount
in cash equal to the same fraction of the current market value of one Preferred
Share. For the purposes of this Section 14(b), the current market value of a
Preferred Share shall be the current per share market price of the Preferred
Shares (as determined pursuant to the second sentence of Section 11(d)(i)
hereof) for the Trading Day immediately prior to the date of such exercise (or,
if not publicly traded, in accordance with Section 11(d)(ii) hereof).
(c) Following the occurrence of one of the transactions or events
specified in Section 11 hereof giving rise to the right to receive Common
Shares, capital stock equivalents (other than Preferred Shares) or other
securities upon the exercise of a Right, the Company shall not be required to
issue fractions of Common Shares or units of such Common Shares, capital stock
equivalents or other securities upon exercise of the Rights or to distribute
certificates which evidence fractional Common Shares, capital stock equivalents
or other securities. In lieu of fractional Common Shares, capital stock
equivalents or other securities, the Company shall pay to the registered holders
of Right Certificates at the time such Rights are exercised as herein provided
an amount in cash equal to the same fraction of the current market value of one
Common Share or unit of such Common Shares, capital stock equivalents or other
securities. For purposes of this Section 14(c), the current market value shall
be the current per share market price (as determined pursuant to Section
11(d)(i) hereof) for the Trading Day immediately prior to the date of such
exercise and, if such capital stock equivalent is not traded, each such capital
stock equivalent shall have the value of one one-hundredth of a Preferred Share.
(d) The holder of a Right by the acceptance of the Right expressly waives
his right to receive any fractional Rights or any fractional shares upon
exercise of a Right (except as provided above).
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SECTION 15. RIGHTS OF ACTION. All rights of action in respect of this
Agreement, excepting the rights of action given to the Rights Agent under
Sections 18 and 20 hereof, are vested in the respective registered holders of
the Right Certificates (and, prior to the Distribution Date, the registered
holders of the Common Shares) and any registered holder of any Right Certificate
(or, prior to the Distribution Date, of the Common Shares), without the consent
of the Rights Agent or of the holder of any other Right Certificate (or, prior
to the Distribution Date, of the Common Shares), may, in his own behalf and for
his own benefit, enforce, and may institute and maintain any suit, action or
proceeding against the Company to enforce, or otherwise act in respect of, his
right to exercise the Rights evidenced by such Right Certificate in the manner
provided in such Right Certificate and in this Agreement. Without limiting the
foregoing or any remedies available to the holders of Rights, it is specifically
acknowledged that the holders of Rights would not have an adequate remedy at law
for any breach of this Agreement and will be entitled to specific performance of
the obligations under, and injunctive relief against actual or threatened
violations of the obligations of any Person subject to, this Agreement. Holders
of Rights shall be entitled to recover the reasonable costs and expenses,
including attorneys fees, incurred by them in any action to enforce the
provisions of this Agreement.
SECTION 16. AGREEMENT OF RIGHT HOLDERS. Every holder of a Right, by
accepting the same, consents and agrees with the Company and the Rights Agent
and with every other holder of a Right that:
(a) prior to the Distribution Date, the Rights will be transferable only
in connection with the transfer of the Common Shares;
(b) after the Distribution Date, the Right Certificates are transferable
(subject to the provisions of this Rights Agreement) only on the registry books
of the Rights Agent if surrendered at the principal office of the Rights Agent,
duly endorsed or accompanied by a proper instrument of transfer; and
(c) the Company and the Rights Agent may deem and treat the person in
whose name the Right Certificate (or, prior to the Distribution Date, the
associated Common Shares certificate) is registered as the absolute owner
thereof and of the Rights evidenced thereby (notwithstanding any notations of
ownership or writing on the Right Certificates or the associated Common Shares
certificate made by anyone other than the Company or the Rights Agent) for all
purposes whatsoever, and neither the Company nor the Rights Agent shall be
affected by any notice to the contrary.
SECTION 17. RIGHT CERTIFICATE HOLDER NOT DEEMED A STOCKHOLDER. No holder, as
such, of any Right Certificate shall be entitled to vote, receive dividends or
be deemed for any purpose the holder of the Preferred Shares or any other
securities of the Company which may at any time be issuable on the exercise of
the Rights represented thereby, nor shall anything contained herein or in any
Right Certificate be construed to confer upon the holder of any Right
Certificate, as such, any of the rights of a stockholder of the Company or any
right to vote for the election of directors or upon any matter submitted to
stockholders at any meeting thereof, or to give or withhold consent to any
corporate action, or to receive notice of meetings or other actions affecting
stockholders (except as provided in Section 25 hereof), or to receive dividends
or subscription rights, or otherwise, until the Right or Rights evidenced by
such Right Certificate shall have been exercised in accordance with the
provisions hereof.
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SECTION 18. CONCERNING THE RIGHTS AGENT. The Company agrees to pay to the
Rights Agent reasonable compensation for all services rendered by it hereunder
and, from time to time, on demand of the Rights Agent, its reasonable expenses
and counsel fees and other disbursements incurred in the administration and
execution of this Agreement and the exercise and performance of its duties
hereunder. The Company also agrees to indemnify the Rights Agent for, and to
hold it harmless against, any loss, liability, or expense, incurred without
negligence, bad faith or willful misconduct on the part of the Rights Agent, for
anything done or omitted by the Rights Agent in connection with the acceptance
and administration of this Agreement, including the costs and expenses of
defending against any claim of liability in the premises. The indemnity
provided herein shall survive the expiration of the Rights and the termination
of this Agreement.
The Rights Agent shall be protected and shall incur no liability for, or in
respect of any action taken, suffered or omitted by it in connection with, its
administration of this Agreement in reliance upon any Right Certificate or
certificate for the Preferred Shares or Common Shares or for other securities of
the Company, instrument of assignment or transfer, power of attorney,
endorsement, affidavit, letter, notice, direction, consent, certificate,
statement, or other paper or document believed by it to be genuine and to be
signed, executed and, where necessary, verified or acknowledged, by the proper
person or persons, or otherwise upon the advice of counsel as set forth in
Section 20 hereof. In no case will the Rights Agent be liable for special,
indirect, incidental or consequential or consequential loss or damage at any
kind whatsoever (including but not limited to lost profits), even if the Rights
Agent has been advised of such loss or damage.
SECTION 19. MERGER OR CONSOLIDATION OR CHANGE OF NAME OF RIGHTS AGENT. Any
corporation into which the Rights Agent or any successor Rights Agent may be
merged or with which it may be consolidated, or any corporation resulting from
any merger or consolidation to which the Rights Agent or any successor Rights
Agent shall be a party, or any corporation succeeding to the shareholder
services or corporate trust business of the Rights Agent or any successor Rights
Agent, shall be the successor to the Rights Agent under this Agreement without
the execution or filing of any paper or any further act on the part of any of
the parties hereto, provided that such corporation would be eligible for
appointment as a successor Rights Agent under the provisions of Section 21
hereof. In case at the time such successor Rights Agent shall succeed to the
agency created by this Agreement any of the Right Certificates shall have been
countersigned but not delivered, any such successor Rights Agent may adopt the
countersignature of the predecessor Rights Agent and deliver such Right
Certificates so countersigned; and in case at that time any of the Right
Certificates shall not have been countersigned, any successor Rights Agent may
countersign such Right Certificates either in the name of the predecessor Rights
Agent or in the name of the successor Rights Agent; and in all such cases such
Right Certificates shall have the full force provided in the Right Certificates
and in this Agreement.
In case at any time the name of the Rights Agent shall be changed and at
such time any of the Right Certificates shall have been countersigned but not
delivered, the Rights Agent may adopt the countersignature under its prior name
and deliver Right Certificates so countersigned; and in case at that time any of
the Right Certificates shall not have been countersigned, the Rights Agent may
countersign such Right Certificates either in its prior name or in its changed
name; and in all such cases such Right Certificates shall have the full force
provided in the Right Certificates and in this Agreement.
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SECTION 20. DUTIES OF RIGHTS AGENT. The Rights Agent undertakes the duties
and obligations imposed by this Agreement upon the following terms and
conditions, by all of which the Company and the holders of Right Certificates,
by their acceptance thereof, shall be bound:
(a) The Rights Agent may consult with legal counsel of its choice (who may
be legal counsel for the Company), and the opinion of such counsel shall be full
and complete authorization and protection to the Rights Agent as to any action
taken or omitted by it in good faith and in accordance with such opinion.
(b) Whenever in the performance of its duties under this Agreement the
Rights Agent shall deem it necessary or desirable that any fact or matter be
proved or established by the Company prior to taking or suffering any action
hereunder, such fact or matter (unless other evidence in respect thereof be
herein specifically prescribed) may be deemed to be conclusively proved and
established by a certificate signed by any one of the Chairman of the Board, the
Chief Executive Officer, the President, the Chief Financial Officer, any Vice
President, the Treasurer or the Secretary of the Company and delivered to the
Rights Agent; and such certificate shall be full authorization to the Rights
Agent for any action taken or suffered in good faith by it under the provisions
of this Agreement in reliance upon such certificate.
(c) The Rights Agent shall be liable hereunder to the Company and any
other Person only for its own negligence, bad faith or willful misconduct.
(d) The Rights Agent shall not be liable for or by reason of any of the
statements of fact or recitals contained in this Agreement or in the Right
Certificates (except its countersignature thereof) or be required to verify the
same, but all such statements and recitals are and shall be deemed to have been
made by the Company only.
(e) The Rights Agent shall not be under any responsibility in respect of
the validity of this Agreement or the execution and delivery hereof (except the
due execution hereof by the Rights Agent) or in respect of the validity or
execution of any Right Certificate (except its countersignature thereof); nor
shall it be responsible for any breach by the Company of any covenant or
condition contained in this Agreement or in any Right Certificate; nor shall it
be responsible for any change in the exercisability of the Rights (including the
Rights becoming void pursuant to Section 11(a)(ii) hereof) or any adjustment in
the terms of the Rights (including the manner, method or amount thereof)
provided for in Sections 3, 11, 13, 23 or 24 hereof, or the ascertaining of the
existence of facts that would require any such change or adjustment (except with
respect to the exercise of Rights evidenced by Right Certificates after receipt
of a certificate pursuant to Section 12 hereof describing such change or
adjustment); nor shall it by any act hereunder be deemed to make any
representation or warranty as to the authorization or reservation of any
Preferred Shares to be issued pursuant to this Agreement or any Right
Certificate or as to whether any Preferred Shares will, when issued, be validly
authorized and issued, fully paid and nonassessable.
(f) The Company agrees that it will perform, execute, acknowledge and
deliver or cause to be performed, executed, acknowledged and delivered all such
further and other acts, instruments and assurances as may reasonably be required
by the Rights Agent for the carrying out or performing by the Rights Agent of
the provisions of this Agreement.
24.
<PAGE>
(g) The Rights Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from any
one of the Chairman of the Board, the Chief Executive Officer, the President,
the Chief Financial Officer, any Vice President, the Secretary or the Treasurer
of the Company, and to apply to such officers for advice or instructions in
connection with its duties, and it shall not be liable for any action taken or
suffered by it in good faith in accordance with instructions of any such officer
or for any delay in acting while waiting for those instructions. Any
application by the Rights Agent for written instructions from the Company may,
at the option of the Rights Agent, set forth in writing any action proposed to
be taken or omitted by the Rights Agent with respect to its duties or
obligations under this Agreement and the date on and/or after which such action
shall be taken or omitted and the Rights Agent shall not be liable for any
action taken or omitted in accordance with a proposal included in any such
application on or after the date specified therein (which date shall not be less
than three business days after the date indicated in such application unless any
such officer shall have consented in writing to an earlier date) unless, prior
to taking or omitting any such action, the Rights Agent has received written
instructions in response to such application specifying the action to be taken
or omitted.
(h) The Rights Agent and any stockholder, director, officer or employee of
the Rights Agent may buy, sell or deal in any of the Rights or other securities
of the Company or become pecuniarily interested in any transaction in which the
Company may be interested, or contract with or lend money to the Company or
otherwise act as fully and freely as though it were not Rights Agent under this
Agreement. Nothing herein shall preclude the Rights Agent from acting in any
other capacity for the Company or for any other legal entity.
(i) The Rights Agent may execute and exercise any of the rights or powers
hereby vested in it or perform any duty hereunder either itself or by or through
its attorneys or agents, and the Rights Agent shall not be answerable or
accountable for any act, default, neglect or misconduct of any such attorneys or
agents or for any loss to the Company resulting from any such act, default,
neglect or misconduct, provided reasonable care was exercised in the selection
and continued employment thereof.
(j) No provision of this Agreement shall require the Rights Agent to
expend or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder or in the exercise of its rights if
there shall be reasonable grounds for believing that repayment of such funds or
adequate indemnification against such risk or liability is not reasonably
assured to it.
(k) If, with respect to any Right Certificate surrendered to the Rights
Agent for exercise or transfer, the certificate attached to the form of
assignment or form of election to purchase, as the case may be, has not been
executed, the Rights Agent shall not take any further action with respect to
such requested exercise of transfer without first consulting with the Company.
SECTION 21. CHANGE OF RIGHTS AGENT. The Rights Agent or any successor Rights
Agent may resign and be discharged from its duties under this Agreement upon 30
days' notice in writing mailed to the Company and to each transfer agent for the
Common Shares or Preferred Shares by registered or certified mail, and to the
holders of the Right Certificates by first-class mail. The Company may remove
the Rights Agent or any successor Rights Agent upon 30 days'
25.
<PAGE>
notice in writing, mailed to the Rights Agent or successor Rights Agent, as
the case may be, and to each transfer agent for the Common Shares or Preferred
Shares by registered or certified mail, and to the holders of the Right
Certificates by first-class mail. If the Rights Agent shall resign or be
removed or shall otherwise become incapable of acting, the Company shall
appoint a successor to the Rights Agent. If the Company shall fail to make
such appointment within a period of 30 days after giving notice of such
removal or after it has been notified in writing of such resignation or
incapacity by the resigning or incapacitated Rights Agent or by the holder of
a Right Certificate (who shall, with such notice, submit his Right Certificate
for inspection by the Company), then the registered holder of any Right
Certificate may apply to any court of competent jurisdiction for the
appointment of a new Rights Agent. Any successor Rights Agent, whether
appointed by the Company or by such a court, shall be either (a) a corporation
business trust or limited liability company organized and doing business under
the laws of the United States or of any other state of the United States which
is authorized under such laws to exercise corporate trust or stock transfer
powers and is subject to supervision or examination by federal or state
authority and which has at the time of its appointment as Rights Agent a
combined capital and surplus of at least $50 million or (b) a direct or
indirect wholly owned subsidiary of such an entity or its wholly-owning
parent. After appointment, the successor Rights Agent shall be vested with
the same powers, rights, duties and responsibilities as if it had been
originally named as Rights Agent without further act or deed; but the
predecessor Rights Agent shall deliver and transfer to the successor Rights
Agent any property at the time held by it hereunder, and execute and deliver
any further assurance, conveyance, act or deed necessary for the purpose. Not
later than the effective date of any such appointment the Company shall file
notice thereof in writing with the predecessor Rights Agent and each transfer
agent for the Common Shares or Preferred Shares, and mail a notice thereof in
writing to the registered holders of the Right Certificates. Failure to give
any notice provided for in this Section 21, however, or any defect therein,
shall not affect the legality or validity of the resignation or removal of the
Rights Agent or the appointment of the successor Rights Agent, as the case may
be.
SECTION 22. ISSUANCE OF NEW RIGHT CERTIFICATES. Notwithstanding any of the
provisions of this Agreement or of the Rights to the contrary, the Company may,
at its option, issue new Right Certificates evidencing Rights in such form as
may be approved by its Board of Directors to reflect any adjustment or change in
the Purchase Price and the number or kind or class of shares or other securities
or property purchasable under the Right Certificates made in accordance with the
provisions of this Agreement. In addition, in connection with the issuance or
sale of Common Shares following the Distribution Date and prior to the earlier
of the Redemption Date and the Final Expiration Date, the Company (a) shall with
respect to Common Shares so issued or sold pursuant to the exercise of stock
options or under any employee plan or arrangement in existence prior to the
Distribution Date, or upon the exercise, conversion or exchange of securities,
notes or debentures issued by the Company and in existence prior to the
Distribution Date, and (b) may, in any other case, if deemed necessary or
appropriate by the Board of Directors of the Company, issue Right Certificates
representing the appropriate number of Rights in connection with such issuance
or sale; PROVIDED, HOWEVER, that (i) the Company shall not be obligated to issue
any such Right Certificates if, and to the extent that, the Company shall be
advised by counsel that such issuance would create a significant risk of
material adverse tax consequences to the Company or the Person to whom such
Right Certificate would be issued, and (ii) no Right Certificate shall be issued
if, and to the extent that, appropriate adjustment shall otherwise have been
made in lieu of the issuance thereof.
26.
<PAGE>
SECTION 23. REDEMPTION.
(a) The Rights may be redeemed by action of the Board of Directors
pursuant to Section 23(b) hereof and shall not be redeemed in any other manner.
(b)
(i) The Board of Directors of the Company may, at its option, at any
time prior to the earlier of such time as any Person becoming an Acquiring
Person or the Final Expiration Date, redeem all but not less than all of the
then outstanding Rights at a redemption price of $.001 per Right, appropriately
adjusted to reflect any stock split, stock dividend or similar transaction
occurring after the date hereof (such redemption price being hereinafter
referred to as the "Redemption Price"), and the Company may, at its option, pay
the Redemption Price in Common Shares (based on the "current per-share market
price," as such term is defined in Section 11(d) hereof, of the Common Shares at
the time of redemption), cash or any other form of consideration deemed
appropriate by the Board of Directors. The redemption of the Rights by the
Board of Directors may be made effective at such time, on such basis and subject
to such conditions as the Board of Directors in its sole discretion may
establish. Notwithstanding anything contained in this Agreement to the
contrary, the Rights shall not be exercisable pursuant to Section 11(a)(ii)
hereof prior to the expiration or termination of the Company's right of
redemption under this Section 23(b)(i).
(ii) In addition, the Board of Directors of the Company may, at its
option, at any time after the time a Person becomes an Acquiring Person and the
expiration of any period during which the holder of Rights may exercise the
rights under Section 11(a)(ii) hereof but prior to any event described in clause
(x), (y) or (z) of the first sentence of Section 13 hereof, redeem all but not
less than all of the then outstanding Rights at the Redemption Price (x) in
connection with any merger, consolidation or sale or other transfer (in one
transaction or in a series of related transactions) of assets or earning power
aggregating 50% or more of the assets or earning power of the Company and its
subsidiaries (taken as a whole) in which all holders of Common Shares are
treated alike and not involving (other than as a holder of Common Shares being
treated like all other such holders) an Interested Stockholder or a Transaction
Person or (y)(A) if and for so long as the Acquiring Person is not thereafter
the Beneficial Owner of 20% or more of the then outstanding Common Shares, and
(B) at the time of redemption no other Persons are Acquiring Persons.
(c) Immediately upon the action of the Board of Directors of the Company
ordering the redemption of the Rights pursuant to Section 23(b) hereof, and
without any further action and without any notice, the right to exercise the
Rights will terminate and the only right thereafter of the holders of Rights
shall be to receive the Redemption Price. The Company shall promptly give
public notice of any such redemption; PROVIDED, HOWEVER, that the failure to
give, or any defect in, any such notice shall not affect the validity of such
redemption. Within 10 days after such action of the Board of Directors ordering
the redemption of the Rights pursuant to Section 23(b) hereof, the Company shall
mail a notice of redemption to all the holders of the then outstanding Rights at
their last addresses as they appear upon the registry books of the Rights Agent
or, prior to the Distribution Date, on the registry books of the transfer agent
for the Common Shares, PROVIDED, HOWEVER, that failure to give, or any defect
in, any such notice shall not affect the validity of such redemption. Any
notice which is mailed in the manner herein
27.
<PAGE>
provided shall be deemed given, whether or not the holder receives the notice.
Each such notice of redemption will state the method by which the payment of
the Redemption Price will be made. Neither the Company nor any of its
Affiliates or Associates may redeem, acquire or purchase for value any Rights
at any time in any manner other than that specifically set forth in this
Section 23 or in Section 24 hereof, and other than in connection with the
purchase of Common Shares prior to the Distribution Date.
(d) The Company may, at its option, discharge all of its obligations with
respect to any redemption of the Rights by (i) issuing a press release
announcing the manner of redemption of the Rights and (ii) mailing payment of
the Redemption Price to the registered holders of the Rights at their last
addresses as they appear on the registry books of the Rights Agent or, prior to
the Distribution Date, on the registry books of the transfer agent for the
Common Shares, and upon such action, all outstanding Right Certificates shall be
null and void without any further action by the Company.
SECTION 24. EXCHANGE.
(a) The Board of Directors of the Company may, at its option, at any time
after any Person becomes an Acquiring Person, exchange all or part of the then
outstanding and exercisable Rights (which shall not include Rights that have
become void pursuant to the provisions of Section 11(a)(ii) hereof) for Common
Shares at an exchange ratio of one Common Share per Right, appropriately
adjusted to reflect any stock split, stock dividend or similar transaction
occurring after the date hereof (such exchange ratio being hereinafter referred
to as the "Exchange Ratio"). Notwithstanding the foregoing, the Board of
Directors shall not be empowered to effect such exchange at any time after any
Person (other than the Company, any Subsidiary of the Company, any employee
benefit plan of the Company or any such Subsidiary, or any entity holding Common
Shares for or pursuant to the terms of any such plan), together with all
Affiliates and Associates of such Person, becomes the Beneficial Owner of 50% or
more of the Common Shares then outstanding.
(b) Immediately upon the action of the Board of Directors of the Company
ordering the exchange of any Rights pursuant to Section 24(a) hereof and without
any further action and without any notice, the right to exercise such Rights
shall terminate and the only right thereafter of a holder of such Rights shall
be to receive that number of Common Shares equal to the number of such Rights
held by such holder multiplied by the Exchange Ratio. The Company shall
promptly give public notice of any such exchange; PROVIDED, HOWEVER, that the
failure to give, or any defect in, such notice shall not affect the validity of
such exchange. The Company promptly shall mail a notice of any such exchange to
all of the holders of such Rights at their last addresses as they appear upon
the registry books of the Rights Agent; PROVIDED, HOWEVER, that the failure to
give, or any defect in, such notice shall not affect the validity of such
exchange. Any notice which is mailed in the manner herein provided shall be
deemed given, whether or not the holder receives the notice. Each such notice
of exchange will state the method by which the exchange of the Common Shares for
Rights will be effected and, in the event of any partial exchange, the number of
Rights which will be exchanged. Any partial exchange shall be effected pro rata
based on the number of Rights (other than Rights which have become void pursuant
to the provisions of Section 11(a)(ii) hereof) held by each holder of Rights.
28.
<PAGE>
(c) In lieu of issuing Common Shares in accordance with Section 24(a)
hereof, the Company may, if a majority of the Board of Directors then in office
determines that such action is necessary or appropriate and not contrary to the
interests of the holders of Rights, elect to (and, in the event that there are
not sufficient treasury shares and authorized but unissued Common Shares to
permit any exchange of the Rights in accordance with Section 24(a) hereof, the
Company shall) take all such action as may be necessary to authorize, issue or
pay, upon the exchange of the Rights, cash (including by way of a reduction of
the Purchase Price), property, Common Shares, other securities or any
combination thereof having an aggregate value equal to the value of the Common
Shares which otherwise would have been issuable pursuant to Section 24(a)
hereof, which aggregate value shall be determined by a nationally recognized
investment banking firm selected by a majority of the Board of Directors then in
office. For purposes of the preceding sentence, the value of the Common Shares
shall be determined pursuant to Section 11(d) hereof. Any election pursuant to
this Section 24(c) by the Board of Directors must be made within 60 days
following the date on which the event described in Section 11(a)(ii) hereof
shall have occurred. Following the occurrence on the event described in Section
11(a)(ii) hereof, a majority of the Board of Directors then in office may
suspend the exercisability of the Rights for a period of up to 60 days following
the date on which the event described in Section 11(a)(ii) hereof shall have
occurred to the extent that such directors have not determined whether to
exercise their rights of election under this Section 24(c). In the event of any
such suspension, the Company shall issue a public announcement stating that the
exercisability of the Rights has been temporarily suspended.
(d) The Company shall not be required to issue fractions of Common Shares
or to distribute certificates which evidence fractional Common Shares. In lieu
of such fractional Common Shares, the Company shall pay to the registered
holders of the Right Certificates with regard to which such fractional Common
Shares would otherwise be issuable an amount in cash equal to the same fraction
of the current market value of a whole Common Share. For the purposes of this
Section 24(d), the current market value of a whole Common Share shall be the
closing price of a Common Share (as determined pursuant to the second sentence
of Section 11(d)(i) hereof) for the Trading Day immediately after the date of
the first public announcement by the Company that an exchange is to be effected
pursuant to this Section 24.
(e) The Company shall not be required to issue fractions of Preferred
Shares (other than fractions which are integral multiples of one one-hundredth
of a Preferred Share) upon exchange of the Rights or to distribute certificates
which evidence fractional Preferred Shares (other than fractions which are
integral multiples of one one-hundredth of a Preferred Share). Fractions of
Preferred Shares in integral multiples of one one-hundredth of a Preferred Share
may, at the election of the Company, be evidenced by depositary receipts;
PROVIDED, HOWEVER, that holders of such depositary receipts shall have all of
the designations and the powers, preferences and rights, and the qualifications,
limitations and restrictions to which they are entitled as beneficial owners of
the Preferred Shares represented by such depositary receipts. In lieu of
fractional Preferred Shares that are not integral multiples of one one-hundredth
of a Preferred Share, the Company shall pay to the registered holders of Right
Certificates at the time such Rights are exercised as herein provided an amount
in cash equal to the same fraction of the current market value of one Preferred
Share. For the purposes of this Section 24(e), the current market value of a
Preferred Share shall be one hundred (100) times the closing price of a Common
Share (as determined pursuant to the second sentence of Section 11(d)(i) hereof)
for
29.
<PAGE>
the Trading Day immediately after the date of the first public announcement
by the Company that an exchange is to be effected pursuant to this Section 24.
SECTION 25. NOTICE OF CERTAIN EVENTS.
(a) In case the Company shall propose (i) to pay any dividend payable in
stock of any class to the holders of its Preferred Shares or to make any other
distribution to the holders of its Preferred Shares (other than a regular
quarterly cash dividend), (ii) to offer to the holders of its Preferred Shares
rights or warrants to subscribe for or to purchase any additional Preferred
Shares or shares of stock of any class or any other securities, rights or
options, (iii) to effect any reclassification of its Preferred Shares (other
than a reclassification involving only the subdivision of outstanding Preferred
Shares), (iv) to effect any consolidation or merger into or with, or to effect
any sale or other transfer (or to permit one or more of its Subsidiaries to
effect any sale or other transfer), in one or more transactions, of 50% or more
of the assets or earning power of the Company and its Subsidiaries (taken as a
whole), to any other Person, (v) to effect the liquidation, dissolution or
winding up of the Company, or (vi) to declare or pay any dividend on the Common
Shares payable in Common Shares or to effect a subdivision, combination or
consolidation of the Common Shares (by reclassification or otherwise than by
payment of dividends in Common Shares), then, in each such case, the Company
shall give to each holder of a Right Certificate, in accordance with Section 26
hereof, a notice of such proposed action, which shall specify the record date
for the purpose of such stock dividend, or distribution of rights or warrants,
or the date on which such reclassification, consolidation, merger, sale,
transfer, liquidation, dissolution, or winding up is to take place and the date
of participation therein by the holders of the Common Shares and/or the
Preferred Shares, if any such date is to be fixed, and such notice shall be so
given in the case of any action covered by clause (i) or (ii) above at least 10
days prior to the record date for determining holders of the Preferred Shares
for purposes of such action, and in the case of any such other action, at least
10 days prior to the date of the taking of such proposed action or the date of
participation therein by the holders of the Common Shares and/or the Preferred
Shares, whichever shall be the earlier.
(b) In case the event set forth in Section 11(a)(ii) hereof shall occur,
then the Company shall as soon as practicable thereafter give to each holder of
a Right Certificate, in accordance with Section 26 hereof, a notice of the
occurrence of such event, which notice shall describe the event and the
consequences of the event to holders of Rights under Section 11(a)(ii) hereof.
SECTION 26. NOTICES. Notices or demands authorized by this Agreement to be
given or made by the Rights Agent or by the holder of any Right Certificate to
or on the Company shall be sufficiently given or made if sent by first-class
mail, postage prepaid, addressed (until another address is filed in writing with
the Rights Agent) as follows:
Coinstar, Inc.
1800 114th Avenue, S.E.
Bellevue, WA 98004
Attn: Kirk Collamer
Fax: 425/637-0253
30.
<PAGE>
Subject to the provisions of Section 21 hereof, any notice or demand
authorized by this Agreement to be given or made by the Company or by the holder
of any Right Certificate to or on the Rights Agent shall be sufficiently given
or made if sent by first-class mail, postage prepaid, addressed (until another
address is filed in writing with the Company) as follows:
American Securities Transfer & Trust, Inc.
938 Quail Street, Suite 101
Lakewood, CO 80215
Attn: Theresa Henshaw
Fax: 303/234-5340
Notices or demands authorized by this Agreement to be given or made by the
Company or the Rights Agent to the holder of any Right Certificate shall be
sufficiently given or made if sent by first-class mail, postage prepaid,
addressed to such holder at the address of such holder as shown on the registry
books of the Company.
SECTION 27. SUPPLEMENTS AND AMENDMENTS. Prior to the Distribution Date, the
Company and the Rights Agent shall, if the Company so directs, supplement or
amend any provision of this Agreement without the approval of any holders of the
Rights. From and after the Distribution Date, the Company and the Rights Agent
shall, if the Company so directs, from time to time supplement or amend any
provision of this Agreement without the approval of any holders of Right
Certificates in order to (i) cure any ambiguity, (ii) correct or supplement any
provision contained herein which may be defective or inconsistent with any other
provisions herein, or (iii) change any other provisions with respect to the
Rights which the Company may deem necessary or desirable; PROVIDED, HOWEVER,
that no such supplement or amendment shall be made which would adversely affect
the interests of the holders of Rights (other than the interests of an Acquiring
Person or its Affiliates or Associates). Any supplement or amendment adopted
during any period after any Person has become an Acquiring Person but prior to
the Distribution Date shall become null and void unless such supplement or
amendment could have been adopted by the Company from and after the Distribution
Date. Any such supplement or amendment shall be evidenced by a writing signed
by the Company and the Rights Agent. Upon delivery of a certificate from an
appropriate officer of the Company which states that the proposed supplement or
amendment is in compliance with the terms of this Section 27, the Rights Agent
shall execute such supplement or amendment unless the Rights Agent shall have
determined in good faith that such supplement or amendment would adversely
affect its interest under this Agreement. Prior to the Distribution Date, the
interests of the holders of Rights shall be deemed coincident with the interests
of the holders of Common Shares.
SECTION 28. DETERMINATION AND ACTIONS BY THE BOARD OF DIRECTORS, ETC. For
all purposes of this Agreement, any calculation of the number of Common Shares
outstanding at any particular time, including for purposes of determining the
particular percentage of such outstanding Common Shares or any other securities
of which any Person is the Beneficial Owner, shall be made in accordance with
the last sentence of Rule 13d-3(d)(1)(i) of the General Rules and Regulations
under the Exchange Act as in effect on the date of this Agreement. The Board of
Directors of the Company shall have the exclusive power and authority to
administer this Agreement and to exercise all rights and powers specifically
granted to the Board, or the Company, or as may be necessary or advisable in the
administration of this Agreement, including without limitation, the right and
power to (i) interpret the provisions of this
31.
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Agreement, and (ii) make all determinations deemed necessary or advisable for
the administration of this Agreement (including a determination to redeem or
not redeem the Rights or to amend the Agreement). All such actions,
calculations, interpretations and determinations (including, for purposes of
clause (y) below, all omissions with respect to the foregoing) which are done
or made by the Board in good faith, shall (x) be final, conclusive and binding
on the Rights Agent and the holders of the Rights, and (y) not subject the
Board to any liability to the holders of the Rights.
SECTION 29. SUCCESSORS. All the covenants and provisions of this Agreement
by or for the benefit of the Company or the Rights Agent shall bind and inure to
the benefit of their respective successors and assigns hereunder.
SECTION 30. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company, the
Rights Agent and the registered holders of the Right Certificates (and, prior to
the Distribution Date, the Common Shares) any legal or equitable right, remedy
or claim under this Agreement; but this Agreement shall be for the sole and
exclusive benefit of the Company, the Rights Agent and the registered holders of
the Right Certificates (and, prior to the Distribution Date, the Common Shares).
SECTION 31. SEVERABILITY. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction or other authority
to be invalid, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions of this Agreement shall remain in full force and
effect and shall in no way be affected, impaired or invalidated.
SECTION 32. GOVERNING LAW. This Agreement and each Right Certificate issued
hereunder shall be deemed to be a contract made under the laws of the State of
Delaware and for all purposes shall be governed by and construed in accordance
with the laws of such State applicable to contracts to be made and performed
entirely within such State.
SECTION 33. COUNTERPARTS. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and all such counterparts shall together constitute but one and
the same instrument.
SECTION 34. DESCRIPTIVE HEADINGS. Descriptive headings of the several
Sections of this Agreement are inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions hereof.
32.
<PAGE>
IN WITNESS WHEREOF, parties whereto have caused this Agreement to be duly
executed, all as of the day and year first above written.
ATTEST: COINSTAR, INC.
/s/ Mark P. Tanoury /s/ Jens H. Molbak
- ------------------------------------ ------------------------------------
Mark P. Tanoury Jens H. Molbak
Secretary President
ATTEST: AMERICAN SECURITIES TRANSFER &
TRUST, INC.
By: /s/ Laura J. Signeros
---------------------------------
Title: Vice President
------------------------------
33.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
SECTION 1. CERTAIN DEFINITIONS . . . . . . . . . . . . . . . 2
SECTION 2. APPOINTMENT OF RIGHTS AGENT . . . . . . . . . . . 5
SECTION 3. ISSUE OF RIGHT CERTIFICATES . . . . . . . . . . . 5
SECTION 4. FORM OF RIGHT CERTIFICATES. . . . . . . . . . . . 6
SECTION 5. COUNTERSIGNATURE AND REGISTRATION . . . . . . . . 7
SECTION 6. TRANSFER, SPLIT UP, COMBINATION AND EXCHANGE
OF RIGHT CERTIFICATES; MUTILATED, DESTROYED,
LOST OR STOLEN RIGHT CERTIFICATES . . . . . . . 7
SECTION 7. EXERCISE OF RIGHTS; PURCHASE PRICE; EXPIRATION
DATE OF RIGHTS. . . . . . . . . . . . . . . . . 8
SECTION 8. CANCELLATION AND DESTRUCTION OF RIGHT
CERTIFICATES. . . . . . . . . . . . . . . . . . 9
SECTION 9. AVAILABILITY OF PREFERRED SHARES. . . . . . . . . 10
SECTION 10. PREFERRED SHARES RECORD DATE. . . . . . . . . . . 11
SECTION 11. ADJUSTMENT OF PURCHASE PRICE, NUMBER OF
SHARES OR NUMBER OF RIGHTS. . . . . . . . . . . 11
SECTION 12. CERTIFICATE OF ADJUSTED PURCHASE PRICE OR
NUMBER OF SHARES. . . . . . . . . . . . . . . . 17
SECTION 13. CONSOLIDATION, MERGER OR SALE OR TRANSFER OF
ASSETS OR EARNING POWER . . . . . . . . . . . . 18
SECTION 14. FRACTIONAL RIGHTS AND FRACTIONAL SHARES . . . . . 20
SECTION 15. RIGHTS OF ACTION. . . . . . . . . . . . . . . . . 22
SECTION 16. AGREEMENT OF RIGHT HOLDERS. . . . . . . . . . . . 22
SECTION 17. RIGHT CERTIFICATE HOLDER NOT DEEMED A
STOCKHOLDER . . . . . . . . . . . . . . . . . . 22
SECTION 18. CONCERNING THE RIGHTS AGENT . . . . . . . . . . . 23
SECTION 19. MERGER OR CONSOLIDATION OR CHANGE OF NAME
OF RIGHTS AGENT . . . . . . . . . . . . . . . . 23
SECTION 20. DUTIES OF RIGHTS AGENT. . . . . . . . . . . . . . 24
SECTION 21. CHANGE OF RIGHTS AGENT. . . . . . . . . . . . . . 25
SECTION 22. ISSUANCE OF NEW RIGHT CERTIFICATES. . . . . . . . 26
SECTION 23. REDEMPTION. . . . . . . . . . . . . . . . . . . . 27
SECTION 24. EXCHANGE. . . . . . . . . . . . . . . . . . . . . 28
SECTION 25. NOTICE OF CERTAIN EVENTS. . . . . . . . . . . . . 30
SECTION 26. NOTICES . . . . . . . . . . . . . . . . . . . . . 30
SECTION 27. SUPPLEMENTS AND AMENDMENTS. . . . . . . . . . . . 31
i.
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
PAGE
SECTION 28. DETERMINATION AND ACTIONS BY THE BOARD
OF DIRECTORS, ETC.. . . . . . . . . . . . . . . 31
SECTION 29. SUCCESSORS. . . . . . . . . . . . . . . . . . . . 32
SECTION 30. BENEFITS OF THIS AGREEMENT. . . . . . . . . . . . 32
SECTION 31. SEVERABILITY. . . . . . . . . . . . . . . . . . . 32
SECTION 32. GOVERNING LAW . . . . . . . . . . . . . . . . . . 32
SECTION 33. COUNTERPARTS. . . . . . . . . . . . . . . . . . . 32
SECTION 34. DESCRIPTIVE HEADINGS. . . . . . . . . . . . . . . 32
Exhibit A - Certificate of Designation
Exhibit B - Form of Right Certificate
Exhibit C - Summary of Rights to Purchase Preferred Shares
</TABLE>
ii.
<PAGE>
An extra section break has been inserted above this paragraph. Do not delete
this section break if you plan to add text after the Table of
Contents/Authorities. Deleting this break will cause Table of
Contents/Authorities headers and footers to appear on any pages following the
Table of Contents/Authorities.
3.
<PAGE>
FORM OF
CERTIFICATE OF DESIGNATION
OF
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
(EXHIBIT A TO RIGHTS AGREEMENT)
(Pursuant to Section 151 of the
Delaware General Corporation Law)
COINSTAR, INC., a corporation organized and existing under the General
Corporation Law of the State of Delaware (hereinafter called the "Company"),
hereby certifies that the following resolution was adopted by the Board of
Directors of the Corporation as required by Section 151 of the General
Corporation Law at a meeting duly called and held on November 12, 1998:
RESOLVED, that pursuant to the authority granted to and vested in
the Board of Directors of the Company in accordance with the
provisions of its Amended and Restated Certificate of Incorporation,
the Board of Directors hereby creates a series of Preferred Stock,
par value $.001 per share, of the Company and hereby states the
designation and number of shares, and fixes the relative
designations and the powers, preferences and rights, and the
qualifications, limitations and restrictions thereof (in addition to
the provisions set forth in the Certificate of Incorporation of the
Company, which are applicable to the Preferred Stock of all classes
and series), as follows:
Series A Junior Participating Preferred Stock:
SECTION 1. DESIGNATION AND AMOUNT. Four Hundred and Fifty Thousand
(450,000) shares of Preferred Stock, $.001 par value, are designated "Series A
Junior Participating Preferred Stock" with the designations and the powers,
preferences and rights, and the qualifications, limitations and restrictions
specified herein (the "Series A Preferred Stock"). Such number of shares may be
increased or decreased by resolution of the Board of Directors; PROVIDED, that
no decrease shall reduce the number of shares of Series A Preferred Stock to a
number less than the number of shares then outstanding
A-1
<PAGE>
plus the number of shares reserved for issuance upon the exercise of
outstanding options, rights or warrants or upon the conversion of any
outstanding securities issued by the Company convertible into Series A
Preferred Stock.
SECTION 2. Dividends and Distributions.
(A) Subject to the rights of the holders of any shares of any series
of Preferred Stock (or any similar stock) ranking prior and superior to the
Series A Preferred Stock with respect to dividends, the holders of shares of
Series A Preferred Stock, in preference to the holders of Common Stock, par
value $.001 per share (the "Common Stock"), of the Company, and of any other
junior stock, shall be entitled to receive, when, as and if declared by the
Board of Directors out of funds legally available for the purpose, quarterly
dividends payable in cash on the first day of April, July, October and January
in each year (each such date being referred to herein as a "Quarterly Dividend
Payment Date"), commencing on the first Quarterly Dividend Payment Date after
the first issuance of a share or fraction of a share of Series A Preferred
Stock, in an amount per share (rounded to the nearest cent) equal to the greater
of (a) $l.00 or (b) subject to the provision for adjustment hereinafter set
forth, 100 times the aggregate per share amount of all cash dividends, and 100
times the aggregate per share amount (payable in kind) of all non-cash dividends
or other distributions, other than a dividend payable in shares of Common Stock
or a subdivision of the outstanding shares of Common Stock (by reclassification
or otherwise), declared on the Common Stock since the immediately preceding
Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend
Payment Date, since the first issuance of any share or fraction of a share of
Series A Preferred Stock. In the event the Company shall at any time declare or
pay any dividend on the Common Stock payable in shares of Common Stock, or
effect a subdivision or combination or consolidation of the outstanding shares
of Common Stock (by reclassification or otherwise than by payment of a dividend
in shares of Common Stock) into a greater or lesser number of shares of Common
Stock, then in each such case the amount to which holders of shares of Series A
Preferred Stock were entitled immediately prior to such event under clause (b)
of the preceding sentence shall be adjusted by multiplying such amount by a
fraction, the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event.
(B) The Company shall declare a dividend or distribution on the
Series A Preferred Stock as provided in paragraph (A) of this Section
immediately after it declares a dividend or distribution on the Common Stock
(other than a dividend payable in shares of Common Stock); PROVIDED, that in the
event no dividend or distribution shall have been declared on the Common Stock
during the period between any Quarterly Dividend Payment Date and the next
subsequent Quarterly Dividend Payment Date, a dividend of $1.00 per share on the
Series A Preferred Stock shall nevertheless be payable on such subsequent
Quarterly Dividend Payment Date.
A-2
<PAGE>
(C) Dividends shall begin to accrue and be cumulative on
outstanding shares of Series A Preferred Stock from the Quarterly Dividend
Payment Date next preceding the date of issue of such shares, unless the date
of issue of such shares is prior to the record date for the first Quarterly
Dividend Payment Date, in which case dividends on such shares shall begin to
accrue from the date of issue of such shares, or unless the date of issue is a
Quarterly Dividend Payment Date or is a date after the record date for the
determination of holders of shares of Series A Preferred Stock entitled to
receive a quarterly dividend and before such Quarterly Dividend Payment Date,
in either of which events such dividends shall begin to accrue and be
cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid
dividends shall not bear interest. Dividends paid on the shares of Series A
Preferred Stock in an amount less than the total amount of such dividends at
the time accrued and payable on such shares shall be allocated pro rata on a
share-by-share basis among all such shares at the time outstanding. The Board
of Directors may fix a record date for the determination of holders of shares
of Series A Preferred Stock entitled to receive payment of a dividend or
distribution declared thereon, which record date shall be not more than 60
days prior to the date fixed for the payment thereof.
SECTION 3. VOTING RIGHTS. The holders of shares of Series A Preferred
Stock shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set forth,
each share of Series A Preferred Stock shall entitle the holder thereof to 100
votes on all matters submitted to a vote of the stockholders of the Company. In
the event the Company shall at any time declare or pay any dividend on the
Common Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock, then in each
such case the number of votes per share to which holders of shares of Series A
Preferred Stock were entitled immediately prior to such event shall be adjusted
by multiplying such number by a fraction, the numerator of which is the number
of shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(B) Except as otherwise provided herein, in any other Certificate of
Designation creating a series of Preferred Stock or any similar stock, or by
law, the holders of shares of Series A Preferred Stock and the holders of shares
of Common Stock and any other capital stock of the Company having general voting
rights shall vote together as one class on all matters submitted to a vote of
stockholders of the Company.
(C) Except as set forth herein, or as otherwise provided by law,
holders of Series A Preferred Stock shall have no special voting rights and
their consent shall not be required (except to the extent they are entitled to
vote with holders of Common Stock as set forth herein) for taking any corporate
action.
A-3
<PAGE>
SECTION 4. Certain Restrictions.
(A) Whenever quarterly dividends or other dividends or distributions
payable on the Series A Preferred Stock as provided in Section 2 are in arrears,
thereafter and until all accrued and unpaid dividends and distributions, whether
or not declared, on shares of Series A Preferred Stock outstanding shall have
been paid in full, the Company shall not:
(i) declare or pay dividends, or make any other
distributions, on any shares of stock ranking junior (either as to dividends
or upon liquidation, dissolution or winding up) to the Series A Preferred
Stock;
(ii) declare or pay dividends, or make any other
distributions, on any shares of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the Series A
Preferred Stock, except dividends paid ratably on the Series A Preferred Stock
and all such parity stock on which dividends are payable or in arrears in
proportion to the total amounts to which the holders of all such shares are
then entitled;
(iii) redeem or purchase or otherwise acquire for consideration
shares of any stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Preferred Stock,
provided that the Company may at any time redeem, purchase or otherwise
acquire shares of any such junior stock in exchange for shares of any stock of
the Company ranking junior (either as to dividends or upon dissolution,
liquidation or winding up) to the Series A Preferred Stock; or
(iv) redeem or purchase or otherwise acquire for consideration
any shares of Series A Preferred Stock, or any shares of stock ranking on a
parity (either as to dividends or upon liquidation, dissolution or winding up)
with the Series A Preferred Stock, except in accordance with a purchase offer
made in writing or by publication (as determined by the Board of Directors) to
all holders of such shares upon such terms as the Board of Directors, after
consideration of the respective annual dividend rates and other relative
rights and preferences of the respective series and classes, shall determine
in good faith will result in fair and equitable treatment among the respective
series or classes.
(B) The Company shall not permit any subsidiary of the Company to
purchase or otherwise acquire for consideration any shares of stock of the
Company unless the Company could, under paragraph (A) of this Section 4,
purchase or otherwise acquire such shares at such time and in such manner.
SECTION 5. REACQUIRED SHARES. Any shares of Series A Preferred Stock
purchased or otherwise acquired by the Company in any manner whatsoever shall be
retired and cancelled promptly after the acquisition thereof. All such shares
shall upon their cancellation become authorized but unissued shares of Preferred
Stock and may be reissued as part of a new series of Preferred Stock subject to
the conditions and restrictions on issuance set forth herein, in the Amended and
Restated Certificate of
A-4
<PAGE>
Incorporation, or in any other Certificate of Designation creating a series of
Preferred Stock or any similar stock or as otherwise required by law.
SECTION 6. LIQUIDATION, DISSOLUTION OR WINDING UP. Upon any
liquidation, dissolution or winding up of the Company, no distribution shall be
made (1) to the holders of shares of stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the Series A
Preferred Stock unless, prior thereto, the holders of shares of Series A
Preferred Stock shall have received $100 per share, plus an amount equal to
accrued and unpaid dividends and distributions thereon, whether or not declared,
to the date of such payment, provided that the holders of shares of Series A
Preferred Stock shall be entitled to receive an aggregate amount per share,
subject to the provision for adjustment hereinafter set forth, equal to 100
times the aggregate amount to be distributed per share to holders of shares of
Common Stock, or (2) to the holders of shares of stock ranking on a parity
(either as to dividends or upon liquidation, dissolution or winding up) with the
Series A Preferred Stock, except distributions made ratably on the Series A
Preferred Stock and all such parity stock in proportion to the total amounts to
which the holders of all such shares are entitled upon such liquidation,
dissolution or winding up. In the event the Company shall at any time declare
or pay any dividend on the Common Stock payable in shares of Common Stock, or
effect a subdivision or combination or consolidation of the outstanding shares
of Common Stock (by reclassification or otherwise than by payment of a dividend
in shares of Common Stock) into a greater or lesser number of shares of Common
Stock, then in each such case the aggregate amount to which holders of shares of
Series A Preferred Stock were entitled immediately prior to such event under the
proviso in clause (1) of the preceding sentence shall be adjusted by multiplying
such amount by a fraction the numerator of which is the number of shares of
Common Stock outstanding immediately after such event and the denominator of
which is the number of shares of Common Stock that were outstanding immediately
prior to such event.
SECTION 7. CONSOLIDATION, MERGER, ETC. In case the Company shall enter
into any consolidation, merger, combination or other transaction in which the
shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case each share of
Series A Preferred Stock shall at the same time be similarly exchanged or
changed into an amount per share, subject to the provision for adjustment
hereinafter set forth, equal to 100 times the aggregate amount of stock,
securities, cash and/or any other property (payable in kind), as the case may
be, into which or for which each share of Common Stock is changed or exchanged.
In the event the Company shall at any time declare or pay any dividend on the
Common Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock, then in each
such case the amount set forth in the preceding sentence with respect to the
exchange or change of shares of Series A Preferred Stock shall be adjusted by
multiplying such amount by a fraction, the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
A-5
<PAGE>
SECTION 8. NO REDEMPTION. The shares of Series A Preferred Stock shall
not be redeemable.
SECTION 9. RANK. The Series A Preferred Stock shall rank, with respect
to the payment of dividends and the distribution of assets, junior to all series
of any other class of the Company's Preferred Stock.
SECTION 10. AMENDMENT. The Amended and Restated Certificate of
Incorporation of the Company shall not be amended in any manner which would
materially alter or change the powers, preferences or special rights of the
Series A Preferred Stock so as to affect them adversely without the affirmative
vote of the holders of at least two-thirds of the outstanding shares of Series A
Preferred Stock, voting together as a single class.
A-6
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this certificate as of
November 12, 1998.
---------------------------------
Jens H. Molbak
President
---------------------------------
Mark P. Tanoury
Secretary
A-7
<PAGE>
FORM OF RIGHT CERTIFICATE
(EXHIBIT B TO RIGHTS AGREEMENT)
CERTIFICATE NO. R- _____ RIGHTS
NOT EXERCISABLE AFTER NOVEMBER 12, 2008 OR EARLIER IF REDEMPTION OR
EXCHANGE OCCURS. THE RIGHTS ARE SUBJECT TO REDEMPTION AT $.001 PER
RIGHT AND TO EXCHANGE ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT.
RIGHT CERTIFICATE
COINSTAR, INC.
This certifies that ___________________________ or registered assigns, is
the registered owner of the number of Rights set forth above, each of which
entitles the owner thereof, subject to the terms, provisions and conditions of
the Rights Agreement, dated as of November 12, 1998 (the "Rights Agreement"),
between Coinstar, Inc., a Delaware corporation (the "Company"), and American
Securities Transfer & Trust, Inc. (the "Rights Agent"), to purchase from the
Company at any time after the Distribution Date (as such term is defined in the
Rights Agreement) and prior to 5:00 p.m. Pacific Time, on November 12, 2008 at
the office of the Rights Agent designated for such purpose, or at the office of
its successor as Rights Agent, one one-hundredth of a fully paid non-assessable
share of Series A Junior Participating Preferred Stock, par value $.001 per
share (the "Preferred Shares"), of the Company, at a purchase price of $45 per
one one-hundredth of a Preferred Share (the "Purchase Price"), upon presentation
and surrender of this Right Certificate with the Form of Election to Purchase
duly executed. The number of Rights evidenced by this Right Certificate (and
the number of one one-hundredths of a Preferred Share which may be purchased
upon exercise hereof) set forth above, and the Purchase Price set forth above,
are the number and Purchase Price as of November 12, 1998, based on the
Preferred Shares as constituted at such date.
From and after the time any Person becomes an Acquiring Person, (as such
terms are defined in the Rights Agreement), if the Rights evidenced by this
Right Certificate are beneficially owned by (i) an Acquiring Person or an
Affiliate or Associate of any such Acquiring Person (as such terms are defined
in the Rights Agreement), (ii) a transferee of any such Acquiring Person,
Associate or Affiliate who becomes a transferee after the Acquiring Person
becomes such, or (iii) under certain circumstances specified in the Rights
Agreement, a transferee of any such Acquiring Person, Associate or Affiliate who
becomes a transferee prior to or concurrently with the Acquiring Person becoming
such, such Rights shall become null and void without any further action and no
holder hereof shall have any right with respect to such Rights from and after
the time any Person becomes an Acquiring Person.
B-1
<PAGE>
As provided in the Rights Agreement, the Purchase Price and the number of
one one-hundredths of a Preferred Share which may be purchased upon the exercise
of the Rights evidenced by this Right Certificate are subject to modification
and adjustment upon the happening of certain events.
This Right Certificate is subject to all of the terms, provisions and
conditions of the Rights Agreement, as amended from time to time, which terms,
provisions and conditions are hereby incorporated herein by reference and made a
part hereof and to which Rights Agreement reference is hereby made for a full
description of the rights, limitations of rights, obligations, duties and
immunities hereunder of the Rights Agent, the Company and the holders of the
Right Certificates. Copies of the Rights Agreement are on file at the principal
executive offices of the Company and the above-mentioned offices of the Rights
Agent.
This Right Certificate, with or without other Right Certificates, upon
surrender at the office of the Rights Agent designated for such purpose, may be
exchanged for another Right Certificate or Right Certificates of like tenor and
date evidencing Rights entitling the holder to purchase a like aggregate number
of Preferred Shares as the Rights evidenced by the Right Certificate or Right
Certificates surrendered shall have entitled such holder to purchase. If this
Right Certificate shall be exercised in part, the holder shall be entitled to
receive upon surrender hereof another Right Certificate or Right Certificates
for the number of whole Rights not exercised.
Subject to the provisions of the Rights Agreement, the Rights evidenced by
this Certificate (i) may be redeemed by the Company at a redemption price of
$.001 per Right or (ii) may be exchanged in whole or in part for shares of the
Company's Common Stock, par value $.001 per share, or, upon circumstances set
forth in the Rights Agreement, cash, property or other securities of the
Company, including fractions of a share of Preferred Stock.
No fractional Preferred Shares will be issued upon the exercise of any
Right or Rights evidenced hereby (other than fractions which are integral
multiples of one one-hundredth of a Preferred Share, which may, at the election
of the Company, be evidenced by depositary receipts) but in lieu thereof a cash
payment will be made, as provided in the Rights Agreement.
No holder of this Right Certificate shall be entitled to vote or receive
dividends or be deemed for any purpose the holder of the Preferred Shares or of
any other securities of the Company which may at any time be issuable on the
exercise hereof, nor shall anything contained in the Rights Agreement or herein
be construed to confer upon the holder hereof, as such, any of the rights of a
stockholder of the Company or any right to vote for the election of directors or
upon any matter submitted to stockholders at any meeting thereof, or to give or
withhold consent to any corporate action, or to receive notice of meetings or
other actions affecting stockholders (except as provided in the Rights
Agreement), or to receive dividends or subscription rights, or otherwise, until
the Right or Rights evidenced by this Right Certificate shall have been
exercised as provided in the Rights Agreement.
This Right Certificate shall not be valid or obligatory for any purpose
until it shall have been countersigned by the Rights Agent.
B-2
<PAGE>
WITNESS the facsimile signature of the proper officers of the Company and
its corporate seal. Dated as of November 12, 1998.
ATTEST: COINSTAR, INC.
- ------------------------------------ ------------------------------------
Mark P. Tanoury Jens H. Molbak
Secretary President
COUNTERSIGNED:
AMERICAN SECURITIES TRANSFER & TRUST, INC.
as Rights Agent
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
B-3
<PAGE>
Form of Reverse Side of Right Certificate
FORM OF ASSIGNMENT
(To be executed by the registered holder if such
holder desires to transfer the Right Certificate.)
FOR VALUE RECEIVED ______________________________________ hereby sells,
assigns and transfers unto
- -------------------------------------------------------------------------------
(Please print name and address of transferee)
_____________________________________________________________________ this Right
Certificate, together with all right, title and interest therein, and does
hereby irrevocably constitute and appoint ________________________ Attorney, to
transfer the within Right Certificate on the books of the within-named Company,
with full power of substitution.
Dated:
---------------------------
------------------------------------
Signature
Form of Reverse Side of Right Certificate -- continued
B-4
<PAGE>
Signature Guaranteed:
Signatures must be guaranteed by an "eligible guarantor institution" as
defined in Rule 17Ad-15 promulgated under the Securities Exchange Act of 1934,
as amended.
- ---------------------------------------------------------------
The undersigned hereby certifies that (1) the Rights evidenced by this
Right Certificate are not being sold, assigned or transferred by or on behalf of
a Person who is or was an Acquiring Person, an Interested Stockholder or an
Affiliate or Associate thereof (as such terms are defined in the Rights
Agreement); and (2) after due inquiry and to the best of the knowledge of the
undersigned, the undersigned did not acquire the Rights evidenced by this Right
Certificate from any Person who is or was an Acquiring Person, an Interested
Stockholder, or an Affiliate or Associate thereof.
------------------------------------
Signature
B-5
<PAGE>
FORM OF ELECTION TO PURCHASE
(To be executed if holder desires to exercise
Rights represented by the Right Certificate.)
To American Securities Transfer & Trust, Inc.
The undersigned hereby irrevocably elects to exercise
___________________________ Rights represented by this Right Certificate to
purchase the Preferred Shares issuable upon the exercise of such Rights and
requests that certificates for such Preferred Shares be issued in the name of:
Please insert social security
or other identifying number: ______________
- -------------------------------------------------------------------------------
(Please print name and address)
- -------------------------------------------------------------------------------
If such number of Rights shall not be all the Rights evidenced by this Right
Certificate, a new Right Certificate for the balance remaining of such Rights
shall be registered in the name of and delivered to:
Please insert social security
or other identifying number: ______________
- -------------------------------------------------------------------------------
(Please print name and address)
- -------------------------------------------------------------------------------
Dated:
---------------------
------------------------------------
Signature
Form of Reverse Side of Right Certificate -- continued
B-6
<PAGE>
Signature Guaranteed:
Signatures must be guaranteed by an "eligible guarantor institution" as
defined in Rule 17Ad-15 promulgated under the Securities Exchange Act of 1934,
as amended.
- ---------------------------------------------------------------
The undersigned hereby certifies that (1) the Rights evidenced by this
Right Certificate are not beneficially owned by nor are they being exercised on
behalf of an Acquiring Person, an Interested Stockholder or an Affiliate or
Associate thereof (as such terms are defined in the Rights Agreement); and
(2) after due inquiry and to the best of the knowledge of the undersigned, the
undersigned did not acquire the Rights evidenced by this Right Certificate from
any Person who is or was an Acquiring Person, an Interested Stockholder, or an
Affiliate or Associate thereof.
------------------------------------
Signature
- ---------------------------------------------------------------
NOTICE
The signature in the Form of Assignment or Form of Election to Purchase,
as the case may be, must conform to the name as written upon the face of this
Right Certificate in every particular, without alteration or enlargement or
any change whatsoever.
In the event the certification set forth above in the Form of Assignment
or the Form of Election to Purchase, as the case may be, is not completed, the
Company and the Rights Agent will deem the beneficial owner of the Rights
evidenced by this Right Certificate to be an Acquiring Person or an Affiliate
or Associate thereof (as defined in the Rights Agreement) and such Assignment
or Election to Purchase will not be honored.
B-7
<PAGE>
COINSTAR, INC.
SUMMARY OF RIGHTS TO PURCHASE
PREFERRED SHARES
(EXHIBIT C TO RIGHTS PLAN)
On November 12, 1998 the Board of Directors of COINSTAR, INC. (the
"Company") declared a dividend of one preferred share purchase right (a "Right")
for each outstanding share of common stock, par value $.001 per share (the
"Common Shares"), of the Company. The dividend is effective as of November 30,
1998 (the "Record Date") with respect to the stockholders of record on that
date. The Rights will also attach to new Common Shares issued after the Record
Date. Each Right entitles the registered holder to purchase from the Company
one one-hundredth of a share of Series A Junior Participating Preferred Stock,
par value $.001 per share (the "Preferred Shares"), of the Company at a price of
$45 per one one-hundredth of a Preferred Share (the "Purchase Price"), subject
to adjustment. Each Preferred Share is designed to be the economic equivalent
of 100 Common Shares. The description and terms of the Rights are set forth in
a Rights Agreement dated as of November 12, 1998 (the "Rights Agreement"),
between the Company and American Securities Transfer & Trust, Inc. (the "Rights
Agent").
DETACHMENT AND TRANSFER OF RIGHTS
Initially, the Rights will be evidenced by the stock certificates
representing Common Shares then outstanding, and no separate Right Certificates
will be distributed. Until the earlier to occur of (i) a public announcement
that a person or group of affiliated or associated persons, has become an
"Acquiring Person" (as such term is defined in the Rights Agreement) or (ii) 10
business days (or such later date as the Board may determine) following the
commencement of, or announcement of an intention to make, a tender offer or
exchange offer which would result in the beneficial ownership by an Acquiring
Person of 20% or more of the outstanding Common Shares (the earlier of such
dates being called the "Distribution Date"), the Rights will be evidenced, with
respect to any of the Common Share certificates outstanding as of the Record
Date, by such Common Share certificate. In general, an "Acquiring Person" is a
person, the affiliates or associates of such person, or a group, which has
acquired beneficial ownership of 20% or more of the outstanding Common Shares.
The Rights Agreement provides that, until the Distribution Date (or earlier
redemption or expiration of the Rights), the Rights will be transferable with
and only with the Common Shares. Until the Distribution Date (or earlier
redemption or expiration of the Rights), new Common Share certificates issued
after the Record Date upon transfer or new issuance of Common Shares will
contain a notation incorporating the Rights Agreement by reference. Until the
Distribution Date (or earlier redemption or expiration of the Rights) the
surrender or transfer of any certificates for Common Shares outstanding as of
the Record Date, even without such notation or a copy of this Summary of Rights
being attached thereto, will also constitute the transfer of the Rights
associated with the Common Shares represented by such certificate. As soon as
practicable following the Distribution Date, separate certificates evidencing
the Rights ("Right
C-1
<PAGE>
Certificates") will be mailed to holders of record of the Common Shares as of
the close of business on the Distribution Date and such separate Right
Certificates alone will evidence the Rights.
EXERCISABILITY OF RIGHTS
The Rights are not exercisable until the Distribution Date. The Rights
will expire on November 12, 2008 (the "Final Expiration Date"), unless the Final
Expiration Date is extended or unless the Rights are earlier redeemed or
exchanged by the Company, in each case as described below. Until a Right is
exercised, the holder thereof, as such, will have no rights as a stockholder of
the Company, including, without limitation, the right to vote or to receive
dividends.
The Purchase Price payable, and the number of Preferred Shares or other
securities or property issuable or payable, upon exercise of the Rights are
subject to adjustment from time to time to prevent dilution. The number of
outstanding Rights and the number of one one-hundredths of a Preferred Share
issuable upon exercise of each Right are also subject to adjustment in the event
of a stock split of the Common Shares or a stock dividend on the Common Shares
payable in Common Shares, or subdivisions, consolidations or combinations of the
Common Shares occurring, in any such case, prior to the Distribution Date. With
certain exceptions, no adjustment in the Purchase Price will be required until
cumulative adjustments require an adjustment of at least 1% in such Purchase
Price. No fractional Preferred Shares will be issued (other than fractions
which are integral multiples of one one-hundredth of a Preferred Share, which
may, at the election of the Company, be evidenced by depositary receipts) and in
lieu thereof, an adjustment in cash will be made based on the market price of
the Preferred Shares on the last trading day prior to the date of exercise.
TERMS OF PREFERRED SHARES
Preferred Shares purchasable upon exercise of the Rights will not be
redeemable. Each Preferred Share will be entitled to a minimum preferential
quarterly dividend payment of $l per share but will be entitled to an aggregate
dividend of 100 times the dividend declared per Common Share. In the event of
liquidation, the holders of the Preferred Shares will be entitled to a minimum
preferential liquidation payment of $100 per share but will be entitled to an
aggregate payment of 100 times the payment made per Common Share. Each
Preferred Share will have 100 votes, voting together with the Common Shares.
Finally, in the event of any merger, consolidation or other transaction in which
Common Shares are exchanged, each Preferred Share will be entitled to receive
100 times the amount received per Common Share. These rights are protected by
customary anti-dilution provisions. Because of the nature of the Preferred
Shares' dividend, liquidation and voting rights, the value of the one
one-hundredth interest in a Preferred Share purchasable upon exercise of each
Right should approximate the value of one Common Share. The Preferred Shares
would rank junior to any other series of the Company's preferred stock.
C-2
<PAGE>
TRIGGER OF FLIP-IN AND FLIP-OVER RIGHTS
In the event that any person or group of affiliated or associated persons
becomes an Acquiring Person, proper provision shall be made so that each holder
of a Right, other than Rights beneficially owned by the Acquiring Person or any
affiliate or associate thereof (which will thereafter be void), will thereafter
have the right to receive upon exercise that number of Common Shares having a
market value of two times the exercise price of the Right. This right will
commence on the date of public announcement that a person has become an
Acquiring Person (or the effective date of a registration statement relating to
distribution of the rights, if later) and terminate 60 days later (subject to
adjustment in the event exercise of the rights is enjoined).
In the event that the Company is acquired in a merger or other business
combination transaction or 50% or more of its consolidated assets or earning
power are sold to an Acquiring Person, its affiliates or associates or certain
other persons in which such persons have an interest, proper provision will be
made so that each such holder of a Right will thereafter have the right to
receive, upon the exercise thereof at the then current exercise price of the
Right, that number of shares of common stock of the acquiring company which at
the time of such transaction will have a market value of two times the exercise
price of the Right.
REDEMPTION AND EXCHANGE OF RIGHTS
At any time prior to the earliest of (i) the close of business on the day
of the first public announcement that a person has become an Acquiring Person,
or (ii) the Final Expiration Date, the Board of Directors of the Company may
redeem the Rights in whole, but not in part, at a price of $.001 per Right (the
"Redemption Price"). In general, the redemption of the Rights may be made
effective at such time on such basis with such conditions as the Board of
Directors in its sole discretion may establish. Immediately upon any redemption
of the Rights, the right to exercise the Rights will terminate and the only
right of the holders of Rights will be to receive the Redemption Price.
At any time after any Person becomes an Acquiring Person and prior to the
acquisition by such person or group of 50% or more of the outstanding Common
Shares, the Board of Directors of the Company may exchange the Rights (other
than Rights owned by such person or group which will have become void), in whole
or in part, at an exchange ratio of one Common Share, or, under circumstances
set forth in the Rights Agreement, cash, property or other securities of the
Company, including fractions of a Preferred Share (or of a share of a class or
series of the Company's preferred stock having equivalent designations and the
powers, preferences and rights, and the qualifications, limitations and
restrictions), per Right (with value equal to such Common Shares).
AMENDMENT OF RIGHTS
The terms of the Rights generally may be amended by the Board of Directors
of the Company without the consent of the holders of the Rights, except that
from and after such time as the Rights are distributed no such amendment may
adversely affect the interests of the holders of the Rights (excluding the
interest of any Acquiring Person).
C-3
<PAGE>
ADDITIONAL INFORMATION
A copy of the Rights Agreement has been filed with the Securities and
Exchange Commission as an Exhibit to a Quarterly Report on Form 10-Q dated
November 13, 1998. A copy of the Rights Agreement is available from the
Company by writing to: 1800 114th Avenue, S.E., Bellevue, Washington 98004,
Attention: Kirk Collamer. This summary description of the Rights is not
intended to be complete and is qualified in its entirety by reference to the
Rights Agreement, which is hereby incorporated herein by reference.
C-4
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JUL-01-1998 JAN-01-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<CASH> 28,496,297 28,496,297
<SECURITIES> 12,663,841 12,663,841
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 42,424,877 42,424,877
<PP&E> 75,447,523 75,447,523
<DEPRECIATION> 22,696,575 22,696,575
<TOTAL-ASSETS> 97,719,625 97,719,625
<CURRENT-LIABILITIES> 29,160,000 29,160,000
<BONDS> 0 0
0 0
0 0
<COMMON> 61,855,991 61,855,991
<OTHER-SE> (77,230,062) (77,230,062)
<TOTAL-LIABILITY-AND-EQUITY> 97,719,625 97,719,625
<SALES> 0 0
<TOTAL-REVENUES> 13,576,423 32,871,162
<CGS> 0 0
<TOTAL-COSTS> 16,104,865 45,515,557
<OTHER-EXPENSES> 0 0
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<INTEREST-EXPENSE> 2,757,830 7,989,521
<INCOME-PRETAX> (4,954,016) (19,311,308)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (4,954,016) (19,311,308)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (4,954,016) (19,311,308)
<EPS-PRIMARY> (.33) (1.28)
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