<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 21, 1999
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
COINSTAR, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 7299 91-3156448
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification
Number)
</TABLE>
1800 -- 114TH AVENUE S.E.
BELLEVUE, WASHINGTON 98004
(425) 943-8000
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
JENS H. MOLBAK
CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD
COINSTAR, INC.
1800 -- 114TH AVENUE S.E.
BELLEVUE, WASHINGTON 98004
(425) 943-8000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------
COPIES TO:
MARK P. TANOURY, ESQ. JOHN L. SAVVA, ESQ.
SUSAN L. PRESTON, ESQ. Sullivan & Cromwell
Cooley Godward LLP 1888 Century Park East, 21st Floor
4205 Carillon Point Los Angeles, CA 90067
Kirkland, WA 98033-7355 (310) 712-6600
(425) 893-7700
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, $0.001 par value............. 4,600,000 $19.75 $90,850,000 $25,257
</TABLE>
(1) Includes 600,000 shares of common stock issuable upon exercise of the
Underwriters' over-allotment option.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933, as amended, on
the basis of the average of the high and low prices of Coinstar, Inc. common
stock on May 17, 1999, as reported on the Nasdaq National Market.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
Subject to Completion. Dated May 21, 1999.
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY
PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
4,000,000 Shares
COINSTAR, INC.
[LOGO] Common Stock
---------------------
The common stock is quoted on the Nasdaq National Market under the symbol
"CSTR". The last reported sale price of the common stock on May 20, 1999 was
$20.125 per share.
SEE "RISK FACTORS" ON PAGE 9 TO READ ABOUT CERTAIN FACTORS YOU SHOULD
CONSIDER BEFORE BUYING SHARES OF THE COMMON STOCK.
---------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY
HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------------
<TABLE>
<CAPTION>
Per Share Total
------------------ ------------------
<S> <C> <C>
Initial price to public................................................. $ $
Underwriting discount................................................... $ $
Proceeds, before expenses, to Coinstar.................................. $ $
</TABLE>
The underwriters may, under certain circumstances, purchase up to an
additional 600,000 shares from Coinstar at the initial price to public less the
underwriting discount.
---------------------
The underwriters expect to deliver the shares against payment in New York,
New York on , 1999.
GOLDMAN, SACHS & CO.
DONALDSON, LUFKIN & JENRETTE
HAMBRECHT & QUIST
---------------------
Prospectus dated , 1999.
<PAGE>
Edgar artwork description:
Front cover flap: [Picture of the Coinstar unit on a hand-truck]
Front cover gatefold: [Text at the top of the page: "The Coinstar Network." Map
of the continental United States with the names and logos of supermarket chains
clustered in the geographic regions where Coinstar units are located.]
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS. THIS SUMMARY MAY NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD
CONSIDER BEFORE INVESTING IN OUR COMMON STOCK. YOU SHOULD READ THE ENTIRE
PROSPECTUS CAREFULLY, INCLUDING "RISK FACTORS" AND OUR FINANCIAL STATEMENTS,
BEFORE MAKING AN INVESTMENT DECISION.
OVERVIEW
We are the first and only company to own and operate a national network of
self-service coin-counting machines in the United States. Our Coinstar units
provide consumers with a fun, convenient and reliable means of converting
accumulated change into cash. With approximately 150 retail partners, primarily
supermarket chains, we currently operate more than 5,400 Coinstar units in
approximately 65 regional markets across the United States. We are also
conducting trials of eight Coinstar units in the United Kingdom and eight units
in Canada. We launched the Coinstar network with the installation of our first
Coinstar unit in 1994, and have installed an average of 1,517 Coinstar units in
each year since January 1, 1996. Since our inception, the Coinstar network has
counted and processed over 33 billion coins with a value of over $1.3 billion in
more than 44 million customer transactions. Coinstar units, which are about the
size of an ATM, rapidly count coins deposited by consumers and issue vouchers
for the dollar value of the coins processed, less our processing fee of 8.9%.
Consumers can redeem the vouchers at cashiers in the stores where our units are
located for store credit or cash. We believe our services also benefit our
retail partners by enhancing customer service, increasing store traffic,
promoting sales, reducing internal store coin handling expenses and providing an
additional source of revenue.
We believe that our key competitive advantages include our technology and
expertise developed over the past six years, the nationwide Coinstar network,
our dedicated field service organization, our strong relationships with a
majority of the leading supermarket chains in the United States and our proven
ability to execute our rollout strategy. Our Coinstar units have been designed
to operate as part of a scalable, two-way, wide-area communications network. Our
intelligent on-line network enables us to track each machine 24 hours a day and
provides key financial data and operating statistics to our headquarters and
field service representatives. Our dedicated field service organization provides
highly responsive service to our retail partners by ensuring the efficient
collection and handling of coins and by performing preventative maintenance and
repair on each Coinstar unit. This intelligent network also provides a platform
for delivering value-added, online services for consumers and retailers.
Our revenue increased from $25.0 million in 1997 to $47.7 million in 1998,
an increase of 91%, and from $8.8 million for the quarter ended March 31, 1998
to $15.8 million for the comparable period in 1999, an increase of 80%. Primary
drivers of our revenue growth have been the rapid expansion of our installed
base of Coinstar units, which increased by 1,609 units in 1998, an increase of
50%, and the increasing usage of the Coinstar network. Revenue per average
installed unit has increased from $9,860 in 1996 to $11,893 in 1998. In addition
to increasing our revenue, we continue to improve our operating margins as we
spread our fixed costs over an expanding network, increase regional densities
and more effectively utilize the Coinstar network and our field service
organization. This resulted in an increase in direct contribution per average
installed unit from $1,250 in 1996 to $5,281 in 1998. Direct contribution is the
difference between revenue and direct operating expenses.
OUR MARKET OPPORTUNITY
We believe the market for coin recycling is very large and still virtually
untapped. We believe that an estimated 290 billion cash transactions occur on an
annual basis in the United States.
4
<PAGE>
Assuming the change generated by each such cash transaction averages fifty
cents, the annual coin flow resulting from such transactions would be
approximately $145 billion. Based on the current population in the United
States, the average person handles approximately $600 in coins each year. To
support this flow of coins in the economy, the U.S. Mint has produced $15
billion in new coins over the past 25 years. According to the U.S. Mint, the
circulating stock of coins used in cash transactions is approximately $8
billion, which we estimate would have to turn over approximately 18 times a year
to support a coin flow of $145 billion.
The prevalence of coins in cash transactions and the lack of a convenient
alternative for converting coins into cash has resulted in the accumulation of
coins. New coins are made to replace those that fall out of circulation and to
support the increasing size of the economy. In 1998 alone, the U.S. Mint
produced over 15.8 billion new coins worth approximately $885 million. We also
believe a significant market opportunity exists for providing a convenient
method of recycling the recurring coin flow and redeeming non-circulating coins
in the United Kingdom, Canada, Europe and other selected international markets.
GROWTH STRATEGY
Our objective is to enhance our position as the leading provider of
self-service coin processing services and to develop new value-added services
that can be delivered through the Coinstar network. Key elements of our strategy
include:
AGGRESSIVELY GROW OUR CORE COIN RECYCLING BUSINESS BY:
RAPIDLY EXPANDING THE COINSTAR NETWORK. We plan to continue to rapidly
expand our presence in supermarkets as our primary retail location because of
the prevalence of large regional chains, geographic concentration of stores and
recurring consumer traffic. We are initially targeting supermarkets in the 100
largest metropolitan areas in the country, which include approximately 22,000 of
the approximately 30,000 supermarkets in the United States. Our current
installation base of more than 5,400 Coinstar units represents only
approximately 25% penetration of our target market. As of March 31, 1999, we had
units installed in only 35% of our existing retail partners' stores. We believe
a significant opportunity exists to increase the number of Coinstar units
installed through increased penetration of our existing retail partner stores as
well as by entering into contracts with new partners.
INCREASING CONSUMER USE OF OUR SERVICE. We promote consumer trials of the
Coinstar unit through commercial media, such as television and radio, and
in-store promotions. We believe that increasing the number of trials of our
service will significantly enhance the growth of our core coin recycling
business. Our August 1998 market study indicates that in our installed regions
only 6% of the market uses our coin recycling service, and 80% of people who
have tried our service are likely to use it again. In addition, we are
developing other value-added services to broaden consumer appeal of the Coinstar
units and promote greater trial and use.
IMPROVING PROFIT MARGINS THROUGH INCREASED EFFICIENCIES. Over the past six
years, we have continued to improve our profit margins through increased
efficiencies resulting from our expansion, including increased regional
densities and more effective utilization of the Coinstar network and our field
service organization. In addition, we have built an effective management, sales
and administrative team. We believe this infrastructure can support substantial
growth in Coinstar unit installations and the introduction of new products and
services.
5
<PAGE>
EXPAND OUR PRESENCE IN THE UNITED KINGDOM
As of May 1999, we have installed eight Coinstar units on a trial basis in
Sainsbury's and Tesco, the two largest grocery retailers in the United Kingdom.
These two retailers operate over 1,000 stores throughout the United Kingdom and
account for more than 40% of all United Kingdom grocery sales. We believe that
the United Kingdom offers an attractive market opportunity given the higher
value coin content of British currencies and similar customer profiles to the
United States.
ENTER OTHER SELECTED INTERNATIONAL MARKETS
We believe there could be a significant opportunity for us to expand our
network beyond North America and the United Kingdom because our Coinstar unit
can be adapted to the currency sets of most countries without significant time
or cost. In addition, our experience in the United Kingdom should position us to
participate in the upcoming conversion to the new Euro currency. We estimate
that more than 75 billion coins worth over $15 billion will need to be converted
to Euros between January 1 and June 30, 2002. As the largest trading block in
the world, we believe the European Union could represent an attractive long-term
market for Coinstar units beyond the potential opportunity to participate in the
one-time conversion of currencies to the new Euro coin. In addition, Japan,
Australia and a number of other countries offer attractive opportunities to
expand our operations internationally.
LEVERAGE OUR RELATIONSHIPS, PRIME RETAIL LOCATIONS AND THE INTERNET TO PROVIDE
VALUE-ADDED SERVICES TO CONSUMERS AND OUR RETAIL PARTNERS
Our relationships with leading supermarket chains, our prime retail
locations and the Coinstar network form a strategic platform from which we are
able to deliver additional value-added services to consumers and our retail
partners. For example, in February 1999 we announced our new Coinstar
Shopper-TM- product, a multifunction retail terminal, which we plan to test
market in 1999 and roll out nationally beginning in 2000. Coinstar Shopper will
allow us to deliver meal solutions, customized grocery discounts, merchandise
offers and enhanced frequent shopper services to consumers at our retail
partners. In addition, we plan to link Internet users with supermarket retailers
through Coinstar Shopper. As part of this strategy, we have acquired software
and other Web-based assets from Compucook, Inc. and Meals.com. The Coinstar
Shopper program will enable consumers to visit a Web site, click on our meal
planning service and then print their recipe and shopping list at a Coinstar
Shopper unit upon arriving at the store.
CORPORATE INFORMATION
Our principal executive offices are located at 1800 114(th) Avenue,
Bellevue, Washington 98004. Our telephone number is (425) 943-8000, and our Web
site is located at www.coinstar.com. Information contained on our Web site does
not constitute part of this prospectus.
Coinstar's logo is a registered trademark of Coinstar, Inc. in the United
States, Canada and the European Union. This prospectus also contains trademarks
and trade names of other companies.
6
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Shares offered............................... 4,000,000 shares
Shares to be outstanding after the 19,441,611 shares(1)
offering...................................
Use of proceeds.............................. For working capital, capital expenditures and
general corporate purposes. See "Use of
Proceeds".
Nasdaq National Market symbol................ "CSTR"
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE, UNIT AND PER UNIT DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue...................................... $ 8,312 $ 25,007 $ 47,674 $ 8,823 $ 15,791
Operating loss............................... (13,906) (22,100) (14,762) (5,416) (1,889)
Net loss..................................... (15,967) (29,593) (23,973) (7,447) (4,534)
Basic and diluted net loss per shares...... $ (20.37) $ (3.81) $ (1.58) $ (0.49) $ (0.30)
Shares used in computing basic and diluted
net loss per share(2).................... 784 7,761 15,150 15,080 15,358
OTHER DATA:
Number of new Coinstar units installed during
the period................................. 1,238 1,703 1,609 327 428
Installed base of Coinstar units at end of
the period................................. 1,501 3,204 4,813 3,531 5,241
Direct contribution(3)....................... $ 1,054 $ 7,108 $ 21,109 $ 3,000 $ 7,852
Direct contribution margin(3)(4)............. 12.7% 28.4% 44.3% 40.0% 49.7%
EBITDA(5).................................... $ (9,772) $ (13,421) $ (1,525) $ (2,603) $ 2,213
Annualized revenue per average installed
unit(6).................................... 9,860 10,709 11,893 10,597 12,699
Annualized direct contribution per average
installed unit(3)(6)....................... 1,250 3,044 5,281 3,601 6,331
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1999
--------------------------
ACTUAL AS ADJUSTED(7)
--------- ---------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments(8).............. $ 39,964 $ 114,119
Working capital................................................... 7,350 81,505
Total assets...................................................... 99,285 173,440
Long-term debt and capital lease obligations, including current
portion......................................................... 89,941 89,941
Total stockholders' equity (deficit).............................. (23,073) 51,082
</TABLE>
- -------------
(1) Based on shares outstanding as of March 31, 1999. Excludes 3,606,565 shares
of common stock reserved for issuance under Coinstar's stock option and
stock purchase plans, 2,129,531 shares of which were subject to outstanding
options as of March 31, 1999 and 980,000 shares of which are subject to
stockholder approval. Also excludes 1,076,883 shares of common stock
reserved for issuance upon exercise of outstanding warrants as of March 31,
1999. See "Capitalization", "Description of Capital Stock" and Notes 6, 8
and 9 of Notes to Consolidated Financial Statements.
(2) See Note 9 of Notes to Consolidated Financial Statements for an explanation
of the determination of the number of shares used in computing loss per
share information, basic and diluted.
7
<PAGE>
(3) Direct contribution is defined as revenue less direct operating expenses. We
use direct contribution as a measure of operating performance to assist in
understanding our operating results. Direct contribution is not a measure of
financial performance under Generally Accepted Accounting Principles
("GAAP") and should not be considered in isolation or as an alternative to
gross margin, income (loss) from operations, net income (loss), or any other
measure of performance under GAAP.
(4) Direct contribution margin is defined as direct contribution divided by
revenue.
(5) EBITDA represents earnings before interest expense, income taxes,
depreciation, amortization and other income/ expense. EBITDA is not a
measure of financial performance under GAAP and should not be considered in
isolation or as an alternative to net income or cash flow from operations as
determined by GAAP. We believe that EBITDA provides useful information
regarding a company's ability to service and/or incur indebtedness.
(6) Based on revenue or direct contribution (annualized in the case of the three
month period ended March 31, 1998 and 1999) divided by monthly averages of
units in operation over the applicable period.
(7) As adjusted reflects the application of the net proceeds from the sale of
4,000,000 shares of common stock by Coinstar in this offering, at an assumed
initial price to public of $19.75, after deducting the underwriting discount
and estimated offering expenses.
(8) Cash, cash equivalents and short-term investments include funds in transit,
which represent amounts being processed by armored carriers or residing in
the Coinstar unit, of $21.5 million.
8
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE MAKING AN
INVESTMENT DECISION. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE
ONLY ONES FACING OUR COMPANY. ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY
KNOWN TO US OR THAT WE CURRENTLY DEEM IMMATERIAL ALSO MAY IMPAIR OUR BUSINESS
OPERATIONS. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS COULD BE
HARMED. IN SUCH CASE, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE AND
YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT.
WE HAVE A HISTORY OF SUSTAINED OPERATING LOSSES AND WE EXPECT SUCH LOSSES TO
CONTINUE
We have incurred substantial losses since inception in 1991. Our net loss
was $16.0 million for 1996, $29.6 million for 1997 and $24.0 million for 1998.
As of March 31, 1999 we had an accumulated deficit of $86.9 million. Our
operating losses to date have resulted primarily from expenses incurred in the
development, marketing and operation of the Coinstar units, expansion and
maintenance of the network, administrative and occupancy expenses at our
headquarters and depreciation and amortization. We expect to continue to incur
operating losses as we continue to increase our installed base of Coinstar units
and seek to develop and market new products, services and enhancements.
WE HAVE A LIMITED OPERATING HISTORY AND FACE UNCERTAINTY IN OUR ABILITY TO
BECOME A PROFITABLE COMPANY
After several years of development, we commenced commercial deployment of
Coinstar units in 1994 and placed approximately 95% of our current installed
base in 1996, 1997, 1998 and the first three months of 1999. Therefore, you have
limited historical financial information on which to base an evaluation of our
performance. You should consider our prospects in light of the risks, expenses
and difficulties frequently encountered by companies in an early stage of
development and operation, particularly companies in new or rapidly evolving
markets. We cannot be certain that we will install a sufficient number of our
Coinstar units or obtain sufficient market acceptance to allow us to achieve or
sustain profitability, or generate sufficient cash flow to meet our capital and
operating expenses and debt service obligations.
OUR COIN PROCESSING SERVICE IS OUR SOLE SOURCE OF REVENUE AND OUR CURRENT MARKET
IS LIMITED
We have derived until now, and expect for the foreseeable future to derive,
substantially all of our revenue from the operation of Coinstar units.
Accordingly, market acceptance of our coin processing service is critical to our
future success. Since there is only a limited current market for our coin
processing service, we cannot assure you that an acceptable level of demand will
be achieved or sustained. If sufficient demand for our coin processing service
does not develop due to lack of market acceptance, technological change,
competition or other factors, our business, financial condition and results of
operations and ability to achieve sufficient cash flow to service our
indebtedness could be seriously harmed.
OUR FUTURE OPERATING RESULTS REMAIN UNCERTAIN
You should not consider prior growth rates in our revenue to be indicative
of our future operating results. The timing and amount of future revenues will
depend almost entirely on our ability to obtain new agreements with potential
retail partners for the installation of Coinstar units, the successful
deployment and operation of our coin processing network and on customer
utilization of our service. Our future operating results will depend upon many
other factors, including:
- the level of product and price competition,
9
<PAGE>
- the service fee we charge consumers to use our service, which we recently
changed to 8.9% and may change in the future,
- the amount of our processing fee that we share with our retail partners,
- our success in expanding our network and managing our growth,
- our ability to develop and market product enhancements and new products,
such as our Coinstar Shopper-TM-,
- our ability to enter into and penetrate new international markets, such as
the United Kingdom, Canada, the European Union and other selected foreign
markets,
- the timing of product enhancements, activities of and acquisitions by
competitors,
- the ability to hire additional employees, and
- the timing of such hiring and the ability to control costs.
OUR BUSINESS IS DEPENDENT ON CONTINUED MARKET ACCEPTANCE BY CONSUMERS
We are substantially dependent on continued market acceptance of our coin
processing service by consumers. The self-service coin processing market is
relatively new and evolving and we cannot predict the future growth rate and
size of this market. In addition, we may not be successful in achieving the
large-scale adoption of our coin processing service or acceptance of our change
in the processing fee from 7.5% to 8.9%. While consumers to date have been
somewhat receptive to our existing installed base of Coinstar units, we cannot
be certain that the operating results of the installed units will continue to be
favorable or that past results will be indicative of future market acceptance of
our service.
We believe that market acceptance of the Coinstar unit is dependent on the
consumer's perception that the units are convenient, easy to use and reliable.
Even if we are successful in promoting awareness of the Coinstar unit among
consumers, consumers may not utilize the Coinstar units in sufficient numbers
and frequency to make us profitable. In addition, the increasing use of
alternatives to coin and currency transactions such as credit and debit cards,
checks, wire transfers, smart cards and other forms of electronic payment may
adversely affect market acceptance and ongoing use of the Coinstar service. If
our coin-processing service does not achieve general market acceptance among
consumers or does so less rapidly than expected, our business, financial
condition and results of operations and ability to achieve sufficient cash flow
to service our indebtedness could be seriously harmed.
OUR BUSINESS IS DEPENDENT ON OUR RETAIL PARTNERS, WHICH ARE PRIMARILY
SUPERMARKET CHAINS
Market acceptance of the Coinstar unit depends on the willingness of
potential retail partners to agree to installation and retention of Coinstar
units in their stores, primarily supermarkets. We believe that market acceptance
by potential retail partners will depend on our ability to demonstrate the
utility of the Coinstar unit as a customer service and as a means to provide
other tangible benefits to potential and existing retail partners, including
increased customer traffic and customer spending in the form of voucher dollars
in the store. If our service does not achieve market acceptance, especially
among supermarket chains, or does so less rapidly than expected, our business,
financial condition and results of operations and ability to achieve sufficient
cash flow to service our indebtedness could be seriously harmed.
We generally have separate agreements with each of our retail partners,
providing for our exclusive right to provide coin processing services in retail
locations. These contracts generally have terms ranging from two to three years
and are generally terminable by either party with
10
<PAGE>
advance notice of at least 90 days. Coinstar units in service in two supermarket
chains, Fred Meyer Inc. and The Kroger Co., accounted for approximately 18.7%
and 18.9%, respectively, of our revenue in 1998. In the quarter ended March 31,
1999, these two supermarket chains accounted for approximately 34.8% of our
revenue. On October 19, 1998 The Kroger Co. and Fred Meyer Inc. announced that
they entered into a definitive merger agreement. The termination of any one or
more of our contracts with our retail partners could seriously harm our
business, financial condition, results of operations and ability to achieve
sufficient cash flow to service our indebtedness.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE DUE TO DIFFERENT USAGE RATES OF
INDIVIDUAL COINSTAR UNITS, SEASONALITY OF USE AND OTHER FACTORS
Customer utilization of our coin processing service varies substantially
from unit to unit, making our revenue difficult to forecast. Customer
utilization is affected by the timing and success of promotions by us and our
retail partners, age of the installed unit, adverse weather conditions and other
factors, many of which are not in our control. Based on our limited operating
history, we believe that coin processing volumes are affected by seasonality; in
particular we believe that on a relative basis, coin processing volumes have
been lower in the months of January, February, September and October. We cannot
be certain, however, that such seasonal trends will continue. Any projections of
future trends in use are inherently uncertain due to our limited operating
history and the lack of comparable companies engaged in the coin processing
business.
In addition, our quarterly operating results are affected by the timing and
number of Coinstar units installed during the quarter. The timing of Coinstar
unit installations during a particular quarter is largely dependent on
installation schedules determined by agreements with our retail partners, the
variable length of trial periods of our retail partners and the planned
coordination of multiple installations in a given geographic region.
As a result of these and other factors, revenue for any quarter is subject
to significant variation, and we believe that period-to-period comparisons of
our results of operations are not necessarily meaningful and should not be
relied upon as indications of future performance. Because our operating expenses
are based on anticipated revenue trends and because a large percentage of our
expenses are relatively fixed, revenue variability could cause significant and
disproportionate variations in operating results from quarter to quarter and
could result in significant losses. To the extent such expenses precede, or are
not followed by, increased revenue, our operating results would be seriously
harmed.
WE HAVE SUBSTANTIAL INDEBTEDNESS
As of March 31, 1999 we had outstanding indebtedness of $89.9 million, which
included $88.4 million of our 13.0% Senior Subordinated Discount Notes due 2006
(the "Notes") and our capital lease obligations. The outstanding indebtedness
associated with the Notes will grow to $95.0 million by October 1999. We must
begin paying cash interest on the Notes in April 2000. Beginning at that time,
we will have debt service obligations of over $12.0 million per year until
October 2006, when the principal amount of $95.0 million will be due. Our
ability to meet our debt service requirements will depend upon achieving
significant and sustained growth in our expected cash flow, which will be
affected by our success in implementing our business strategy, prevailing
economic conditions and financial, business and other factors, some of which are
beyond our control. Accordingly, we cannot be certain as to whether or when we
will have sufficient resources to meet our debt service obligations. If we are
unable to generate sufficient cash flow to service our indebtedness, we will
have to reduce or delay planned capital expenditures, sell assets, restructure
or refinance our indebtedness or seek additional equity capital. We cannot
assure you that any of these strategies can be effected on satisfactory terms,
if at all, particularly in light of our high levels
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<PAGE>
of indebtedness. In addition, the extent to which we continue to have
substantial indebtedness could have significant consequences, including:
- our ability to obtain additional financing in the future for working
capital, capital expenditures, product research and development,
acquisitions and other general corporate purposes may be materially
limited or impaired,
- a substantial portion of our cash flow from operations may need to be
dedicated to the payment of principal and interest on our indebtedness and
therefore not available to finance our business, and
- our high degree of indebtedness may make us more vulnerable to economic
downturns, limit our ability to withstand competitive pressures or reduce
our flexibility in responding to changing business and economic
conditions.
OUR MARKET IS INCREASINGLY COMPETITIVE
We are the first company to provide a national network of self-service coin
processing machines that provide a convenient, reliable means for consumers to
convert loose coins into cash. We compete regionally with several direct
competitors that operate self-service coin processing machines. We cannot be
certain that these competitors have not or will not substantially increase their
installed units and expand their service nationwide. We compete indirectly with
manufacturers of machines and devices that enable consumers to count or sort
coins themselves, and we also compete or may compete directly or indirectly with
banks and similar depository institutions for coin conversion customers.
Currently, we believe banks are the primary alternative available to consumers
for converting coins into cash, and they generally do not charge a fee for
accepting rolled coins. As the market for coin processing develops, banks and
other businesses may decide to offer additional coin processing services, either
as a customer service or on a self-service basis, and compete directly with us.
Moreover, we may face direct competition from Scan Coin AB of Malmo, Sweden, our
prior supplier of coin-counting devices, or other third parties to whom Scan
Coin may sell its coin-counting device. See "--Our business could be harmed by a
dispute with our supplier".
In addition, we may face new competition as we seek to expand into
international markets and develop new products, services and enhancements. Our
ability to expand internationally may subject us to competition with banks that
offer services competitive with ours and with manufacturers and other companies
that have established or are seeking to establish coin-counting networks
competitive with ours. Many of the competitors have greater experience than we
do in operating in these international markets. Moreover, new products that we
intend to develop, such as those involving the Internet, may subject us to
competition from companies with significantly greater technological resources
and experience.
Many of our potential competitors have longer operating histories, greater
name recognition, larger customer bases and significantly greater financial,
technical, marketing and public relations resources than we have. These
competitors may be able to undertake more extensive marketing campaigns, adopt
more aggressive pricing policies and make more attractive offers to consumers
and businesses. Our competitors might succeed in developing technologies,
products or services that are more effective, less costly or more widely used
than those that have been or are being developed by us or that would render our
technologies or products obsolete or noncompetitive. We cannot be certain that
we will be able to compete effectively with current or future competitors.
Competitive pressures could seriously harm our business, financial condition and
results of operations and our ability to achieve sufficient cash flow to service
our indebtedness.
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<PAGE>
THE SUCCESS OF OUR POTENTIAL NEW SERVICES AND PRODUCTS IS UNCERTAIN
We have committed, and expect to continue to commit, significant resources
and capital to develop and market existing product and service enhancements and
new products and services such as through value-added services and promotions.
One example is Coinstar Shopper-TM-, which is a multifunction Internet portal.
These products and services are relatively untested, and we cannot assure you
that we will achieve market acceptance for these products and services, or other
new products and services. Moreover, these and other new products and services
may be subject to significant competition with offerings by potential
competitors in addition to companies that compete in our coin processing
business. Many of these potential competitors have significantly greater
technological expertise and financial and other resources than we do. In
addition, new products, services and enhancements may pose a variety of
technical challenges and require us to enhance the capabilities of our network
and attract additional qualified employees. The failure to develop and market
new products, services or enhancements successfully could seriously harm our
business, financial condition and results of operations and ability to achieve
sufficient cash flow to service our indebtedness.
OUR FAILURE TO MANAGE GROWTH COULD HARM OUR BUSINESS
We have experienced rapid growth and intend to continue to expand our
operations aggressively. The growth in the size and scale of our business has
placed, and we expect it will continue to place, significant demands on our
operational, administrative and financial personnel and operating systems. Our
additional planned expansion may further strain management and other resources.
Our ability to manage growth effectively will depend on our ability to improve
our operating systems, to expand, train and manage our employee base, to
identify additional manufacturing capacity and to develop additional service
capacity. In particular, we will be required to rapidly expand our operating
systems and processes in order to support the projected installations of
Coinstar units and the potential addition of value-added services. In addition,
we will be required to establish relationships with additional third-party
service providers. We may be unable to effectively manage the expansion of our
operations, to implement and develop our systems, procedures or controls, to
adequately support our operations or to achieve and manage the currently
projected installations. If we are unable to manage growth effectively, our
business, financial condition and results of operations and our ability to
achieve sufficient cash flow to service our indebtedness could be seriously
harmed.
OUR BUSINESS COULD BE HARMED BY A DISPUTE WITH OUR SUPPLIER
Our sole source of coin counter components has been Scan Coin, pursuant to
an agreement originally entered into in 1993 and subsequently amended. Scan Coin
claims that this agreement requires that only Scan Coin coin counters may be
used in Coinstar units. Additionally, Scan Coin claims that the agreement gives
ownership to Scan Coin of any improvements or developments to the coin counter.
We believe that Scan Coin has no claim on any of our intellectual property. On
September 8, 1998 Scan Coin informed us that we were in violation of the
original agreement and we had 30 days to correct the violation. Scan Coin also
restated its claim to our intellectual property. We responded on September 16,
1998 indicating that we rejected all claims made by Scan Coin in its letter. On
May 5, 1999 Scan Coin informed us that it was terminating the agreement. Scan
Coin also reiterated its claims to our intellectual property and stated that it
will seek full compensation for all damages suffered. We have not yet responded
to this letter. We will continue to attempt to settle this dispute amicably with
Scan Coin. However, even if it is determined that our use of the new
coin-counting technology violates the agreement, we believe that the amount of
damages to which Scan Coin would be entitled would not be material to our
business. Our evaluation of the amount of damages to which Scan Coin could be
entitled is subject to
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<PAGE>
significant uncertainty, and it is possible that we could be found to be liable
for damages that would be material to our business. We cannot be certain that we
will resolve the dispute with Scan Coin, nor can we assure you that if
litigation commences, we will prevail. Our failure to prevail in litigation may
result in a payment of monetary damages, the forfeiture of certain intellectual
property rights, or both. The occurrence of either event could seriously harm
our business, financial condition and results of operations and ability to
achieve sufficient cash flow to service our indebtedness.
Currently, coin counter devices supplied by Scan Coin are installed in most
commercially deployed Coinstar units. Replacement parts for the coin counter
devices installed in these units are supplied by Scan Coin. We believe, if all
pending parts orders from Scan Coin are received, that we will have enough parts
to meet our estimated demand through the end of 1999. However, we cannot be
certain that the dispute with Scan Coin, or Scan Coin's purported termination of
our agreement with them, will not affect Scan Coin's decision to fill such
orders or others in the future. We believe we can purchase many of these parts
from third party suppliers. However, we may not be able to source all necessary
parts from outside suppliers for the Scan Coin counters on a timely basis, if at
all. Our failure to secure necessary replacement parts on a timely basis may
result in a slowdown of installation or in machine downtime, either of which
could seriously harm our business, financial condition and results of operations
and ability to achieve sufficient cash flow to service our indebtedness.
WE DEPEND UPON THIRD-PARTY MANUFACTURERS AND SERVICE PROVIDERS
We do not conduct manufacturing operations and depend, and will continue to
depend, on outside parties for the manufacture of the Coinstar unit and its key
components. We intend to significantly expand our installed base, and such
expansion may be limited by the manufacturing capacity of our third-party
manufacturers and suppliers. Although we expect that our current contract
manufacturer, SeaMed Corporation, will be able to produce sufficient units to
meet projected demand, SeaMed or other manufacturers may not be able to meet our
manufacturing needs in a satisfactory and timely manner. If there is an
unanticipated increase in demand for Coinstar unit installations, we may be
unable to meet such demand due to manufacturing constraints. Although we have a
contract with SeaMed, SeaMed does not have a long-term obligation to continue
the manufacture of the Coinstar unit or its components. Further, SeaMed is
principally engaged in the manufacture of electronic medical instruments for
medical technology companies. We believe that we are SeaMed's only material
non-medical customer. As such, we face an increased risk that SeaMed may choose
to focus exclusively on manufacturing medical products and cease making our
products. Should SeaMed cease manufacturing Coinstar units, we would be required
to locate and qualify additional suppliers. We may be unable to locate alternate
manufacturers on a timely basis.
On March 16, 1999 SeaMed announced that it had entered into an agreement to
merge with Plexus Corp. of Neenah, Wisconsin. The merger is subject to
conditions, including shareholder approval. SeaMed's management has assured us
that the combined entity will be able to continue to meet our manufacturing
needs and that the merger will add additional capacity. However, we cannot be
certain that if the merger is completed, Plexus will continue to operate in
Redmond, Washington or be able to meet our manufacturing needs without
additional cost, or at all.
In addition, we obtain some key hardware components used in the Coinstar
units from sole source suppliers. We cannot be certain that we will be able to
continue to obtain an adequate supply of these components in a timely manner or,
if necessary, from alternative sources. If we are unable to obtain sufficient
quantities of components or to locate alternative sources of supply on a timely
basis, we may experience delays in installing or maintaining Coinstar units,
either of which could seriously harm our business, financial condition and
results of operations and ability to achieve sufficient cash flow to service our
indebtedness.
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<PAGE>
We rely on third-party service providers for substantial support and service
efforts that we currently do not provide directly. In particular, we contract
with armored carriers and other third party providers to arrange for pick-up,
processing and deposit of coins. We generally contract with one transportation
provider and coin processor to service a particular region. Many of these
service providers do not have long-standing relationships with us and our
contracts with them generally can be terminated by either party with advance
notice ranging from 30 to 90 days. We do not currently have nor do we expect to
have in the foreseeable future the internal capability to provide back up
service in the event of sudden disruption in service from an armored carrier
company. Any failure by us to maintain our existing relationships or to
establish new relationships on a timely basis or on acceptable terms would harm
our business, financial condition and results of operations and our ability to
achieve sufficient cash flow to service our indebtedness. Moreover, as with any
business that handles large volumes of cash, we are susceptible to theft,
counterfeit and other forms of fraud, including security breaches of our
computing system that performs important accounting functions. We cannot be
certain that we will be successful in developing product enhancements and new
services to thwart such attempts.
WE MAY BE UNABLE TO ADEQUATELY PROTECT OR ENFORCE OUR PATENTS AND PROPRIETARY
RIGHTS
Our future success depends, in part, on our ability to protect our
intellectual property and maintain the proprietary nature of our technology
through a combination of patents, licenses and other intellectual property
arrangements, without infringing the proprietary rights of third parties. We
have five issued patents relating to the removal of debris from coins processed
in a self-service environment and other aspects of self-service coin processing.
We cannot assure you that any of our patents will be held valid if
challenged, that any pending patent applications will issue, or that other
parties will not claim rights in or ownership of our patents and other
proprietary rights. Moreover, patents issued to us may be circumvented or fail
to provide adequate protection. Our competitors might independently develop or
patent technologies that are substantially equivalent or superior to our
technologies.
On June 18, 1997 we filed suit in the United States District Court, Northern
District of California against CoinBank Automated Systems, Inc., one of our
competitors, based on alleged infringement of one of our United States patents.
On June 27, 1997 CoinBank answered our patent infringement claim and
counterclaimed for declaration of non-infringement, invalidity and
unenforceability of this patent, and filed a claim for breach of warranty
against Scan Coin. The claim against Scan Coin has been dismissed by agreement
of the parties. On January 26, 1998 the court, in response to cross motions for
summary judgment filed by both parties, held that some of CoinBank's devices did
not infringe on the subject patent, and that there remained a question of fact
as to the infringement of other devices. On October 27, 1998 we added our most
recently issued patent to the pending litigation by agreement of the parties. We
cannot assure you that we will prevail in our patent infringement claim against
CoinBank or on any claim that may be filed by CoinBank against us or, that as a
result of the patent infringement claim, our patents will not be limited in
scope or found to be invalid.
Since patent applications in the United States are not publicly disclosed
until the patent is issued, applications may have been filed by others which, if
issued as patents, could cover our products. We cannot be certain that others
will not assert patent infringement claims or claims of misappropriation against
us based on patents, copyrights or trade secrets or that such claims will not be
successful. In addition, defending our company and our retail partners against
these types of claims, regardless of their merits, could require us to incur
substantial costs and divert the attention of key personnel. Parties making
these types of claims may be able to obtain injunctive or other equitable relief
which could effectively block our ability to provide our coin processing service
and use our processing equipment in the United States and abroad, and could
result in an award
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<PAGE>
of substantial damages. In the event of a successful claim of infringement, we
may need or be required to obtain one or more licenses from, as well as grant
one or more licenses to, others. We cannot assure you that we could obtain
necessary licenses from others at a reasonable cost or at all.
We also rely on trade secrets to develop and maintain our competitive
position. Although we protect our proprietary technology in part by
confidentiality agreements with our employees, consultants and corporate
partners, we cannot assure you that these agreements will not be breached, that
we will have adequate remedies for any breach or that our trade secrets will not
otherwise become known or be discovered independently by our competitors. The
failure to protect our intellectual property rights effectively or to avoid
infringing the intellectual property rights of others could seriously harm our
business, financial condition and results of operations and ability to achieve
sufficient cash flow to service our indebtedness.
THERE ARE MANY RISKS ASSOCIATED WITH DOING BUSINESS IN INTERNATIONAL MARKETS
We intend to increase our deployment of Coinstar units in select
international markets. We have only recently begun to expand our business
internationally through limited trials in the United Kingdom and Canada and,
accordingly, have limited experience in operating in international markets. We
anticipate that our international operations will become increasingly
significant to our business. International transactions pose a number of risks,
including:
- failure of customer acceptance,
- risks of regulatory delays or disapprovals with respect to our products
and services,
- competition from potential and current coin-counting businesses,
- exposure to exchange rate risks,
- restrictions on the repatriation of funds,
- political instability,
- adverse changes in tax, tariff and trade regulations,
- difficulties with foreign distributors,
- difficulties in managing an organization spread over several countries,
and
- weaker legal protection for intellectual property rights.
These risks could seriously harm our business, financial condition, results
of operations and ability to achieve sufficient cash flow to service our
indebtedness.
Our expansion into Europe will present challenges different from those faced
in the United States. We expect to face greater competition than currently is
the case in the United States because banks in Europe typically offer
coin-counting services to their customers and most of the world's self-service
coin-counting machine manufacturers are located in Europe. Some of these
manufacturers have been involved in attempts to set up networks similar to ours.
In addition, local laws and market conditions may require us to change our fee
structure. We also will face a number of technical challenges as we attempt to
expand into Europe. In several areas, close national borders may require that
our units be able to handle as many as six different national coin sets, as well
as the new Euro coin. Supermarkets in Europe tend to be smaller than those in
the United States. Because of this, floor space is more of an issue than in the
typical supermarket in the United States. As a result, it may be necessary for
us to reduce the size of our unit to succeed in Europe. Reducing our unit size
could present technical challenges, and the smaller capacity that might result
from a smaller unit could increase operating costs in servicing the units. Many
local
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laws do not permit stores to be operated on a 24-hour, seven day per week basis.
This could reduce volumes and present challenges in our servicing of the units.
We also expect to face higher telecommunications costs in Europe than in the
United States, and a European network may need to make extensive use of cellular
communications.
WE DEPEND UPON KEY PERSONNEL AND NEED TO HIRE ADDITIONAL PERSONNEL
Our performance is substantially dependent on the continued services of our
executive officers and key employees, all of whom we employ on an at-will basis.
Our long-term success will depend on our ability to recruit, retain and motivate
highly skilled personnel. Competition for such personnel is intense. We have at
times experienced difficulties in recruiting qualified personnel, and we may
experience difficulties in the future. The inability to attract and retain
necessary technical and managerial personnel could seriously harm our business,
financial condition and results of operations and our ability to achieve
sufficient cash flow to service our indebtedness. Currently, we maintain a "key
man" life insurance policy on our chairman and chief executive officer, Jens
Molbak, in the amount of $2.0 million. See "Management--Executive Officers,
Directors and Key Employees".
DEFECTS IN OR FAILURES OF OUR OPERATING SYSTEM COULD HARM OUR BUSINESS
We collect financial and operating data, and monitor performance of Coinstar
units, through a wide-area communications network connecting each of the
Coinstar units with a central computing system at our headquarters. This
information is used to track the flow of coins, verify coin counts and schedule
the dispatch unit service and coin pickup. The operation of Coinstar units
depends on sophisticated software, computing systems and communication services
that may contain undetected errors or may be subject to failures. These errors
may arise particularly when new services or service enhancements are added or
when the volume of services provided increases. Although each Coinstar unit is
designed to store all data collected, thereby helping to ensure that critical
data is not lost due to an operating systems failure, our inability to collect
the data from our Coinstar units could lead to a delay in processing coins and
crediting the accounts of our retail partners for vouchers already redeemed. The
design of the operating systems to prevent loss of data may not operate as
intended. Any loss or delay in collecting coin processing data would seriously
harm our operations.
We have in the past experienced limited delays and disruptions resulting
from upgrading or improving our operating systems. Although such disruptions
have not had a material effect on our operations, future upgrades or
improvements could result in delays or disruptions that would seriously harm our
operations. In particular, we are currently planning some significant
improvements in our operating platform in order to support our projected
expansion of the installed base of Coinstar units and the potential addition of
value-added services. While we are taking steps to ensure that the potential
adverse impact of such improvements on our operations is minimized, we cannot be
certain that the platform will be able to handle the increased volume of
services expected from the continued expansion of our network and the potential
addition of value-added services or that the improvements will occur on a timely
basis so as not to disrupt such continued expansion and potential addition of
value-added services.
The communications network on which we rely is not owned by us and is
subject to service disruptions. Further, while we have taken significant steps
to protect the security of our network, any breach of security whether
intentional or from a computer virus could seriously harm us. Any service
disruptions, either due to errors or delays in our software or computing systems
or interruptions or breaches in the communications network, or security breaches
of the system, could seriously harm our business, financial condition and
results of operations and ability to achieve sufficient cash flow to service our
indebtedness.
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<PAGE>
WE MUST KEEP PACE WITH RAPID TECHNOLOGICAL CHANGES TO REMAIN COMPETITIVE
The self-service coin processing market is relatively new and evolving. We
anticipate that, as the market matures, it will be subject to technological
change, new services and product enhancements, particularly as we expand our
service offerings. Accordingly, our success may depend in part upon our ability
keep pace with continuing changes in technology and consumer preferences while
remaining price competitive. Our failure to develop technological improvements
or to adapt our products and services to technological change on a timely basis
could, over time, seriously harm our business, financial condition and results
of operations and our ability to achieve sufficient cash flow to service our
indebtedness.
OUR STOCK PRICE HAS BEEN AND MAY CONTINUE TO BE VOLATILE
Our Common Stock price has fluctuated substantially since our initial public
offering in July 1997. The market price of our Common Stock could decline from
current levels or continue to fluctuate. The market price of our Common Stock
may be significantly affected by the following factors:
- announcements of technological innovations or new products or services by
us or our competitors,
- trends and fluctuations in use of Coinstar units,
- the termination of one or more retail distribution contracts,
- timing of installations relative to financial reporting periods,
- release of reports,
- operating results below market expectations,
- changes in, or our failure to meet, financial estimates by securities
analysts,
- industry developments,
- market acceptance of the Coinstar service by retail partners and
consumers,
- economic and other external factors, and
- period-to-period fluctuations in our financial results.
In addition, the securities markets have from time to time experienced
significant price and volume fluctuations that are unrelated to the operating
performance of particular companies. These market fluctuations may also
materially and adversely affect the market price of our common stock.
OUR BUSINESS COULD BE HARMED BY YEAR 2000 COMPLIANCE ISSUES
Many currently installed computer systems and software programs were
designed to use only a two-digit date field. These date code fields will need to
accept four digit entries to distinguish 21st century dates from 20th century
dates. Until the date fields are updated, the systems and programs could fail or
give erroneous results when referencing dates following December 31, 1999. Such
failure or errors could occur prior to the actual change in century. We rely on
computer applications for our coin processing machines and to manage and monitor
our accounting and administrative functions. Such failure or malfunction could
cause disruptions of operations, including among other things a temporary
inability to process transactions or engage in normal business activities. In
addition, our retail partners, suppliers and service providers, including
financial institutions, rely upon computer applications, some of which may
contain software that may fail or give erroneous results as a result of the
upcoming change in century, with respect to functions that materially affect
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their interactions with us. While we do not believe our computer systems or
applications currently in use will be harmed by the upcoming change in century,
we have not completed our assessment as to whether any of our retail partners,
suppliers or service providers will be so affected. Failure or malfunction of
our software or that of our retail partners, suppliers or service providers
could seriously harm our business, financial condition and results of operations
and on our ability to achieve sufficient cash flow to service to our
indebtedness. We have not yet fully developed a contingency plan to address
situations that may result if we are unable to achieve Year 2000 readiness of
our critical operations. The cost of developing and implementing such a plan may
itself be significant.
WE DO NOT INTEND TO PAY DIVIDENDS IN THE FORESEEABLE FUTURE
We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain any future earnings for funding growth and,
therefore, do not expect to pay any dividends in the foreseeable future. See
"Dividend Policy".
SOME ANTI-TAKEOVER PROVISIONS MAY AFFECT THE PRICE OF OUR COMMON STOCK
Provisions of our certificate of incorporation, bylaws and rights plan and
of Delaware law could make it more difficult for a third party to acquire us,
even if doing so would be beneficial to our stockholders.
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FORWARD-LOOKING STATEMENTS
This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). Any statements
contained herein (including without limitation statements to the effect that we
or our management "believes", "expects", "anticipates", "plans" and similar
expressions) that are not statements of historical fact should be considered
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements as a result of many different
factors, including those set forth in the "Risk Factors" section. Reference is
also made to the particular discussions set forth under "Management's Discussion
and Analysis of Financial Condition and Results of Operations".
USE OF PROCEEDS
We estimate that the net proceeds from our sale of 4,000,000 shares of
common stock at an assumed initial price to public of $19.75 per share will be
approximately $74.2 million, after deducting the underwriting discount and
estimated offering expenses that we will pay, or $85.4 million if the
underwriters' option to purchase additional shares in the offering is exercised
in full.
We intend to use the net proceeds from this offering to invest in the
expansion of our networks in the United States, to support our planned expansion
internationally, to develop and market new products and product enhancements,
for working capital, capital expenditures and general corporate purposes. We may
also use a portion of the net proceeds to acquire or invest in businesses,
technologies, products or services that are complementary to our business. We
have no present plans or commitments and are not currently engaged in any
negotiations with respect to such transactions that are material. Pending such
uses, we intend to invest the net proceeds from this offering in short-term,
interest-bearing, investment grade securities.
PRICE RANGE OF COMMON STOCK
Our common stock has been quoted on the Nasdaq National Market under the
symbol "CSTR" since our initial public offering on July 2, 1997. Prior to that
time, there was no public market for our common stock. The following table sets
forth, for the periods indicated, the high and low closing bid prices per share
of our common stock, as reported on the Nasdaq National Market since our initial
public offering.
<TABLE>
<CAPTION>
HIGH LOW
-------- ----------
<S> <C> <C>
1997
Third Quarter (beginning July 3,
1997)............................... $ 14 1/8 $ 9 7/8
Fourth Quarter........................ 12 7/8 8 1/16
1998
First Quarter......................... 9 1/8 8
Second Quarter........................ 9 7/8 6 1/2
Third Quarter......................... 9 3/4 4 3/4
Fourth Quarter........................ 10 3/4 5 5/16
1999
First Quarter......................... 17 3/4 9 11/16
Second Quarter (through May 20,
1999)............................... 23 1/2 15
</TABLE>
Bid prices for the Nasdaq National Market reflect inter-dealer prices, do
not include retail mark-ups, mark-downs and commissions and do not necessarily
reflect actual transactions.
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As of March 31, 1999, there were approximately 213 stockholders of record of
our common stock. On May 20, 1999, the last reported sale price of our common
stock on the Nasdaq National Market was $20 1/8 per share.
DIVIDEND POLICY
We have never paid any dividends and do not anticipate declaring or paying
cash dividends in the foreseeable future. We intend to retain future earnings,
if any, to reinvest in our business and repay indebtedness. Instruments
governing certain of our debt restrict our ability to pay dividends. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources".
DILUTION
Our net tangible book value as of March 31, 1999 was approximately $(25.8)
million or $(1.67) per share of common stock. Net tangible book value per share
represents the amount of total tangible assets less total liabilities, divided
by the shares of common stock outstanding as of March 31, 1999.
Our pro forma net tangible book value as of March 31, 1999, would have been
$48.4 million, or $2.49 per share, after giving effect to the issuance and sale
of the 4,000,000 shares of common stock offered by Coinstar at an assumed
initial price to public of $19.75 per share, after deducting estimated
underwriting discounts and commissions and estimated offering expenses payable
by Coinstar. This represents an immediate increase in pro forma net tangible
book value per share of $4.16 to existing stockholders and an immediate dilution
per share of $17.26 to new investors. The following table illustrates this per
share dilution:
<TABLE>
<S> <C> <C>
Assumed initial price to public............................ $ 19.75
-----------
Net tangible book value before the offering.............. $ (1.67)
-----------
Increase in pro forma net tangible book value
attributable to net proceeds from the offering......... 4.16
-----------
Pro forma net tangible book value per share after the
offering................................................. 2.49
-----------
Dilution to new investors.................................. $ 17.26
-----------
-----------
</TABLE>
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CAPITALIZATION
The following table shows our capitalization as of March 31, 1999, on an
actual basis, and as adjusted basis to reflect our sale of 4,000,000 shares of
common stock at an assumed initial price to public of $19.75 per share, after
deducting the underwriting discounts and estimated offering expenses that we
will pay.
<TABLE>
<CAPTION>
MARCH 31, 1999
-----------------------
ACTUAL AS ADJUSTED
--------- ------------
(IN THOUSANDS)
<S> <C> <C>
Debt:
Senior Subordinated Discount Notes Due 2006...................... $ 88,435 $ 88,435
Other long term obligations, including current portion........... 1,505 1,505
--------- ------------
Total debt, including current portion............................ 89,941 89,941
--------- ------------
--------- ------------
Stockholders' equity:
Preferred Stock, $0.001 par value, 5,000,000 shares authorized,
no shares issued and outstanding............................... -- --
Common Stock, $0.001 par value, 45,000,000 shares authorized,
15,441,611 shares issued and outstanding actual; 19,441,611
shares issued and outstanding as adjusted(1)................... 62,531 136,686
Contributed capital for warrants................................... 1,347 1,347
Accumulated other comprehensive income............................. (3) (3)
Accumulated deficit................................................ (86,948) (86,948)
--------- ------------
Total stockholders' equity....................................... (23,073) 51,082
--------- ------------
Total capitalization........................................... $ 66,868 $ 141,023
--------- ------------
--------- ------------
</TABLE>
- -------------
(1) Excludes 3,606,565 shares of common stock reserved for issuance under our
stock option and stock purchase plans, 2,129,531 shares of which were
subject to outstanding options as of March 31, 1999 at a weighted average
exercise price of $8.96 per share and 980,000 shares of which are subject to
stockholder approval. Also excludes 1,076,883 shares of common stock
reserved for issuance upon exercise of outstanding warrants at a weighted
average exercise price of $13.35 as of March 31, 1999. See Notes 6, 8 and 9
of Notes to Consolidated Financial Statements.
22
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with, and are qualified by reference to, the Consolidated Financial
Statements and Notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere in this
prospectus. The consolidated statement of operations data for the years ended
December 31, 1996, 1997 and 1998 and the consolidated balance sheet data at
December 31, 1997 and 1998, are derived from, and are qualified by reference to,
our audited consolidated financial statements and notes thereto included
elsewhere in this prospectus. The financial data as of and for the periods ended
March 31, 1998 and 1999 are unaudited, but have been prepared on a basis
consistent with our audited consolidated financial statements and the notes
thereto and include all adjustments (constituting only normal recurring
adjustments) which we considered necessary for a fair presentation of the
information. The results of operations for the three months ended March 31, 1999
are not necessarily indicative of results to be expected for the year or any
future periods.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE, UNIT AND PER UNIT
DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenue................................................... $ 8,312 $ 25,007 $ 47,674 $ 8,823 $ 15,791
Expenses:
Direct operating........................................ 7,258 17,899 26,565 5,823 7,939
Regional sales and marketing............................ 1,505 3,088 3,778 917 1,318
Product research and development........................ 3,969 6,362 4,744 1,410 940
Selling, general and administrative..................... 5,351 11,079 14,112 3,276 3,381
Depreciation and amortization........................... 4,134 8,679 13,237 2,813 4,103
--------- --------- --------- --------- ---------
Loss from operations...................................... (13,906) (22,100) (14,762) (5,416) (1,890)
Other income (expense):
Interest income......................................... 848 2,328 1,367 501 163
Interest expense........................................ (2,661) (9,822) (10,817) (2,571) (2,851)
Other income............................................ -- -- 240 39 44
--------- --------- --------- --------- ---------
Net loss before extraordinary item........................ (15,719) (29,593) (23,973) (7,447) (4,534)
Extraordinary item loss related to early retirement of
debt.................................................... (249) -- -- -- --
Net loss.................................................. $ (15,967) $ (29,593) $ (23,973) $ (7,447) $ (4,534)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Loss per share before extraordinary item, basic and
diluted(1).............................................. $ (20.06) $ (3.81) $ (1.58) $ (0.49) $ (0.30)
Extraordinary item per share, basic and diluted(1)........ (0.31) -- -- -- --
Loss per share, basic and diluted(1)...................... $ (20.37) $ (3.81) $ (1.58) $ (0.49) $ (0.30)
Weighted average shares outstanding(1).................... 784 7,761 15,150 15,080 15,358
OTHER DATA:
Number of new Coinstar units installed during the
period.................................................. 1,238 1,703 1,609 327 428
Installed base of Coinstar units at end of the period..... 1,501 3,204 4,813 3,531 5,241
Average age of network for the period (months)............ 6.5 10.0 15.5 13.4 19.2
Number of regional markets................................ 23 40 58 42 64
Value of coins processed.................................. $ 115,476 $ 332,526 $ 623,258 $ 117,298 $ 177,248
Direct contribution(2).................................... 1,054 7,108 21,109 3,000 7,852
Direct contribution margin(2)(3).......................... 12.7% 28.4% 44.3% 40.0% 49.7%
EBITDA(4)................................................. $ (9,771) $ (13,421) $ (1,525) $ (2,603) $ 2,213
Annualized revenue per average installed unit(5).......... 9,860 10,709 11,893 10,597 12,699
Annualized direct contribution per average installed
unit(2)(5).............................................. 1,250 3,044 5,281 3,601 6,331
International development costs(6)........................ -- -- 369 28 275
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------------- -----------
1996 1997 1998 1999
--------- --------- --------- -----------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments(7).................. $ 56,310 $ 56,803 $ 41,871 $ 39,964
Total assets.......................................................... 82,531 103,546 98,833 99,285
Long-term debt and capital lease obligations, including current
portion............................................................. 70,065 78,945 88,056 89,941
Mandatorily redeemable preferred stock................................ 24,972 -- -- --
Paid in capital(8).................................................... 6,871 61,553 62,372 63,878
Total stockholders' equity (deficit).................................. $ (21,976) $ 3,109 $ (20,039) $ (23,073)
</TABLE>
23
<PAGE>
- -------------
(1) See Note 9 of Notes to Consolidated Financial Statements for an explanation
of the determination of the number of shares used in computing loss per
share information, basic and diluted.
(2) Direct contribution is defined as revenue less direct operating expenses. We
use direct contribution as a measure of operating performance to assist in
understanding our operating results. Direct contribution is not a measure of
financial performance under Generally Accepted Accounting Principles
("GAAP") and should not be considered in isolation or as an alternative to
gross margin, income (loss) from operations, net income (loss), or any other
measure of performance under GAAP.
(3) Direct contribution margin is defined as direct contribution divided by
revenue.
(4) EBITDA represents earnings before interest expense, income taxes,
depreciation, amortization and other income/ expense. EBITDA is not a
measure of financial performance under GAAP and should not be considered in
isolation or as an alternative to net income or cash flow from operations as
determined by GAAP. We believe that EBITDA provides useful information
regarding a company's ability to service and/or incur indebtedness.
(5) Based on revenue or direct contribution (annualized in the case of the three
month period ended March 31, 1998 and 1999) divided by monthly averages of
units in operation over the applicable period.
(6) International development costs represent the costs incurred by Coinstar
International Inc., our wholly owned subsidiary, related to the exploration
of our international expansion. All costs related to international
development (such as market research and travel) are expensed as incurred in
accordance with the American Institute of Certified Public Accountants
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities",
issued on April 3, 1998.
(7) Cash, cash equivalents and short-term investments include funds in transit,
which represent amounts being processed by armored cash carriers or residing
in Coinstar units of $21.5 million at March 31, 1999 and $21.8 million,
$14.2 million and $5.5 million at December 31, 1998, 1997, and 1996. Funds
in transit prior to such dates are negligible.
(8) Paid in capital consists of paid in capital for common stock and contributed
capital for warrants.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We are the first and only company to provide a national network of
self-service coin-counting machines that provides consumers with a convenient
and reliable means of converting accumulated change into cash. Through our
partnerships with approximately 150 retailers, we currently operate more than
5,400 Coinstar units in approximately 65 regional markets across the United
States. Since inception, our network has counted and processed more than 44
million customer transactions worth over $1.3 billion. Since January 1, 1996, we
have installed an average of 1,517 Coinstar units every year.
We currently derive substantially all our revenue from coin processing
services generated by our installed base of Coinstar units located in
supermarket chains in 38 states across the United States. We generate revenue
based on a processing fee charged on the total dollar amount of coins processed
in a transaction. In December 1998, we changed this processing fee at most
locations to 8.9% from the previous rate of 7.5%. Coin processing fee revenue is
recognized at the time the customers' coins are counted by the Coinstar unit.
Overall revenue growth is dependent on both the rate of new installations and
the growth in coin processing volumes of our installed base. Our experience to
date is that coin processing volumes per unit have generally increased with the
length of time the unit is in operation as trial levels of the service increase,
driving initial trial and repeat usage for the service. We believe that coin
processing volumes per unit may also be affected by other factors such as public
relations, advertising and other activities that promote trials of the units, as
well as the amount of consumer traffic in the stores in which the units are
located and seasonality. Given our limited operating history, there can be no
assurance, however, that unit volumes will continue to increase as a function of
the time the unit is in operation, or that unit volumes will be affected by such
other factors. We expect that as we continue to aggressively expand
installations relative to the size of our installed base, the average revenue
per unit may decrease even as the per unit dollar volume of more mature units
increases.
We established a wholly-owned subsidiary, Coinstar International, Inc., in
March 1998 to explore expanding our operations internationally. At the present
time, Coinstar International is piloting an eight store test in Canada to
determine the viability of the Canadian market for our services and is piloting
eight Coinstar units in the United Kingdom. In addition, Coinstar International
is investigating the viability of our services in certain European countries. We
have also established a wholly-owed subsidiary, MyShoppinglist.com, Inc., in
December 1998 to explore the development and deployment of electronic commerce
technology, including Coinstar Shopper.
Direct operating expenses are comprised of the regional expenses associated
with Coinstar unit operations and support and consist primarily of coin pickup
and processing, field operations support and related expenses, retail operations
support and the amount of our service fee that we share with our retail
partners. Coin pickup and processing costs, which represent a major portion of
direct operating expenses, vary based on the level of total coin processing
volume and the density of the units within a region. We believe that while coin
pickup and processing costs are variable based on units in service and coin
volume generated, economies related to these direct expense components can be
achieved through increasing the density of units in operation in regional
markets. Field service operations and related expenses vary depending on the
number of geographic regions in which Coinstar units are located and the density
of the units within a region. Regional sales and marketing expenses are
comprised of ongoing marketing, advertising and public relations efforts in
existing market regions and startup marketing expenses incurred to launch our
services in new regional markets. Product research and development expense
consists of the development costs of the Coinstar unit software, network
applications, Coinstar unit improvements
25
<PAGE>
and new product development. Selling, general and administrative expenses are
comprised of management compensation, administrative support for field
operations, the customer service center, sales and marketing support, systems
and engineering support, computer network operations, accounting, human
resources and occupancy expenses. Depreciation and amortization consists
primarily of depreciation charges on Coinstar units and, to a lesser extent,
depreciation on furniture and fixtures, automobiles, computer equipment and
amortization of intangibles. Other income consists of rental income from a
sublease of unused office space.
Since 1995, we have devoted significant resources to building a sales and
marketing organization, adding administrative personnel and developing the
network systems and infrastructure to support the rapid growth of our installed
base of Coinstar units. The cost of this expansion and the significant
depreciation expense of our installed network have resulted in significant
operating losses to date and an accumulated stockholders' deficit of $86.9
million as of March 31, 1999. We expect to continue to evaluate new marketing
and promotional programs to increase the breadth and rate of customer
utilization of our service and to engage in systems and product research and
development. We expect these expenses will negatively impact our operating
results. We believe that our future revenue growth, operating margin gains and
profitability will be dependent upon the penetration of our installed base with
retail partners in existing markets, expansion and penetration of installations
in new market regions and successful ongoing marketing and promotional
activities to sustain the growth in unit coin volume over time. Given our
limited operating history, unpredictability of the timing of installations with
retail partners and the resulting revenues, and the continued market acceptance
of our service by consumers and retail partners, our operating results for any
quarter are subject to significant variation, and we believe that
period-to-period comparisons of our results of operations are not necessarily
meaningful and should not be relied upon as indications of future performance.
26
<PAGE>
RESULTS OF OPERATIONS
The following table shows revenue and expense as a percent of revenue for
the periods presented:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Revenue..................................................... 100.0% 100.0% 100.0%
Expenses:
Direct operating.......................................... 87.3 71.6 55.7
Regional sales and marketing.............................. 18.1 12.3 7.9
Product research and development.......................... 47.8 25.4 10.0
Selling, general, and administrative...................... 64.4 44.3 29.6
Depreciation and amortization............................. 49.7 34.7 27.8
------ ------ ------
Loss from operations........................................ (167.3)% (88.4)% (31.0)%
------ ------ ------
------ ------ ------
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
---------------
1998 1999
------ ------
<S> <C> <C>
Revenue..................................................... 100.0% 100.0%
Expenses:
Direct operating.......................................... 66.0 50.3
Regional sales and marketing.............................. 10.4 8.3
Product research and development.......................... 16.0 6.0
Selling, general, and administrative...................... 37.1 21.4
Depreciation and amortization............................. 31.9 26.0
------ ------
Loss from operations........................................ (61.4)% (12.0)%
------ ------
------ ------
</TABLE>
THREE MONTHS ENDED MARCH 31, 1998 AND 1999
REVENUE
Revenue increased by 79.5% to $15.8 million for the quarter ended March 31,
1999 from $8.8 million in the comparable 1998 period. The increase was due to
(1) the increase in the number of Coinstar units in service during the 1999
period, (2) the increase in the volume of coins processed by the units in
service during this period, and (3) the increase in the service fee from 7.5% to
8.9% in December 1998. The installed base of Coinstar units increased to 5,241
as of March 31, 1999 from 3,531 units as of March 31, 1998. The dollar value of
coins processed increased to $177.2 million during the quarter ended March 31,
1999 from $117.3 million in the comparable 1998 period.
DIRECT OPERATING EXPENSES
Direct operating expenses increased to $7.9 million for the quarter ended
March 31, 1999 from $5.8 million in the comparable 1998 period. The increase in
direct operating expenses was primarily attributable to (1) an increase in
retailer revenue sharing resulting from an increase in December 1999 of the
amount of our service fee that we share with our retail partners, and (2) the
increase in field service personnel and direct support expenses associated with
our growth and expansion into six new regional markets. Direct operating
expenses as a percentage of revenue
27
<PAGE>
decreased to 50.3% in the quarter ended March 31, 1999 from 66.0% in the
comparable 1998 period. The decrease in direct operating expenses as a
percentage of revenue was the result of (1) the realization of coin pickup and
processing cost economies from increased regional densities and utilization of
cheaper, more efficient coin pick-up methods, and (2) the decline in field
service expenses per unit as a percentage of revenue brought about by our
increased density in our existing markets.
REGIONAL SALES AND MARKETING
Regional sales and marketing expenses increased to $1.3 million for the
quarter ended March 31, 1999 from $917,000 in the comparable 1998 period. The
increase in regional marketing expense was the result of an increased level of
radio and television advertising in selected markets, offset partially by a
decrease in new market launches and promotional activity. Regional sales and
marketing as a percentage of revenue decreased to 8.3% in the quarter ended
March 31, 1999 from 10.4% in the comparable 1998 period. The decrease in
regional sales and marketing as a percentage of revenue was the result of (1)
increasing volumes processed by the network, and (2) lower advertising costs per
unit as we increase the density of units within a region.
PRODUCT RESEARCH AND DEVELOPMENT
Product research and development expenses decreased to $940,000 for the
quarter ended March 31, 1999 from $1.4 million in the comparable 1998 period.
The decrease in product research and development costs reflects the decrease in
expenditures associated with the completion of the development of the new
coin-counting technology and the completion of our new operating system. Product
research and development as a percentage of revenue decreased to 6.0% in the
quarter ended March 31, 1999 from 16.0% in the comparable 1998 period. While we
currently expense all product research and development costs, a portion, related
to internally developed software, may be capitalized in the future.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased to $3.4 million for
the quarter ended March 31, 1999 from $3.3 million in the comparable 1998
period. Selling, general and administrative as a percentage of revenue decreased
to 21.4.% in the quarter ended March 31, 1999 from 37.1% in the comparable 1998
period. The decrease in selling, general, and administrative as a percentage of
revenue was the result of (1) increasing volumes processed by the network
combined with (2) the realization of improved operating efficiencies.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expenses increased to $4.1 million for the
quarter ended March 31, 1999 from $2.8 million in the comparable 1998 period.
The increase was primarily due to the increase in the installed base of Coinstar
units during these periods. Depreciation and amortization as a percentage of
revenue decreased to 26.0% in the quarter ended March 31, 1999 from 31.9% in the
comparable 1998 period. During the quarter, we wrote off certain obsolete
equipment resulting in a one time charge of $68,000 during the period. The
decrease in depreciation and amortization as a percentage of revenue was the
result of increasing volumes processed through the network. We expect
depreciation and amortization expense to increase significantly over the next
several years as a result of expected increases in the installation of Coinstar
units.
28
<PAGE>
OTHER INCOME AND EXPENSE
We generated other income of $42,000 for the quarter ended March 31, 1999
due to the subleasing of excess office space. On March 12, 1999 this third party
lessor announced that it was suspending its operations and vacated the space as
of March 31, 1999. We are currently evaluating alternative subleasing
arrangements. However, we believe that this event will not have a material
adverse impact on our results of operations. The sublease expires January 31,
2000.
Interest income decreased to $163,000 for the quarter ended March 31, 1999
from $501,000 in the comparable 1998 period. The decrease in interest income is
attributed to a reduction in invested cash balances resulting from the sale of
certain short-term investments to finance the installation of Coinstar units
during the period.
Interest expense increased to $2.9 million for the quarter ended March 31,
1999 from $2.6 million in the comparable 1998 period. The increase was primarily
due to the accretion of the Notes. No cash interest payments are due on the
Notes until April 2000.
NET LOSS
Net loss decreased to $4.5 million for the three month quarter ended March
31, 1999 from $7.4 million in the comparable 1997 period. The decrease in the
net loss was primarily due to an increase in our direct contribution (i.e.,
revenue minus direct operating expenses) combined with a reduction in the rate
of growth of expenses. As a result, the reduction in net loss reflects the
operating leverage of the Coinstar network resulting from the relatively fixed
nature of a number of our costs. In the longer term, we expect that we will not
be required to add as much infrastructure as we have in the past to support our
installed base and as a result expect to achieve profitability as our revenue
from our larger base of installed units grows proportionately faster than our
expenses. There can be no assurance, however, that we will install a sufficient
number of units or obtain sufficient market acceptance to allow us to achieve or
sustain profitability.
YEARS ENDED DECEMBER 31, 1997 AND 1998
REVENUE
Revenue increased by 90.8% to $47.7 million in 1998 from $25.0 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 4,813 as of December 31, 1998 from
3,204 units as of December 31, 1997. The dollar value of coins processed
increased to $623.3 million during the 1998 period from $332.5 million in the
comparable 1997 period.
DIRECT OPERATING EXPENSES
Direct operating expenses increased to $26.6 million in 1998 from $17.9
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 our growth and our expansion into 18 new
regional markets as of December 31, 1998. Direct operating expenses as a
percentage of revenue decreased to 55.7% in the 1998 period from 71.6% in the
comparable 1997 period. The decrease in direct operating expenses as a
percentage of revenue was the result of (1) the realization of coin pickup and
processing cost economies from regional densities and utilization of cheaper,
more
29
<PAGE>
efficient coin pick-up methods, and (2) a decline in field service expenses per
unit as a percentage of revenue brought about by our increased density in our
existing markets.
REGIONAL SALES AND MARKETING. Regional sales and marketing expenses
increased to $3.8 million in 1998 from $3.1 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. Regional sales and marketing as a
percentage of revenue decreased to 7.9% in the 1998 period from 12.3% in the
comparable 1997 period. The decrease in regional sales and marketing as a
percentage of revenue was the result of (1) increasing volumes processed by the
network, and (2) lower advertising costs per unit as we increased the density of
units within a region.
PRODUCT RESEARCH AND DEVELOPMENT. Product research and development expenses
decreased to $4.7 million in 1998 from $6.4 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 and the completion of our new operating system.
Product research and development as a percentage of revenue decreased to 10.0%
in the 1998 period from 12.3% in the comparable 1997 period.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased to $14.1 million in 1998 from $11.1 million in the comparable
1997 period. The principal component of such expenses was employee compensation.
The period-to-period increase primarily reflects an investment in higher
staffing levels to support our rapid growth and expansion. Selling, general and
administrative as a percentage of revenue decreased to 29.6% in the 1998 period
from 44.3% in the comparable 1997 period. The decrease in selling, general, and
administrative as a percentage of revenue was the result of (1) increasing
volumes processed by the network combined with (2) the realization of improved
operating efficiencies.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
increased to $13.2 million in 1998 from $8.7 million in the comparable 1997
period. The increase was primarily due to the increase in the installed base of
Coinstar units during these periods. Depreciation and amortization as a
percentage of revenue decreased to 27.8% in the 1998 period from 34.7% in the
comparable 1997 period. The decrease in depreciation and amortization as a
percentage of revenue was the result of increasing volumes processed through the
network.
OTHER INCOME AND EXPENSE
We generated other income of $240,000 in 1998 due to the subleasing of
excess office space.
Interest income decreased to $1.4 million in 1998 from $2.3 million in the
comparable 1997 period. The decrease in interest income resulted from 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 $10.8 million in 1998 from $9.8 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 $24.0 million in 1998 from $29.6 million in the
comparable 1997 period. The decrease in the net loss was primarily due to an
increase in our direct contribution combined with a reduction in the rate of
growth of expenses, reflecting the operating leverage of the Coinstar network.
In the longer term, we expect that we will not be required to add as much
infrastructure as
30
<PAGE>
we have in the past to support our installed base and as a result expect to
achieve profitability as our revenue from our larger base of installed units
grows proportionately faster than our expenses. There can be no assurance,
however, that we will install a sufficient number of units or obtain sufficient
market acceptance to allow us to achieve or sustain profitability.
YEARS ENDED DECEMBER 31, 1996 AND 1997
REVENUE
Revenue increased by 201.2% to $25.0 million in 1997 from $8.3 million in
1996. The increase was due principally to the increase in the number of Coinstar
units in service during 1997 and the increase in the volume of coins processed
by the units in service during that year. The installed base of Coinstar units
increased to 3,204 as of December 31, 1997 from 1,501 units as of December 31,
1996. The dollar value of coins processed increased to $332.5 million during
1997 from $115.5 million in 1996.
DIRECT OPERATING EXPENSES
Direct operating expenses increased to $17.9 million in 1997 from $7.3
million in 1996. 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 our accelerated growth and our expansion into 17
new regional markets in 1997. Direct operating expenses as a percentage of
revenue decreased to 71.6% in 1997 from 87.3% in 1996. Direct operating expenses
declined as a percentage of revenue due to (1) realization of coin pickup and
processing cost economies from increased regional densities and (2) the decline
in field service expenses per unit as a percentage of revenue brought about by
our increased density in our existing markets.
REGIONAL SALES AND MARKETING. Regional sales and marketing expenses
increased to $3.1 million in 1997 from $1.5 million in 1996. The increase in
regional marketing expense was the result of an increased level of advertising,
cooperative promotion with our retail partners, public relations efforts focused
in the new regions installed during 1997, and the initial incurrence of ongoing
marketing expenses in existing markets. Regional sales and marketing expenses
decreased as a percentage of revenue to 12.3% in the 1997 period from 18.1% in
the comparable 1996 period. The decrease in sales and marketing as a percentage
of revenue was the result of (1) increasing volumes processed by the network and
(2) lower advertising costs per unit as we increased the unit density within a
region.
PRODUCT RESEARCH AND DEVELOPMENT. Product research and development expenses
increased to $6.4 million in 1997 from $4.0 million in 1996. The principal
component of such expenses was compensation costs and the year-to-year increase
was due largely to higher staffing levels required for the improvement of
existing and development of new Coinstar unit software, hardware, network
applications and development costs related to new service offerings. Product
research and development decreased as a percentage of revenue to 25.4% in the
1997 period from 47.8% in the comparable 1996 period. The decrease in product
research and development as a percentage of revenue was the result of increasing
volumes processed through the network.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased to $11.1 million in 1997 from $5.4 million in 1996. The
principal component of such expenses was personnel compensation. The
year-to-year increase primarily reflects an investment in higher staffing levels
during 1997 to support our rapid growth and expansion. Selling, general, and
administrative decreased as a percentage of revenue to 44.3% in the 1997 period
from 64.4% in the comparable
31
<PAGE>
1996 period. The decrease in selling, general, and administrative as a
percentage of revenue was the result of increasing volumes processed through the
network.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
increased to $8.7 million in 1997 from $4.1 million in 1996. The increase was
primarily due to the increase in the installed base of Coinstar units during
these periods. Depreciation and amortization decreased as a percentage of
revenue to 34.7% in the 1997 period from 49.7% in the comparable 1996 period.
The decrease in depreciation and amortization as a percentage of revenue was the
result of increasing volumes processed through the network.
INTEREST INCOME AND EXPENSE
Interest income increased to $2.3 million in 1997 from $848,000 in 1996. The
increase in interest income is attributable to higher invested cash balances
resulting from net proceeds received from the sale of the Notes in October 1996
and the completion of the our initial public offering in July 1997.
Interest expense increased to $9.8 million in 1997 from $2.7 million in
1996. The increase was due to the accretion of the Notes.
NET LOSS
Net loss increased to $29.6 million in 1997 from $16.0 million in 1996. The
increase in net loss primarily was due to the fact that selling, general and
administrative expenses, product research and development expenses, and
depreciation and amortization expenses increased during the year at a
disproportionately higher rate than our revenues. This was the result of our
decision to build the infrastructure necessary to support the rapid growth of
our installed base of units.
INCOME TAXES
At December 31, 1998 and 1997, we had net deferred tax assets of
approximately $28.0 million and $19.8 million, respectively, resulting primarily
from net operating loss and credit carryforwards available to offset future
income tax obligations. Such federal carryforwards expire through 2013. Based
upon our history of operating losses and expiration dates of the loss
carryforwards, we have recorded a valuation allowance to the full extent of our
net deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999 we had cash and cash equivalents of $37.9 million,
short-term investments of $2.1 million and working capital of $7.4 million. Cash
and cash equivalents include $21.5 million of funds in transit, which represent
amounts being processed by armored car carriers or residing in Coinstar units.
Net cash provided by operating activities was $3.4 million for the quarter ended
March 31, 1999 compared to net cash used in operating activities of $2.9 million
for the comparable period in 1998. Net cash provided by operating activities was
$9.5 million for 1998 compared to net cash used in operating activities of
$458,756 for 1997. The principal use of cash was to fund net operating losses
incurred, offset by depreciation, other non-cash charges, and an increase in
accounts payable and accrued liabilities.
Net cash used by investing activities for the three months ended March 31,
1999 was $3.0 million and $275,000 in comparable period in 1998. Capital
expenditures during the quarter ended March 31, 1999 were $5.0 million and in
the comparable 1998 period were $4.7 million. Net cash provided by investing
activities during 1998 was $9.0 million compared to net cash used in investing
activities in 1997 of $31.9 million. Capital expenditures for 1998 were $23.0
million and for
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1997 were $29.8 million. The majority of capital expenditures consist of the
purchase of Coinstar units.
Net cash used by financing activities for the three month ended March 31,
1999 was $272,000, which principally was the result of the repayment of long
term debt and the payment of fees associated with the closing of the long term
credit facility. The use of funds was partially offset by the proceeds from the
exercise of stock options and employee stock purchases. Net cash provided by
financing activities for the comparable 1998 period was $22,000, which was the
result of the proceeds of the exercise of employee stock options and stock
purchases, offset by the repayment of long term debt. Net cash used by financing
activities for 1998 was $921,541, which principally was the result of the
repayment of long term debt partially offset by the proceeds from the exercise
of stock options. Net cash provided by financing activities for 1997 was $28.7
million, which was the result of our initial public offering and the proceeds of
the exercise of stock warrants partially offset by the repayment of long term
debt.
In July 1997 we completed our initial public offering of 3,000,000 million
shares of common stock at a purchase price of $10.50 per share for net proceeds
of approximately $28.4 million. The net proceeds received by us have been and
will be used (1) predominantly to fund capital expenditures and working capital
in connection with the continued expansion of the Coinstar network, (2) for
product research and development, and deployment of enhancements to the Coinstar
unit and the coin processing network and (3) for general corporate purposes.
As of March 31, 1999 we had outstanding secured irrevocable letters of
credit with a bank which totaled $2.9 million. These letters of credit, which
expire through August 1999, collateralize our obligations to third parties. As
of March 31, 1999 no amounts were outstanding under these letters of credit.
On February 19, 1999 we entered into a Credit Agreement with Imperial Bank,
for itself and as agent of Bank Austria Creditanstalt Corporate Finance, Inc.
("Bank Austria" and, together with Imperial Bank, the "Lenders"). The Credit
Agreement provides us with a credit facility of up to $25 million, consisting of
revolving loans of $5 million from each of the Lenders, and term loans of $5
million from each of the Lenders. The Credit Agreement requires us to maintain
certain financial covenants during the term of the agreement, which, among other
things, prohibit us from paying dividends without the Lenders' consent. In
addition, amounts available under the term loans will increase to $7.5 million
per Lender after we have satisfied certain debt ratios. Upon the closing of this
offering, the Credit Agreement will terminate according to its terms. We intend
to amend the Credit Agreement or enter into a new credit facility but we cannot
assure you that we will be able to do so on reasonable terms or at all.
In connection with the Credit Agreement, we issued to each of the Lenders a
warrant to purchase 51,326 shares of our common stock. The exercise price for
the warrants, which will expire on February 19, 2009, is $12.177 per share. The
values of the warrants issued in connection with the Credit Agreement are
recorded as contributed capital and represent discounts which are being
amortized ratably over the term of the related debt. We have agreed, pursuant to
certain Registration Rights Agreements dated February 19, 1999 with the Lenders,
to file a registration statement on Form S-3 to register the shares issuable
upon exercise of the warrants within 60 days following the date on which we have
satisfied all of our obligations in full under the Credit Agreement and the
Lenders have no further commitment to make loans or extend credit under the
Credit Agreement (the "Loan Termination Date"). We must use reasonable efforts
to cause the registration statement to be declared effective no later than 120
days following the Loan Termination Date and must keep the registration open for
at least 45 days following the date the registration statement is declared
effective. The Registration Rights Agreements also obligates us to include the
common stock issuable upon exercise of the warrants in certain registration
statements we may file.
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On March 3, 1999 we acquired from Compucook, Inc. assets consisting of
Internet domain names, software, fixed assets, contracts, and web site content.
In consideration of the purchase, we issued 25,000 common stock warrants at an
exercise price of $15.63 per warrant, which expire on March 2, 2004. On April
15, 1999 we acquired from Nu World Marketing Limit Inc. assets consisting of
Internet domain names, fixed assets, contracts, and web site content. As
consideration for this purchase, we issued 25,000 shares of common stock.
As of March 31, 1999 we also had outstanding $88.4 million of our 13.0%
Senior Subordinated Discount Notes due 2006 ("the Notes"). The indebtedness
associated with the Notes will grow to $95.0 million by October 1999. We must
begin paying cash interest on the Notes in April 2000. Beginning at that time,
we will have debt service obligations of over $12.0 million per year until
October 2006 when the principal amount of $95.0 million will be due. The
Indenture governing the Notes contains covenants that, among other restrictions,
limit our ability to pay dividends or make other restricted payments, engage in
transactions with affiliates, incur additional indebtedness, effect asset
dispositions, or merge or sell substantially all our assets.
We believe existing cash equivalents, short-term investments, and our Credit
Agreement will be sufficient to fund our cash requirements and capital
expenditure needs for the continued expansion of the domestic Coinstar network
at the recent installation rate and to fund the pilot deployment of Coinstar
units internationally for at least the next twelve months. The extent of
additional financing needed will depend on the success of our business. If we
significantly increase installations beyond planned levels or if unit coin
processing volumes generated are lower than historical levels, our cash needs
will be increased. Our future capital requirements will depend on a number of
factors, including the timing and number of installations, the type and scope of
service enhancements, the level of market acceptance of our service, the
feasibility of international expansion, and potential new product and service
offerings and product and service enhancements. See "Risk Factors -- Our future
operating results remain uncertain", "-- Our quarterly operating results may
fluctuate due to different usage rates of individual Coinstar units, seasonality
of use and other factors" and "-- We have substantial indebtedness".
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QUARTERLY FINANCIAL RESULTS
The following table sets forth selected unaudited quarterly financial
information and operating data for the last eight quarters. This information has
been prepared on the same basis as our unaudited consolidated financial
statements and includes, in the opinion of management, all normal and recurring
adjustments that management considers necessary for a fair statement of the
quarterly results for the periods. The operating results and data for any
quarter are not necessarily indicative of the results for future periods.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------------------
JUNE 30, SEP. 30, DEC. 31, MAR. 31, JUNE 30, SEP. 30, DEC. 31, MAR. 31,
1997 1997 1997 1998 1998 1998 1998 1999
----------- --------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT UNIT AND PER UNIT DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue.......................... $ 5,294 $ 7,762 $ 7,957 $ 8,823 $ 10,472 $ 13,576 $ 14,802 $ 15,791
Expenses:
Direct operating................. 3,966 5,276 5,208 5,823 6,142 7,141 7,458 7,939
Regional sales and marketing..... 972 798 689 917 854 930 1,077 1,318
Product research and
development.................... 1,640 1,637 1,644 1,410 1,329 867 1,138 940
Selling, general and
administrative................. 2,630 2,669 3,252 3,276 3,726 3,531 3,579 3,381
Depreciation and amortization.... 2,158 2,297 2,539 2,813 3,120 3,635 3,669 4,103
----------- --------- --------- --------- --------- --------- --------- ---------
Loss from operations............. $ (6,072) $ (4,915) $ (5,375) $ (5,416) $ (4,699) $ (2,528) $ (2,119) $ (1,890)
----------- --------- --------- --------- --------- --------- --------- ---------
----------- --------- --------- --------- --------- --------- --------- ---------
OTHER DATA:
Number of new Coinstar units
installed during the period.... 406 400 469 327 501 405 376 428
Installed base of Coinstar units
at end of period............... 2,335 2,735 3,204 3,531 4,032 4,437 4,813 5,241
Average age of network for the
period (months)................ 9.3 10.6 11.7 13.4 14.8 15.8 17.5 19.2
Number of regional markets....... 33 35 40 42 49 57 58 64
Value of coins processed......... $ 70,626 $ 103,442 $ 105,692 $ 117,298 $ 139,227 $ 180,600 $ 186,166 $ 177,248
Direct contribution(1)........... 1,328 2,486 2,749 3,000 4,330 6,435 7,344 7,852
Direct contribution
margin(1)(2)................... 25.1% 32.0% 34.5% 34.0% 41.3% 47.4% 49.6% 49.7%
EBITDA (3)....................... $ (3,914) $ (2,618) $ (2,836) $ (2,603) $ (1,579) $ 1,107 $ 1,550 $ 2,213
Annualized revenue per average
installed unit(4).............. 9,939 12,284 10,907 10,597 11,195 12,703 12,937 12,699
Annualized direct contribution
per average installed
unit(1)(4)..................... 2,494 3,935 3,768 3,601 4,568 6,021 6,405 6,331
International development
costs(5)....................... -- -- -- 28 241 116 369 275
</TABLE>
- -------------
(1) Direct contribution is defined as revenue less direct operating expenses. We
use direct contribution as a measure of operating performance to assist in
understanding our operating results. Direct contribution is not a measure of
financial performance under Generally Accepted Accounting Procedures
("GAAP") and should not be considered in isolation or as an alternative to
gross margin, income (loss) from operations, net income (loss), or any other
measure of performance under GAAP.
(2) Direct contribution margin is defined as direct contribution divided by
revenue.
(3) EBITDA represents earnings before interest expense, income taxes,
depreciation, amortization and other income/ expense. EBITDA is not a
measure of financial performance under GAAP and should not be considered in
isolation or as an alternative to net income or cash flow from operations as
determined by GAAP. We, however, believe that EBITDA provides useful
information regarding a company's ability to service and/or incur
indebtedness.
(4) Based on actual quarterly results annualized divided by the monthly averages
of units in operation over the applicable period.
(5) International development costs represent the costs incurred by Coinstar
International related to the exploration of international expansion. All
costs related to international development (such as market research and
travel) are expensed as incurred in accordance with the American Institute
of Certified Public Accountants Statement of Position 98-5, "Reporting on
the Costs of Start-Up Activities", issued on April 13, 1998.
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<PAGE>
Based on our limited operating history, we believe that coin processing
volumes have been affected by seasonality; in particular, coin processing
volumes are lower in the months of January, February, September and October.
There can be no assurance, however, that such seasonal trends will continue. Any
projections of future seasonality are inherently uncertain due to our limited
operating history and the lack of comparable companies engaged in the coin
processing business.
In addition to fluctuations in revenue resulting from factors affecting
customer usage, timing of unit installations will result in significant
fluctuations in quarterly results. The rate of installations does not follow a
regular pattern, as it depends principally on installation schedules determined
by agreements between us and our retail partners, variable length of partner
trial periods and the planned coordination of multiple partner installations in
a given geographic region.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) 133, "Accounting for Derivative
Instruments and Hedging Activities". This pronouncement requires an entity to
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. Management
believes the impact of adoption will not be material to the financial
statements, taken as a whole. SFAS 133 is effective for fiscal years beginning
after June 15, 1999.
EFFECTS OF YEAR 2000 ON THE COMPUTER PROGRAMS AND SYSTEMS
Many currently installed computer systems and software programs were
designed to use only a two-digit date field. These date code fields will need to
accept four digit entries to distinguish 21st century dates from 20th century
dates. Until the date fields are updated, the systems and programs could fail or
give erroneous results when referencing dates following December 31, 1999. Such
failure or errors could occur prior to the actual change in century. We rely on
computer applications for our coin processing machines and to manage and monitor
our accounting and administrative functions. Such failure or malfunction could
cause disruption of operations, including among other things a temporary
inability to process transactions or engage in normal business activities. In
addition, our retail partners, suppliers and service providers (including
financial institutions) rely upon computer applications, some of which may
contain software that may fail or give erroneous results as a result of the
upcoming change in century, with respect to functions that materially affect
their interactions with us. Failure or malfunction of our software or that of
our retail partners, suppliers or service providers could seriously harm our
business, financial condition and results of operations and on our ability to
achieve sufficient cash flow service to our indebtedness.
During the second and third quarters of 1998, we undertook a program to
identify, test, and evaluate our internal operating systems to determine the
impact of the year 2000 on these systems. These tests involved simulating
transactional activity before, during and after the various impacted dates and
assessing the results to ensure the proper handling of the information by the
internal operating system. As a result of these tests performed on the internal
operating systems, we do not believe our computer systems or applications
currently in use will be harmed by the upcoming change in century.
We completed our review of the year 2000 impact on our retail partners,
suppliers, and service providers in the first quarter of 1999. Our partners have
made, and continue to make, significant progress towards completing their year
2000 projects. We have not incurred any significant costs in reviewing our
retail partners, suppliers or service provider systems for year 2000 compliance
and do not foresee any significant harm from their year 2000 issues. We will
continue to monitor the status of our retail partners, suppliers or service
providers for year 2000 activities.
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We will complete our year 2000 contingency planning during the second
quarter of 1999. This planning involves an assessment of problem scenarios that
could disrupt critical business functions and the steps to be taken to minimize
the risk and impact of these problems. Accordingly, we have not yet fully
developed a contingency plan to address situations that may result if we are
unable to achieve year 2000 readiness of our critical operations. The cost of
developing and implementing such a plan may itself be significant.
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<PAGE>
BUSINESS
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. OUR ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS
DISCUSSED IN THESE FORWARD-LOOKING STATEMENTS. FACTORS THAT MAY CAUSE SUCH A
DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS".
OVERVIEW
We are the first and only company to own and operate a national network of
self-service coin-counting machines in the United States. Our Coinstar units
provide consumers with a fun, convenient and reliable means of converting
accumulated change into cash. With approximately 150 retail partners, primarily
supermarket chains, we currently operate more than 5,400 Coinstar units in
approximately 65 regional markets across the United States. We are also
conducting trials of eight Coinstar units in the United Kingdom and eight units
in Canada. We launched the Coinstar network with the installation of our first
Coinstar unit in 1994, and have installed an average of 1,517 Coinstar units in
each year since January 1, 1996. Since our inception, the Coinstar network has
counted and processed over 33 billion coins with a value of over $1.3 billion in
more than 44 million customer transactions.
The Coinstar unit, which is about the size of an ATM, is highly accurate,
durable, easy to use and service and capable of processing up to 600 coins per
minute. It accepts consumers' loose change and then prints out a voucher listing
the total number, denomination and dollar value of the processed coins, less our
processing fee. Consumers may then apply the vouchers to their retail purchases
or redeem the vouchers for cash. We believe our services provide consumers with
a convenient and reliable means of reducing loose coins and an alternative to
manually presorting, counting and wrapping coins for cash redemption at a bank.
Our services also benefit our retail partners by enhancing customer service,
increasing store traffic, promoting sales, reducing internal store coin handling
expenses and providing an additional source of revenue.
We believe that our key competitive advantages include our technology and
expertise developed over the past six years, the nationwide Coinstar network,
our dedicated field service organization, our strong relationships with a
majority of the leading supermarket chains in the United States and our proven
ability to execute our rollout strategy. Our Coinstar units have been designed
to operate as part of a scalable, two-way, wide-area communications network. Our
intelligent on-line network enables us to track each machine 24 hours a day and
provides key financial data and operating statistics to our headquarters and
field service representatives. Our dedicated field service organization provides
highly responsive service to our retail partners by ensuring the efficient
collection and handling of coins and by performing preventative maintenance and
repair on each Coinstar unit. Combined, these elements are critical in providing
a great customer experience and the high level of service demanded by our retail
partners. Our intelligent network and highly trained field service organization
have enabled us to maintain a system-wide Coinstar unit availability of 98%. Our
prime retail locations along with these other competitive advantages form a
strategic platform from which we are able to deliver additional value-added
services to consumers and our retail partners.
$145 BILLION ANNUAL COIN RECYCLING OPPORTUNITY IN THE UNITED STATES
We believe the market for coin recycling is very large and still virtually
untapped. We believe that an estimated 290 billion cash transactions occur on an
annual basis in the United States. Assuming the change generated by each such
cash transaction averages fifty cents, the annual coin flow resulting from such
transactions would be approximately $145 billion. Based on the current
population in the United States, the average person handles approximately $600
in coins
38
<PAGE>
each year. To support this flow of coins in the economy, the U.S. Mint has
produced $15 billion in new coins over the past 25 years. According to the U.S.
Mint, the circulating stock of coins used in cash transactions is approximately
$8 billion, which we estimate would have to turn over approximately 18 times a
year to support a coin flow of $145 billion.
The prevalence of coins in cash transactions and the lack of a convenient
alternative for converting coins into cash has resulted in the accumulation of
coins. Based on the U.S. Mint data, only $8 billion of the $15 billion in coins
produced over the last 25 years, the useful life of a coin, are regarded as
circulating, and we believe there is an estimated $7 billion of non-circulating
coins. New coins are made to replace those that fall out of circulation and to
support the increasing size of the economy. In 1998 alone, the U.S. Mint
produced over 15.8 billion new coins worth approximately $885 million. We also
believe a significant market opportunity exists for providing a convenient
method of recycling the recurring coin flow and redeeming non-circulating coins
in the United Kingdom, Canada, Europe and other selected international markets.
THE COINSTAR SOLUTION -- OUR CORE COIN RECYCLING BUSINESS
Traditionally, banks and other depository institutions have been the primary
means by which consumers could convert coins into cash, but they typically have
provided the service only to their customers and generally only after the
customer has pre-sorted, counted and wrapped in paper roll the coins, an
inefficient and labor-intensive process.
We have designed, developed and commercially deployed the first, largest and
only nationwide network of self-service coin-counting and processing machines.
The Coinstar unit accepts consumers' loose change and then prints out a voucher
listing the total number, denomination and dollar value of the processed coins,
less our processing fee. Our Coinstar unit is highly accurate, durable, easy to
use and service and capable of processing up to 600 coins per minute. Our
Coinstar units have been designed to operate as part of a scalable, two-way,
wide-area communications network that allows us to keep track of key financial
and operational statistics. We believe our Coinstar unit offers an efficient,
hassle-free alternative for consumers to convert coins into cash allowing us to
capitalize on a $145 billion annual consumer coin recycling market opportunity.
GROWTH STRATEGY
Our objective is to enhance our position as the leading provider of
self-service coin processing services and to develop new value-added services
that can be delivered through the Coinstar network. Key elements of our strategy
include:
AGGRESSIVELY GROW OUR CORE COIN RECYCLING BUSINESS
We plan to aggressively grow our domestic core coin recycling business by
rapidly expanding the Coinstar network, increasing customer use of our service,
leveraging our relationships and prime retail locations to provide value-added
services to consumers and our retail partners and improving profit margins
through increased efficiencies.
RAPIDLY EXPANDING THE COINSTAR NETWORK. We plan to continue to rapidly
expand our presence in supermarkets as our primary retail location because of
the prevalence of large regional chains, geographic concentration of stores and
recurring consumer traffic. We are initially targeting supermarkets in the 100
largest metropolitan areas in the country, which include approximately 22,000 of
the approximately 30,000 supermarkets in the United States. Our current
installation base of more than 5,400 Coinstar units represents only
approximately 25% penetration of our target market. We believe a significant
opportunity exists to increase the number of Coinstar units installed through
increased penetration of existing retail partner stores as well as by entering
into contracts
39
<PAGE>
with new partners. As of March 31, 1999, we had units installed in only 35% of
our existing retail partners' stores. We believe that convenience stores and
other mass merchants also represent a viable retail distribution channel for our
services, offering a large market of potential consumers, a convenient location
for multiple consumer visits and opportunities for large scale deployments. In
addition, we believe our coin processing unit provides banks and other
depository institutions with an economical way to handle their in-branch coin
processing needs.
The following table sets forth key data which highlights our growth in
installed units:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- --------------------
1994 1995 1996 1997 1998 1998 1999
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Installed base of Coinstar
units....................... 48 263 1,501 3,204 4,813 3,531 5,241
Number of regional markets.... 4 11 23 40 58 42 64
Value of coins processed (in
thousands).................. $ 5,245 $ 17,701 $ 115,476 $ 332,526 $ 623,258 $ 117,298 $ 177,248
</TABLE>
Currently, we have eight Coinstar units installed in the United Kingdom and
eight units in Canada on a trial basis.
INCREASING CONSUMER USE OF OUR SERVICE. We promote consumer trials of the
Coinstar unit through commercial media, such as television and radio, and
in-store promotions. We believe that building greater awareness of our service
will significantly enhance the growth of our core coin recycling business. Our
August 1998 market study indicates that in areas where we have operated for over
one year, only 6% of the market uses our coin recycling service, and 80% of
people who have tried our service are likely to use it again. In addition, we
are developing other value-added services to broaden consumer appeal of the
Coinstar units and promote greater trial and use.
IMPROVING PROFIT MARGINS THROUGH INCREASED EFFICIENCIES. Over the past six
years, we have continued to improve our profit margins through increased
efficiencies resulting from our expansion, including increased regional
densities and more effective utilization of the Coinstar network and our field
service organization. In addition, we have built an effective management, sales
and administrative team. We believe this infrastructure can support substantial
growth in Coinstar unit installations and the introduction of new products and
services.
EXPAND OUR PRESENCE IN THE UNITED KINGDOM
As of May 1999, we have installed eight Coinstar units on a trial basis in
Sainsbury's and Tesco, the two largest grocery retailers in the United Kingdom.
These two retailers operate over 1,000 stores throughout the United Kingdom and
account for more than 40% of all United Kingdom grocery sales. We believe the
United Kingdom offers an attractive market opportunity given the higher coin
content of British currencies and similar customer profiles to the United
States. In addition, British supermarkets are leaders in providing financial
services to their customers and in using technology in their stores to add value
to the shopping experience.
ENTER OTHER SELECTED INTERNATIONAL MARKETS
We believe there could be a significant opportunity for us to expand our
network beyond North America and the United Kingdom because our Coinstar unit
can be adapted to the currency sets of most countries without significant time
or cost. In addition, our experience in the United Kingdom should position us to
participate in the upcoming conversion to the new Euro currency. New Euro coins
will begin circulating in January 2002, and by June 30, 2002 existing national
coins must be converted to Euros. We estimate that more than 75 billion coins
worth over $15 billion will need to be converted to Euros. As the largest
trading block in the world, we believe the European Union
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<PAGE>
could represent an attractive long-term market for Coinstar units beyond the
potential opportunity to participate in the one-time conversion of currencies to
the new Euro coin. The EU's two largest national markets, France and Germany,
together have a total population of 145 million people, a combined gross
domestic product of $3,909 billion, and over 30 billion coins currently in
circulation. In addition, Japan, Australia and a number of other countries offer
attractive opportunities to expand our operations internationally.
LEVERAGE OUR RELATIONSHIPS, PRIME RETAIL LOCATIONS AND THE INTERNET TO PROVIDE
VALUE-ADDED SERVICES TO CONSUMERS AND OUR RETAIL PARTNERS
Our relationships with leading supermarket chains, our prime retail
locations and the Coinstar network form a strategic platform from which we are
able to deliver additional value-added services to consumers and our retail
partners. For example, in February 1999 we announced our new Coinstar
Shopper-TM- product, a multifunction retail terminal, which we plan to test
market in 1999 and roll out nationally beginning in 2000. Coinstar Shopper will
allow us to deliver meal solutions, customized grocery discounts, merchandise
offers and enhanced frequent shopper services to consumers at our retail
partners. In addition, we plan to link Internet users with supermarket retailers
through Coinstar Shopper. As part of this strategy, we have acquired software
and other Web-based assets from Compucook, Inc. and Meals.com. The Coinstar
Shopper program will enable consumers to visit a Web site, click on our meal
planning service and then print their recipe and shopping list at a Coinstar
Shopper machine upon arriving at the store. We continue to explore new ways to
use our prime retail locations and intelligent network to service our customers
and retail partners better.
COINSTAR NETWORK
COINSTAR UNIT
Our coin processing unit is comprised of a coin input and patented cleaning
process, a coin counter that is designed to be jam-resistant, coin collection
bins, a computer, a thermal printer, an input keypad, an internal phone and a
color monitor. Our Coinstar unit is highly accurate, durable, easy to use and
service and capable of processing up to 600 coins per minute. The counter system
in our Coinstar unit detects and removes foreign coins, slugs, debris and
damaged coins and directs the coins processed to collection trolleys located
inside the Coinstar unit. Since our first commercial introduction of our
Coinstar unit in 1994, we have improved the unit to decrease problems from
clogging or malfunctioning including from moisture, dirt, lint, and other
debris. These improvements in Coinstar units have reduced downtime and as a
result, reduced maintenance costs. Since October 1996, we have received five
issued United States patents relating to removing debris from coins processed in
a self-service environment and other aspects of self-service coin processing.
Our proprietary technology has enabled our coin processing units to be available
to customers on a more consistent basis. In the event of any malfunction, our
units have a telephone handset so our retail partners can connect directly to
our customer service center via a toll free number. The reliability of our
Coinstar unit and the utilization of our communications network have resulted in
a unit availability rate that exceeds 98%.
Our Coinstar unit is controlled by an internal computer that runs a
multi-tasking operating system. In addition to controlling and coordinating coin
sorting and other functions, the computer electronically records nearly all unit
operations. For each coin-counting and processing transaction, the unit produces
a unique transaction number, records the dollar amount, time and duration of the
transaction, and identifies the number of each type of coin processed and the
number of rejected coins. This information is sent daily over our wide-area
communications network to our headquarters for analysis and backup.
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<PAGE>
INTELLIGENT COMMUNICATIONS AND INFORMATION SYSTEMS
Our Coinstar units have been designed to operate as part of a scalable,
two-way, wide-area communications network. The network is designed to allow
Coinstar units to transmit key financial data and operating statistics to our
headquarters on a daily basis. We use this information to accurately track unit
coin flow and operating performance, enabling us to schedule just-in-time coin
pickups, provide unit service and perform essential accounting and reporting
functions. In addition, this network enables us to configure the units remotely
with a variety of operational and marketing data and future enhancements to our
Coinstar unit.
These network and associated features provide the following key benefits:
DOWNLOADABLE INFORMATION, SOFTWARE PROGRAMS AND SYSTEMS ENHANCEMENTS. With
a scalable, two-way network, we can send information to each Coinstar unit,
customized to each unit's location and store specific advertising, on-screen
promotions and coupons. In addition, we can download new versions of application
and operating system software using the network. This ability to perform
multiple functions remotely, eliminates costly on-site visits and lowers our per
unit operating costs.
ENHANCEMENT OF FIELD SERVICE PRODUCTIVITY. Each Coinstar unit generates
daily performance and operating reports that are transmitted over the network to
our headquarters for consolidation. We can then electronically distribute this
information, via the network to our field service employees, which enable us to
better utilize field service and transportation personnel. Information on
individual unit usage and operations help us manage the efficiency of coin
collection and transportation activities and reduce downtime resulting from full
Coinstar units.
FINANCIAL REPORTING AND RECONCILIATION. We receive financial data and
operating statistics through the network on a daily basis. The financial and
accounting information is reconciled with bank records and coin collection and
transportation processing data logged into the network to ensure the accuracy,
speed and control of each deposit. In addition, our retail partners receive
weekly automated facsimile or email reports generated by the network detailing
information such as transaction volumes and deposits made for each store.
AUTOMATED TRACKING OF COIN COLLECTION, PROCESSING AND DEPOSITS. Our
wide-area and local area networks are coupled securely using sophisticated
networking equipment that enable us to accurately track all coin flow activity
from the Coinstar unit to the depository institution. The Coinstar network is
linked with our transportation and coin processing partners, which enables us to
generate key coin tracking data.
COINSTAR NETWORK SCALABILITY. The Coinstar network is scalable to support
the increasing demands that will result from our rapid installation of Coinstar
units. Headquarters components of the Coinstar network operate on widely
available personal computers with advanced reliability features. In addition, we
have built an extensive and secure intranet on top of our infrastructure using
standard client/server tools provided by leading industry vendors.
REGIONAL FIELD SERVICE AND ORGANIZATION
We have recruited and retained a dedicated field service organization of
over 200 field service personnel and supporting employees. Our field service
organization provides highly responsive service to our retail partners by
ensuring the efficient collection and handling of coins and by performing
preventative maintenance and repairs.
FIELD SERVICE PERSONNEL. In all our markets, our field service employee has
the primary direct contact with our consumers and retail partners. Each field
service team member is connected to
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our wide-area communications network by laptop computer, mobile phone and pager.
Each Coinstar unit provides specific service information to the responsible
field service employee by directly paging the employee with current operating
information based on a series of predetermined performance criteria.
TRANSPORTATION AND PROCESSING SERVICES. Generally, we contract with third
party providers to transport and process coins deposited in Coinstar units. We
believe the use of these contracted resources allows growth with minimal
investment in facilities and equipment. The transportation service typically
includes removing the coin trolleys, tagging them for deposit, cleaning of the
Coinstar unit, transporting the coins for processing at the coin processing
facilities and depositing the coins to our local depository. We have an
automated tracking system for tracking each deposit to each retail partner's
account, as well as our bank account.
INSTALLATION PERSONNEL. Each installation is managed by an individual
account manager. For a typical installation, an operations representative visits
the store prior to the delivery of the Coinstar unit to coordinate with the
store manager on the location of the Coinstar unit within the store and review
site requirements. On the day of delivery, our field service representative
unpacks the unit and conducts a training and orientation session for store
personnel.
KEY BENEFITS OF THE COINSTAR NETWORK
BENEFITS TO OUR RETAIL PARTNERS
Our retail partner marketing strategy is to significantly increase our
penetration with existing leading retail partners as well as to establish
relationships with new leading retail partners in the 100 largest metropolitan
areas in the United States. Our Coinstar units are located in a majority of the
leading supermarket chains, such as Albertsons, American Stores, Kroger's and
Safeway.
When marketing to supermarkets, we highlight the benefits of our service,
including increasing store traffic, promoting sales, reducing internal store
coin handling expenses and providing an additional source of revenue. We believe
our Coinstar unit enables supermarkets to provide a convenient service to their
customers using minimal store space, while incurring virtually no additional
cost.
INCREASES STORE TRAFFIC. We believe the Coinstar unit helps to increase
store traffic by providing consumers with a fun, convenient and reliable means
of converting accumulated change into cash. A market study conducted in 1995 by
Griggs & Anderson Research, an independent market research firm hired by us,
indicated that 33% of the Coinstar unit users surveyed were not in the store in
which they normally shop. A survey conducted in April 1998 by Qwest Marketing
Services indicated that 72% of the Coinstar users surveyed would visit another
store to use a Coinstar unit if it was not installed in the store they regularly
visit.
PROMOTES SALES. We believe the Coinstar unit promotes sales for our retail
partners by putting new disposable income in shoppers' hands while they are in
the store. Customers are more likely to make a purchase in the store because
they generally must redeem their vouchers at a check-out counter. The 1995
Griggs & Anderson Research study indicated that 77% of customers surveyed spent
some or all of their voucher in the store. Moreover, the study indicated that,
of the Coinstar unit users surveyed who were not in the store in which they
usually shop, 67% made purchases in that store. Based on our August 1998 study,
on average, a typical customer spends approximately 47% of their voucher in the
store. This first opportunity at new "found" money provides supermarkets with an
increased opportunity of generating incremental sales.
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REDUCE INTERNAL COIN HANDLING EXPENSES. We offer our retail partners the
ability to process and count coins without any processing fee during select
times of the day. We believe that this service reduces our retail partners'
internal coin handling expenses and losses.
INCREASE REVENUES. We provide our retail partners an additional source of
revenue through the sharing of our processing fee.
KEY BENEFITS TO CONSUMERS
Since we offer a new consumer service through our convenient, self-service
coin processing units, an important element of our marketing strategy is to
increase consumer trials of our service. To promote consumer trials, we use
awareness-building campaigns that we believe increases dollar volumes processed
by the Coinstar units. We market to our retail partners' existing customer base
by communicating through advertising media already used by our partners. These
joint marketing efforts include cooperative newspaper advertisements and direct
mail circulars, window signs, bag stuffers or printed bags, shelf talkers,
in-store demonstrations and other merchandising aids. We also promote the
Coinstar unit to consumers in general by various media, including free-standing
newspaper advertisements, billboards, radio and television commercials, targeted
mailings and door-hangers. We plan to continue to use effective promotional
opportunities in new markets and in expansion of existing markets with new or
existing retail partners. We have generally found local, regional and national
press interested in our coin processing service and willing to devote space and
airtime to communicate our message.
Our Coinstar unit has been designed to be prominently branded, highly
identifiable, easily recognized and capable of self promotion to consumers. The
Coinstar unit is generally located near the primary entrance areas of our retail
partners and in clear view of the check-out counters or service centers. We are
continually developing additional techniques such as the use of sound and
animation that, when added to the Coinstar unit, are intended to attract
consumers and stimulate trials and repeat use.
We are also developing other programs designed to increase the breadth and
volume of consumer usage. For example, in May 1997, we began a philanthropic
service program in the western region of the State of Washington that we believe
provides non-profit organizations with a cost- effective means of raising money.
This new philanthropic service provides consumers with a simple means for making
tax-deductible donations. Instead of receiving vouchers to be redeemed at the
retail partner's check-out counter, consumers receive printed receipts
evidencing the value of their donations. In addition, in February 1999 we
announced our new Coinstar Shopper product, which will allow us to deliver meal
solutions, customized grocery discounts, merchandise offers and enhanced
frequent shopper services to consumers at our retail partners.
PRODUCT RESEARCH AND DEVELOPMENT
We believe that strong product research and development capabilities are
essential to maintaining the competitiveness of our product and service
offerings. Since inception, we have focused our research and development efforts
on developing and enhancing our operating system and support network for
continued expansion of our network and addition of value-added services. As of
March 31, 1999, we employed 45 software engineers, information technology
specialists and other professional staff in these efforts. We also contract with
a number of specialized outside consultants for additional services.
MANUFACTURING AND SUPPLY
Currently, Coinstar units are assembled by SeaMed, a contract manufacturer
in Redmond, Washington, which utilizes several subsuppliers to provide
components and subassemblies. In
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March 1999, SeaMed announced that it had entered into an agreement to merge with
Plexus Corp. Each Coinstar unit is manufactured to our proprietary designs and
specifications. We own all designs, documentation, tooling, specialized fixtures
and test equipment. Our personnel inspect and test each unit for quality
assurance prior to shipment. We believe that using contract manufacturers has
several advantages including decreasing capital investment in plant and
equipment and working capital, the ability to leverage contract manufacturers'
purchasing relationships for lower material costs, minimal fixed costs of
maintaining unused manufacturing capacity, greater capacity flexibility and the
ability to utilize suppliers' broad technical and process expertise.
We have introduced and are currently installing coin-counting devices of our
own proprietary design. However, most of the commercially installed Coinstar
units were supplied with coin-counters developed by an over-seas manufacturer.
We still purchase parts from this supplier, although we no longer purchase
coin-counters. We believe, if all pending parts orders from this supplier are
received, that we will have enough parts to meet our estimated demand through
the end of 1999.
PROPRIETARY RIGHTS
We regard the protection of our patents, copyrights, service marks,
trademarks, trade dress and trade secrets as important to our success. We rely
on a combination of patent, copyright, trademark, service mark and trade secret
laws and contractual restrictions to protect our proprietary rights in products
and services. We have entered into confidentiality and invention assignment
agreements with our employees and contractors.
We have made several technological advances relating to self-service coin
processing that we believe are important to the successful operation of the
Coinstar unit in a self-service environment. These advancements are implemented
both mechanically and through our wide-area network software. These technologies
enable the Coinstar unit to handle moisture, dust, lint, dirt, paper, paper
clips, and other debris with infrequent clogging or malfunctioning. Since
October 1996 we have received five issued United States patents relating to
removing debris from coins processed in a self-service environment and other
aspects of self-service coin processing. 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 our field service personnel or retail partner must spend
attending to the unit.
COMPETITION
We are the first and only company to own and operate a national network of
self-service coin processing machines. We believe that our key competitive
advantages include our technology and expertise developed over the past six
years, the nationwide Coinstar network, our dedicated field service
organization, our strong relationships with a majority of the leading
supermarket chains in the United States and our proven ability to execute our
rollout strategy. We compete on a regional basis with several direct competitors
that operate self-service coin processing machines. We also compete indirectly
with manufacturers of machines and devices that enable consumers to count or
sort coins themselves. In addition, we 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 us. Many of these potential
competitors have longer operating histories, greater name recognition, larger
customer base and significantly greater financial, technical, marketing and
public relations resources. There can be no assurance that our competitors or
others will not succeed in developing technologies, products or services that
are more effective, less costly or more widely used than those we have or are
developing.
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FACILITIES
Our principal administrative, marketing and product development facilities
are located in a 46,070 square foot facility in Bellevue, Washington, under a
lease which expires in August 2004. We also lease a 10,196 square foot facility
in Bellevue, Washington, under a lease which expires in March 2002. This
additional space is currently under a sublease agreement to a third party. On
March 12, 1999, this third party announced that it was suspending its operations
and vacated the space as of March 31, 1999. We are currently evaluating
alternative subleasing arrangements. However, we believe that this event will
not seriously harm our results of operations.
EMPLOYEES
As of March 31, 1999, we employed approximately 300 full-time employees and
approximately 65 part-time employees. None of our employees is represented by a
union and management believes our employee relations are good.
LEGAL PROCEEDINGS
We are currently involved in pending litigation with one of our competitors,
CoinBank Automated Systems Inc. On June 18, 1997, we filed in the United States
District Court, Northern District of California against CoinBank a complaint for
infringement of one of our United States patents. On June 27, 1997, CoinBank
answered this patent infringement claim and counterclaimed for declaration of
non-infringement, invalidity and unenforceability, and filed a claim for breach
of warranty against Scan Coin. The claim against Scan Coin was dismissed by
agreement of the parties. On January 26, 1998, the court held that certain of
CoinBank's devices did not infringe our patent, but there remained a question of
fact as to the infringement by other devices. On October 27, 1998, we added our
most recently issued patent to the pending litigation by agreement of the
parties. We cannot assure you that we will prevail in this action or on any
claim that may be filed by CoinBank against us, or that as a result of this
action, our patents will not be limited in scope or found to be invalid. See
"Risk Factors -- We may be unable to adequately protect or enforce our patents
and proprietary rights".
In addition, we are currently involved in a dispute with our former supplier
of coin counting equipment, Scan Coin. No legal or alternative dispute
resolution proceedings have begun. See "Risk Factors -- Our business could be
harmed by a dispute with our supplier".
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MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The following table sets forth the name, age and position of our executive
officers, directors and key employees as of March 31, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ ----------- ------------------------------------------
<S> <C> <C>
Jens H. Molbak............................ 36 Chief Executive Officer and Chairman of
the Board of Directors
Daniel A. Gerrity......................... 37 President and Chief Operating Officer
Kirk A. Collamer.......................... 46 Vice President and Chief Financial Officer
Steven M. Geiger.......................... 41 Treasurer and Controller
Michael W. Parks.......................... 52 Vice President of Operations
Carol Lewis............................... 49 Vice President of Corporate Organization
and Development
Michael L. Doran.......................... 48 Vice President of Software Technology
William W. Booth.......................... 43 Vice President of Retail Development
Ian G. Melanson........................... 34 Vice President of Sales and Marketing
Robert O. Aders........................... 67 Director
George H. Clute(1)(2)..................... 49 Director
Larry A. Hodges(1)........................ 50 Director
William D. Ruckelshaus(3)................. 66 Director
David E. Stitt(1)(3)...................... 53 Director
Ronald A. Weinstein(2)(3)................. 58 Director
</TABLE>
- ----------
(1) Member of the Audit Committee.
(2) Member of the Nominating Committee.
(3) Member of the Compensation Committee.
JENS H. MOLBAK founded Coinstar in 1990 and has served as our chief
executive officer and chairman of the board of directors since then. Prior to
that he served two years as an analyst at Morgan Stanley & Co., Inc., an
investment bank.
DANIEL A. GERRITY joined Coinstar in November 1993 as our vice president and
chief technology officer, after serving on Coinstar's Advisory Board since 1990.
Mr. Gerrity has served as our president and chief operating officer since April
1998. Prior to joining Coinstar, Mr. Gerrity was an engineering manager for
Slate Corporation, an application software company, from 1990 until November
1993.
KIRK A. COLLAMER has served as our vice president and chief financial
officer since joining Coinstar in February 1997. From March 1995 until February
1997, Mr. Collamer served as the chief financial officer of Muzak Limited
Partnership, a business music services provider. From April 1988 to March 1995,
he served in various capacities at Ameritech Corporation, a telecommunications
company, including serving as vice president, finance and controller and vice
president and chief financial officer of two subsidiaries.
STEVEN M. GEIGER has served as our treasurer since September 1998 and as our
director of accounting and controller from June 1996 through September 1998.
From January 1991 until June 1996 he served as corporate controller and the
director of financial planning and assistant
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treasurer for MIDCOM Communications, Inc., a communications services company.
Mr. Geiger is a certified public accountant, a certified management accountant
and a certified cash manager.
MICHAEL W. PARKS has served as our vice president of operations since July
1998 and as our director of field operations from April 1994 through June 1998.
From September 1993 to April 1994, Mr. Parks served as president of Seriphus
Group, a consulting company he founded.
CAROL LEWIS has served as our vice president of corporate organization and
development since September 1998 and as our national director, philanthropic
services from September 1996 through September 1998. From February 1994 until
July 1995, she served as executive director of Pacific Northwest Ballet, a
professional ballet company. Prior to that she served as senior vice president
of administration for Egghead Software. Ms. Lewis' prior experience includes
service as deputy mayor of the City of Seattle.
MICHAEL L. DORAN has served as our vice president of software technology
since September 1998 and as our director of information systems from August 1996
through September 1998. From June 1989 to August 1996, Mr. Doran served as
senior manager, application services for Snohomish Public Utility District where
he directed automation planning and application development. Prior to that, he
opened and managed the Oregon office of Fiserv, Inc., a national service bureau
providing computer services to financial institutions and, while at US Bancorp,
Inc., he managed the bank's automated teller machines and debit card automation
projects.
WILLIAM W. BOOTH has served as our vice president of retail development
since December 1998 and as our director of retail development from April 1995
through December 1998. From April 1992 until March 1995 he served as the senior
director, retail marketing services for Catalina Marketing Corporation, a
consumer marketing company. From July 1989 until March 1992 he served as senior
accountant executive at Citicorp POS Information Services. Prior to that he held
account management and analyst positions at Datachecker Systems Inc. and Sweda
International, Inc.
IAN G. MELANSON has served as our vice president of sales and marketing
since December 1998. Prior to that, Mr. Melanson served Coinstar as a marketing
consultant from July 1998 to December 1998. From November 1996 until May 1998,
Mr. Melanson was vice president of marketing at Digital Media Networks
Corporation, a development stage company in Toronto, Canada. From June 1993 to
November 1996, Mr. Melanson was a consultant at McKinsey & Company and active in
both the marketing and retailing practices. From July 1988 to February 1993, Mr.
Melanson worked in brand management for Procter & Gamble, Inc.
ROBERT O. ADERS has served as a director of Coinstar since March 1999. Mr.
Aders is President Emeritus and a member of the board of directors of the Food
Marketing Institute where he served as CEO from its founding in 1976 until his
retirement in 1993. Immediately prior to joining the Food Marketing Institute,
Mr. Aders was acting Secretary of Labor in the Ford Administration. Mr. Aders
worked at the Kroger Company from 1957 until 1974. He served in a number of
executive positions before being elected chairman of the board in 1970. He is
current chairman of The Advisory Board, Inc., an international consulting
organization. He is also of counsel to Collier, Shannon, Rill & Scott, a law
firm in Washington, D.C., and a director of Telepanel Systems, a manufacturer
and distributor of electronic shelf labels for retail stores, and The Source
Information Management Company, a manufacturer and provider of marketing and
merchandising services for display racks in retail stores.
GEORGE H. CLUTE has served as a director of Coinstar since 1995. Mr. Clute,
a founding general partner of Rainier Venture Partners and Olympic Venture
Partners, has been a general partner of those venture capital funds since 1982.
Mr. Clute serves on the boards of Nth Degree Software Corp., Inc., a privately
held software development company, Sequel Technology Corp., a privately held
Internet software development company, the Western Association of Venture
Capitalists and the Washington Software & Digital Media Alliance. He also sits
on the Executive Industry Board for the Fred Hutchinson Cancer Research Center.
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LARRY A. HODGES has served as a director of Coinstar since December 1995.
Mr. Hodges has served as the president and chief executive officer of Mrs.
Field's Cookies, a retail cookie/bakery chain, since April 1994. From 1992 to
1993, Mr. Hodges managed Food Barn Stores, Inc., a supermarket chain owned by
Prudential Insurance Company. Prior to that, Mr. Hodges served in various
capacities at American Stores Company, a food and drug retailer, for 25 years,
including serving as president of two subsidiaries. Mr. Hodges also serves as a
director of Ameristar Casinos, Inc., a casino gaming company.
WILLIAM D. RUCKELSHAUS has served as a director of Coinstar since November
1997. He also serves as the Chairman of the Board of Browning-Ferris Industries,
Inc., a national disposal company. Since January 1996 he has been a principal of
Madrona Investment Group, L.L.C., a private investment company. From 1985 to
1988, he was a partner at Perkins Coie LLP, a law firm. Prior to that, he was
appointed by former President Reagan and unanimously confirmed by the U.S.
Senate in May 1983 as the fifth Environmental Protection Agency Administrator.
In 1976, he joined Weyerhaeuser Company, a timber company, where he served as
Senior Vice President for Law and Corporate affairs until 1983.
DAVID E. STITT has served as a director of Coinstar since 1995. He has
served as Managing Partner, Banyan Private Equity Management, a private
investment firm, since February 1998. From 1985 to February 1998, he was an
employee of Vencap, Inc. (formerly, Vencap Equities Alberta Ltd.), a venture
capital firm, most recently as a Vice President. Previously for seven years, he
was Vice President of Sales and Marketing for Westmills Carpet Ltd., a regional
carpet manufacturer located in western Canada.
RONALD A. WEINSTEIN has served as a director of Coinstar since 1992. From
1984 to July 1991, he was a principal of Sloan Capital Companies, a private
investment firm. From February 1989 until April 1991, Mr. Weinstein served as
Executive Vice President of Merchandising at Egghead, Inc. Mr Weinstein also
served on the Board of Direcors of Quality Food Centers, Inc. until 1998.
BOARD COMPOSITION
Our board of directors is divided into three classes, Class I, Class II and
Class III, with each class serving staggered three-year terms. The Class II
directors, currently Messrs. Stitt and Weinstein, will stand for re-election at
the 1999 annual meeting of stockholders. The Class III directors, currently
Messrs. Clute and Hodges, will stand for re-election at the 2000 annual meeting
of stockholders. The Class I directors, currently Messrs. Molbak, Ruckelshaus
and Aders, will stand for re-election at the 2001 annual meeting of
stockholders.
BOARD COMMITTEES
The Board has an Audit Committee, Compensation Committee and Nominating
Committee.
The Audit Committee meets with the Company's independent auditors at least
annually to review the results of the annual audit. The Audit Committee also
recommends to the Board the independent auditors to be retained and reviews the
accountants' comments as to controls, adequacy of staff and management
performance and procedures in connection with the audit and financial controls.
The Audit Committee is composed of three non-employee directors, Messrs. Hodges,
Clute, and Stitt.
The Compensation Committee makes recommendations to the Board concerning
salaries and incentive compensation, awards stock options to employees and
consultants under the Company's stock option plans and performs other functions
regarding compensation as delegated by the Board. The Compensation Committee is
composed of three non-employee directors, Messrs. Ruckelshaus, Stitt and
Weinstein.
The Nominating Committee consists of Messrs. Clute and Weinstein. The
Nominating Committee makes recommendations to the Board concerning candidates
for directorships.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the ownership
of our common stock as of March 31, 1999, except as noted in footnotes 2 and 3
below, by: (i) each director and nominee for director; (ii) each of our
executive officers named below; (iii) all our executive officers and directors
as a group; and (iv) all those known by us to be beneficial owners of more than
five percent of our common stock.
<TABLE>
<CAPTION>
PERCENT
BENEFICIALLY
OWNED(1)
SHARES ------------------------
BENEFICIALLY BEFORE THE AFTER THE
NAME OWNED(1) OFFERING OFFERING
- ---------------------------------------------------------------------------- ------------ ----------- -----------
<S> <C> <C> <C>
Gilder Gagnon Howe & Co. LLC(2) ............................................ 1,739,515 11.3% 8.9%
1775 Broadway, 26th Floor
New York, NY 10019
Acorn Ventures, Inc.(3) .................................................... 1,095,142 6.7% 5.6%
11400 SE 6th Street, Suite 120
Bellevue, WA 98004
Richard C. and Elizabeth A. Hedreen(4) ..................................... 1,059,680 6.9% 5.5%
R.C. Hedreen Co.
P.O. Box 9006
Seattle, WA 98109
CIBC Wood Gundy Ventures, Inc. ............................................. 880,751 5.7% 4.5%
1775 Broadway, 26th Floor
New York, NY 10019
Entities affiliated with Olympic Venture Partners(5) ....................... 775,540 5.0% 4.0%
2420 Carillon Point
Kirkland, WA 98033
Jens H. Molbak(6)........................................................... 929,890 5.9% 4.7%
Kirk A. Collamer(7)......................................................... 138,807 * *
Daniel A. Gerrity(8)........................................................ 316,401 2.0% 1.6%
Michael Parks(9)............................................................ 86,287 * *
George H. Clute(10)......................................................... 790,540 5.1% 4.1%
Larry A. Hodges(11)......................................................... 30,000 * *
David E. Stitt(12).......................................................... 17,000 * *
William D. Ruckelshaus(13).................................................. 17,726 * *
Ronald A. Weinstein(14)..................................................... 263,379 1.7% 1.4%
Robert O. Aders(15)......................................................... 10,000 * *
All directors and executive officers as a group (10 persons)................ 2,600,030 15.9% 12.8%
</TABLE>
- ----------
* Represents beneficial ownership of less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage of ownership of that
person, shares of common stock subject to options or warrants held by that
person that are currently exercisable or will become exercisable within 60
days of March 31, 1999 are deemed outstanding. These option shares are not
deemed
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<PAGE>
outstanding for the purpose of computing the percentage ownership of any
other person (unless otherwise assumed to be outstanding). Except as
indicated by footnote, and subject to marital community property laws where
applicable, we believe that the persons named in the table above have sole
voting and investment power with respect to all shares of common stock shown
as beneficially owned by them. As of March 31, 1999, the Company had
15,441,611 shares of common stock outstanding.
(2) Beneficial ownership of shares shown as of December 31, 1998. As reported on
Form 13G filed with the Securities and Exchange Commission on February
16,1999, Gilden Gagnon Howe & Co. LLC's benefical ownership consisted of
1,293,570 shares held in customer accounts over which members and/or
employees of Gilden Gagnon Howe & Co. LLC have discretionary authority to
dispose of or direct the disposition of the shares, 430,275 shares held in
accounts owned by the members of Gilden Gagnon Howe & Co. LLC and their
families, and 15,670 shares held in the account of the profit-sharing plan
of Gilden Gagnon Howe & Co. LLC.
(3) Includes 900,000 shares that may be acquired upon the exercise of warrants
issued in connection with a prior Preferred Stock financing and 19,000
shares held by an affiliated charitable trust. Fifty percent (50%) of the
shares issued upon the exercise of such warrants are subject to a repurchase
option in our favor in the event that we have not attained a specified
valuation on certain dates.
(4) Beneficial ownership of shares shown as of December 31, 1998. As reported on
Form 13G/A filed with the Securities and Exchange Commission on January
29,1999, Richard C. Hedreen's and Elizabeth A. Hedreen's ("Hedreen")
benefical ownership included 251,428 shares in the name of R.C. Hedreen Co.
which is owned by Hedreen, 115,000 shares owned by Hedreen as general
partner of the Hedreen Family Limited Partnership, and 42,353 shares in the
Hedreen Grandchildren Irrevocable Trust, David M. Eskenazy Trustee.
(5) Consists of 738,498 shares beneficially owned by Olympic Venture Partners
III, L.P. ("OVP III") and 37,042 shares beneficially owned by OVP III
Entrepreneurs Fund. On April 21, 1999 OVP III distributed its shares to its
limited partners.
(6) Includes 283,308 shares issuable upon the exercise of options exercisable
within 60 days of March 31, 1999, but portions of these shares are subject
to repurchase by us through April 2000 and February 2001. Also includes
65,000 shares held by Mt. Shuksan Investments LLC ("Shuksan") and 73,000
shares held by Penny Partners L.P. ("Penny"). Mr. Molbak shares voting and
investment power over the shares held by Shuksan and Penny and disclaims
beneficial ownership of such shares except to the extent of his ownership
interest therein.
(7) Consists of 137,269 shares issuable upon the exercise of options exercisable
within 60 days of March 31, 1999, but portions of these shares are subject
to repurchase by us through February 2001.
(8) Includes 248,137 shares issuable upon the exercise of options exercisable
within 60 days of March 31, 1999, but portions of these shares are subject
to repurchase by us through April 2000 and February 2001. Also includes 100
shares held by Mr. Gerrity's son. Mr. Gerrity shares voting and investment
power over the shares held by his son and disclaims beneficial ownership of
such shares except to the extent of his ownership interest therein.
(9) Includes 86,000 shares issuable upon the exercise of options exercisable
within 60 days of March 31, 1999, but portions of these shares are subject
to repurchase by us through April 2000 and February 2001.
(10) Includes 738,498 shares beneficially owned by OVP III. Also includes 37,042
shares beneficially owned by OVP III Entrepreneurs Fund, an affiliate of OVP
III. Mr. Clute is a general partner of the general partner of OVP III and
OVP III Entrepreneurs Fund. Mr. Clute disclaims beneficial ownership of the
shares except to the extent of his pro rata ownership therein. Also includes
51
<PAGE>
15,000 shares issuable upon the exercise of options exercisable within 60
days of March 31, 1999. See note (5) above.
(11) Includes 30,000 shares issuable upon the exercise of options exercisable
within 60 days of March 31, 1999.
(12) Includes 15,000 shares issuable upon the exercise of options exercisable
within 60 days of March 31, 1999.
(13) Includes 12,726 shares issuable upon exercise of an option exercisable
within 60 days of March 31, 1999.
(14) Includes 26,428 shares issuable upon exercise of options exercisable within
60 days of March 31, 1999. Also includes 90,400 shares beneficially owned by
the Weinstein Family Partnership. Mr. Weinstein is a general partner of the
Weinstein Family Partnership.
(15) Consists of 10,000 shares subject to stock options exercisable within 60
days of March 31, 1999.
DESCRIPTION OF CAPITAL STOCK
The following description of our capital stock and certain provisions of our
certificate of incorporation and bylaws is a summary and is qualified in its
entirety by the provisions of our certificate of incorporation and bylaws, which
are incorporated by reference as exhibits to this registration statement.
The authorized capital stock of the Company is 45,000,000 shares of common
stock, $0.001 par value and 5,000,000 shares of preferred stock, $0.001 par
value.
COMMON STOCK
The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. The holders of
common stock are not entitled to cumulative voting rights with respect to the
election of directors, and, as a consequence, minority stockholders will not be
able to elect directors on the basis of their votes alone. Subject to
preferences that may be applicable to any then outstanding shares of preferred
stock, holders of common stock are entitled to receive ratably such dividends as
may be declared by the board of directors out of funds legally available
therefor. See "Dividend Policy". In the event of our liquidation, dissolution or
winding up, holders of the common stock are entitled to share ratably in all
assets remaining after payment of liabilities and the liquidation preference of
any then outstanding preferred stock. Holders of common stock have no preemptive
rights and no right to convert their common stock into any other securities.
There are no redemption or sinking fund provisions applicable to the common
stock. All outstanding shares of common stock are, and all shares of common
stock to be outstanding upon completion of this offering will be, fully paid and
nonassessable.
PREFERRED STOCK
Under our certificate of incorporation, the board of directors has the
authority to issue up to 5,000,000 shares of preferred stock in one or more
series and to fix the rights, preferences, privileges, and restrictions granted
to or imposed upon such preferred stock, including dividend rights, conversion
rights, terms of redemption, liquidation preference sinking fund terms and the
number of shares constituting any series or the designation of such series,
without any further vote or action by the stockholders. We have established and
designated a series of our preferred stock known as Series A Junior
Participating Preferred Stock, par value $0.001 per share, consisting of an
aggregate of 450,000 shares. None of this preferred series has been issued. In
addition, the board of directors, without stockholder approval, can issue
additional preferred stock with voting and
52
<PAGE>
conversion rights which could adversely affect the voting power of the holders
of common stock. The issuance of preferred stock could have the effect of
delaying, deferring or preventing a change in control of Coinstar. We have no
present plan to issue any shares of preferred stock.
WARRANTS
As of May 1, we have outstanding warrants to purchase an aggregate of
1,027,652 shares of common stock. Such outstanding warrants consist of:
- a warrant to purchase 350,000 shares of common stock at an exercise price
of $12.00 per sharer (the "$12.00 Warrant"),
- a warrant to purchase 550,000 shares of common stock at an exercise price
of $16.00 per share (the "$16.00 Warrant"),
- two warrants to purchase 51,326 shares of common stock at an exercise
price of $12.177 per share, and
- a warrant to purchase 25,000 shares of common stock at an exercise price
of $15.625 per share.
The terms of the $12.00 Warrant and the $16.00 Warrant provide that the
purchase price paid for each warrant will be credited toward the exercise price
for such warrant, resulting in effective exercise prices for the $12.00 Warrant
and the $16.00 Warrant of $11.40 and $15.61136 per share, respectively. The
$12.00 Warrant and the $16.00 Warrant will expire on July 1, 2000. All of the
warrants described in this paragraph contain a "net exercise" provision that
enables the warrantholders to exercise a portion of their warrant without paying
the exercise price. To the extent the warrantholders choose to "net exercise"
their warrants, we will not receive the proceeds from the exercise of such
warrants.
In connection with our Credit Agreement with Imperial Bank, for itself and
as agent of Bank Austria Creditanstalt Corporate Finance, Inc. (Bank Austria
and, together with Imperial Bank, the "Lenders"), which provides us with a
credit facility of up to $25 million, we issued to each of the Lenders a warrant
to purchase 51,326 shares of our common stock. The exercise price for the
warrants, which will expire on February 19, 2009, is $12.177 per share.
In March 1999 we issued a warrant to purchase 25,000 shares of our common
stock to Level 3 Communications, Inc. at an exercise price of $15.625 per share,
which will expire on March 2, 2004, for the purchase of certain assets
consisting of Intenet domain names, software, computer equipment, customer
contracts and content from Compucook, Inc.
REGISTRATION RIGHTS
Pursuant to the Second Amended and Restated Investor's Rights Agreement,
dated as of August 27, 1996 and as amended on October 22, 1996 and March 10,
1997, among Coinstar, Jens Molbak and those persons and entities set forth on
the schedule of investors attached thereto, as of April 30, 1999 holders of
1,163,295 shares of our common stock and warrants to purchase 900,000 shares of
our common stock are entitled to demand and piggyback registration rights with
respect to registration of their shares under the Securities Act of 1933. Such
rights expire on December 15, 2005.
Pursuant to the Warrant Registration Rights Agreement, dated as of October
22, 1996, between us and Smith Barney, Inc., as of April 30, 1999 holders of
approximately 665,000 shares of our common stock are entitled to demand and
piggyback registration rights with respect to registration of their shares under
the Securities Act of 1933.
Pursuant to Registration Rights Agreements, dated February 19, 1999, between
us and each of Imperial Bank and Bank Austria Creditanstalt Corporate Finance,
Inc., as of April 30, 1999 holders of warrants to purchase 102,652 shares of our
common stock are entitled to demand and
53
<PAGE>
piggyback registration rights with respect to registration of the shares
received upon exercise of their warrants under the Securities Act of 1933. Such
rights expire on February 12, 2000.
TAKEOVER PROTECTION
DELAWARE LAW
We are subject to Section 203 of the Delaware General Corporation Law (the
"Anti-Takeover Law") which, subject to certain exceptions, prohibits a Delaware
corporation from engaging in a "business combination" (which includes a merger
or sale of more than 10% of the corporation's assets) with an "interested
stockholder" (defined generally as any person who beneficially owns 15% or more
of the corporation's outstanding voting stock or any person of affiliated with
such person) for a period of three years following the time that such
stockholder became an "interested stockholder", unless (1) prior to such time
the board of directors of the corporation approved either the business
combination or the transaction that resulted in the stockholder becoming an
"interested stockholder", (2) upon consummation of the transaction that resulted
in the stockholder's becoming an "interested stockholder", the "interested
stockholder" owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced (excluding for the purpose of
determining the number of shares outstanding those shares owned by (a) directors
who are also officers of the corporation; and (b) employee stock plans in which
employee participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange offer),
or (3) at or subsequent to such time the "business combination" is approved by
the board of directors and authorized at an annual or special meeting of
stockholders by the affirmative vote of at least two-thirds of the outstanding
voting stock of the corporation that is not owned by the "interested
stockholder". A Delaware corporation may "opt out" of the Anti-Takeover Law with
an express provision in its original certificate of incorporation or an express
provision in its certificate or incorporation or bylaws resulting from a
stockholders' amendment approved by at least a majority of the outstanding
voting shares. We have not "opted out" of the provisions of the Anti-Takeover
Law. The statute could prohibit or delay mergers or other takeover or
change-in-control attempts and, accordingly, may discourage attempts to acquire
us.
CHARTER AND BYLAW PROVISIONS
Our bylaws divide the board into three classes as nearly equal in size as
possible with staggered three-year terms. The classification of the board could
have the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from acquiring, control of Coinstar. In addition, our
bylaws provide that any action required or permitted to be taken by our
stockholders at an annual meeting or a special meeting may be taken only if it
is properly brought before such meeting and may not be taken by written action
in lieu of a meeting. To be properly brought before an annual meeting,
stockholders must give notice of nomination of directors or other proper
business no less than 60, nor more than 90, days prior to the anniversary of the
preceding year's meeting. Our bylaws provide that special meetings of our
stockholders may be called only by the chairman of the board, the chief
executive officer or, if none, the president or the board.
Our certificate of incorporation and our bylaws provide that we will
indemnify officers and directors against losses that they may incur in
investigations and legal proceedings resulting from their services to us, which
may include services in connection with takeover defense measures.
STOCKHOLDER RIGHTS PLAN
On November 12, 1998, our board of directors adopted a stockholder rights
plan. Under this plan, a dividend of one preferred share purchase right was
declared for each outstanding share of common stock, payable November 30, 1998
to stockholders of record on that date. Each right
54
<PAGE>
entitles stockholders to buy one one-hundredth of a share of newly created
Series A Junior Participating Preferred Stock at an exercise price of $45,
subject to adjustment in the event a person or entity acquires, or makes a
tender or exchange offer for, 20% or more of the outstanding common stock. In
such event, each right entitles the holder, other than the person acquiring 20%
or more of the outstanding common stock (an "Acquiring Person"), to purchase
shares of common stock with a market value of twice the right's exercise price.
In addition, if an entity acquires us in a merger or other business combination,
or if we sell more than 50% of our consolidated assets or earning power, these
rights will entitle our stockholders, other than the acquiror, to purchase, for
the exercise price, shares of the common stock of the acquiring company or its
parent having a market value of two times the exercise price. At any time prior
to the time a person becomes an Acquiring Person, our board of directors may
redeem the rights at $0.001 per right. The rights can be transferred only with
the common stock and expire at the close of business on November 12, 2008. The
existence of the rights may render more difficult or discourage attempts to
acquire us.
TRANSFER AGENT AND REGISTRAR
American Securities Transfer, Inc. is the transfer agent and registrar for
our common stock. Its telephone number is (303) 298-5370.
VALIDITY OF COMMON STOCK
The validity of the shares of common stock offered hereby will be passed
upon for Coinstar by Cooley Godward LLP, Kirkland, Washington. Mark P. Tanoury,
a partner of Cooley Godward, is Coinstar's secretary. The validity of the shares
of common stock offered hereby will be passed upon for the underwriters by
Sullivan & Cromwell, Los Angeles, California.
EXPERTS
The consolidated financial statements of Coinstar as of December 31, 1997
and 1998 and for each of the three years in the period ended December 31, 1998,
included in this prospectus, have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein (which report
expresses an unqualified opinion and includes an explanatory paragraph for a
change in accounting for loss per share), and has been so included in reliance
upon the report of such firm given upon their authority as experts in accounting
and auditing.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission (the "Commission")
a Registration Statement on Form S-3 under the Securities Act of 1933 with
respect to the shares of common stock offered hereby. This prospectus does not
contain all of the information set forth in the Registration Statement and the
exhibits thereto. We file annual, quarterly and special reports, proxy
statements and other information with the Commission. For further information
with respect to us and the common stock offered hereby, you should refer to
reference is made to the Registration Statement and the exhibits thereto.
Statements contained in this prospectus regarding the contents of any contract
or any other document to which reference is made are not necessarily complete,
and, in each instance, you should refer to the copy of such contract or other
document filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference. You may read and copy any
document we file with the Commission, including the Registration Statement and
the exhibits thereto at the Commission's offices at 450 Fifth Street N.W,
Washington, D.C. 20549. You can also review our filings by accessing the web
site maintained by the Commission at http://www.sec.gov. This site contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission.
55
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Commission allows us to "incorporate by reference" the information we
file with them, which means we can disclose important information to you by
referring you to those documents. The information included in the following
documents is incorporated by reference and is considered to be a part of this
prospectus. The most recent information that we file with the Commission
automatically updates and supersedes more dated information. We have previously
filed the following documents with the Commission and are incorporating them by
reference into this prospectus:
a) Our Annual Report on Form 10-K for the fiscal year ended December
31, 1998, filed on or about March 31, 1999, including all material
incorporated by reference therein;
b) Our Current Report on Form 8-K, filed on or about March 3, 1999;
c) Our Proxy Statement for our annual meeting of stockholders to be
held on June 16, 1999, filed on or about April 30, 1999;
d) Our Quarterly Report on Form 10-Q for the fiscal quarter ended March
31, 1999, filed on or about May 17, 1999, including all material
incorporated by reference therein; and
e) The description of our common stock contained in our Registration
Statement on Form S-1, filed on or about May 9, 1997.
We also incorporate by reference all documents subsequently filed by us
pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act until this
offering is completed.
We will provide without charge to each person, including any beneficial
owner, to whom this prospectus is delivered, upon written or oral request of
such person, a copy of any and all of the documents that have been incorporated
by reference herein (not including exhibits to such documents unless such
exhibits are specifically incorporated by reference herein or into such
documents). Such request may be directed to: Investor Relations, Coinstar, Inc.,
1800 114(th) Avenue, Bellevue, Washington 98004. The phone number for Investor
Relations is (425) 943-8000.
56
<PAGE>
COINSTAR, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Independent Auditors' Report.............................................................................. F-2
Consolidated Balance Sheet................................................................................ F-3
Consolidated Statements of Operations..................................................................... F-4
Consolidated Statements of Stockholders' Equity........................................................... F-5
Consolidated Statements of Cash Flows..................................................................... F-6
Notes to Consolidated Financial Statements................................................................ F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Coinstar, Inc.
Bellevue, Washington
We have audited the accompanying consolidated balance sheets of Coinstar,
Inc. and subsidiaries (the "Company") as of December 31, 1998 and 1997, and the
related consolidated statements of operations, changes in stockholders' equity
(deficit), and cash flows for each of the three years in the period ended
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company at December 31,
1998 and 1997, and the results of its operations, and its cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
As discussed in Note 2 to the financial statements, in 1997 the Company
changed its method of accounting for loss per share to conform with Statement of
Financial Accounting Standards No. 128 and, retroactively, restated the 1996
financial statements for the change.
/s/ DELOITTE & TOUCHE LLP
February 5, 1999
(May 15, 1999, As To Notes 4, 12, and 15)
Seattle, Washington
F-2
<PAGE>
COINSTAR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- MARCH 31,
1997 1998 1999
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 20,199,914 $ 37,688,205 $ 37,865,222
Short-term investments available for sale................. 36,603,474 4,182,315 2,098,645
Prepaid expenses and other current assets................. 1,021,349 1,043,010 1,582,336
------------ ------------ ------------
Total current assets.................................... 57,824,737 42,913,530 41,546,203
Property and equipment:
Coinstar units............................................ 51,002,230 73,191,704 77,866,918
Computers................................................. 2,792,326 3,060,899 3,271,536
Office furniture and equipment............................ 1,153,974 1,191,221 1,208,821
Leased vehicles........................................... 1,014,873 1,637,647 2,022,555
Leasehold improvements.................................... 366,090 437,593 437,593
Coinstar components....................................... 110,024 94,865 64,875
------------ ------------ ------------
56,439,517 79,613,929 84,872,298
Accumulated depreciation.................................. (13,511,235) (26,263,528) (30,195,857)
------------ ------------ ------------
42,928,282 53,350,401 54,676,441
Other assets, net of accumulated amortization of $359,775,
$617,961 and $694,995..................................... 2,792,875 2,569,187 3,062,723
------------ ------------ ------------
Total................................................. $103,545,894 $ 98,833,118 $ 99,285,367
------------ ------------ ------------
------------ ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 3,238,069 $ 3,828,459 $ 4,717,837
Accrued liabilities....................................... 18,253,065 26,987,334 27,700,156
Current portion of long-term debt and capital lease
obligations, net of unamortized discount of $0, $14,031
and $9,822.............................................. 1,612,451 2,020,696 1,777,849
------------ ------------ ------------
Total current liabilities............................. 23,103,585 32,836,489 34,195,842
Long-term debt and capital lease obligations, less current
portion and net of unamortized discounts of $19,675,155,
$9,315,552 and $7,277,022................................. 77,333,005 86,035,758 88,162,731
------------ ------------ ------------
Total liabilities..................................... 100,436,590 118,872,247 122,358,573
Commitments and contingencies (Notes 5, 11, and 12)
Stockholders' equity (deficit):
Preferred stock, $.001 par value; Authorized, 5,000,000
shares; Issued and outstanding, 0 shares................
Common stock, $.001 par value; Authorized, 45,000,000
shares; Issued and outstanding, 15,034,629, 15,217,504
and 15,441,611 shares................................... 61,039,848 61,858,154 62,531,295
Contributed capital for warrants.......................... 513,584 513,584 1,347,035
Accumulated other comprehensive income.................... (2,962) 3,171 (3,043)
Accumulated deficit....................................... (58,441,166) (82,414,038) (86,948,493)
------------ ------------ ------------
Total stockholders' equity (deficit).................. 3,109,304 (20,039,129) (23,073,206)
------------ ------------ ------------
Total................................................. $103,545,894 $ 98,833,118 $ 99,285,367
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE>
COINSTAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------- ------------------------
1996 1997 1998 1998 1999
------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Revenue.................................... $ 8,312,080 $ 25,007,251 $ 47,673,651 $ 8,822,835 $15,791,424
Expenses:
Direct operating......................... 7,258,406 17,899,402 26,564,505 5,823,711 7,938,563
Regional sales and marketing............. 1,504,633 3,088,370 3,777,995 916,896 1,318,144
Product research and development......... 3,969,185 6,361,568 4,744,110 1,409,817 939,915
Selling, general, and administrative..... 5,351,476 11,078,649 14,112,213 3,275,628 3,380,651
Depreciation and amortization............ 4,133,904 8,679,036 13,237,234 2,813,277 4,102,747
------------ ------------ ------------ ----------- -----------
Loss from operations....................... (13,905,524) (22,099,774) (14,762,406) (5,416,494) (1,888,596)
Other Income (Expense):
Interest income............................ 848,194 2,328,031 1,366,580 501,407 162,635
Interest expense........................... (2,661,374) (9,821,619) (10,816,858) (2,571,057) (2,850,614)
Other...................................... 239,812 39,108 42,117
------------ ------------ ------------ ----------- -----------
Net loss before extraordinary item......... (15,718,704) (29,593,362) (23,972,872) (7,447,036) (4,534,458)
Extraordinary Item:
Loss related to early retirement of
debt................................. 248,631 -- -- -- --
------------ ------------ ------------ ----------- -----------
Net Loss................................... $(15,967,335) $(29,593,362) $(23,972,872) $(7,447,036) $(4,534,458)
------------ ------------ ------------ ----------- -----------
------------ ------------ ------------ ----------- -----------
Loss Per Share:
Loss per share before extraordinary item,
basic and diluted...................... $ (20.06) $ (3.81) $ (1.58) $ (0.49) $ (0.30)
Extraordinary item per share, basic and
diluted................................ $ (0.31) $ -- $ -- $ -- $ --
------------ ------------ ------------ ----------- -----------
Loss per share, basic and diluted........ $ (20.37) $ (3.81) $ (1.58) $ (0.49) $ (0.30)
------------ ------------ ------------ ----------- -----------
Weighted average shares outstanding,
basic and diluted...................... 783,690 7,761,425 15,150,463 15,079,985 15,357,980
------------ ------------ ------------ ----------- -----------
------------ ------------ ------------ ----------- -----------
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE>
COINSTAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK SERIES A PREFERRED
---------------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT
------------- ------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1996............................................ 779,559 $ 14,346 649,775 $ 649,775
Exercise of stock options........................................... 13,500 4,050
Exercise of Series C Preferred stock warrants.......................
Exercise of Series D Preferred stock warrants.......................
Contributed capital for warrants....................................
Net loss............................................................ --
------------- ------------- ---------- -----------
Balance, December 31, 1996.......................................... 793,059 18,396 649,775 649,775
Exercise of stock options........................................... 199,078 78,013
Conversion of Series A Preferred stock.............................. 649,775 649,775 (649,775) (649,775)
Conversion of Series B Preferred stock.............................. 1,023,399 3,582,034
Conversion of Mandatorily Redeemable Preferred stock................ 7,315,795 24,972,084
Exercise of warrants................................................ 2,053,523 3,369,852
Issuance of common stock, net of issuance costs of $3,130,306....... 3,000,000 28,369,694
Comprehensive income
Unrealized loss on short-term investments available for sale......
Net loss..........................................................
Comprehensive income................................................
------------- ------------- ---------- -----------
Balance, December 31, 1997.......................................... 15,034,629 61,039,848 -- --
Issuance of shares under employee stock purchase plan............... 98,239 738,968
Exercise of stock options........................................... 80,418 42,713
Non-cash stock-based compensation................................... 4,218 36,625
Comprehensive income
Unrealized loss on short-term investments available for sale......
Unrealized gain on foreign currency translation...................
Other comprehensive income........................................
Net loss..........................................................
Comprehensive income................................................
------------- ------------- ---------- -----------
Balance, December 31, 1998.......................................... 15,217,504 $ 61,858,154 -- --
------------- ------------- ---------- -----------
Issuance of shares under employee stock purchase plan (unaudited)... 35,446 304,664
Exercise of stock options (unaudited)............................... 129,200 309,550
Exercise of stock warrants (unaudited).............................. 59,461 58,927
Contributed capital for warrants (unaudited)........................
Comprehensive income (unaudited)
Unrealized loss on short-term investments available for sale
(unaudited).....................................................
Unrealized gain on foreign currency translation (unaudited).......
Other comprehensive income (unaudited)............................
Net loss (unaudited)..............................................
Comprehensive income (unaudited)....................................
------------- ------------- ---------- -----------
Balance, March 31, 1999 (unaudited)................................. $ 15,441,611 $ 62,531,295
------------- ------------- ---------- -----------
------------- ------------- ---------- -----------
<CAPTION>
ACCUMULATED
SERIES B PREFERRED CONTRIBUTED OTHER
------------------------- CAPITAL FOR COMP
SHARES AMOUNT WARRANTS INCOME
---------- ------------- -------------- ---------------
<S> <C> <C>
Balance, January 1, 1996............................................ 895,506 $ 3,582,034 $ 1,163,319 $ --
Exercise of stock options...........................................
Exercise of Series C Preferred stock warrants....................... (45,453)
Exercise of Series D Preferred stock warrants....................... (34,329)
Contributed capital for warrants.................................... 1,537,623
Net loss............................................................
---------- ------------- -------------- -------
Balance, December 31, 1996.......................................... 895,506 3,582,034 2,621,160 0
Exercise of stock options...........................................
Conversion of Series A Preferred stock..............................
Conversion of Series B Preferred stock.............................. (895,506) (3,582,034)
Conversion of Mandatorily Redeemable Preferred stock................
Exercise of warrants................................................ (2,107,576)
Issuance of common stock, net of issuance costs of $3,130,306.......
Comprehensive income
Unrealized loss on short-term investments available for sale...... (2,962)
Net loss..........................................................
Comprehensive income................................................
---------- ------------- -------------- -------
Balance, December 31, 1997.......................................... -- -- 513,584 (2,962)
Issuance of shares under employee stock purchase plan...............
Exercise of stock options...........................................
Non-cash stock-based compensation...................................
Comprehensive income
Unrealized loss on short-term investments available for sale...... 6,007
Unrealized gain on foreign currency translation................... 126
Other comprehensive income........................................
Net loss..........................................................
Comprehensive income................................................
---------- ------------- -------------- -------
Balance, December 31, 1998.......................................... -- -- $ 513,584 $ 3,171
---------- ------------- -------------- -------
Issuance of shares under employee stock purchase plan (unaudited)...
Exercise of stock options (unaudited)...............................
Exercise of stock warrants (unaudited).............................. (58,927)
Contributed capital for warrants (unaudited)........................ 892,378
Comprehensive income (unaudited)
Unrealized loss on short-term investments available for sale
(unaudited)..................................................... (5,298)
Unrealized gain on foreign currency translation (unaudited)....... (916)
Other comprehensive income (unaudited)............................
Net loss (unaudited)..............................................
Comprehensive income (unaudited)....................................
---------- ------------- -------------- -------
Balance, March 31, 1999 (unaudited)................................. $ 1,347,035 $ (3,043)
---------- ------------- -------------- -------
---------- ------------- -------------- -------
<CAPTION>
ACCUMULATED
DEFICIT TOTAL
--------------- --------------
Balance, January 1, 1996............................................ $ (12,880,469) $ (7,470,995)
Exercise of stock options........................................... 4,050
Exercise of Series C Preferred stock warrants....................... (45,453)
Exercise of Series D Preferred stock warrants....................... (34,329)
Contributed capital for warrants.................................... 1,537,623
Net loss............................................................ (15,967,335) (15,967,335)
--------------- --------------
Balance, December 31, 1996.......................................... (28,847,804) (21,976,439)
Exercise of stock options........................................... 78,013
Conversion of Series A Preferred stock..............................
Conversion of Series B Preferred stock..............................
Conversion of Mandatorily Redeemable Preferred stock................ 24,972,084
Exercise of warrants................................................ 1,262,276
Issuance of common stock, net of issuance costs of $3,130,306....... 28,369,694
--------------
Comprehensive income
Unrealized loss on short-term investments available for sale...... (2,962)
Net loss.......................................................... (29,593,362) (20,593,362)
--------------
Comprehensive income................................................ (29,596,324)
--------------- --------------
Balance, December 31, 1997.......................................... (58,441,166) 3,109,304
Issuance of shares under employee stock purchase plan............... 738,968
Exercise of stock options........................................... 42,713
Non-cash stock-based compensation................................... 36,625
--------------
Comprehensive income
Unrealized loss on short-term investments available for sale......
Unrealized gain on foreign currency translation...................
Other comprehensive income........................................ 6,133
Net loss.......................................................... (23,972,872) (23,972,872)
--------------
Comprehensive income................................................ (23,966,739)
--------------- --------------
Balance, December 31, 1998.......................................... $ (82,414,038) $ (20,039,129)
--------------- --------------
Issuance of shares under employee stock purchase plan (unaudited)... 304,664
Exercise of stock options (unaudited)............................... 309,550
Exercise of stock warrants (unaudited)..............................
Contributed capital for warrants (unaudited)........................ 892,378
--------------
Comprehensive income (unaudited)
Unrealized loss on short-term investments available for sale
(unaudited).....................................................
Unrealized gain on foreign currency translation (unaudited).......
Other comprehensive income (unaudited)............................ (6,214)
Net loss (unaudited).............................................. (4,534,455) (4,534,455)
--------------
Comprehensive income (unaudited).................................... (4,540,667)
--------------- --------------
Balance, March 31, 1999 (unaudited)................................. $ (86,948,493) $ (23,073,206)
--------------- --------------
--------------- --------------
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
COINSTAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
YEAR ENDED DECEMBER 31, 31,
---------------------------------------- -------------------------
1996 1997 1998 1998 1999
------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Operating activities:
Net Loss.......................................... $(15,967,335) $(29,593,362) $(23,972,873) $ (7,447,036) $(4,534,455)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and amortization................... 4,133,904 8,679,036 13,237,234 2,813,277 4,102,747
Debt discount amortization...................... 1,819,457 9,156,396 10,345,573 2,433,187 2,765,950
Accrued investment income....................... (263,063) (389,254) 483,502 164,509 79,529
Non-cash stock-based compensation............... -- -- 36,625 10,754
Unrealized loss on short-term investments
available for sale............................ (5,298)
Unrealized gain (loss) on foreign currency
translation................................... -- -- 117 (916)
Cash provided (used) by changes in operating assets
and liabilities:
Prepaid expenses and other current assets....... (613,484) (156,349) (21,661) (88,551) (500,466)
Other assets.................................... (64,803) (176,978) 2,592 588 (85,664)
Accounts payable................................ 869,029 1,458,978 590,390 481,235 889,378
Accrued liabilities............................. 6,734,378 10,562,777 8,753,736 (1,256,764) 721,960
------------ ------------ ------------ ------------ -----------
Net cash provided (used) by operating
activities.................................. (3,351,917) (458,756) 9,455,235 (2,888,801) 3,432,764
Investing activities:
Purchases of short-term investments............... (32,245,346) (47,962,984) (24,258,982) (15,537,936) 0
Sales and maturities of short-term
investments................................... 45,856,665 56,202,659 19,998,755 2,002,495
Purchases of fixed assets....................... (20,819,556) (29,767,502) (22,991,701) (4,735,679) (4,986,790)
Costs to dispose of equipment................... (923)
Other........................................... (98,791) -- 2,622
------------ ------------ ------------ ------------ -----------
Net cash provided (used) by investing
activities.................................. (53,163,693) (31,873,821) 8,954,598 (274,860) (2,985,218)
Financing activities:
Payments on long-term debt........................ (6,462,640) (1,045,255) (1,703,222) (407,920) (467,257)
Borrowings under long-term debt obligations, net
of financing costs............................ 69,840,270 -- --
Financing costs associated with long-term credit
facility...................................... (419,133)
Proceeds from sale of common stock, net of
issuance costs................................ 28,369,694
Proceeds from sale of Series C, D and E
Preferred stock............................... 1,344,538 -- --
Proceeds from exercise of stock options and
issuance of shares under employee stock
purchase plan................................. 4,050 78,013 781,681 429,614 614,214
Contributed capital for warrants................ 1,537,623 -- --
Proceeds from exercise of warrants.............. -- 1,262,276 --
------------ ------------ ------------ ------------ -----------
Net cash provided/(used) by financing
activities.................................. 66,263,841 28,664,728 (921,541) 21,694 (272,176)
------------ ------------ ------------ ------------ -----------
Increase/(decrease) in cash and cash equivalents.... 9,748,231 (3,667,849) 17,488,292 (3,141,967) 177,017
Cash and cash equivalents:
Beginning of period............................. 14,119,532 23,867,763 20,199,913 20,199,913 37,688,205
------------ ------------ ------------ ------------ -----------
End of period................................... $ 23,867,763 $ 20,199,914 $ 37,688,205 $ 17,057,946 $37,865,222
------------ ------------ ------------ ------------ -----------
------------ ------------ ------------ ------------ -----------
Supplemental disclosure of cash flow information:
Cash paid during the period for interest.......... $ 832,061 $ 668,058 $ 486,298 $ 141,952 $ 109,731
Supplemental disclosures of noncash financing
activities:
Purchase of vehicles financed by capital lease
obligations................................... $ -- $ 735,970 $ 504,811 $ 74,637 $ 308,235
Purchase of computer equipment financed by
capital lease obligations..................... 553,065 -- -- -- --
Cashless exercises of warrants.................. -- 2,581,426 -- -- 137,156
Purchase of assets with warrants................ -- -- -- -- 169,167
Issuance of warrants under revolving credit
facility...................................... -- -- -- -- 723,211
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE>
COINSTAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND BUSINESS:
GENERAL
Coinstar, Inc. (the "Company") develops, owns and operates a network of
automated, self-service coin-counting and processing machines that provide
consumers with a convenient means to convert loose coins into cash. The Company
has increased its installed base every year since inception, and as of December
31, 1998, had an installed base of 4,813 units located in supermarkets and
financial institutions in 37 states.
PRINCIPLES OF CONSOLIDATION
The financial statements include the accounts of Coinstar, Inc. and its
wholly owned subsidiaries, including Coinstar International, Inc., which was
formed for the purpose of exploring the expansion of the Coinstar network
internationally. All costs incurred by Coinstar, Inc. and its subsidiaries
relating to the development of domestic and international markets are expensed
as incurred.
INTERIM FINANCIAL INFORMATION
The interim financial information as of March 31, 1999, and for the
three-month periods ended March 31, 1998 and 1999, was prepared by the Company
in a manner consistent with the audited financial statements and pursuant to the
rules and requirements of the Securities and Exchange Commission. The unaudited
information, in management's opinion, reflects all adjustments that are of a
normal recurring nature and that are necessary to present fairly the results for
the periods presented. The results of operations for the three-month period
ended March 31, 1999, are not necessarily indicative of the results to be
expected for the entire year.
INITIAL PUBLIC OFFERING
On July 9, 1997, the Company completed its initial public offering of
3,000,000 shares of common stock at a purchase price of $10.50 per share for
proceeds, net of issuance costs, of $28.4 million. The net proceeds received by
the Company have been and will be used (i) predominantly to fund capital
expenditures and working capital in connection with the continued expansion of
the Coinstar network, (ii) for product research and development, and deployment
of enhancements to the Coinstar unit and the coin processing network and (iii)
for general corporate purposes.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid securities purchased with a maturity
of three months or less to be cash equivalents. Cash and cash equivalents
includes funds in transit, which represent amounts being processed by armored
carriers or residing in Coinstar units, of $21.8 million and $14.2 million at
December 31, 1998 and 1997, respectively.
SECURITIES AVAILABLE FOR SALE
The Company's investments are all classified as available for sale and are
stated at fair value in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for
F-7
<PAGE>
COINSTAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Certain Investments in Debt and Equity Securities." This statement specifies
that available for sale securities are reported at fair value with changes in
unrealized gains and losses recorded directly to stockholders' equity. All of
the Company's investments have maturities of one year or less. Realized and
unrealized gains or losses at December 31, 1998 and 1997, were insignificant.
Fair value is based upon quoted market prices.
PROPERTY AND EQUIPMENT
Property and equipment are depreciated using the following methods and
useful lives:
<TABLE>
<CAPTION>
TYPE OF ASSET METHOD USEFUL LIFE
- ------------------------------------------------------------- -------------- ---------------
<S> <C> <C>
Coinstar units purchased prior to January 1, 1996 balance.... 150% declining 60 months
Coinstar units purchased subsequent to
January 1, 1996.............................................. Straight-line 60 months
Installation costs for Coinstar units........................ Straight-line 36 months
Furniture and equipment...................................... Straight-line 60 months
Computer equipment........................................... Straight-line 36 months
Automobiles and light trucks................................. Straight-line 36 months
Leasehold improvements....................................... Straight-line 60 to 84 months
</TABLE>
In order to achieve volume discounts, the Company prepurchases certain
components of the Coinstar units. When a component is placed into service, the
cost is transferred to the appropriate Coinstar equipment account and
depreciated accordingly.
OTHER ASSETS
Other assets include lease and utility deposits, deferred financing fees for
the issuance of the Company's 13% senior subordinated discount notes (the
"Notes") and amounts capitalized relating to organizational costs. Deferred
financing fees and organizational costs are amortized on a straight-line basis
over ten and five years, respectively.
LONG-LIVED ASSETS
The Company periodically reviews long-lived assets, including identified
intangible assets, for impairment to determine whether any events or
circumstances indicate that the carrying amount of the assets may not be
recoverable. Such review includes estimating expected future cash flows.
During 1996, the Company discontinued its preprinted coupon distribution
business line. As a result, a provision for additional depreciation in the
amount of $329,096 was made to write down the recorded value of coupon
dispensing components of the Coinstar units, which are no longer being used in
operations, to their estimated fair value. During 1997, the Company upgraded
certain components of the Coinstar unit. As a result, a provision for additional
depreciation in the amount of $107,054 was made to write down the recorded value
of the obsolete equipment. During 1998, the Company reduced the carrying value
of certain components of the Coinstar unit resulting in a provision for
additional depreciation of $170,097.
F-8
<PAGE>
COINSTAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
REVENUE RECOGNITION
Coin processing fees are recognized at the time the customers' coins are
counted by the Coinstar unit. Units in service with two retail distribution
partners in 1997 accounted for approximately 25.6% and 17.2%, respectively, of
the Company's revenues. In 1998, two retail distribution partners accounted for
approximately 18.7% and 18.9%, respectively, of the Company's revenues.
LOSS PER SHARE
The Company adopted SFAS No. 128, "Earnings Per Share," for the year ended
December 31, 1997, as required. On February 3, 1998, the Securities and Exchange
Commission (the "Commission") released Staff Accounting Bulletin No. 98, which
requires companies to restate all prior periods presented in accordance with the
provisions of SFAS No. 128, including those periods prior to an initial public
offering. Because the results from operations reflect a net loss for all years
presented, basic and diluted loss per share are calculated based on the same
weighted average number of shares outstanding.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
The carrying amounts for cash and cash equivalents, short-term investments,
and accounts payable approximate fair value because of the short maturity of
these instruments.
At December 31, 1997 and 1998, the carrying amount and estimated fair value
of such financial instruments for which fair value can be determined are as
follows:
<TABLE>
<CAPTION>
1997 1998
------------------------ ------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Cash and cash equivalents...................... $ 20,200 $ 20,200 $ 37,688 $ 37,688
Short-term investments......................... 36,603 36,603 4,182 4,182
Accounts payable............................... 3,238 3,238 3,828 3,828
Long-term debt................................. 75,356 77,425 85,684 76,950
</TABLE>
STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to employees using the intrinsic
value method in accordance with Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees." SFAS No. 123, "Accounting for
Stock-Based Compensation," has been adopted by the Company for disclosure of
certain additional information related to its stock option plans.
F-9
<PAGE>
COINSTAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") 133, "Accounting for Derivative
Instruments and Hedging Activities." This pronouncement requires an entity to
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. 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.
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.
NOTE 3 -- ACCRUED LIABILITIES:
Accrued liabilities consisted of the following at the respective dates:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1998
----------- -----------
<S> <C> <C>
Funds in transit................................................. $14,175,898 $21,786,686
Accrued liabilities for revenue sharing.......................... 539,198 1,193,000
Accrued liabilities to service contract providers................ 1,598,325 1,021,890
Accrued liabilities for taxes.................................... 571,320 768,466
Other............................................................ 1,368,324 2,214,292
----------- -----------
$18,253,065 $26,987,334
----------- -----------
----------- -----------
</TABLE>
F-10
<PAGE>
COINSTAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- LONG-TERM DEBT:
Long-term debt, including current portion, consisted of the following at
December 31, 1997 and 1998:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1998
----------- -----------
<S> <C> <C>
Senior subordinated discount notes, net of unamortized
discount of $9,315,551 and $19,644,288......................... $75,355,712 $85,684,448
Equipment loan, net of unamortized discount of $14,031
and $30,867.................................................... 2,458,334 1,442,460
----------- -----------
77,814,046 87,126,908
Less current portion............................................. 1,032,710 1,442,460
----------- -----------
Long-term debt................................................... $76,781,336 $85,684,448
----------- -----------
----------- -----------
</TABLE>
EQUIPMENT LOANS
In January 1996, the Company entered into a loan agreement which allows for
maximum borrowings of $3,000,000 under specific notes secured by certain
Coinstar equipment. During the first six months of 1996, the Company drew the
entire $3,000,000. This loan has an effective annual interest rate of 16.6% and
is due in monthly installments through October 1999.
EARLY RETIREMENT OF DEBT
On December 1996, the Company repaid an aggregate of $5,838,050 in equipment
loans prior to scheduled maturity. As a result of the early repayment, the
Company recognized an extraordinary loss of $248,631, which included early
termination penalties of $200,763 and write-off of related discounts of $47,868.
SENIOR SUBORDINATED DISCOUNT NOTES
On October 22, 1996, the Company completed a private placement offering of
95,000 units, each of which consisted of a $1,000 principal amount of 13% senior
subordinated discount notes, due at maturity in 2006, and warrants to purchase
seven shares of common stock of the Company, at an exercise price of $.01 per
warrant share, subject to adjustment under certain circumstances. Imputed
interest on the discount notes, as represented by the original issue discount of
$29,413,154, accrues until October 1999, at which time interest is payable in
semi-annual installments through maturity.
The Notes are not redeemable at the option of the Company prior to October
1, 2001, other than from the proceeds of a public equity offering. The Notes are
redeemable at the option of the Company, in whole or in part, at any time on and
after October 1, 2001, at specified redemption prices for the relevant year of
redemption, plus accrued and unpaid interest to the date of redemption.
In the event of a change of control (as defined), each holder of the Notes
has the option to require the Company to repurchase such holder notes at 101% of
the accreted value thereof on the date of repurchase plus liquidated damages.
The Notes are subordinate in rank to all existing and
F-11
<PAGE>
COINSTAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- LONG-TERM DEBT: (CONTINUED)
future senior indebtedness of the Company. The Indenture pursuant to which the
Notes were issued contains certain covenants that, among other things, limit the
ability of the Company to make dividend payments, make investments, repurchase
outstanding shares of stock, prepay other debt obligations, incur additional
indebtedness, effect asset dispositions, engage in sale and leaseback
transactions, consolidate, merge or sell all or substantially all of the
Company's assets, engage in transactions with affiliates, or permit its
restricted subsidiaries to effect certain transactions.
Subsequent to the completion of the Company's initial public offering and
pursuant to a related Notes Registration Rights Agreement between the Company
and the initial purchasers of the Notes (the "Registration Rights Agreement"),
the Company completed an exchange offer of the Notes to satisfy its obligations
under the Registration Rights Agreement. The Notes were exchanged for otherwise
substantially identical notes registered under the Securities Act of 1933, as
amended.
The Notes were recorded net of discount of $30,410,654, and the warrants
issued in connection with these notes were recorded as $997,500 of contributed
capital, each as determined by the relative fair values of the Notes and the
warrants as of the closing date. In addition, the Company has recorded deferred
financing fees related to the Notes of $2,714,354. Additional costs associated
with the exchange offer of $121,063 were added to the deferred financing cost.
The deferred financing costs and discount attributable to the warrants are being
amortized over the term of the Notes.
PRINCIPAL PAYMENTS
Scheduled principal payments on long-term debt for the next five years
ending December 31, are as follows:
<TABLE>
<S> <C> <C>
1999.............................................................. $ 1,456,491
2000.............................................................. --
2001.............................................................. --
2002.............................................................. --
2003.............................................................. --
Thereafter........................................................ 95,000,000
-----------
96,456,491
Less unamortized discounts, including current portion............. 9,329,583
-----------
$87,126,908
-----------
-----------
</TABLE>
CREDIT AGREEMENT
On February 19, 1999, Coinstar entered into a Credit Agreement with Imperial
Bank, for itself and as agent of Bank Austria Creditanstalt Corporate Finance,
Inc. ("Bank Austria" and, together with Imperial Bank, the "Lenders"). The
Credit Agreement provides Coinstar with a credit facility of up to $25 million,
consisting of revolving loans of $5 million from each of the Lenders, and term
loans of $5 million from each of the Lenders. The amounts available under the
term loans will increase to $7,500,000 per Lender after Coinstar has satisfied
certain debt ratios.
F-12
<PAGE>
COINSTAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- LONG-TERM DEBT: (CONTINUED)
In connection with the Credit Agreement, Coinstar issued to each of the
Lenders a warrant to purchase 51,326 shares of its common stock. The exercise
price for the warrants, which will expire on February 19, 2009, is $12.177 per
share. Coinstar has agreed, pursuant to Registration Rights Agreements with the
Lenders, to file a registration statement on Form S-3 to register the shares
issuable upon exercise of the warrants within 60 days following the date on
which Coinstar has satisfied all of its obligations under the Credit Agreement
(the "Termination Date"). Coinstar must use reasonable efforts to cause the
registration statement to be declared effective no later than 120 days following
the Termination Date and must keep the registration open for at least 45 days
following the date the registration statement is declared effective. The
Registration Rights Agreements also obligate Coinstar to include the common
stock issuable upon exercise of the warrants in certain registration statements
it may file.
NOTE 5 -- COMMITMENTS:
LEASE COMMITMENTS
The Company entered into two lease agreements for office space which
commenced April 1, 1997, and September 1, 1997, and expire on March 31, 2002,
and August 31, 2004, respectively. The agreements require the Company to pay a
portion of operating costs and minimum monthly payments, which escalate annually
based on a stated schedule. Each agreement allows the Company to renew each
lease for one consecutive period of five years.
The Company has entered into capital lease agreements to finance the
acquisition of certain Coinstar equipment, computer equipment, and automobiles.
Title to such assets is retained by the Company. These capital leases have terms
of 36 months at imputed interest rates which range from 10.4% to 24.9%. Assets
under capital lease obligations aggregated $2,300,694, and $2,193,810, net of
$1,122,119 and $1,016,627 of accumulated amortization, at December 31, 1998 and
1997, respectively.
A summary of the Company's minimum lease obligations as of December 31,
1998, are as follows:
<TABLE>
<CAPTION>
CAPITAL LEASES OPERATING LEASES
--------------- -----------------
<S> <C> <C> <C>
1999........................................ $ 651,391 $ 1,265,643
2000........................................ 306,232 1,284,138
2001........................................ 67,311 1,310,969
2002........................................ -- 1,158,608
2003........................................ -- 1,122,723
Thereafter.................................. -- 759,617
--------------- -----------------
Total minimum lease commitments............. 1,024,934 $ 6,901,698
--------------- -----------------
-----------------
Less amounts representing interest.......... 95,388
---------------
Present value of lease obligation........... 929,546
Less current portion........................ 578,236
---------------
Long-term portion........................... $ 351,310
---------------
---------------
</TABLE>
F-13
<PAGE>
COINSTAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- COMMITMENTS: (CONTINUED)
Rental expense was $1,365,148, $889,506 and $359,842 for the years ended
December 31, 1998, 1997 and 1996, respectively.
SERVICE PROVIDERS
As of December 31, 1998, the Company had outstanding service contracts with
several service providers. These contracts generally cover a one- to two-year
period and have cancellation clauses ranging from 30 to 60 days.
PURCHASE COMMITMENTS
The Company has entered into certain purchase agreements with suppliers of
Coinstar units which require aggregate purchases in the amount of $11,208,712 in
1999.
CONCENTRATION OF SUPPLIERS
The Company currently buys a significant component of the Coinstar unit from
a single supplier. Although there are a limited number of suppliers for the
component, management believes that other suppliers could provide similar
equipment which would require certain modifications. Accordingly, a change in
suppliers could cause a delay in manufacturing and a possible slow-down of
growth, which could materially adversely affect future operating results.
LETTER OF CREDIT
As of December 31, 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 through June 1999, collateralize the Company's obligations
to third parties. As of December 31, 1998, no amounts were outstanding under the
letters of credit.
NOTE 6 -- STOCKHOLDERS' EQUITY:
As a result of the Company's initial public offering, 649,775 shares of
Series A and 895,506 shares of Series B Preferred Stock outstanding were
converted to common stock. Shares of Series A Preferred Stock shares were
converted into shares of the Company's common stock on a one-for-one basis, and
Series B shares were converted on a basis of 1.142857 shares of common stock for
each share of Preferred stock.
Pursuant to the terms of Series C, D, and E Preferred Stock agreements, the
completion of the Company's initial public offering resulted in the conversion
of 4,659,324 shares of Series C, 2,556,471 shares of Series D, and 100,000
shares of Series E Preferred Stock on a one-for-one basis into the Company's
common stock.
In connection with various financing transactions, the Company issued
warrants which entitled the holders to purchase shares of the Company's common
stock and Series B, C, D, E-2, and E-3 Preferred Stock. All Preferred Stock
warrants were converted to common stock warrants upon completion of the
Company's initial public offering on a basis of 1.142857 common stock warrants
for each Series B Preferred Stock warrant, and on a one-for-one basis for the
Series C, D, E-2, and
F-14
<PAGE>
COINSTAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- STOCKHOLDERS' EQUITY: (CONTINUED)
E-3 Preferred Stock warrants. A summary of the warrants outstanding for the
three years in the period ended December 31, 1998, is as follows:
<TABLE>
<CAPTION>
SERIES B SERIES C
COMMON STOCK PREFERRED STOCK PREFERRED STOCK
------------------------ ----------------------- -----------------------
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
----------- ----------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, January 1,
1996................... 43,752 $ 4.00 1,419,369 $3.00-4.00
Issued................... 665,000 $ .01
Exercised................ (92,308) 4.00
----------- ----------- ----------- ---------- ----------- ----------
Outstanding, December 31,
1996................... 665,000 .01 43,752 4.00 1,327,061 3.00-4.00
Exercised................ (665,000) .01 (43,752) 4.00 (1,277,830) 3.00-4.00
Conversion to common
stock warrants......... 1,042,981 $3.25-15.61 (49,231) 3.25
----------- ----------- ----------- ---------- ----------- ----------
Outstanding, December 31,
1997 and 1998.......... 1,042,981 $3.25-15.61 -- --
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
<CAPTION>
SERIES D SERIES E-2 SERIES E-3
PREFERRED STOCK PREFERRED PREFERRED
------------------------ ----------------------- -----------------------
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
----------- ----------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, January 1,
1996................... 705,891 $ 4.25 -- $ -- -- $ --
Issued................... 144,926 4.00-4.25 350,000 11.40 550,000 15.61
Exercised................ (56,471) 4.25 -- -- -- --
----------- ----------- ----------- ---------- ----------- ----------
Outstanding, December 31,
1996................... 794,346 4.00-4.25 350,000 11.40 550,000 15.61
Exercised................ (700,596) 4.00-4.25
Conversion to common
stock warrants......... (93,750) 4.00 (350,000) 11.40 (550,000) 15.61
----------- ----------- ----------- ---------- ----------- ----------
Outstanding, December 31,
1997 and 1998.......... -- -- --
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Certain warrants, which were to expire upon the closing of the initial
public offering, were exercised for 352,907 shares of common stock at an
aggregate exercise price of $1.26 million. Certain warrants, which also were to
expire upon the closing of the initial public offering, were exercised on a
cashless basis resulting in the issuance of 1,035,715 shares of common stock.
The warrants issued in connection with the sale of the Notes were exercised with
cash payments or on a cashless basis, resulting in the issuance of an aggregate
of 664,937 shares of common stock. The remaining warrants have expiration dates
from June 28, 1998, to December 15, 2000, and have
F-15
<PAGE>
COINSTAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- STOCKHOLDERS' EQUITY: (CONTINUED)
been recorded at amounts which reflect management's best estimate of fair value
on the date of issuance.
In November 1998, the Board of Directors approved the adoption of a
Stockholder Rights Plan under which all stockholders receive rights to purchase
shares of new series of Preferred Stock. The rights are exercisable only if a
person or group acquires 20 percent or more of the Company's common stock or
announces a tender offer for 20 percent or more of the common stock. If a person
acquires 20 percent or more of the Company's common stock, all rightsholders
except the purchaser will be entitled to acquire the Company common stock at a
50 percent discount. The rights trade with the common stock, unless and until
they are separated upon the occurrence of certain future events. The Board of
Directors may terminate the Rights Plan at any time or redeem the rights prior
to the time a person acquires more than 20 percent of Coinstar's common stock.
NOTE 7 -- INCOME TAXES:
The components of the Company's deferred tax asset at December 31, 1998 and
1997 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1998
----------- -----------
<S> <C> <C>
Tax loss and credit carryforwards................................ 17,901,000 $24,236,000
Depreciation and amortization.................................... (1,905,000) (3,614,000)
Subordinated debt discount amortization.......................... 3,645,000 7,124,000
Other............................................................ 231,000 216,000
----------- -----------
19,872,000 27,962,000
Valuation allowance.............................................. (19,872,000) (27,962,000)
----------- -----------
$ 0 $ 0
----------- -----------
----------- -----------
</TABLE>
A valuation allowance in the full amount of the net deferred tax asset
balances has been established as it is uncertain that the Company will be able
to realize such tax assets in the future. At December 31, 1998, the Company had
net operating loss and credit carryforwards in the amount of $71,230,000 which
expire through 2013.
The Company recorded deferred tax benefits of $8,113,000, $10,036,000, and
$5,422,000 for each of the years ended December 31, 1998, 1997 and 1996. A
valuation allowance in the amount of the deferred tax benefit was recorded each
year.
NOTE 8 -- STOCK-BASED COMPENSATION PLANS:
In March 1997, the Company adopted the 1997 Equity Incentive Plan, under
which options generally vest over four years and expire after 10 years. The
Company has also granted certain options under the 1997 Equity Incentive Plan
that have accelerated vesting provisions that are based on specified performance
goals being met. If these goals are met, the options vest immediately. If the
goals are not met, the options vest after five years. All options with
performance-accelerated vesting that were granted in 1998 were vested in 1998.
The Equity Incentive Plan is an amendment and restatement of the Company's 1992
Stock Option Plan, as amended. The
F-16
<PAGE>
COINSTAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- STOCK-BASED COMPENSATION PLANS: (CONTINUED)
Company has reserved a total of 2,900,000 shares of common stock for issuance
under the 1997 Equity Incentive Plan. Stock options have been granted to
officers and employees to purchase common stock at prices ranging from $.10 to
$13.94 per share which represented management's best estimate of fair market
value at the dates of grant. The Company did not recognize any compensation
expense related to the options issued under the 1997 Equity Incentive Plan.
In March 1997, the Company adopted the Non-Employee Directors' Stock Option
Plan, under which the Board of Directors has provided for the automatic grant of
options to purchase shares of common stock to non-employee directors of the
Company. The Company has reserved a total of 100,000 shares of common stock for
issuance under the Non-Employee Directors' Stock Option Plan. Stock options have
been granted to non-employee directors to purchase common stock at prices of
$7.75 and $10.00 per share which represents management's best estimate of fair
market value at the date of grant. The price ranges of all options exercised
were $.25 to $1.50 in 1998, and $.25 to $.70 in 1997. At December 31, 1998,
there were 2,689,450 shares of unissued common stock reserved for issuance, of
which options for the purchase of 1,010,891 shares were available for future
grants. Numbers of common and converted Series B Preferred shares under the
plans are as follows as of December 31:
<TABLE>
<CAPTION>
1996 1997 1998
---------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Number of common shares under
option:
Outstanding, beginning of
year.......................... 376,550 $ 0.37 614,950 $ 0.52 978,502 $ 5.76
Granted......................... 254,850 0.74 544,000 9.93 1,033,944 7.81
Series B Preferred options
converted to common stock
options....................... 39,998 3.50 --
Exercised....................... (13,500) 0.30 (199,078) 0.39 (84,636) .51
Canceled or expired............. (2,950) 0.51 (21,368) 6.94 (249,251) 7.19
--------- --------- ---------
Outstanding, end of year.......... 614,950 0.52 978,502 5.76 1,678,559 7.08
--------- --------- ---------
--------- --------- ---------
Exercisable, end of year.......... 84,017 $ 0.32 192,385 $ 3.52 464,811 $ 5.46
--------- --------- ---------
--------- --------- ---------
Number of Series B preferred
shares under option
Outstanding, beginning of
year.......................... 35,000 $ 4.00 35,000 $ 4.00 --
Converted to common stock
options....................... -- -- (35,000) 4.00 --
--------- ----- --------- ----- ---------
Outstanding, end of year.......... 35,000 4.00 -- -- --
--------- --------- ---------
--------- --------- ---------
Exercisable, end of year.......... 35,000 $ 4.00 -- -- --
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-17
<PAGE>
COINSTAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- STOCK-BASED COMPENSATION PLANS: (CONTINUED)
As a result of the Company's initial public offering, all Series B Preferred
stock options converted to common stock options on a 1.142857 to one basis.
The following table summarizes information about common stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS EXERCISABLE
OPTIONS OUTSTANDING ------------------------------------
------------------------------------------ WEIGHTED
NUMBER OF OPTIONS WEIGHTED AVERAGE NUMBER OF OPTIONS AVERAGE
OUTSTANDING AT REMAINING WEIGHTED AVERAGE EXERCISABLE AT EXERCISE
DECEMBER 31, 1998 CONTRACTUAL LIFE EXERCISE PRICE DECEMBER 31, 1998 PRICE
------------------- --------------------- ------------------- ------------------- ---------------
<S> <C> <C> <C> <C> <C>
$ 0.25-3.50............. 317,685 6.81 $ 0.98 229,491 $ 1.09
3.75-7.75............. 114,226 9.69 5.66 22,726 7.75
8.00-8.00............. 696,356 9.11 8.00 0
8.13-9.50............. 137,200 9.27 8.79 12,250 8.52
10.00-13.94............ 413,092 8.17 10.03 200,344 10.03
---------- --------
1,678,559 8.49 $ 7.08 464,811 $ 5.46
---------- --------
---------- --------
</TABLE>
In March 1997, the Company adopted the Employee Stock Purchase Plan (the
"ESPP") under Section 423 of the Internal Revenue Code. Under the ESPP, the
Board of Directors may authorize participation by eligible employees, including
officers, in periodic offerings. The Company has reserved a total of 200,000
shares of common stock for issuance under the Employee Stock Purchase Plan.
Eligible employees may participate through payroll deductions in amounts related
to their basic compensation. At the end of each offering period, shares are
purchased by the participants at 85% of the lower of the fair market value at
the beginning or the end of the offering period. No shares were issued under the
ESPP during 1997. As of December 31, 1998, payroll deductions totaling $994,642
on behalf of approximately 249 employees were collected for the purchase of
shares. Actual shares purchased by participating employees as of December 31,
1998 totaled 98,239 at an average price of $7.52.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its plans. Accordingly, no compensation cost has been recognized
for its stock option grants. The weighted average fair value of options granted
during 1998, 1997, and 1996 were $3.46, $2.80 and $.20, respectively. The fair
value of each option granted during 1998, 1997, and 1996 is estimated on the
date of grant using the Black-Scholes option-pricing model with the following
assumptions: four to five year expected life from date of grant; weighted 49%
stock volatility for 1998; 48% stock volatility for 1997 and no stock volatility
for 1996; risk-free interest rates from 4.2% to 6.95%; and no dividends during
the expected term. Had compensation costs for the Company's stock-based
compensation plans been determined based on the fair value at the grant dates
for awards under those plans consistent with the method prescribed in SFAS No.
123, "Accounting for Stock-Based
F-18
<PAGE>
COINSTAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- STOCK-BASED COMPENSATION PLANS: (CONTINUED)
Compensation," the Company's net loss and net loss per share would have
increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Net loss:
As reported........................ $(15,967,335) $(29,593,362) $(23,972,872)
Pro forma.......................... (15,981,530) (30,211,943) (25,512,452)
Net loss per share, basic and
diluted:
As reported........................ (20.37) (3.81) (1.58)
Pro forma.......................... (20.39) (3.89) (1.68)
</TABLE>
In January 1997, the Board of Directors approved an agreement for
acceleration of exercise provisions for stock options granted to certain
employees. Under the terms of the agreement, these employees are allowed to
exercise unvested stock options. Any shares purchased by an employee relating to
unvested stock options will be held in escrow until such options are vested. In
addition, the Company has the right to repurchase such shares prior to the
applicable date of vesting should the employees terminate their employment
status. The agreement has not established a new measurement date for the
affected stock options.
NOTE 9 -- LOSS PER SHARE:
The weighted average number of shares outstanding used to compute basic and
diluted loss per share were 15,150,463, 7,761,425, and 783,690 for the years
ended December 31, 1998, 1997, and 1996, respectively. Because the results from
operations reflect a net loss for all years presented, basic and diluted loss
per share are calculated based on the same weighted average number of shares
outstanding.
The following warrants, options and Preferred stock were not included in the
computation of diluted loss per share, as of December 31, because the effect was
antidilutive:
<TABLE>
<CAPTION>
1996 1997 1998
---------------------- ---------------------- ----------------------
EXERCISE EXERCISE EXERCISE
NUMBER PRICE NUMBER PRICE NUMBER PRICE
--------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Stock warrants............. 3,730,159 $0.01-15.61 1,042,981 $4.00-15.61 1,042,981 $3.25-15.61
Common stock options....... 649,950 0.25-1.50 978,502 0.25-13.94 1,668,559 0.25-13.94
Preferred stock............ 8,861,076 -- -- -- -- --
</TABLE>
NOTE 10 -- RETIREMENT PLAN:
In July 1995, the Company adopted a tax-qualified employee savings and
retirement plan under Section 401(k) of the Internal Revenue Code of 1986 (the
"Plan") for all employees who satisfy the age and service requirements under the
Plan. The Plan is funded by voluntary employee salary deferral of up to 15% of
annual compensation and employer matching contributions of up to 6% of annual
compensation. Effective October 1, 1998, the Company adopted an amendment to the
plan, whereby participating employees are 100% vested for the Company matched
F-19
<PAGE>
COINSTAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 -- RETIREMENT PLAN: (CONTINUED)
contributions. The Company has contributed $170,243 and $36,297 to the plan for
the years ended December 31, 1998 and 1997.
NOTE 11 -- 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 patents will not be limited in scope or found to be invalid.
NOTE 12 -- TERMINATION OF SUPPLIER RELATIONSHIP:
The Company's sole source of coin counter components has been Scan Coin,
pursuant to an agreement originally entered into in 1993 and subsequently
amended. Scan Coin claims that this agreement requires that only Scan Coin coin
counters may be used in Coinstar units. Additionally, Scan Coin claims that the
agreement gives ownership to Scan Coin of any improvements or developments to
the coin counter. The Company believes that Scan Coin has no claim on any of its
intellectual property. On September 8, 1998 Scan Coin informed the Company that
it was in violation of the original agreement and had 30 days to correct the
violation. Scan Coin also restated its claim to the Company's intellectual
property. The Company responded on September 16, 1998 indicating that it
rejected all claims made by Scan Coin in its letter. On May 5, 1999 Scan Coin
informed the Company that it was terminating the agreement. Scan Coin also
reiterated its claims to the Company's intellectual property and stated that it
will seek full compensation for all damages suffered. The Company has not yet
responded to this letter. The Company will continue to attempt to settle this
dispute amicably with Scan Coin.
F-20
<PAGE>
COINSTAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13 -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
Following is a presentation of selected financial data for each of the four
quarters of 1997 and 1998:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997 1998 1998 1998 1998
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statements of Operations
Data:
Revenue................. $ 3,995 $ 5,294 $ 7,762 $ 7,957 $ 8,823 $ 10,472 $ 13,576 $ 14,802
Expenses:
Direct operating........ 3,450 3,966 5,276 5,208 5,823 6,142 7,141 7,458
Regional sales and
marketing............. 630 972 798 689 917 854 930 1,077
Product research and
development........... 1,441 1,640 1,637 1,644 1,410 1,329 867 1,138
Selling, general and
administrative........ 2,528 2,630 2,669 3,252 3,276 3,726 3,531 3,579
Depreciation and
amortization.......... 1,684 2,158 2,297 2,539 2,813 3,120 3,635 3,669
Loss from operations.... (5,738) (6,072) (4,915) (5,375) (5,416) (4,699) (2,528) (2,119)
Other income (expense):
Interest income......... 580 440 710 597 501 386 273 206
Interest expense........ (2,344) (2,415) (2,499) (2,563) (2,571) (2,660) (2,758) (2,827)
Other income............ 39 63 59 78
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Net loss................ $ (7,502) $ (8,047) $ (6,704) $ (7,341) $ (7,447) $ (6,910) $ (4,954) $ (4,661)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Loss per share, basic
and diluted........... $ (8.31) $ (8.18) $ (.48) $ (.49) $ (.49) $ (.46) $ (.33) $ (.31)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Weighted average shares
outstanding, basic and
diluted............... 903 984 13,906 15,029 15,080 15,116 15,187 15,216
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
MARCH 31,
1999
-----------
<S> <C>
Statements of Operations
Data:
Revenue................. $ 15,791
Expenses:
Direct operating........ 7,939
Regional sales and
marketing............. 1,318
Product research and
development........... 940
Selling, general and
administrative........ 3,381
Depreciation and
amortization.......... 4,103
Loss from operations.... (1,890)
Other income (expense):
Interest income......... 163
Interest expense........ (2,851)
Other income............ 44
-----------
Net loss................ $ 4,534
-----------
-----------
Loss per share, basic
and diluted........... $ (.30)
-----------
-----------
Weighted average shares
outstanding, basic and
diluted............... 15,358
-----------
-----------
</TABLE>
NOTE 14 -- BUSINESS SEGMENT INFORMATION:
SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION establishes standards for the way that companies report information
about operating segments. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers.
The Company generates substantially all of its revenues through a common
delivery infrastructure, and therefore the Company has only one reportable
segment. Substantially all revenues are generated from domestic sources.
Substantially all Company long-lived assets are physically located within the
United States.
NOTE 15 -- NONCASH ASSET ACQUISITIONS:
In March 1999 the Company acquired assets consisting of internet domain
names, software, fixed assets, contracts, and web site content from Compucook,
Inc. In consideration for the purchase, the Company issued 25,000 common stock
warrants at an exercise price of $15.63 per warrant, which expire on March 2,
2004.
In April 1999 the Company acquired certain assets consisting of internet
domain names, fixed assets, contracts, and web site content from Nu World
Marketing Limit Inc. In consideration for the purchase, the Company issued
25,000 shares of common stock.
F-21
<PAGE>
UNDERWRITING
Coinstar and the underwriters for the offering (the "Underwriters") named
below have entered into an underwriting agreement with respect to the shares
being offered. Subject to certain conditions, each Underwriter has severally
agreed to purchase the number of shares indicated in the following table.
Goldman, Sachs & Co., Donaldson, Lufkin & Jenrette Securities Corporation and
Hambrecht & Quist LLC are the representatives of the Underwriters.
<TABLE>
<CAPTION>
Underwriters Number of Shares
- ------------------------------------------------------------- -----------------
<S> <C>
Goldman, Sachs & Co..........................................
Donaldson, Lufkin & Jenrette Securities Corporation..........
Hambrecht & Quist LLC........................................
-----------------
Total.................................................... 4,000,000
-----------------
-----------------
</TABLE>
---------------------
If the Underwriters sell more shares than the total number set forth in the
table above, the Underwriters have an option to buy up to an additional 600,000
shares from Coinstar to cover such sales. They may exercise that option for 30
days. If any shares are purchased pursuant to this option, the Underwriters will
severally purchase shares in approximately the same proportion as set forth in
the table above.
The following table shows the per share and total underwriting discounts and
commissions to be paid to the Underwriters by Coinstar. Such amounts are shown
assuming both no exercise and full exercise of the Underwriters' option to
purchase additional shares.
<TABLE>
<CAPTION>
Paid by Coinstar
-------------------------
Full
No Exercise Exercise
----------- ------------
<S> <C> <C>
Per Share............................................ $ $
Total................................................ $ $
</TABLE>
Shares sold by the Underwriters to the public will initially be offered at
the initial price to public set forth on the cover of this prospectus. Any
shares sold by the Underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial price to public. Any such securities
dealers may resell any shares purchased from the Underwriters to certain other
brokers or dealers at a discount of up to $ per share from the initial
price to public. If all the shares are not sold at the initial price to public,
the representatives may change the offering price and the other selling terms.
Coinstar has agreed with the Underwriters not to dispose of or hedge any of
its common stock or securities convertible into or exchangeable for shares of
common stock during the period from the date of this prospectus continuing
through the date 90 days after the date of this prospectus,
U-1
<PAGE>
except with the prior written consent of the representatives. This agreement
does not apply to any existing employee benefit plans.
In connection with the offering, the Underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the Underwriters of a greater
number of shares than they are required to purchase in the offering. Stabilizing
transactions consist of certain bids or purchases made for the purpose of
preventing or retarding a decline in the market price of the common stock while
the offering is in progress.
The Underwriters also may impose a penalty bid. This occurs when a
particular Underwriter repays to the Underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such Underwriter in stabilizing or short covering
transactions.
These activities by the Underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be discontinued by the
Underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
As permitted by Rule 103 under the Exchange Act, certain Underwriters and
selling group members that are market makers ("passive market makers") in the
common stock may make bids for or purchases of the common stock in the Nasdaq
National Market until a stabilizing bid has been made. Rule 103 generally
provides that
- a passive market maker's net daily purchases of the common stock may not
exceed 30% of its average daily trading volume in such securities for the
two full consecutive calendar months, or any 60 consecutive days ending
within the 10 days, immediately preceding the filing date of the
registration statement of which this prospectus forms a part,
- a passive market maker may not effect transactions or display bids for the
common stock at a price that exceeds the highest independent bid for the
common stock by persons who are not passive market makers, and
- bids made by passive market makers must be identified as such.
Coinstar estimates that its share of the total expenses of the offering,
excluding underwriting discounts and commissions, will be approximately
$500,000.
Coinstar has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1993.
U-2
<PAGE>
Edgar artwork description:
Inside back cover: [The Coinstar logo and name. Picture of a jar of coins. Text
at the bottom of the page: "Turning change into spending power!"]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this prospectus. You must not rely on
any unauthorized information or representations. This prospectus is an offer to
sell only the shares offered hereby, but only under circumstances and in
jurisdictions where it is lawful to do so. The information contained in this
prospectus is current only as of its date.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary........................................................ 4
Risk Factors.............................................................. 9
Forward Looking Statements................................................ 20
Use of Proceeds........................................................... 20
Price Range of Common Stock............................................... 20
Dividend Policy........................................................... 21
Dilution.................................................................. 21
Capitalization............................................................ 22
Selected Consolidated Financial Data...................................... 23
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 25
Business.................................................................. 38
Management................................................................ 47
Principal Stockholders.................................................... 50
Description of Capital Stock.............................................. 52
Validity of Common Stock.................................................. 55
Experts................................................................... 55
Additional Information.................................................... 55
Incorporation of Certain Documents by Reference........................... 56
Index to Financial Statements............................................. F-1
Underwriting.............................................................. U-1
</TABLE>
4,000,000 Shares
COINSTAR, INC.
Common Stock
----------------
[LOGO]
----------------
GOLDMAN, SACHS & CO.
DONALDSON, LUFKIN & JENRETTE
HAMBRECHT & QUIST
Representatives of the Underwriters
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses to be paid by us in
connection with the sale of the shares of common stock being registered hereby.
All amounts are estimates except for the Securities and Exchange Commission
registration fee, the NASD filing fee and the Nasdaq National Market filing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee.............................. $ 25,257
NASD filing fee.................................................................. 9,585
Nasdaq National Market filing fee................................................ 17,500
Accounting fees and expenses..................................................... 150,000
Legal fees and expenses.......................................................... 200,000
Printing and engraving expenses.................................................. 50,000
Blue sky fees and expenses....................................................... 7,000
Transfer agent and registrar fees and expenses................................... 7,500
Miscellaneous.................................................................... 33,158
---------
Total............................................................................ $ 500,000
---------
---------
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933, as amended (the "Securities
Act").
As permitted by the Delaware General Corporation Law, Coinstar's certificate
of incorporation includes a provision that eliminates the personal liability of
its directors for monetary damages for breach of fiduciary duty as a director,
except for liability (1) for any breach of the director's duty of loyalty to
Coinstar or its stockholders, (2) for acts or omissions not in good faith or
that involve intentional misconduct or a knowing violation of law, (3) under
section 174 of the Delaware General Corporation Law (regarding unlawful
dividends and stock purchases) or (4) for any transaction from which the
director derived an improper personal benefit.
As permitted by the Delaware General Corporation Law, Coinstar's bylaws
provide that (1) Coinstar is required to indemnify its directors and officers to
the fullest extent permitted by the Delaware General Corporation Law, subject to
certain very limited exceptions, (2) Coinstar is required to advance expenses,
as incurred, to its directors and officers in connection with a legal proceeding
to the fullest extent permitted by the Delaware General Corporation Law, subject
to certain very limited exceptions and (3) the rights conferred in the bylaws
are not exclusive.
Coinstar has entered into indemnification agreements with certain of its
current directors and officers to give such directors and officers additional
contractual assurances regarding the scope of the indemnification set forth in
Coinstar's certificate of incorporation and bylaws and to provide additional
procedural protections. At present, there is no pending litigation or proceeding
involving a director, officer or employee of Coinstar regarding which
indemnification is sought, nor is Coinstar aware of any threatened litigation
that may result in claims for indemnification.
II-1
<PAGE>
Reference is also made to Section 8 of the Underwriting Agreement, which
provides for the indemnification of officers, directors and controlling persons
of Coinstar against certain liabilities. The indemnification provision in
Coinstar's certificate of incorporation, bylaws and the Indemnity Agreements
entered into between Coinstar and each of its directors and officers may be
sufficiently broad to permit indemnification of Coinstar's directors and
officers for liabilities arising under the Securities Act.
Coinstar has obtained directors' and officers' liability insurance.
Reference is made to Item 17 of this Registration Statement for additional
information regarding indemnification of officers and directors.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ----------- ----------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement
4.1* Specimen certificate for shares of common stock
5.1 Opinion of Cooley Godward LLP as to the legality of the common stock
being registered
23.1 Consent of Cooley Godward LLP (included in Exhibit 5.1)
23.2 Consent of Deloitte & Touche LLP
24 Power of attorney (included on signature pages of this registration statement)
27+ Financial Data Schedule
</TABLE>
* Incorporated by reference to Coinstar's Registration Statement on Form S-1
(File No. 333-26843).
+ Incorporated by reference to Coinstar's Quarterly Report on Form 10-Q for
the fiscal quarter ended March 31, 1999 (File No. 0-22555).
ITEM 17. UNDERTAKINGS.
Coinstar hereby undertakes that, for purposes of determining any liability
under the Securities Act of 1933, each filing of Coinstar's annual report
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and,
where applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial BONA
FIDE offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of Coinstar
pursuant to the foregoing provisions, or otherwise, Coinstar has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by Coinstar of expenses
incurred or paid by a director, officer or controlling person of Coinstar in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, Coinstar will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-2
<PAGE>
Coinstar hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by Coinstar pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Coinstar, Inc.
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Bellevue, King County, State of Washington on this
21st day of May, 1999.
<TABLE>
<S> <C> <C>
COINSTAR, INC.
By: /s/ JENS H. MOLBAK
-----------------------------------------
Jens H. Molbak
CHIEF EXECUTIVE OFFICER AND
CHAIRMAN OF THE BOARD
</TABLE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Jens H. Molbak and Kirk A. Collamer as his true
and lawful attorneys-in-fact each acting alone, with full power of substitution
and resubstitution, for him and in his name, place and stead in any and all
capacities to sign any or all amendments (including post-effective amendments)
to this registration statement, and any registration statement filed pursuant to
Rule 462(b) under the Securities Act of 1933 in connection with the registration
under the Securities Act of 1933 of equity securities of Coinstar, Inc., and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact full power and authority to do and perform each and every act
and thing requisite and necessary to be done in and about the premises, as fully
for all intents and purposes as he might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact, or their substitutes, each
acting alone, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
Chief Executive Officer
/s/ JENS H. MOLBAK and Chairman of the
- ------------------------------ Board (Principal May 21, 1999
Jens H. Molbak Executive Officer)
Vice President and Chief
/s/ KIRK A. COLLAMER Financial Officer
- ------------------------------ (Principal Financial and May 21, 1999
Kirk A. Collamer Accounting Officer)
/s/ GEORGE H. CLUTE
- ------------------------------ Director May 21, 1999
George H. Clute
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ LARRY A. HODGES
- ------------------------------ Director May 21, 1999
Larry A. Hodges
/s/ DAVID E. STITT
- ------------------------------ Director May 21, 1999
David E. Stitt
/s/ RONALD A. WEINSTEIN
- ------------------------------ Director May 21, 1999
Ronald A. Weinstein
/s/ WILLIAM D. RUCKELSHAUS
- ------------------------------ Director May 21, 1999
William D. Ruckelshaus
/s/ RONALD O. ADERS
- ------------------------------ Director May 21, 1999
Ronald O. Aders
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- ------------------- ----------------------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement
4.1* Specimen certificate for shares of common stock
5.1 Opinion of Cooley Godward LLP as to the legality of the common stock being registered
23.1 Consent of Cooley Godward LLP (included in Exhibit 5.1)
23.2 Consent of Deloitte & Touche LLP
24 Power of attorney (included on signature pages of this registration statement)
27+ Financial Data Schedule
</TABLE>
- ----------
* Incorporated by reference to Coinstar' Registration Statement on Form S-1
(File No. 333-26843).
+ Incorporated by reference to Coinstar's Quarterly Report on Form 10-Q for
the fiscal quarter ended March 31, 1999 (File No. 0-22555).
<PAGE>
COINSTAR, INC.
COMMON STOCK, PAR VALUE $0.001 PER SHARE
----------
UNDERWRITING AGREEMENT
................., 1999
Goldman, Sachs & Co.,
Donaldson, Lufkin & Jenrette Securities Corporation,
Hambrecht & Quist LLC,
As representatives of the several Underwriters
named in Schedule I hereto,
c/o Goldman, Sachs & Co.,
85 Broad Street,
New York, New York 10004.
Ladies and Gentlemen:
Coinstar, Inc., a Delaware corporation (the "Company"), proposes, subject
to the terms and conditions stated herein, to issue and sell to the Underwriters
named in Schedule I hereto (the "Underwriters") an aggregate of . . . . . . .
shares and, at the election of the Underwriters, up to . . . . . . additional
shares of Common Stock, par value $0.001 per share ("Stock") of the Company. The
aggregate of . . . . . . . shares to be sold by the Company is herein called the
"Firm Shares" and the aggregate of . . . . . additional shares to be sold by the
Company is herein called the "Optional Shares". The Firm Shares and the Optional
Shares that the Underwriters elect to purchase pursuant to Section 2 hereof are
herein collectively called the "Shares".
1. The Company represents and warrants to, and agrees with, each of
Underwriters that:
(a) A registration statement on Form S-3 (File No. 333-....) (the
"Initial Registration Statement") in respect of the Shares has been
filed with the Securities and Exchange Commission (the "Commission");
the Initial Registration Statement and any post-effective amendment
thereto, each in the form heretofore delivered to you, and, excluding
exhibits thereto but including all documents incorporated by reference
in the prospectus contained therein, to you for each of the other
Underwriters, have been declared effective by the Commission in such
form; other than a registration statement, if any, increasing the size
of the offering (a "Rule 462(b) Registration Statement"), filed
pursuant to Rule 462(b) under the Securities Act of 1933, as amended
(the "Act"), which became effective upon filing, no other document with
respect to the Initial Registration Statement or document incorporated
by reference therein has heretofore been filed with the Commission; and
no stop order suspending the effectiveness of the Initial Registration
Statement, any post-effective amendment thereto or the Rule 462(b)
Registration Statement, if any, has been issued and no proceeding for
that purpose has been initiated or threatened by the Commission (any
preliminary prospectus included in the Initial Registration Statement
or filed with the Commission pursuant to Rule 424(a) of the rules and
regulations of the Commission under the Act is hereinafter called a
"Preliminary Prospectus"; the various parts of the Initial Registration
1
<PAGE>
Statement and the Rule 462(b) Registration Statement, if any, including
all exhibits thereto and including (i) the information contained in the
form of final prospectus filed with the Commission pursuant to Rule
424(b) under the Act in accordance with Section 5(a) hereof and deemed
by virtue of Rule 430A under the Act to be part of the Initial
Registration Statement at the time it was declared effective and (ii)
the documents incorporated by reference in the prospectus contained in
the Initial Registration Statement at the time such part of the Initial
Registration Statement became effective, each as amended at the time
such part of the Initial Registration Statement became effective or
such part of the Rule 462(b) Registration Statement, if any, became or
hereafter becomes effective, are hereinafter collectively called the
"Registration Statement"; and such final prospectus, in the form first
filed pursuant to Rule 424(b) under the Act, is hereinafter called the
"Prospectus"; and any reference herein to any Preliminary Prospectus or
the Prospectus shall be deemed to refer to and include the documents
incorporated by reference therein pursuant to Item 12 of Form S-3 under
the Act, as of the date of such Preliminary Prospectus or Prospectus,
as the case may be; any reference to any amendment or supplement to any
Preliminary Prospectus or the Prospectus shall be deemed to refer to
and include any documents filed after the date of such Preliminary
Prospectus or Prospectus, as the case may be, under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and incorporated
by reference in such Preliminary Prospectus or Prospectus, as the case
may be; and any reference to any amendment to the Registration
Statement shall be deemed to refer to and include any annual report of
the Company filed pursuant to Section 13(a) or 15(d) of the Exchange
Act after the effective date of the Initial Registration Statement that
is incorporated by reference in the Registration Statement;
(b) No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission, and each Preliminary
Prospectus, at the time of filing thereof, conformed in all material
respects to the requirements of the Act and the rules and regulations
of the Commission thereunder, and did not contain an untrue statement
of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading;
PROVIDED, HOWEVER, that this representation and warranty shall not
apply to any statements or omissions made in reliance upon and in
conformity with information furnished in writing to the Company by an
Underwriter through Goldman, Sachs & Co. expressly for use therein;
(c) The documents incorporated by reference in the Prospectus,
when they became effective or were filed with the Commission, as the
case may be, conformed in all material respects to the requirements of
the Act or the Exchange Act, as applicable, and the rules and
regulations of the Commission thereunder, and none of such documents
contained an untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading; and any further documents so filed
and incorporated by reference in the Prospectus or any further
amendment or supplement thereto, when such documents become effective
or are filed with the Commission, as the case may be, will conform in
all material respects to the requirements of the Act or the Exchange
Act, as applicable, and the rules and regulations of the Commission
thereunder and will not contain an untrue statement of a material fact
or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; provided,
however, that this representation and warranty shall not apply to any
statements or omissions made in reliance upon and in conformity with
information furnished in writing to the Company by an Underwriter
through Goldman, Sachs & Co. expressly for use therein;
2
<PAGE>
(d) The Registration Statement conforms, and the Prospectus and
any further amendments or supplements to the Registration Statement or
the Prospectus will conform, in all material respects to the
requirements of the Act and the rules and regulations of the Commission
thereunder and do not and will not, as of the applicable effective date
as to the Registration Statement and any amendment thereto and as of
the applicable filing date as to the Prospectus and any amendment or
supplement thereto, contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; PROVIDED,
HOWEVER, that this representation and warranty shall not apply to any
statements or omissions made in reliance upon and in conformity with
information furnished in writing to the Company by an Underwriter
through Goldman, Sachs & Co. expressly for use therein;
(e) Neither the Company nor any of its subsidiaries has sustained
since the date of the latest audited financial statements included or
incorporated by reference in the Prospectus any material loss or
interference with its business from fire, explosion, flood or other
calamity, whether or not covered by insurance, or from any labor
dispute or court or governmental action, order or decree, otherwise
than as set forth or contemplated in the Prospectus; and, since the
respective dates as of which information is given in the Registration
Statement and the Prospectus, there has not been any change in the
capital stock or long-term debt of the Company or any of its
subsidiaries or any material adverse change, or any development
involving a prospective material adverse change, in or affecting the
general affairs, management, financial position, stockholders' equity
or results of operations of the Company and its subsidiaries, otherwise
than as set forth or contemplated in the Prospectus;
(f) The Company and its subsidiaries own no real property and
have good and marketable title to all personal property owned by them,
in each case free and clear of all liens, encumbrances and defects
except such as are described in the Prospectus or such as do not
materially affect the value of such property and do not interfere with
the use made and proposed to be made of such property by the Company
and its subsidiaries; and any real property and buildings held under
lease by the Company and its subsidiaries are held by them under valid,
subsisting and enforceable leases with such exceptions as are not
material and do not interfere with the use made and proposed to be made
of such property and buildings by the Company and its subsidiaries;
(g) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Delaware, with power and authority (corporate and other) to own its
properties and conduct its business as described in the Prospectus, and
has been duly qualified as a foreign corporation for the transaction of
business and is in good standing under the laws of each other
jurisdiction in which it owns or leases properties or conducts any
business so as to require such qualification, or is subject to no
material liability or disability by reason of the failure to be so
qualified in any such jurisdiction; and each subsidiary of the Company
has been duly incorporated and is validly existing as a corporation in
good standing under the laws of its jurisdiction of incorporation;
(h) The Company has an authorized capitalization as set forth in
the Prospectus, and all of the issued shares of capital stock of the
Company have been duly and validly authorized and issued, are fully
paid and non-assessable and conform to the description of the Stock
contained in the Prospectus; and all of the issued shares of capital
stock of each subsidiary of the Company have been duly and validly
authorized and issued, are fully paid and
3
<PAGE>
non-assessable and are owned directly or indirectly by the Company,
free and clear of all liens, encumbrances, equities or claims;
(i) The unissued Shares to be issued and sold by the Company to
the Underwriters hereunder have been duly and validly authorized and,
when issued and delivered against payment therefor as provided herein,
will be duly and validly issued and fully paid and non-assessable and
will conform to the description of the Stock contained in the
Prospectus;
(j) The issue and sale of the Shares to be sold by the Company
and the compliance by the Company with all of the provisions of this
Agreement and the consummation of the transactions herein contemplated
will not conflict with or result in a breach or violation of any of the
terms or provisions of, or constitute a default under, any indenture,
mortgage, deed of trust, loan agreement or other agreement or
instrument to which the Company or any of its subsidiaries is a party
or by which the Company or any of its subsidiaries is bound or to which
any of the property or assets of the Company or any of its subsidiaries
is subject, nor will such action result in any violation of the
provisions of the Certificate of Incorporation or Bylaws of the Company
or any statute or any order, rule or regulation of any court or
governmental agency or body having jurisdiction over the Company or any
of its subsidiaries or any of their properties; and no consent,
approval, authorization, order, registration or qualification of or
with any such court or governmental agency or body is required for the
issue and sale of the Shares or the consummation by the Company of the
transactions contemplated by this Agreement, except the registration
under the Act of the Shares and such consents, approvals,
authorizations, registrations or qualifications as may be required
under state securities or blue sky laws or the bylaws, rules and
regulations of the National Association of Securities Dealers, Inc.
(the "NASD") in connection with the purchase and distribution of the
Shares by the Underwriters;
(k) Neither the Company nor any of its subsidiaries is in
violation of its Certificate of Incorporation or Bylaws or in default
in the performance or observance of any material obligation, agreement,
covenant or condition contained in any material indenture, mortgage,
deed of trust, loan agreement, lease or other agreement or instrument
to which it is a party or by which it or any of its properties may be
bound;
(l) The statements set forth in the Prospectus under the caption
"Description of Capital Stock", insofar as they purport to constitute a
summary of the terms of the Stock, are accurate, complete and fair;
(m) Other than as set forth in the Prospectus, there are no legal
or governmental proceedings pending to which the Company or any of its
subsidiaries is a party or of which any property of the Company or any
of its subsidiaries is the subject which, if determined adversely to
the Company or any of its subsidiaries, would individually or in the
aggregate have a material adverse effect on the current or future
consolidated financial position, stockholders' equity or results of
operations of the Company and its subsidiaries; and, to the best of the
Company's knowledge, no such proceedings are threatened or contemplated
by governmental authorities or threatened by others;
(n) The Company is not and, after giving effect to the offering
and sale of the Shares, will not be an "investment company", as such
term is defined in the Investment Company Act of 1940, as amended (the
"Investment Company Act");
4
<PAGE>
(o) Deloitte & Touche LLP, who have certified certain
consolidated financial statements of the Company and its subsidiaries,
are independent public accountants as required by the Act and the rules
and regulations of the Commission thereunder;
(p) The disclosure included or incorporated by reference in the
Prospectus concerning the Year 2000 Problem is fair and accurate in all
material respects. The "Year 2000 Problem" as used herein means any
significant risk that computer hardware or software used in the
receipt, transmission, processing, manipulation, storage, retrieval,
retransmission or other utilization of data or in the operation of
mechanical or electrical systems of any kind will not, in the case of
dates or time periods occurring after December 31, 1999, function at
least as effectively as in the case of dates or time periods occurring
prior to January 1, 2000; and
(q) The Company and its subsidiaries own or have valid, binding,
enforceable licenses or other rights to use any patents, trademarks,
trade names, service marks, service names, copyrights, and other
proprietary intellectual property rights ("Intellectual Property")
necessary to conduct the business of the Company and its subsidiaries
in the manner in which it has been and is being conducted, without any
conflict with the rights of others, except in each case as do not and
will not have a material adverse effect on the condition, financial or
otherwise, results of operations, business affairs or business
prospects of the Company and its subsidiaries, taken as a whole; the
information contained in the Registration Statement and the Prospectus
concerning patents issued to, or patent applications filed on behalf
of, the Company and its subsidiaries is accurate in all material
respects; and, except as described in the Prospectus, neither the
Company nor any of its subsidiaries has received any correspondence
relating to any of the foregoing or notice of infringement of or
conflict with (and knows of no such infringement of or conflict with)
asserted rights of others with respect to any Intellectual Property,
which if determined adversely to the Company or any of its subsidiaries
would, individually or in the aggregate, have a material adverse effect
on the condition, financial or otherwise, results of operations,
business affairs or business prospectus of the Company and its
subsidiaries, taken as a whole.
2. Subject to the terms and conditions herein set forth, (a) the
Company agrees to sell to each of the Underwriters, and each of the Underwriters
agrees, severally and not jointly, to purchase from the Company at a purchase
price per share of $.............., the number of Firm Shares set forth opposite
the name of such Underwriter in Schedule I hereto and (b) in the event and to
the extent that the Underwriters shall exercise the election to purchase
Optional Shares as provided below, the Company agrees to sell to each of the
Underwriters, and each of the Underwriters agrees, severally and not jointly, to
purchase from the Company, at the purchase price per share set forth in clause
(a) of this Section 2, that portion of the number of Optional Shares as to which
such election shall have been exercised (to be adjusted by you so as to
eliminate fractional shares) determined by multiplying such number of Optional
Shares by a fraction the numerator of which is the maximum number of Optional
Shares which such Underwriter is entitled to purchase as set forth opposite the
name of such Underwriter in Schedule I hereto and the denominator of which is
the maximum number of Optional Shares that all of the Underwriters are entitled
to purchase hereunder.
The Company hereby grants to the Underwriters the right to purchase at
their election up to ................... Optional Shares, at the purchase price
per share set forth in the paragraph above, for the sole purpose of covering
sales of shares in excess of the number of Firm Shares. Any such election to
purchase Optional Shares may be exercised only by written notice from you to the
Company, given within a period of 30 calendar days after the date of this
Agreement and setting forth the aggregate number of Optional Shares to be
purchased and the date on which such Optional Shares are to be
5
<PAGE>
delivered, as determined by you but in no event earlier than the First Time
of Delivery (as defined in Section 4 hereof) or, unless you and the Company
otherwise agree in writing, earlier than two or later than ten business days
after the date of such notice.
3. Upon the authorization by you of the release of the Firm Shares, the
several Underwriters propose to offer the Firm Shares for sale upon the terms
and conditions set forth in the Prospectus.
4. (a) The Shares to be purchased by each Underwriter hereunder, in
definitive form, and in such authorized denominations and registered in such
names as Goldman, Sachs & Co. may request upon at least forty-eight (48) hours
prior notice to the Company shall be delivered by or on behalf of the Company to
Goldman, Sachs & Co., through the facilities of the Depository Trust Company
("DTC"), for the account of such Underwriter, against payment by or on behalf of
such Underwriter of the purchase price therefor by wire transfer of Federal
(same-day) funds to the account specified by the Company, to Goldman, Sachs &
Co. at least forty-eight (48) hours in advance. The Company will cause the
certificates representing the Shares to be made available for checking and
packaging at least twenty-four (24) hours prior to the Time of Delivery (as
defined below) with respect thereto at the office of DTC or its designated
custodian (the "Designated Office"). The time and date of such delivery and
payment shall be, with respect to the Firm Shares, 9:30 a.m., New York time, on
............., 1999 or such other time and date as Goldman, Sachs & Co. and the
Company may agree upon in writing, and, with respect to the Optional Shares,
9:30 a.m., New York time, on the date specified by Goldman, Sachs & Co. in the
written notice given by Goldman, Sachs & Co. of the Underwriters' election to
purchase such Optional Shares, or such other time and date as Goldman, Sachs &
Co. and the Company may agree upon in writing. Such time and date for delivery
of the Firm Shares is herein called the "First Time of Delivery", such time and
date for delivery of the Optional Shares, if not the First Time of Delivery, is
herein called the "Second Time of Delivery", and each such time and date for
delivery is herein called a "Time of Delivery".
(b) The documents to be delivered at each Time of Delivery by or
on behalf of the parties hereto pursuant to Section 7 hereof, including the
cross receipt for the Shares and any additional documents requested by the
Underwriters pursuant to Section 7(m) hereof, will be delivered at the offices
of Cooley Godward LLP, 4205 Carillon Point, Kirkland, WA 98033 (the "Closing
Location"), and the Shares will be delivered at the Designated Office, all at
such Time of Delivery. A meeting will be held at the Closing Location at 6:00
p.m., New York, on the New York Business Day next preceding such Time of
Delivery, at which meeting the final drafts of the documents to be delivered
pursuant to the preceding sentence will be available for review by the parties
hereto. For the purposes of this Section 4, "New York Business Day" shall mean
each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which
banking institutions in New York are generally authorized or obligated by law or
executive order to close.
5. The Company agrees with each of the Underwriters:
(a) To prepare the Prospectus in a form approved by you and to
file such Prospectus pursuant to Rule 424(b) under the Act not later
than the Commission's close of business on the second business day
following the execution and delivery of this Agreement, or, if
applicable, such earlier time as may be required by Rule 430A(a)(3)
under the Act; to make no further amendment or any supplement to the
Registration Statement or Prospectus prior to the last Time of Delivery
which shall be disapproved by you promptly after reasonable notice
thereof; to advise you, promptly after it receives notice thereof, of
the time when any amendment to the Registration Statement has been
filed or becomes effective or any supplement to the Prospectus or any
amended Prospectus has been filed and to furnish you
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with copies thereof; to file promptly all reports and any definitive
proxy information or information statements required to be filed with
the Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Exchange Act subsequent to the date of the Prospectus and for so long
as the delivery of a prospectus is required in connection with the
offering or sale of the Shares; to advise you, promptly after it
receives notice thereof, of the issuance by the Commission of any stop
order or of any order preventing or suspending the use of any
Preliminary Prospectus or Prospectus, of the suspension of the
qualification of the Shares for offering or sale in any jurisdiction,
of the initiation or threatening of any proceeding for any such
purpose, or of any request by the Commission for the amending or
supplementing of the Registration Statement or Prospectus or for
additional information; and, in the event of the issuance of any stop
order or of any order preventing or suspending the use of any
Preliminary Prospectus or Prospectus or suspending any such
qualification, promptly to use its best efforts to obtain the
withdrawal of such order;
(b) Promptly from time to time to take such action as you may
reasonably request to qualify the Shares for offering and sale under
the securities laws of such jurisdictions as you may reasonably request
and to comply with such laws so as to permit the continuance of sales
and dealings therein in such jurisdictions for as long as may be
necessary to complete the distribution of the Shares, provided that in
connection therewith the Company shall not be required to qualify as a
foreign corporation or to file a general consent to service of process
in any jurisdiction;
(c) Prior to 12:00 P.M., New York City time, on the New York
Business Day next succeeding the date of this Agreement and from time
to time, to furnish the Underwriters with copies of the Prospectus in
New York City in such quantities as you may reasonably request, and, if
the delivery of a prospectus is required at any time prior to the
expiration of nine months after the time of issue of the Prospectus in
connection with the offering or sale of the Shares and if at such time
any events shall have occurred as a result of which the Prospectus as
then amended or supplemented would include an untrue statement of a
material fact or omit to state any material fact necessary in order to
make the statements therein, in the light of the circumstances under
which they were made when such Prospectus is delivered, not misleading,
or, if for any other reason it shall be necessary during such period to
amend or supplement the Prospectus or to file under the Exchange Act
any document incorporated by reference in the Prospectus in order to
comply with the Act or the Exchange Act, to notify you and upon your
request to file such document and to prepare and furnish without charge
to each Underwriter and to any dealer in securities as many copies as
you may from time to time reasonably request of an amended Prospectus
or a supplement to the Prospectus which will correct such statement or
omission or effect such compliance, and in case any Underwriter is
required to deliver a prospectus in connection with sales of any of the
Shares at any time nine months or more after the time of issue of the
Prospectus, upon your request but at the expense of such Underwriter,
to prepare and deliver to such Underwriter as many copies as you may
request of an amended or supplemented Prospectus complying with Section
10(a)(3) of the Act;
(d) To make generally available to its securityholders as soon as
practicable, but in any event not later than eighteen months after the
effective date of the Registration Statement (as defined in Rule 158(c)
under the Act), an earnings statement of the Company and its
subsidiaries (which need not be audited) complying with Section 11(a)
of the Act and the rules
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and regulations of the Commission thereunder
(including, at the option of the Company, Rule 158);
(e) During the period beginning from the date hereof and
continuing to and including the date 90 days after the date of the
Prospectus, not to offer, sell, contract to sell or otherwise dispose
of, except as provided hereunder, any securities of the Company that
are substantially similar to the Shares, including but not limited to
any securities that are convertible into or exchangeable for, or that
represent the right to receive, Stock or any such substantially similar
securities (other than (i) pursuant to employee stock option plans or
agreements described in the Prospectus and adopted prior to, or upon
the conversion or exchange of convertible or exchangeable securities
outstanding as of, the date of this Agreement or (ii) upon conversion
or exercise of any securities outstanding on the date of this agreement
exercisable for or convertible into Stock), without your prior written
consent;
(f) To furnish to its stockholders as soon as practicable after
the end of each fiscal year an annual report (including a balance sheet
and statements of income, stockholders' equity and cash flows of the
Company and its consolidated subsidiaries certified by independent
public accountants) and, as soon as practicable after the end of each
of the first three quarters of each fiscal year (beginning with the
fiscal quarter ending after the effective date of the Registration
Statement), to make available to its stockholders consolidated summary
financial information of the Company and its subsidiaries for such
quarter in reasonable detail;
(g) During a period of five years from the effective date of the
Registration Statement, to furnish to you copies of all reports or
other communications (financial or other) furnished to stockholders,
and to deliver to you (i) as soon as they are available, copies of any
reports and financial statements furnished to or filed with the
Commission or any national securities exchange on which any class of
securities of the Company is listed; and (ii) such additional
information concerning the business and financial condition of the
Company as you may from time to time reasonably request (such financial
statements to be on a consolidated basis to the extent the accounts of
the Company and its subsidiaries are consolidated in reports furnished
to its stockholders generally or to the Commission);
(h) To use the net proceeds received by it from the sale of the
Shares pursuant to this Agreement in the manner specified in the
Prospectus under the caption "Use of Proceeds";
(i) To use its best efforts to list for quotation the Shares on
the National Association of Securities Dealers Automated Quotations
National Market System ("NASDAQ"); and
(j) If the Company elects to rely upon Rule 462(b), the Company
shall file a Rule 462(b) Registration Statement with the Commission in
compliance with Rule 462(b) by 10:00 P.M., Washington, D.C. time, on
the date of this Agreement, and the Company shall at the time of filing
either pay to the Commission the filing fee for the Rule 462(b)
Registration Statement or give irrevocable instructions for the payment
of such fee pursuant to Rule 111(b) under the Act.
6. The Company covenants and agrees with the several Underwriters that
the Company will pay or cause to be paid, the following: (i) the fees,
disbursements and expenses of the Company's counsel and accountants in
connection with the registration of the Shares under the Act and all other
expenses in connection with the preparation, printing and filing of the
Registration Statement, any Preliminary Prospectus and the Prospectus and
amendments and supplements thereto and the mailing and delivering of copies
thereof to the Underwriters and dealers; (ii) the cost of printing or
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producing any Agreement among Underwriters, this Agreement, the Blue Sky
Memorandum, closing documents (including any compilations thereof) and any other
documents in connection with the offering, purchase, sale and delivery of the
Shares; (iii) all expenses in connection with the qualification of the Shares
for offering and sale under state securities laws as provided in Section 5(b)
hereof, including the fees and disbursements of counsel for the Underwriters in
connection with such qualification and in connection with the Blue Sky survey
(iv) all fees and expenses in connection with listing the Shares on the NASDAQ;
(v) the filing fees incident to, and the fees and disbursements of counsel for
the Underwriters in connection with, securing any required review by the
National Association of Securities Dealers, Inc. of the terms of the sale of the
Shares; (vi) the cost of preparing stock certificates; (vii) the cost and
charges of any transfer agent or registrar, and (viii) all other costs and
expenses incident to the performance of its obligations hereunder which are not
otherwise specifically provided for in this Section. It is understood, however,
that the Company shall bear the cost of any other matters not directly relating
to the sale and purchase of the Shares pursuant to this Agreement, and that,
except as provided in this Section, and Sections 8 and 11 hereof, the
Underwriters will pay all of their own costs and expenses, including the fees of
their counsel, stock transfer taxes on resale of any of the Shares by them, and
any advertising expenses connected with any offers they may make.
7. The obligations of the Underwriters hereunder, as to the Shares to
be delivered at each Time of Delivery, shall be subject, in their discretion, to
the condition that all representations and warranties and other statements of
the Company herein are, at and as of such Time of Delivery, true and correct,
the condition that the Company shall have performed all of its obligations
hereunder theretofore to be performed, and the following additional conditions:
(a) The Prospectus shall have been filed with the Commission
pursuant to Rule 424(b) within the applicable time period prescribed
for such filing by the rules and regulations under the Act and in
accordance with Section 5(a) hereof; if the Company has elected to rely
upon Rule 462(b), the Rule 462(b) Registration Statement shall have
become effective by 10:00 P.M., Washington, D.C. time, on the date of
this Agreement; no stop order suspending the effectiveness of the
Registration Statement or any part thereof shall have been issued and
no proceeding for that purpose shall have been initiated or threatened
by the Commission; and all requests for additional information on the
part of the Commission shall have been complied with to your reasonable
satisfaction;
(b) Sullivan & Cromwell, counsel for the Underwriters, shall have
furnished to you such written opinion or opinions (a draft of each such
opinion is attached as Annex II(a) hereto), dated such Time of
Delivery, with respect to such matters as you may reasonably request,
and such counsel shall have received such papers and information as
they may reasonably request to enable them to pass upon such matters;
(c) Cooley Godward LLP, counsel for the Company, shall have
furnished to you their written opinion (a draft of such opinion is
attached as Annex II(b) hereto), dated such Time of Delivery, in form
and substance satisfactory to you, to the effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of
Delaware, with corporate power and authority to own, lease and
operate its properties and conduct its business as described in
the Prospectus;
(ii) The Company had an authorized and outstanding
capitalization as of the date set forth in the Prospectus under
the caption "Capitalization" and all of the issued
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and outstanding shares of capital stock of the Company (including the
Shares being delivered at such Time of Delivery) have been duly
and validly authorized and issued and are fully paid and
non-assessable; and the Shares conform in all material respects
to the description of the Stock contained in the Prospectus under
the caption "Description of Capital Stock"; and such description
summarizes the information called for with respect to such matter
to the extent required by the Act and the rules and regulations
thereunder;
(iii) To the best of such counsel's knowledge, the Company
is duly qualified as a foreign corporation to conduct its
business and is in good standing in each jurisdiction within the
United States in which it owns or leases properties or conducts
any business so as to require such qualification, except where
the failure to so qualify does not have a material adverse effect
on the financial condition, business or results of operations of
the Company (such counsel being entitled to rely in respect of
the opinion in this clause upon opinions of local counsel and in
respect of matters of fact upon certificates of officers of the
Company, provided that such counsel shall state that they believe
that both you and they are justified in relying upon such
opinions and certificates);
(iv) Each of Coinstar International, Inc. and
MyShoppinglist.com, has been duly incorporated and is validly
existing as a corporation in good standing under the laws of its
jurisdiction of incorporation; and all of the issued and
outstanding shares of capital stock of each such subsidiary have
been duly and validly authorized and issued, are fully paid and
non-assessable, and are owned directly or indirectly by the
Company;
(v) To the best of such counsel's knowledge and other than
as set forth in the Prospectus, (A) there are no legal (within
the meaning of Item 103 of Regulation S-K under the Act) or
governmental proceedings pending, contemplated or threatened to
which the Company or any of its subsidiaries is a party or of
which any property of the Company or any of its subsidiaries is
the subject, which are required to be described in the Prospectus
that are not described as required; and (B) there are no
agreements, contracts, indentures, leases or other instruments
that are required to be described in the Prospectus or to be
filed as an exhibit to the Registration Statement that are not
described or filed as required, as the case may be, in compliance
with applicable rules and regulations;
(vi) This Agreement has been duly authorized, executed and
delivered by the Company;
(vii) The issue and sale of the Shares being delivered at
such Time of Delivery and the compliance by the Company with all
of the provisions of this Agreement and the consummation of the
transactions herein contemplated will not conflict with or result
in a breach or violation of any of the terms or provisions of, or
constitute a default under, any material indenture, mortgage,
deed of trust, loan agreement or other agreement or instrument,
nor will such action result in any violation of the provisions of
the Certificate of Incorporation or Bylaws of the Company or any
statute or any order, rule or regulation known to such counsel of
any court or governmental agency or body having jurisdiction over
the Company or any of its subsidiaries or any of their
properties, except for the rules and regulations of the NASD and
state securities and blue sky laws, as to which such counsel need
express no opinion (such counsel being entitled to rely upon a
certificate of an officer of the Company identifying such
agreements and instruments, provided that such counsel shall
state that they believe that both you and they are justified in
relying upon such certificate);
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(viii) To such counsel's knowledge, no consent, approval,
authorization, order, registration or qualification of or with
any such court or governmental agency or body is required for the
issue and sale of the Shares or the consummation by the Company
of the transactions contemplated by this Agreement, except the
registration under the Act of the Shares, and such consents,
approvals, authorizations, registrations or qualifications as may
be required under state securities or blue sky laws or the
bylaws, rules and regulations of the NASD (as to which such
counsel need express no opinion) in connection with the purchase
and distribution of the Shares by the Underwriters;
(ix) The Company is not an "investment company", as such
term is defined in the Investment Company Act;
(x) The documents incorporated by reference in the
Prospectus or any further amendment or supplement thereto made by
the Company prior to such Time of Delivery (other than the
financial statements, related schedules and other financial data
therein, as to which such counsel need express no opinion), when
they became effective or were filed with the Commission, as the
case may be, complied as to form in all material respects with
the requirements of the Act or the Exchange Act, as applicable
and the rules and regulations of the Commission thereunder; and
(xi) The Registration Statement and the Prospectus and
any further amendments and supplements thereto made by the
Company prior to such Time of Delivery (other than the financial
statements, related schedules and other financial data therein,
as to which such counsel need express no opinion) comply as to
form in all material respects with the requirements of the Act
and the rules and regulations thereunder and such counsel does
not know of any amendment to the Registration Statement required
to be filed or of any contracts or other documents of a character
required to be filed as an exhibit to the Registration Statement
or required to be incorporated by reference into the Prospectus
or required to be described in the Registration Statement or the
Prospectus which are not filed or incorporated by reference or
described as required.
In addition, such counsel shall state the following: in
connection with the preparation of the Registration Statement and
the Prospectus, it has participated in conferences with officers
and representatives of the Company and with its certified public
accountants, as well as with representatives of the Underwriters
and their counsel. At such conferences, the contents of the
Registration Statement and the Prospectus and related matters
were discussed. Such counsel has not independently verified, and
accordingly, except as specified in subparagraph (ii), is not
confirming and assumes no responsibility for the accuracy, or
completeness of the statements contained in the Registration
Statement or the Prospectus. On the basis of the foregoing,
nothing has come to such counsel's attention that has caused it
to believe (i) that the Registration Statement (except as to the
financial statements, related schedules and other financial data
therein, as to which such counsel need express no belief) at the
effective date or any further amendment thereto made by the
Company prior to such Time of Delivery contained any untrue
statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading, or (ii) that the Prospectus (except as to
the financial statements, related schedules and other financial
data therein, as to which such counsel need express no belief) as
of its date or at the Time of Delivery, contained or contains any
untrue statement of material
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fact or omitted or omits to state a material fact necessary, in order
to make the statements therein, in light of circumstances under which
they were made, not misleading, or (iii) that the documents
incorporated by reference into the Prospectus, when such documents
became effective or were so filed, as the case may be, contained, in
the case of a registration statement which became effective under the
Act, an untrue statement of a material fact, or omitted to state a
material fact required to be stated therein or necessary to make
the statements therein not misleading, or, in the case of other
documents which were filed under the Exchange Act with the
Commission, an untrue statement of a material fact or omitted to
state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were
made when such documents were so filed, not misleading;
(d) Sheridan Ross, patent counsel for the Company, shall have
furnished to you their written opinion (a draft of such opinion is
attached as Annex II(c) hereto), dated such Time of Delivery, in form
and substance satisfactory to you, to the effect that:
(i) To the best of such counsel's knowledge, neither the
Company nor any of its subsidiaries has received notice of any
claim of infringement of any patent, except as set forth in such
opinion; and
(ii) Such counsel has reviewed the Registration Statement
and Prospectus, the amendments and supplements thereto and the
documents incorporated by reference, and insofar as they concern
patents, patent rights or patent licenses, such counsel has no
reason to believe that either the Registration Statement or the
Prospectus or any amendment or supplement thereto or any document
incorporated by reference (including particularly the information
in the Prospectus under the captions "Risk Factors--We may be
unable to adequately protect or enforce our patents and
proprietary rights", "Business--Proprietary Rights" and "--Legal
Proceedings") contains any untrue statement of a material fact or
omits to state a material fact necessary to make the statements
therein not misleading.
In rendering such opinion, such counsel (i) shall state that they have
represented the Company as to patent matters, are knowledgeable about
its technologies and have discussed such technologies with engineers
for the Company and (ii) may state that insofar as such opinion related
to factual matters, it is based upon certificates by officers of the
Company, provided that such counsel shall state that they believe that
both you and they are justified in relying upon such certificates.
(e) On the date of the Prospectus at a time prior to the
execution of this Agreement, at 9:30 a.m., New York City time, on the
effective date of any post-effective amendment to the Registration
Statement filed subsequent to the date of this Agreement and also at
each Time of Delivery, Deloitte & Touche LLP shall have furnished to
you a letter or letters, dated the respective dates of delivery
thereof, in form and substance satisfactory to you, to the effect set
forth in Annex I hereto (the executed copy of the letter delivered
prior to the execution of this Agreement is attached as Annex I(a)
hereto and a draft of the form of letter to be delivered on the
effective date of any post-effective amendment to the Registration
Statement and as of each Time of Delivery is attached as Annex I(b)
hereto);
(f)(i) Neither the Company nor any of its subsidiaries shall have
sustained since the date of the latest audited financial statements
included or incorporated by reference in the Prospectus any loss or
interference with its business from fire, explosion, flood or other
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calamity, whether or not covered by insurance, or from any labor
dispute or court or governmental action, order or decree, otherwise
than as set forth or contemplated in the Prospectus, and (ii) since the
respective dates as of which information is given in the Prospectus
there shall not have been any change in the capital stock or long-term
debt of the Company or any of its subsidiaries or any change, or any
development involving a prospective change, in or affecting the general
affairs, management, financial position, stockholders' equity or
results of operations of the Company and its subsidiaries, otherwise
than as set forth or contemplated in the Prospectus, the effect of
which, in any such case described in clause (i) or (ii), is in the
judgment of the Representatives so material and adverse as to make it
impracticable or inadvisable to proceed with the public offering or the
delivery of the Shares being delivered at such Time of Delivery on the
terms and in the manner contemplated in the Prospectus;
(g) On or after the date hereof there shall not have occurred any
of the following: (i) a suspension or material limitation in trading in
securities generally on the New York Stock Exchange or on NASDAQ; (ii)
a suspension or material limitation in trading in the Company's
securities on NASDAQ; (iii) a general moratorium on commercial banking
activities declared by either Federal or New York or Washington State
authorities; or (iv) the outbreak or escalation of hostilities
involving the United States or the declaration by the United States of
a national emergency or war, if the effect of any such event specified
in this clause (iv) in the judgment of the Representatives makes it
impracticable or inadvisable to proceed with the public offering or the
delivery of the Shares being delivered at such Time of Delivery on the
terms and in the manner contemplated in the Prospectus;
(h) The Shares at such Time of Delivery shall have been duly
listed for quotation on NASDAQ;
(i) The Company has obtained and delivered to the Underwriters
executed copies of an agreement from each director and executive
officer of the Company, substantially to the effect set forth in
Subsection 1(b)(iv) hereof in form and substance satisfactory to you;
(j) The Company shall have complied with the provisions of
Section 5(c) hereof with respect to the furnishing of prospectuses on
the New York Business Day next succeeding the date of this Agreement;
and
(k) The Company shall have furnished or caused to be furnished to
you at such Time of Delivery certificates of officers of the Company
satisfactory to you as to the accuracy of the representations and
warranties of the Company herein at and as of such Time of Delivery, as
to the performance by the Company of all of its obligations hereunder
to be performed at or prior to such Time of Delivery, and as to such
other matters as you may reasonably request, and the Company shall have
furnished or caused to be furnished certificates as to the matters set
forth in subsections (a) and (f) of this Section.
8. (a) The Company will indemnify and hold harmless each Underwriter
against any losses, claims, damages or liabilities, joint or several, to which
such Underwriter may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon an untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus, the Registration
Statement or the Prospectus, or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse each Underwriter for any legal or
other expenses
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reasonably incurred by such Underwriter in connection with investigating or
defending any such action or claim as such expenses are incurred; PROVIDED,
HOWEVER, that the Company shall not be liable in any such case to the extent
that any such loss, claim, damage or liability arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission
made in any Preliminary Prospectus, the Registration Statement or the Prospectus
or any such amendment or supplement in reliance upon and in conformity with
written information furnished to the Company by any Underwriter through Goldman,
Sachs & Co. expressly for use therein.
(b) Each Underwriter will indemnify and hold harmless the Company
against any losses, claims, damages or liabilities to which the Company may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon an untrue statement or alleged untrue statement of a material fact
contained in any Preliminary Prospectus, the Registration Statement or the
Prospectus, or any amendment or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
in each case to the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission was made in any
Preliminary Prospectus, the Registration Statement or the Prospectus or any such
amendment or supplement in reliance upon and in conformity with written
information furnished to the Company by such Underwriter through Goldman, Sachs
& Co. expressly for use therein; and will reimburse the Company for any legal or
other expenses reasonably incurred by the Company in connection with
investigating or defending any such action or claim as such expenses are
incurred.
(c) Promptly after receipt by an indemnified party under subsection (a)
or (b) above of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against the indemnifying
party under such subsection, notify the indemnifying party in writing of the
commencement thereof; but the omission so to notify the indemnifying party shall
not relieve it from any liability which it may have to any indemnified party
otherwise than under such subsection. In case any such action shall be brought
against any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate
therein and, to the extent that it shall wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party (who shall not, except with the
consent of the indemnified party, be counsel to the indemnifying party), and,
after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party shall not be
liable to such indemnified party under such subsection for any legal expenses of
other counsel or any other expenses, in each case subsequently incurred by such
indemnified party, in connection with the defense thereof other than reasonable
costs of investigation. No indemnifying party shall, without the written consent
of the indemnified party, effect the settlement or compromise of, or consent to
the entry of any judgment with respect to, any pending or threatened action or
claim in respect of which indemnification or contribution may be sought
hereunder (whether or not the indemnified party is an actual or potential party
to such action or claim) unless such settlement, compromise or judgment (i)
includes an unconditional release of the indemnified party from all liability
arising out of such action or claim and (ii) does not include a statement as to
or an admission of fault, culpability or a failure to act, by or on behalf of
any indemnified party.
(d) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party
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shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages or liabilities (or actions in respect
thereof) in such proportion as is appropriate to reflect the relative benefits
received by the Company on the one hand and the Underwriters on the other from
the offering of the Shares. If, however, the allocation provided by the
immediately preceding sentence is not permitted by applicable law or if the
indemnified party failed to give the notice required under subsection (c) above,
then each indemnifying party shall contribute to such amount paid or payable by
such indemnified party in such proportion as is appropriate to reflect not only
such relative benefits but also the relative fault of the Company on the one
hand and the Underwriters on the other in connection with the statements or
omissions which resulted in such losses, claims, damages or liabilities (or
actions in respect thereof), as well as any other relevant equitable
considerations. The relative benefits received by the Company on the one hand
and the Underwriters on the other shall be deemed to be in the same proportion
as the total net proceeds from the offering (before deducting expenses) received
by the Company bears to the total underwriting discounts and commissions
received by the Underwriters, in each case as set forth in the table on the
cover page of the Prospectus. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company on the one hand or the
Underwriters on the other and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company and the Underwriters agree that it would not be just and equitable
if contributions pursuant to this subsection (d) were determined by PRO RATA
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this subsection (d). The amount
paid or payable by an indemnified party as a result of the losses, claims,
damages or liabilities (or actions in respect thereof) referred to above in this
subsection (d) shall be deemed to include any legal or other expenses reasonably
incurred by such indemnified party in connection with investigating or defending
any such action or claim. Notwithstanding the provisions of this subsection (d),
no Underwriter shall be required to contribute any amount in excess of the
amount by which the total price at which the Shares underwritten by it and
distributed to the public were offered to the public exceeds the amount of any
damages which such Underwriter has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations in
this subsection (d) to contribute are several in proportion to their respective
underwriting obligations and not joint.
(e) The obligations of the Company under this Section 8 shall be in
addition to any liability which the Company may otherwise have and shall extend,
upon the same terms and conditions, to each person, if any, who controls any
Underwriter within the meaning of the Act; and the obligations of the
Underwriters under this Section 8 shall be in addition to any liability which
the respective Underwriters may otherwise have and shall extend, upon the same
terms and conditions, to each officer and director of the Company and to each
person, if any, who controls the Company within the meaning of the Act.
9. (a) If any Underwriter shall default in its obligation to purchase
the Shares which it has agreed to purchase hereunder at a Time of Delivery, you
may in your discretion arrange for you or another party or other parties to
purchase such Shares on the terms contained herein. If within thirty-six (36)
hours after such default by any Underwriter you do not arrange for the purchase
of such Shares, then the Company shall be entitled to a further period of
thirty-six (36) hours within which to
15
<PAGE>
procure another party or other parties satisfactory to you to purchase such
Shares on such terms. In the event that, within the respective prescribed
periods, you notify the Company that you have so arranged for the purchase of
such Shares, or the Company notifies you that it has so arranged for the
purchase of such Shares, you or the Company shall have the right to postpone a
Time of Delivery for a period of not more than seven days, in order to effect
whatever changes may thereby be made necessary in the Registration Statement or
the Prospectus, or in any other documents or arrangements, and the Company
agrees to file promptly any amendments to the Registration Statement or the
Prospectus which in your opinion may thereby be made necessary. The term
"Underwriter" as used in this Agreement shall include any person substituted
under this Section with like effect as if such person had originally been a
party to this Agreement with respect to such Shares.
(b) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Company as
provided in subsection (a) above, the aggregate number of such Shares which
remains unpurchased does not exceed one-eleventh of the aggregate number of all
the Shares to be purchased at such Time of Delivery, then the Company shall have
the right to require each non-defaulting Underwriter to purchase the number of
Shares which such Underwriter agreed to purchase hereunder at such Time of
Delivery and, in addition, to require each non-defaulting Underwriter to
purchase its pro rata share (based on the number of Shares which such
Underwriter agreed to purchase hereunder) of the Shares of such defaulting
Underwriter or Underwriters for which such arrangements have not been made; but
nothing herein shall relieve a defaulting Underwriter from liability for its
default.
(c) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Company as
provided in subsection (a) above, the aggregate number of such Shares which
remains unpurchased exceeds one-eleventh of the aggregate number of all of the
Shares to be purchased at such Time of Delivery, or if the Company shall not
exercise the right described in subsection (b) above to require non-defaulting
Underwriters to purchase Shares of a defaulting Underwriter or Underwriters,
then this Agreement (or, with respect to the Second Time of Delivery, the
obligations of the Underwriters to purchase and of the Company to sell the
Optional Shares) shall thereupon terminate, without liability on the part of any
non-defaulting Underwriter or the Company, except for the expenses to be borne
by the Company and the Underwriters as provided in Section 6 hereof and the
indemnity and contribution agreements in Section 8 hereof; but nothing herein
shall relieve a defaulting Underwriter from liability for its default.
10. The respective indemnities, agreements, representations, warranties
and other statements of the Company and the several Underwriters, as set forth
in this Agreement or made by or on behalf of them, respectively, pursuant to
this Agreement, shall remain in full force and effect, regardless of any
investigation (or any statement as to the results thereof) made by or on behalf
of any Underwriter or any controlling person of any Underwriter, or the Company,
or any officer or director or controlling person of the Company, and shall
survive delivery of and payment for the Shares.
11. If this Agreement shall be terminated pursuant to Section 9 hereof,
the Company shall not then be under any liability to any Underwriter except as
provided in Sections 6 and 8 hereof; but, if for any other reason any Shares are
not delivered by or on behalf of the Company as provided herein, the Company
will reimburse the Underwriters through you for all out-of-pocket expenses
approved in writing by you, including fees and disbursements of counsel,
reasonably incurred by the Underwriters in making preparations for the purchase,
sale and delivery of the Shares not so delivered, but the Company shall then be
under no further liability to any Underwriter in respect of the Shares not so
delivered except as provided in Sections 6 and 8 hereof.
16
<PAGE>
12. In all dealings hereunder, you shall act on behalf of each of the
Underwriters, and the parties hereto shall be entitled to act and rely upon any
statement, request, notice or agreement on behalf of any Underwriter made or
given by you jointly or by Goldman, Sachs & Co. on behalf of you as the
representatives.
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex or
facsimile transmission to you as the representatives in care of Goldman, Sachs &
Co., 32 Old Slip, 21st Floor, New York, New York 10005, Attention: Registration
Department; and if to the Company shall be delivered or sent by mail, telex or
facsimile transmission to the address of the Company set forth in the
Registration Statement, Attention: Secretary; provided, however, that any notice
to an Underwriter pursuant to Section 8(c) hereof shall be delivered or sent by
mail, telex or facsimile transmission to such Underwriter at its address set
forth in its Underwriters' Questionnaire or telex constituting such
Questionnaire, which address will be supplied to the Company by you on request.
Any such statements, requests, notices or agreements shall take effect upon
receipt thereof.
13. This Agreement shall be binding upon, and inure solely to the
benefit of, the Underwriters, the Company and, to the extent provided in
Sections 8 and 10 hereof, the officers and directors of the Company and each
person who controls the Company or any Underwriter, and their respective heirs,
executors, administrators, successors and assigns, and no other person shall
acquire or have any right under or by virtue of this Agreement. No purchaser of
any of the Shares from any Underwriter shall be deemed a successor or assign by
reason merely of such purchase.
14. Time shall be of the essence of this Agreement. As used herein, the
term "business day" shall mean any day when the Commission's office in
Washington, D.C. is open for business.
15. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEW YORK.
16. This Agreement may be executed by any one or more of the parties
hereto in any number of counterparts, each of which shall be deemed to be an
original, but all such counterparts shall together constitute one and the same
instrument.
17
<PAGE>
If the foregoing is in accordance with your understanding, please sign
and return to us 7 counterparts hereof, and upon the acceptance hereof by you,
on behalf of each of the Underwriters, this letter and such acceptance hereof
shall constitute a binding agreement between each of the Underwriters and the
Company. It is understood that your acceptance of this letter on behalf of each
of the Underwriters is pursuant to the authority set forth in a form of
Agreement among Underwriters, the form of which shall be submitted to the
Company for examination, upon request, but without warranty on your part as to
the authority of the signers thereof.
Very truly yours,
Coinstar, Inc.
By:
------------------------------
Name:
Title:
Accepted as of the date hereof:
Goldman, Sachs & Co.
Donaldson, Lufkin & Jenrette Securities Corporation
Hambrecht & Quist LLC
By:
--------------------------------------------
(Goldman, Sachs & Co.)
<PAGE>
<TABLE>
<CAPTION>
On behalf of each of the Underwriters
SCHEDULE I
NUMBER OF OPTIONAL
SHARES TO BE
TOTAL NUMBER OF PURCHASED IF
FIRM SHARES MAXIMUM OPTION
UNDERWRITER TO BE PURCHASED EXERCISED
----------- ---------------- -------------------
<S> <C> <C>
Goldman, Sachs & Co.................................................
Donaldson, Lufkin & Jenrette Securities Corporation.................
Hambrecht & Quist LLC...............................................
[Names of Other Underwriters].......................................
--------------- --------------
--------------- --------------
Total...................................................... --------------- --------------
</TABLE>
<PAGE>
[LETTERHEAD OF COOLEY GODWARD LLP]
May 21, 1999
Coinstar, Inc.
1800 - 114th Avenue S.E.
Bellevue, Washington 98004
Ladies and Gentlemen:
You have requested our opinion with respect to certain matters in connection
with the filing by Coinstar, Inc. (the "Company") of a Registration Statement
on Form S-3 (the "Registration Statement") with the Securities and Exchange
Commission (the "Commission") covering an underwritten public offering of up
to 4,600,000 shares of common stock, including 600,000 shares for which the
Underwriters have been granted an over-allotment option (collectively, the
"Common Stock").
In connection with this opinion, we have (i) examined and relied upon the
Registration Statement and related Prospectus, the Company's Amended and
Restated Certificate of Incorporation and Amended and Restated Bylaws and the
originals or copies certified to our satisfaction of such records, documents,
certificates, memoranda and other instruments as in our judgment are necessary
or appropriate to enable us to render the opinion expressed below, and (ii)
assumed that the shares of Common Stock will be sold by the Underwriters at a
price established by the Pricing Committee of the Company's Board of Directors.
On the basis of the foregoing, and in reliance thereon, we are of the opinion
that the Common Stock, when sold and issued in accordance with the
Registration Statement and related Prospectus, will be validly issued, fully
paid and non-assessable.
We consent to the reference to our firm under the caption "Validity of Common
Stock" in the Prospectus included on the Registration Statement and to the
filing of this opinion as an exhibit to the Registration Statement.
Very truly yours,
COOLEY GODWARD LLP
By: /s/ Mark P. Tanoury
------------------------------
Mark P. Tanoury
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Coinstar, Inc. on Form
S-3 of our report dated February 5, 1999 (May 15, 1999, as to Notes 4, 12
and 15), (which report expresses an unqualified opinion and includes an
explanatory paragraph for a change in accounting for loss per share),
in the Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Seattle, Washington
May 21, 1999
