COINSTAR, INC.
1800 114TH AVENUE S.E.
BELLEVUE, WA 98004
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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 16, 1999
------------------------
TO THE STOCKHOLDERS OF COINSTAR, INC.:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of COINSTAR,
INC., a Delaware corporation (the "Company"), will be held on Wednesday, June
16, 1999 at 10:00 a.m. local time at the Company's offices located at 1800 114th
Avenue S.E., Bellevue, Washington 98004. At the meeting, the stockholders will
be asked to consider and vote on the following matters:
1. To elect two directors to hold office until the 2002 Annual Meeting of
Stockholders.
2. To approve the Company's 1997 Equity Incentive Plan (i) as amended to
increase the number of shares authorized for issuance under the plan from
2,900,000 shares to 3,580,000 shares and (ii) to approve the grant
limitations under the plan for purposes of Section 162(m) of the Internal
Revenue Code of 1986, as amended.
3. To approve an amendment to the Company's Employee Stock Purchase Plan to
increase the number of shares authorized for issuance under the plan from
200,000 to 400,000 shares.
4. To approve the 1997 Non-Employee Directors' Stock Option Plan, as
amended and restated to increase the number of shares authorized for
issuance under the plan from 100,000 to 200,000 shares.
5. To ratify the selection of Deloitte & Touche LLP as independent auditors
of the Company for its fiscal year ending December 31, 1999.
6. To transact such other business as may properly come before the meeting
or any adjournment or postponement thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
The Board of Directors has fixed the close of business on April 26, 1999, as
the record date for the determination of stockholders entitled to notice of and
to vote at this Annual Meeting and at any adjournment or postponement thereof.
By Order of the Board of Directors
[SIG]
Mark P. Tanoury
Secretary
Menlo Park, California
April 30, 1999
ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON.
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, DATE, SIGN AND
RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE IN ORDER TO ENSURE YOUR
REPRESENTATION AT THE MEETING. A RETURN ENVELOPE (WHICH IS POSTAGE PREPAID IF
MAILED IN THE UNITED STATES) IS ENCLOSED FOR THAT PURPOSE. EVEN IF YOU HAVE
GIVEN YOUR PROXY, YOU MAY STILL VOTE IN PERSON IF YOU ATTEND THE MEETING. PLEASE
NOTE, HOWEVER, THAT IF YOUR SHARES ARE HELD OF RECORD BY A BROKER, BANK OR OTHER
NOMINEE AND YOU WISH TO VOTE AT THE MEETING, YOU MUST OBTAIN FROM THE RECORD
HOLDER A PROXY ISSUED IN YOUR NAME.
COINSTAR, INC.
1800 114TH AVENUE S.E.
BELLEVUE, WA 98004
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PROXY STATEMENT
FOR ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 16, 1999
------------------------
INFORMATION CONCERNING SOLICITATION AND VOTING
GENERAL
The enclosed proxy is solicited on behalf of the Board of Directors of
Coinstar, Inc., a Delaware corporation (the "Company"), for use at the Annual
Meeting of Stockholders to be held on June 16, 1999, at 10:00 a.m. local time
(the "Annual Meeting"), or at any adjournment or postponement thereof, for the
purposes set forth herein and in the accompanying Notice of Annual Meeting. The
Annual Meeting will be held at the Company's offices located at 1800 114th
Avenue S.E., Bellevue, Washington 98004. The Company intends to mail this proxy
statement and accompanying proxy card on or about April 30, 1999 to the
stockholders entitled to vote at the Annual Meeting.
SOLICITATION
The Company will bear the entire cost of solicitation of proxies, including
preparation, assembly, printing and mailing of this proxy statement, the term of
proxy and any additional information furnished to stockholders. The Company will
furnish copies of solicitation materials to banks, brokerage houses, fiduciaries
and custodians holding in their names shares of Common Stock beneficially owned
by others to forward to such beneficial owners. The Company may reimburse
persons representing beneficial owners of Common Stock for their costs of
forwarding solicitation materials to such beneficial owners. Original
solicitation of proxies by mail may be supplemented by telephone, telegram or
personal solicitation by directors, officers or other regular employees of the
Company. No additional compensation will be paid to directors, officers or other
regular employees for such services.
VOTING RIGHTS AND OUTSTANDING SHARES
Only holders of record of Common Stock at the close of business on April 26,
1999 will be entitled to notice of and to vote at the Annual Meeting. At the
close of business on April 26, 1999, the Company had outstanding and entitled to
vote 15,467,582 shares of Common Stock.
Each holder of record of Common Stock on the record date will be entitled to
one vote for each share held on all matters to be voted upon at the Annual
Meeting.
All shares represented by proxies will be voted in accordance with
stockholder directions. If the proxy is signed and returned without any
directions given, shares will be voted in accordance with the Board of
Directors' recommendations. The Company is not aware, as of the date hereof, of
any matters to be voted on at the Annual Meeting other than as stated in this
Proxy Statement and the accompanying notice of Annual Meeting of Stockholders.
If any other matters are properly presented at the Annual Meeting, the enclosed
proxy gives discretionary authority to the persons named herein to vote the
shares in their best judgment.
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All votes will be tabulated by the inspector of election appointed for the
meeting, who will separately tabulate affirmative and negative votes,
abstentions and broker non-votes. Abstentions will be counted towards the
tabulation of votes cast on proposals presented to the stockholders and will
have the same effect as negative votes. In an uncontested election of directors,
any action other than a vote for a nominee will have no effect, assuming the
presence of a quorum.
Brokers who hold shares for the accounts of their clients may vote such
shares either as directed by their clients or in their own discretion if
permitted by the stock exchange or other organization of which they are members.
Members of the New York Stock Exchange are permitted to vote their clients'
proxies in their own discretion as to the election of directors if their clients
have not furnished voting instructions within ten days prior to the meeting.
Certain proposals other than the election of directors are "non-discretionary,"
and brokers who have received no instructions from their clients do not have
discretion to vote on those items. When brokers vote proxies on some but not all
of the proposals at a meeting, the missing votes are referred to as "broker
non-votes." Broker non-votes are included in determining the presence of a
quorum at the meeting, but they are not considered "shares present" for voting
purposes and have no impact on the outcome of non-discretionary proposals, other
than to reduce the number of favorable votes necessary to approve the proposal.
Brokers have discretion to vote on Proposals 2 through 5; accordingly, there
will be no broker non-votes on these proposals.
REVOCABILITY OF PROXIES
Any person giving a proxy pursuant to this solicitation may revoke it at any
time before it is voted. It may be revoked by filing with the Secretary of the
Company at the Company's principal executive office, 1800 114th Avenue S.E.,
Bellevue, Washington 98004, a written notice of revocation or a duly executed
proxy bearing a later date, or it may be revoked by attending the meeting and
voting in person. Attendance at the meeting will not, by itself, revoke a proxy.
STOCKHOLDER PROPOSALS
Proposals of stockholders that are intended to be presented at the Company's
2000 Annual Meeting of Stockholders must be received by the Company not later
than December 31, 1999 in order to be included in the proxy statement and proxy
relating to that Annual Meeting. Stockholders are also advised to review the
Company Bylaws which contain additional requirements with respect to advance
notice of stockholder proposals and director nominations.
Pursuant to Rule 14a-4(c) under the Securities and Exchange Act of 1934, as
amended, the Company intends to retain discretionary authority to vote proxies
with respect to stockholder proposals for which the proponent does not seek
inclusion of the proposed matter in the Company's proxy statement for the
Company's 2000 Annual Meeting, except in circumstances where (i) the Company
receives notice of the proposed matter no later than March 17, 2000, and (ii)
the proponent complies with the other requirements set forth in Rule 14a-4.
PROPOSAL 1
ELECTION OF DIRECTORS
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF EACH NOMINEE.
The Company's Amended and Restated Certificate of Incorporation and Bylaws
divide the Board of Directors into three classes. Each class consists, as nearly
as possible, of one-third of the total number of directors, and each class has a
three-year term. Vacancies on the Board may be filled only by persons elected by
a majority of the remaining directors. A director elected by the Board to fill a
vacancy (including a vacancy created by an increase in the Board of Directors)
serves for the remainder of the full term of the class of directors in which the
vacancy occurred and until his or her successor is elected and qualified.
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The Board of Directors is presently composed of seven members. There are two
directors in the class whose term of office expires in 1999. Both of the
nominees for election to this class, David E. Stitt and Ronald A. Weinstein,
currently are directors of the Company and were previously elected by the
shareholders. If elected at the Annual Meeting, each of the nominees would serve
until the 2002 annual meeting and until his successor is elected and qualified,
or until such director's earlier death, resignation or removal.
Directors are elected by a plurality of the votes present in person or
represented by proxy and entitled to vote at the meeting. Shares represented by
executed proxies will be voted, if authority to do so is not withheld, for the
election of the two nominees named below. In the event that any nominee becomes
unavailable for election, such shares will be voted for the election of a
substitute nominee proposed by management. Each person nominated for election
has agreed to serve if elected, and management has no reason to believe that any
nominee will be unable to serve.
Set forth below is biographical information for each nominee and each person
whose term of office as a director will continue after the Annual Meeting.
NOMINEES FOR ELECTION FOR A THREE-YEAR TERM EXPIRING AT THE 2002 ANNUAL MEETING:
DAVID E. STITT
David E. Stitt, 52, has been a director of the Company 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
Ronald A. Weinstein, 58, has been a director of the Company since 1992. From
1984 to July 1991, he was a principal of Sloan Capital Companies, a private
investment firm. From February 1989 until April 1991, Mr. Weinstein served as
Executive Vice President of Merchandising at Egghead, Inc. Mr Weinstein also
served on the Board of Direcors of Quality Food Centers, Inc. until 1998.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF EACH NOMINEE.
DIRECTORS CONTINUING IN OFFICE UNTIL THE 2000 ANNUAL MEETING:
GEORGE H. CLUTE
George H. Clute, 49, has been a director of the Company since 1995. Mr.
Clute, a founding general partner of Rainier Venture Partners and Olympic
Venture Partners, has been a general partner of those venture capital funds
since 1982. Mr. Clute serves on the boards of Nth Degree Software Corp., 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.
LARRY A. HODGES
Larry A. Hodges, 50, has been a director of the Company since December 1995.
Mr. Hodges has served as the President and Chief Executive Officer of Mrs.
Field's Cookies, a retail cookie/bakery chain, since April 1994. Mr. Hodges also
serves as a director of Ameristar Casinos, Inc., a casino gaming company. Prior
to that Mr. Hodges was hired in 1992 by Prudential Insurance Company
("Prudential") to manage Food Barn Stores, Inc., a supermarket chain which was a
distressed asset of Prudential ("Food
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Barn"). In 1993, Food Barn filed for bankruptcy protection in federal court and
was subsequently sold. Prior to that, Mr. Hodges served in various capacities at
American Stores Company, a food and drug retailer, for 25 years, including
serving as President of two subsidiaries.
DIRECTORS CONTINUING IN OFFICE UNTIL THE 2001 ANNUAL MEETING:
JENS H. MOLBAK
Jens H. Molbak, 36, the Company's Chief Executive Officer and Chairman of
the Board, founded the Company in 1990. Prior to that he served two years as an
analyst at Morgan Stanley & Co., Inc., an investment bank. Mr. Molbak earned his
M.B.A. from Stanford University Graduate School of Business and his B.A. from
Yale University.
WILLIAM D. RUCKELSHAUS
William D. Ruckelshaus, 66, has been a director of the Company 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.
ROBERT O. ADERS
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 FMI, 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 a number of publicly held companies.
BOARD COMMITTEES AND MEETINGS
During the fiscal year ended December 31, 1998 the Board of Directors held
10 meetings. The Board has an Audit Committee and a Compensation 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. It met 4 times during 1998. On February 25, 1999, Mr. Hodges
was elected to the Committee as Chairman, along with Messrs. Stitt and Clute.
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 Compensation Committee met 2 times during 1998. On February 25,
1999, Mr. Ruckelshaus was elected to the Committee as Chairman, along with
Messrs. Stitt and Weinstein.
During the fiscal year ended December 31, 1998, each director attended at
least 75% of the aggregate of the meetings of the Board and of the committees on
which he served.
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PROPOSAL 2
APPROVAL OF AMENDMENT OF THE 1997 EQUITY INCENTIVE PLAN
1997 EQUITY INCENTIVE PLAN
GENERAL. On March 28, 1997, the Board of Directors adopted the 1997 Equity
Incentive Plan (the "1997 Plan"), which was approved at the Annual Meeting of
Shareholders on June 9, 1997. The purpose of the 1997 Plan is to provide a means
by which selected employees, consultants and directors may be given an
opportunity to benefit from increases in the value of the Common Stock, to
assist the Company in securing and retaining the services of those persons and
to provide those persons with incentives to exert maximum efforts for the
Company's success.
PROPOSED AMENDMENT. On March 25, 1999, the Board of Directors adopted,
subject to shareholder approval, an amendment to the 1997 Plan to increase the
number of shares of Common Stock available for grant under the 1997 Plan from
2,900,000 to 3,580,000 shares. As of March 31, 1999, 413,445 shares were
available for the grant of new awards under the 1997 Plan (not including the
proposed 680,000 share increase). The total number of shares subject to
outstanding options under all of the Company's plans, plus the number of shares
available for new grants under the 1997 Plan (as proposed to be amended), is
approximately 20% of the Company's total outstanding Common Stock.
ADDITIONAL APPROVAL. Section 162(m) of the Code provides generally that a
publicly held corporation may not take a federal income tax deduction for
compensation paid to a "covered employee" in excess of $1 million in any taxable
year. "Covered employees" include the Chief Executive Officer of the corporation
and every other officer who is among the other four most highly compensated
officers of the corporation and is employed at year-end, as reported in the
corporation's proxy statement. The $1 million limit on deductibility does not
apply to compensation that meets the requirements for "qualified
performance-based compensation" as defined in the Treasury regulations. For
compensation plans such as the 1997 Plan, these requirements include, among
other things, that the stockholders approve the plan's grant limits. The 1997
Plan, for purposes of Section 162(m), limits the number of options that may be
granted to any particular individual in any calendar year to 1,000,000 shares.
To ensure that the requirements for qualified performance-based compensation are
met, the Board is requesting the shareholders' approval of this grant limitation
under the 1997 Plan.
Set forth below is a summary of certain important features of the 1997 Plan,
as amended. It is qualified in its entirety by reference to the full text of the
1997 Plan.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE AMENDMENT TO
THE 1997 PLAN AND THE SECTION 162(M) GRANT LIMITS UNDER THE 1997 PLAN.
GENERAL
The 1997 Plan provides for the grant of (i) incentive and nonstatutory stock
options (ii) stock bonuses, and (iii) rights to purchase restricted stock
(collectively, "Stock Awards"). Incentive stock options granted under the 1997
Plan are intended to qualify as "incentive stock options" within the meaning of
Section 422 of the Code. Nonstatutory stock options granted under the 1997 Plan
are intended not to qualify as incentive stock options under the Code. See
"Federal Income Tax Information" for a discussion of the tax treatment of
incentive and nonstatutory stock options.
PURPOSE
In March 1997, the Board of Directors adopted, and the stockholders
subsequently approved, the 1997 Plan as an amendment and restatement of the
Company's 1992 Stock Option Plan, as amended. The 1997 Plan provides a means by
which selected officers and employees of and consultants to the Company and its
affiliates may be given an opportunity to purchase stock in the Company, to
assist in retaining the services of employees holding key positions, to secure
and retain the services of persons capable of filling
5
such positions and to provide incentives for such persons to exert maximum
efforts for the success of the Company.
ADMINISTRATION
The 1997 Plan is administered by the Board of Directors of the Company. The
Board has the power to construe and interpret the 1997 Plan and, subject to the
provisions of the 1997 Plan, to determine the persons to whom and the dates on
which Stock Awards will be granted; whether a Stock Award will be an incentive
stock option, a nonstatutory stock option, a stock bonus, a right to purchase
restricted stock or a combination of the foregoing; the provisions of each Stock
Award granted (which need not be identical), including the number of shares to
be subject to each Stock Award, the time or times and when a person shall be
permitted to receive stock pursuant to the Stock Award. The Board of Directors
is authorized to delegate administration of the 1997 Plan to a committee
composed of one or more members of the Board. The Board has delegated
administration of the 1997 Plan to the Compensation Committee of the Board. As
used herein with respect to the 1997 Plan, the "Board" refers to the
Compensation Committee as well as to the Board of Directors itself.
ELIGIBILITY
Incentive stock options may be granted under the 1997 Plan only to selected
key employees (including officers and directors who are employees) of the
Company and its affiliates. Selected employees (including officers), directors
and consultants are eligible to receive Stock Awards other than incentive stock
options under the 1997 Plan.
No incentive stock option may be granted under the 1997 Plan to any person
who, at the time of the grant, owns (or is deemed to own) stock possessing more
than 10% of the total combined voting power of the Company or any affiliate of
the Company, unless the incentive stock option exercise price is at least 110%
of the fair market value of the stock subject to the incentive stock option on
the date of grant, and the term of the incentive stock option does not exceed
five years from the date of grant. For incentive stock options granted under the
1997 Plan after 1986, the aggregate fair market value, determined at the time of
grant, of the shares of Common Stock with respect to which such options are
exercisable for the first time by an optionee during any calendar year (under
all such plans of the Company and its affiliates) may not exceed $100,000.
STOCK SUBJECT TO THE 1997 PLAN
The Company has reserved a total of 2,900,000 shares of Common Stock for
issuance under the 1997 Plan, and the Board is seeking approval of the
stockholders of an amendment to add an additional 680,000 shares. As of March
31, 1999, 468,320 shares of Common Stock have been issued upon exercise of
options granted under the 1997 Plan, options to purchase 2,018,235 shares of
Common Stock at a weighted average exercise price of $9.00 per share were
outstanding and 413,445 shares remained available for future grants of Stock
Awards (not including the proposed increase). If any Stock Award granted under
the 1997 Plan expires or otherwise terminates without being exercised, the
Common Stock not purchased pursuant to such Stock Awards again becomes available
for issuance under the 1997 Plan.
TERMS OF OPTIONS
The following is a description of the permissible terms of options under the
1997 Plan. Individual option grants may be more restrictive as to any or all of
the permissible terms described below.
EXERCISE PRICE; PAYMENT. The exercise price of incentive stock options
under the 1997 Plan may not be less than the fair market value of the Common
Stock subject to the option on the date of the option grant, and in some cases
(see "Eligibility" above), may not be less than 110% of such fair market value.
The exercise price of nonstatutory options under the 1997 Plan may not be less
than 85% of the fair market
6
value of the Common Stock subject to the option on the date of the option grant.
However, if options were granted with exercise prices below market value,
deductions for compensation attributable to the exercise of such options could
be limited by Section 162(m). See "Federal Income Tax Information." At December
31, 1998, the closing price of the Company's Common Stock as reported on the
Nasdaq National Market System was $10.75 per share.
In the event of a decline in the value of the Company' s Common Stock, the
Board has the authority to offer employees the opportunity to replace
outstanding higher priced options, whether incentive or nonstatutory, with new
lower priced options. To the extent required by Section 162(m), an option
repriced under the 1997 Plan is deemed to be canceled and a new option granted.
Both the option deemed to be canceled and the new option deemed to be granted
will be counted against the 1997 Plan share limitation.
The exercise price of options granted under the 1997 Plan must be paid
either: (a) in cash at the time the option is exercised; or (b) at the
discretion of the Board, (i) by delivery of other Common Stock of the Company,
(ii) pursuant to a deferred payment arrangement or (c) in any other form of
legal consideration acceptable to the Board.
OPTION EXERCISE. Options granted under the 1997 Plan may become exercisable
("vest") in cumulative increments as determined by the Board. Shares covered by
options granted in the future under the 1997 Plan may be subject to different
vesting terms. The Board has the power to accelerate the time during which an
option may be exercised. In addition, options granted under the 1997 Plan may
permit exercise prior to vesting, but in such event the optionee may be required
to enter into an early exercise stock purchase agreement that allows the Company
to repurchase shares not yet vested at their exercise price should the optionee
leave the employ of or discontinue service to the Company before vesting. To the
extent provided by the terms of an option, an optionee may satisfy any federal,
state or local tax withholding obligation relating to the exercise of such
option by a cash payment upon exercise, by authorizing the Company to withhold a
portion of the stock otherwise issuable to the optionee, by delivering
already-owned stock of the Company or by a combination of these means.
TERM. The maximum term of options under the 1997 Plan is 10 years, except
that in certain cases (see "Eligibility") the maximum term is five years.
Options under the 1997 Plan terminate three months after termination of the
optionee's employment or relationship as a consultant or director of the Company
or any affiliate of the Company, unless (a) such termination is due to such
person's permanent and total disability (as defined in the Code), in which case
the option may, but need not, provided that it may be exercised at any time
within one year of such termination; (b) the optionee dies while employed by or
serving as a consultant or director of the Company or any affiliate of the
Company, or within three months after termination of such relationship, in which
case the option may, but need not, provided that it may be exercised (to the
extent the option was exercisable at the time of the optionee's death) within
twelve months of the optionee's death by the person or persons to whom the
rights to such option pass by will or by the laws of descent and distribution;
or (c) the option by its terms specifically provides otherwise. Individual
options by their terms may provide for exercise within a longer period of time
following termination of employment or the consulting relationship. The option
term may also be extended in the event that exercise of the option within these
periods is prohibited for specified reasons.
TERMS OF STOCK BONUSES AND PURCHASES OF RESTRICTED STOCK
The following is a description of the permissible terms of stock bonuses and
restricted stock purchase agreements under the 1997 Plan. The terms and
conditions of stock bonus or restricted stock purchase agreements may change
from time to time, and the terms and conditions of separate agreements need not
be identical, but each stock bonus or restricted stock purchase agreement
includes the substance of each of the following provisions as appropriate:
7
PURCHASE PRICE. The purchase price under each restricted stock purchase
agreement is such amount as the Board may determine and designate in such
agreement, but in no event may the purchase price be less than eighty-five
percent (85%) of the stock's fair market value on the date such award is made.
Notwithstanding the foregoing, the Board may determine that eligible
participants in the 1997 Plan may be awarded stock pursuant to a stock bonus
agreement in consideration for past services actually rendered to the Company
for its benefit.
CONSIDERATION. The purchase price of stock acquired pursuant to a stock
purchase agreement must be paid either: (i) in cash at the time of purchase;
(ii) at the discretion of the Board or the Committee, according to a deferred
payment or other arrangement with the person to whom the stock is sold; or (iii)
in any other form of legal consideration that may be acceptable to the Board in
its discretion. Notwithstanding the foregoing, the Board may award stock
pursuant to a stock bonus agreement in consideration for past services actually
rendered to the Company or for its benefit.
VESTING. Shares of stock sold or awarded under the Plan may, but need not,
be subject to a repurchase option in favor of the Company in accordance with a
vesting schedule to be determined by the Board.
TERMINATION OF EMPLOYMENT OR RELATIONSHIP AS A DIRECTOR OR CONSULTANT. In
the event a participant's continuous status as an employee, director or
consultant terminates, the Company may repurchase or other re-acquire any or all
of the shares of stock held by that person which have not vested as of the date
of termination under the terms of the stock bonus or restricted stock purchase
agreement between the Company and such person.
ADJUSTMENT PROVISIONS
If there is any change in the stock subject to the 1997 Plan or subject to
any Stock Award granted under the 1997 Plan (through merger, consolidation,
reorganization, recapitalization, stock dividend, dividend in property other
than cash, stock split, liquidating dividend, combination of shares, exchange of
shares, change in corporate structure or otherwise), the 1997 Plan and Stock
Awards outstanding thereunder will be appropriately adjusted as to the class and
the maximum number of shares subject to such plan, the maximum number of shares
which may be granted to an employee during a calendar year, and the class,
number of shares and price per share of stock subject to such outstanding Stock
Awards.
EFFECT OF CERTAIN CORPORATE EVENTS
The 1997 Plan provides that, in the event of a dissolution, liquidation or
sale of substantially all of the assets of the Company, specified types of
merger or other corporate reorganizations, to the extent permitted by law, any
surviving corporation will be required to either assume Stock Awards outstanding
under the 1997 Plan or substitute similar Stock Awards for those outstanding
under such plan, or such outstanding Stock Awards will continue in full force
and effect. In the event that any surviving corporation declines to assume or
continue Stock Awards outstanding under the 1997 Plan, or to substitute similar
Stock Awards, then, with respect to Stock Awards held by persons then performing
services as employees, directors or consultants, the vesting Stock Awards will
accelerate if so determined by the Board, and the Stock Awards terminated if not
exercised during a specified time. The acceleration of a Stock Award in the
event of an acquisition or similar corporate event may be viewed as an
anti-takeover device, with respect to Stock Awards held by persons then
performing services as employees, directors or consultants, provision, and may
have the effect of discouraging a proposal to acquire or otherwise obtain
control of the Company.
DURATION, AMENDMENT AND TERMINATION
The Board may suspend or terminate the 1997 Plan without stockholder
approval or ratification at any time or from time to time. Unless sooner
terminated, the 1997 Plan will terminate on March 27, 2007.
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The Board may also amend the 1997 Plan at any time or from time to time.
However, no amendment will be effective unless approved by the stockholders of
the Company within twelve months before or after its adoption by the Board if
the amendment would: (a) modify the requirements as to eligibility for
participation (to the extent such modification requires stockholder approval in
order for the 1997 Plan to satisfy Section 422 of the Code, if applicable, or
Rule 16b-3 ("Rule 16b-3") of the Securities Exchange Act of 1934, as amended
(the "Exchange Act")); (b) increase the number of shares reserved for issuance
under the 1997 Plan; or (c) change any other provision of the 1997 Plan in any
other way if such modification requires stockholder approval in order to comply
with Rule 16b-3 or satisfy the requirements of Section 422 of the Code. The
Board may submit any other amendment to the 1997 Plan for stockholder approval,
including, but not limited to, amendments intended to satisfy the requirements
of Section 162(m) of the Code regarding the exclusion of performance-based
compensation from the limitation on the deductibility of compensation paid to
certain employees.
RESTRICTIONS ON TRANSFER
Under the 1997 Plan, an incentive stock option may not be transferred by the
optionee otherwise than by will or by the laws of descent and distribution and
during the lifetime of the optionee, may be exercised only by the optionee. A
nonstatutory stock option may not be transferred except by will or by the laws
of descent and distribution or pursuant to a "qualified domestic relations
order," unless otherwise specified in the option agreement. In any case, the
optionee may designate in writing a third party who may exercise the option in
the event of the optionee's death. In addition, shares subject to repurchase by
the Company under an early exercise stock purchase agreement may be subject to
restrictions on transfer which the Board deems appropriate.
FEDERAL INCOME TAX INFORMATION
INCENTIVE STOCK OPTIONS. Incentive stock options under the 1997 Plan are
intended to be eligible for the favorable federal income tax treatment accorded
"incentive stock options" under the Code.
There generally are no federal income tax consequences to the optionee or
the Company by reason of the grant or exercise of an incentive stock option.
However, the exercise of an incentive stock option may increase the optionee's
alternative minimum tax liability, if any.
If an optionee holds stock acquired through exercise of an incentive stock
option for at least two years from the date on which the option is granted and
at least one year from the date on which the shares are transferred to the
optionee upon exercise of the option, any gain or loss on a disposition of such
stock will be long-term capital gain or loss. Generally, if the optionee
disposes of the stock before the expiration of either of these holding periods
(a "disqualifying disposition"), at the time of disposition, the optionee will
realize taxable ordinary income equal to the lesser of (a) the excess of the
stock's fair market value on the date of exercise over the exercise price, or
(b) the optionee's actual gain, if any, on the purchase and sale. The optionee's
additional gain, or any loss, upon the disqualifying disposition will be a
capital gain or loss, which will be long-term or short-term depending on how
long the stock was held. Long-term capital gains currently are generally subject
to lower tax rates than ordinary income. The maximum capital gains rate for
federal income tax purposes is currently 20% while the maximum ordinary income
rate is effectively 39.6% at the present time. Slightly different rules may
apply to optionees who acquire stock subject to certain repurchase options or
who are subject to Section 16(b) of the Exchange Act.
To the extent the optionee recognizes ordinary income by reason of a
disqualifying disposition, the Company will generally be entitled (subject to
the requirement of reasonableness, the provisions of Section 162(m) of the Code
and the satisfaction of a tax reporting obligation) to a corresponding business
expense deduction in the tax year in which the disqualifying disposition occurs.
NONSTATUTORY STOCK OPTIONS. Nonstatutory stock options granted under the
1997 Plan generally have the following federal income tax consequences:
9
There are no tax consequences to the optionee or the Company by reason of
the grant of a nonstatutory stock option. Upon exercise of a nonstatutory stock
option, the optionee normally will recognize taxable ordinary income equal to
the excess of the stock's fair market value on the date of exercise over the
option exercise price. Generally, with respect to employees, the Company is
required to withhold from regular wages or supplemental wage payments an amount
based on the ordinary income recognized. Subject to the requirement of
reasonableness, the provisions of Section 162(m) of the Code and the
satisfaction of a tax reporting obligation, the Company will generally be
entitled to a business expense deduction equal to the taxable ordinary income
realized by the optionee. Upon disposition of the stock, the optionee will
recognize a capital gain or loss equal to the difference between the selling
price and the sum of the amount paid for such stock plus any amount recognized
as ordinary income upon exercise of the option. Such gain or loss will be long
or short-term depending on how long the stock was held. Slightly different rules
may apply to optionees who acquire stock subject to certain repurchase options
or who are subject to Section 16(b) of the Exchange Act.
RESTRICTED STOCK AND STOCK BONUSES. Restricted stock and stock bonuses
granted under the 1997 Plan generally have the following federal income tax
consequences:
Upon acquisition of stock under a restricted stock or stock bonus award, the
recipient normally will recognize taxable ordinary income equal to the excess of
the stock's fair market value over the purchase price, if any. However, to the
extent the stock is subject to certain types of vesting restrictions, the
taxable event will be delayed until the vesting restrictions lapse unless the
recipient elects to be taxed on receipt of the stock. Generally, with respect to
employees, the Company is required to withhold from regular wages or
supplemental wage payments an amount based on the ordinary income recognized.
Subject to the requirement of reasonableness, Section 162(m) of the Code and the
satisfaction of a tax reporting obligation, the Company will generally be
entitled to a business expense deduction equal to the taxable ordinary income
realized by the recipient. Upon disposition of the stock, the recipient will
recognize a capital gain or loss equal to the difference between the selling
price and the sum of the amount paid for such stock, if any, plus any amount
recognized as ordinary income upon acquisition (or vesting) of the stock. Such
gain or loss will be long or short-term depending on how long the stock was held
from the date ordinary income is measured. Slightly different rules may apply to
persons who acquire stock subject to forfeiture.
POTENTIAL LIMITATION ON COMPANY DEDUCTIONS. As part of the Omnibus Budget
Reconciliation Act of 1993, the U.S. Congress amended the Code to add Section
162(m), which denies a deduction to any publicly held corporation for
compensation paid to certain employees in a taxable year to the extent that
compensation exceeds $1,000,000 for a covered employee. It is possible that
compensation attributable to Stock Awards, when combined with all other types of
compensation received by a covered employee from the Company, may cause this
limitation to be exceeded in any particular year.
Certain kinds of compensation, including qualified "performance-based
compensation," are disregarded for purposes of the deduction limitation. In
accordance with proposed Treasury regulations issued under Section 162(m),
compensation attributable to stock awards will qualify as performance-based
compensation, provided that (i) the stock award contains a per-employee
limitation on the number of shares for which options may be granted during a
specified period, (ii) the per-employee limitation is approved by the
stockholders, (iii) the award is granted by a compensation committee composed
solely of "outside directors"; and (iv) the exercise price of the award is no
less than the fair market value of the stock on the date of grant. Stock bonuses
qualify as performance-based compensation under the Treasury regulations only
if: (i) the award is granted by a compensation committee comprised solely of
"outside directors"; (ii) the award is granted (or exercisable) only upon the
achievement of an objective performance goal established in writing by the
compensation committee while the outcome is substantially uncertain; (iii) the
compensation committee certifies in writing prior to the granting (or
exercisability) of the award that the performance goal has been satisfied; and
(iv) prior to the granting (or exercisability) of the award, stockholders have
approved the material terms of the award (including the class of employees
10
eligible for such award, the business criteria on which the performance goal is
based, and the maximum amount (or formula used to calculate the amount) payable
upon attainment of the performance goal).
PROPOSAL 3
APPROVAL OF AMENDMENT OF THE EMPLOYEE STOCK PURCHASE PLAN
EMPLOYEE STOCK PURCHASE PLAN
GENERAL. On March 28, 1997, the Board of Directors adopted the Company's
Employee Stock Purchase Plan (the "ESPP"), which was approved at the Annual
Meeting of Shareholders on June 9, 1997. The purpose of the ESPP is to provide a
means by which the Company's employees may be given an opportunity to purchase
the Company's Common Stock.
PROPOSED AMENDMENT. On March 25, 1999, the Board of Directors adopted,
subject to shareholder approval, an amendment to the ESPP to increase the number
of shares available for issuance under the ESPP from 200,000 to 400,000 shares.
As of March 31, 1999, 66,315 shares were available for issuance under the ESPP
(not including the proposed 200,000 share increase).
Set forth below is a summary of certain important features of the ESPP, as
amended, which summary is qualified in its entirety by reference to the full
text of the ESPP.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE AMENDMENT TO
THE ESPP.
GENERAL
In March 1997, the Board of Directors adopted, and the stockholders
subsequently approved, the ESPP. The ESPP provides a means by which employees of
the Company (and any parent or subsidiary of the Company) may purchase Common
Stock of the Company at a discount through accumulated payroll deductions.
Currently, the maximum number of shares of Common Stock that may be issued under
the ESPP is 200,000, but will increase to 400,000 shares upon stockholder
approval of the amendment to the ESPP.
PURPOSE
The purpose of the ESPP is to provide incentives for such persons eligible
to participate thereunder to exert maximum efforts for the success of the
Company. As of December 31, 1998, approximately 242 of the Company's
approximately 292 employees are eligible to participate in the ESPP.
The rights to purchase Common Stock granted under the ESPP are intended to
qualify as options issued under an "employee stock purchase plan" as that term
is defined in Section 423(b) of the Code.
ADMINISTRATION
The ESPP is administered by the Board of Directors, which has the final
power to construe and interpret the ESPP and the rights granted under it. The
Board has the power, subject to the provisions of the ESPP, to determine when
and how rights to purchase Common Stock of the Company will be granted, the
provisions of each offering of such rights (which need not be identical), and
whether any parent or subsidiary of the Company shall be eligible to participate
in such plan. The Board has the power to delegate administration of such plan to
a committee of not less than two Board members. The Board may abolish any such
committee at any time and revest in the Board the administration of the ESPP.
OFFERINGS
The ESPP is implemented by offerings of rights to all eligible employees
from time to time by the Board. The offering period for any offering may be no
more than 27 months. The initial offering period began on the date of
effectiveness of the Company's initial public offering and will end on July 31,
1999.
11
Thereafter, each offering will begin on August 1 every two (2) years, beginning
in 1999, and will end on the day prior to the second anniversary of its offering
date.
ELIGIBILITY
Any person who is customarily employed at least 20 hours per week and five
months per calendar year by the Company (or by any parent or subsidiary of the
Company designated from time to time by the Board) on the first day of an
offering period is eligible to participate in that offering under the ESPP,
provided such employee has been in the continuous employ of the Company for the
period preceding the first day of the offering period as determined by the Board
(which period will not equal or exceed two years). The Board may provide in any
offering that officers of the Company who are "highly compensated" as defined in
the Code are not eligible to participate in the ESPP.
Notwithstanding the foregoing, no employee is eligible for the grant of any
rights under the ESPP if, immediately after the grant, the employee would own,
directly or indirectly, stock possessing 5% or more of the total combined voting
power or value of all classes of stock of the Company or of any parent or
subsidiary of the Company (including any stock which such employee may purchase
under all outstanding rights and options), nor will any employee be granted
rights that would permit him to buy more than $25,000 worth of stock (determined
at the fair market value of the shares at the time such rights are granted)
under all employee stock purchase plans of the Company in any calendar year.
PARTICIPATION IN THE PLAN
Eligible employees become participants in the ESPP by delivering to the
Company, prior to the date selected by the Board as the offering date for the
offering, an agreement authorizing payroll deductions of up to 15% of their
earnings during the purchase period.
PURCHASE PRICE
The purchase price per share at which shares are sold in an offering under
the ESPP will not be less than the lower of (a) 85% of the fair market value of
a share of Common Stock on the first day of the offering or on the first date of
eligibility or (b) 85% of the fair market value of a share of Common Stock on
the purchase date.
PAYMENT OF PURCHASE PRICE; PAYROLL DEDUCTIONS
The purchase price of the shares is accumulated by payroll deductions over
the offering period. At any time during the purchase period, a participant may
reduce or terminate his or her payroll deductions. A participant may not
increase or begin such payroll deductions after the beginning of any purchase
period, except, if the Board provides, in the case of an employee who first
becomes eligible to participate as of a date specified during the purchase
period. All payroll deductions made for a participant are credited to his or her
account under the ESPP and deposited with the general funds of the Company. A
participant may not make any additional payments into such account.
PURCHASE OF STOCK
By executing an agreement to participate in the ESPP, the employee is
entitled to purchase shares under such plan. In connection with offerings made
under the ESPP, the Board specifies a maximum number of shares any employee may
be granted the right to purchase and the maximum aggregate number of shares
which may be purchased pursuant to such offering by all participants. If the
aggregate number of shares to be purchased upon exercise of rights granted in
the offering would exceed the maximum aggregate number, the Board would make a
pro rata allocation of shares available in a uniform and equitable manner.
Unless the employee's participation is discontinued, his right to purchase
shares is exercised automatically at the end of the purchase period at the
applicable price. See "Withdrawal" below.
12
WITHDRAWAL
While each participant in the ESPP is required to sign an agreement
authorizing payroll deductions, the participant may withdraw from a given
offering by terminating his or her payroll deductions and by delivering to the
Company a notice of withdrawal from the ESPP. The withdrawal may be elected at
any time prior to the end of the applicable offering period, subject to any
specified limitations in the offering.
Upon any withdrawal from an offering by the employee, the Company will
distribute to the employee his or her accumulated payroll deductions without
interest, less any accumulated deductions previously applied to the purchase of
stock on the employee's behalf during such offering, and such employee's
interest in the offering will be automatically terminated. The employee is not
entitled to again participate in such offering. An employee's withdrawal from an
offering will not have any effect upon such employee's eligibility to
participate in subsequent offerings under the ESPP.
TERMINATION OF EMPLOYMENT
Rights granted pursuant to any offering under the ESPP terminate immediately
upon cessation of an employee's employment for any reason, and the Company will
distribute to a terminated employee all of his or her accumulated payroll
deductions, without interest.
RESTRICTIONS ON TRANSFER
Rights granted under the ESPP are not transferable and may be exercised only
by the person to whom such rights are granted.
DURATION, AMENDMENT AND TERMINATION
The Board may suspend or terminate the ESPP at any time in its discretion.
Unless terminated earlier, the ESPP will terminate when all of the shares
subject to the ESPP's reserve has been issued under the terms of the ESPP.
The Board may amend the ESPP at any time in its discretion. Any amendment of
the ESPP must be approved by the stockholders within 12 months of its adoption
by the Board if the amendment would (i) increase the number of shares of Common
Stock reserved for issuance under the ESPP, (ii) modify the requirements
relating to eligibility for participation in the ESPP, or (iii) modify any other
provision of the ESPP in a manner that would materially increase the benefits
accruing to participants under the ESPP, if required in order to comply with the
requirements of Rule 16b-3 under the Exchange Act.
Rights granted before amendment or termination of the ESPP will not be
altered or impaired by any amendment or termination of such plan without consent
of the person to whom such rights were granted.
EFFECT OF CERTAIN CORPORATE EVENTS
In the event of a dissolution, liquidation or specified type of merger of
the Company, the surviving corporation either will assume the rights under the
ESPP or substitute similar rights, or the exercise date of any ongoing offering
will be accelerated such that the outstanding rights may be exercised
immediately prior to, or concurrent with, the event.
13
STOCK SUBJECT TO ESPP
If rights granted under the ESPP expire, lapse or otherwise terminate
without being exercised, the Common Stock not purchased under such rights again
becomes available for issuance under such plan.
FEDERAL INCOME TAX INFORMATION
Rights granted under the ESPP are intended to qualify for favorable federal
income tax treatment associated with rights granted under an employee stock
purchase plan which qualifies under provisions of Section 423 of the Code.
A participant will be taxed on amounts withheld for the purchase of shares
as if such amounts were actually received. Other than this, no income will be
taxable to a participant until disposition of the shares acquired, and the
method of taxation will depend upon the holding period of the purchase shares.
If the stock is disposed of at least two years after the beginning of the
offering period and at least one year after the stock is transferred to the
participant, then the lesser of (i) the excess of the fair market value of the
stock at the time of such disposition over the exercise price or (ii) the excess
of the fair market value of the stock as of the beginning of the offering period
over the exercise price (determined as of the beginning of the offering period)
will be treated as ordinary income. Any further gain or any loss will be taxed
as a long-term or short-term capital gain or loss depending on how long the
stock was held. Capital gains currently are generally subject to lower tax rates
than ordinary income. The maximum capital gains rate for federal income tax
purposes is 20% while the maximum ordinary rate is effectively 39.6% at the
present time.
If the stock is sold or disposed of before the expiration of either of the
holding periods described above, then the excess of the fair market value of the
stock on the exercise date over the exercise price will be treated as ordinary
income at the time of such disposition, and the Company may, in the future, be
required to withhold income taxes relating to such ordinary income from other
payments made to the participant. The balance of any gain will be treated as
capital gain. Even if the stock is later disposed of for less than its fair
market value on the exercise date, the same amount of ordinary income is
attributed to the participant, and a capital loss is recognized equal to the
difference between the sales price and the fair market value of the stock on
such exercise date. Any capital gain or loss will be long or short-term
depending on how long the stock has been held.
There are no federal income tax consequences to the Company by reason of the
grant or exercise of rights under the ESPP. The Company is entitled to a
deduction to the extent amounts are taxed as ordinary income to a participant
(subject to the requirement of reasonableness, the provisions of Section 162(m)
of the Code and the satisfaction of a tax reporting obligation).
PROPOSAL 4
APPROVAL OF AMENDMENT AND RESTATEMENT OF THE 1997 NON-EMPLOYEE
DIRECTORS' STOCK OPTION PLAN
1997 NON-EMPLOYEE DIRECTORS' PLAN
GENERAL. On March 28, 1997, the Board of Directors adopted the Non-Employee
Directors' Stock Option Plan (the "Directors' Plan"), which was approved at the
Annual Meeting of Shareholders on June 9, 1997. The purpose of the Directors'
Plan is to provide a means by which each director of the Company who is not
otherwise an employee or affiliate of the Company may be given an opportunity to
purchase the Company's Common Stock.
PROPOSED AMENDMENTS. On March 25, 1999, the Board of Directors adopted
certain amendments to the Directors' Plan. Among other things, the Board
approved, subject to shareholder approval, an amendment to increase the number
of shares of Common Stock available for grant under the Directors'
14
Plan from 100,000 to 200,000 shares. As of March 31, 1999, 17,274 shares were
available for the grant of new awards under the Directors' Plan (not including
the proposed 100,000 share increase). The Board is hereby requesting the
stockholders' approval of this increase.
The Directors' Plan, as proposed to be amended and restated to reflect the
amendments approved by the Board, is attached hereto as Exhibit A and is
incorporated by reference. Set forth is a summary of certain important features
of the Directors' Plan, as amended. It is qualified in its entirety by reference
to the full extent of the Directors' Plan.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE AMENDMENT AND
RESTATEMENT OF THE DIRECTORS' PLAN.
GENERAL
The Directors' Plan provides for the automatic grant of stock options to
purchase shares of Common Stock to Non-Employee Directors (as defined below) of
the Company. Options granted under the Directors' Plan are not intended to
qualify as incentive stock options, as defined under Section 422 of the Code.
PURPOSE
The purpose of the Directors' Plan is to attract and retain the services of
persons capable of serving as Non-Employee Directors on the Board of Directors
and to provide incentives for such persons to exert maximum efforts to promote
the success of the Company.
ADMINISTRATION
The Directors' Plan is administered by the Board of Directors of the
Company. The Board of Directors has the final power to construe and interpret
the Directors' Plan and options granted under it, and to establish, amend and
revoke rules and regulations for its administration. The Board of Directors is
authorized to delegate administration of the Directors' Plan to a committee
composed of one or more two members of the Board. The Board of Directors does
not presently contemplate delegating administration of the Directors' Plan to
any committee of the Board of Directors.
ELIGIBILITY
The Directors' Plan provides that options may be granted only to
Non-Employee Directors of the Company. A "Non-Employee Director" is defined in
the Directors' Plan as a director of the Company who is not otherwise an
employee of the Company or any affiliate.
Option grants under the Directors' Plan are non-discretionary. Each person
who, for the first time becomes a Non-Employee Director will automatically
receive on the date of his or her initial election or appointment as a director
by the Board or stockholders of the Company, an option to purchase 10,000 shares
of Common Stock (an "Initial Grant"). In addition, on the date of the annual
meeting of stockholders each year, each Non-Employee Eligible Director will be
automatically granted an option to purchase 5,000 shares of Common Stock (an
"Annual Grant"), except that (1) if the Non-Employee Director has not served for
12 months prior to such date, then the number of shares subject to that Non-
Employee Director's option will be pro rated based on the number of days the
Non-Employee Director served as such during the preceding 12 months, and (2) the
Annual Grant will not be made if the director has received, at any time, an
"Election Grant" as described below.
Beginning at the 1999 Annual Meeting of Stockholders, each Non-Employee
Director who is elected to the Board by the Stockholders will automatically
receive a grant (the "Election Grant") of an option to purchase 5,000 shares. In
addition to this grant, each Non-Employee Director will be granted an additional
5,000 shares for each year remaining in their term of service. Directors who
have ever received an Election
15
Grant will no longer be eligible to receive an Annual Grant, as Election Grants
are intended to replace the Annual Grants.
TERMS OF OPTIONS
Each option under the Directors' Plan is subject to the following additional
terms and conditions:
Each Grant is fully vested and exercisable on the date of grant. Election
Grants vest on the date of grant with respect to the number of Shares equal to
5,000. The remaining shares vest in 5,000 share installments on the dates of the
first and second annual meetings following the date of election.
EXERCISE PRICE; PAYMENT. The exercise price of options granted under the
Directors' Plan shall be equal to 100% of the fair market value of the Common
Stock subject to the options on the date of grant. The exercise price of options
granted under the Directors' Plan may be paid in cash or by delivery of shares
of Common Stock of the Company that have been held for the period required to
avoid a charge to the earnings of the Company. Any shares so surrendered will be
valued at their fair market value on the date of exercise.
TRANSFERABILITY; TERM. Under the Directors' Plan, an option may not be
transferred by the optionee, except by will or the laws of descent and
distribution or pursuant to a "qualified domestic relations order." During the
lifetime of an optionee, an option may be exercised only by the optionee or
transferee pursuant to such an order. No option granted under the Directors'
Plan is exercisable by any person after the expiration of ten years from the
date the option is granted.
OTHER PROVISIONS. The option agreement may contain such other terms,
provisions and conditions not inconsistent with the Directors' Plan as may be
determined by the Board of Directors.
ADJUSTMENT PROVISIONS
If there is any change in the stock subject to the Directors' Plan or
subject to any option granted under the Directors' Plan (through merger,
consolidation, reorganization, recapitalization, stock dividend, dividend in
property other than cash, stock split, liquidating dividend, combination of
shares, exchange of shares, change in corporate structure or otherwise), the
Directors' Plan and options outstanding thereunder will be appropriately
adjusted as to the class and the maximum number of shares subject to such plan
and the class, number of shares and price per share of stock subject to such
outstanding options.
In the event of a merger or consolidation in which the Company is not the
surviving corporation or a reverse merger in which the Company is the surviving
corporation but the shares of the Company's Common Stock outstanding immediately
preceding the merger were converted by virtue of the merger into other property,
whether in the form of securities, cash or otherwise, or any other capital
reorganization after which less than 50% of the outstanding voting shares of the
new or continuing corporation are owned by stockholders of the Company
immediately before such transactions, then to the extent permitted by applicable
law, the time during which such options may be exercised shall be accelerated,
and the options terminated if not exercised prior to such event.
DURATION, AMENDMENT AND TERMINATION
The Board of Directors may amend, suspend or terminate the Directors' Plan
at any time or from time to time; provided, however, that the Board may not
amend the Directors' Plan with respect to the amount, price or timing of grants
more often than once every six months. No amendment will be effective unless
approved by the stockholders of the Company within twelve months before or after
its adoption by the Board if the amendment would: (i) increase the number of
shares reserved for options under the Directors' Plan; (ii) modify the
requirements as to eligibility for participation in the Directors' Plan (to the
extent such modification requires stockholder approval in order for the
Directors' Plan to comply with the
16
requirements of Rule 16b-3; or (iii) modify the Directors' Plan in any other way
if such modification requires stockholder approval in order for the Directors'
Plan to meet the requirements of Rule 16b-3. Unless sooner terminated, the
Directors' Plan will terminate on March 27, 1997.
FEDERAL INCOME TAX INFORMATION
Stock options granted under the Directors' Plan are subject to federal
income tax treatment pursuant to rules governing options that are not incentive
stock options.
The following is only a summary of the effect of federal income taxation
upon the optionee and the Company with respect to the grant and exercise of
options under the Directors' Plan, does not purport to be complete and does not
discuss the income tax laws of any state or foreign country in which an optionee
may reside.
Options granted under the Directors' Plan are nonstatutory options. There
are no tax consequences to the optionee or the Company by reason of the grant of
a nonstatutory stock option. Upon exercise of a nonstatutory stock option, the
optionee normally will recognize taxable ordinary income equal to the excess of
the stock's fair market value on the date of exercise over the option exercise
price. Because the optionee is a director of the Company, under existing laws,
the date of taxation (and the date of measurement of taxable ordinary income)
may in some instances be deferred unless the optionee files an election under
Section 83(b) of the Code. The filing of Section 83(b) election with respect to
the exercise of an option may affect the time of taxation and the amount of
income recognized at each such time. Upon disposition of the stock, the optionee
will recognize a capital gain or loss equal to the difference between the
selling price and the sum of the amount paid for such stock plus any amount
recognized as ordinary income upon exercise of such option. Such gain or loss
will be long-term or short-term depending on how long the stock was held.
PROPOSAL 5
RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS
The Board of Directors has selected Deloitte & Touche LLP as the Company's
independent auditors for the fiscal year ending December 31, 1999 and has
further directed that management submit the selection of independent auditors
for ratification by the stockholders at the Annual Meeting. Deloitte & Touche
LLP has audited the Company's financial statements since its inception in 1991.
Representatives of Deloitte & Touche LLP are expected to attend the Annual
Meeting, they will have an opportunity to make a statement if they so desire and
will be available to respond to appropriate questions.
Stockholder ratification of the selection of Deloitte & Touche LLP as the
Company's independent auditors is not required by the Company's Bylaws or
otherwise. The Board nonetheless is submitting the selection of Deloitte &
Touche LLP to the stockholders for ratification as a matter of good corporate
practice. If the stockholders fail to ratify the selection, the Audit Committee
and the Board will reconsider whether or not to retain that firm. Even if the
selection is ratified, the Audit Committee and the Board in their discretion may
direct the appointment of different independent auditors at any time during the
year if they determine that such a change would be in the best interests of the
Company and its stockholders.
The affirmative vote of the holders of a majority of the shares present in
person or represented by proxy and entitled to vote at the Annual Meeting will
be required to ratify the selection of Deloitte & Touche LLP.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF PROPOSAL 5.
17
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the ownership
of the Company's Common Stock as of March 31, 1999 by: (i) each director and
nominee for director; (ii) each of the executive officers named in the Summary
Compensation Table below; (iii) all executive officers and directors of the
Company as a group; and (iv) all those known by the Company to be beneficial
owners of more than five percent of its Common Stock.
BENEFICIAL OWNERSHIP(1)
--------------------------
NUMBER OF
SHARES
BENEFICIALLY PERCENT OF
BENEFICIAL OWNER OWNED TOTAL
- ------------------------------------------------------------------------------------------ ----------- -------------
CIBC Wood Gundy Ventures, Inc............................................................. 880,751 5.7%
425 Lexington Avenue, 2nd Floor
New York, NY 10017
Acorn Ventures, Inc.(2)................................................................... 1,000,000 6.1%
11400 SE 6th Street, Suite 120
Bellevue, WA 98004
Entities affiliated with Olympic Venture Partners(3)...................................... 775,540 5.0%
2420 Carillon Point
Kirkland, WA 98033
Jens H. Molbak(4)......................................................................... 929,890 5.9%
Kirk A. Collamer(5)....................................................................... 138,807 *
Daniel A. Gerrity(6)...................................................................... 316,401 2.0%
Michael Parks(7).......................................................................... 86,287 *
George H. Clute(8)........................................................................ 790,540 5.1%
Larry A. Hodges(9)........................................................................ 30,000 *
David E. Stitt(10)........................................................................ 17,000 *
William D. Ruckelshaus(11)................................................................ 17,726 *
Ronald A. Weinstein(12)................................................................... 263,379 1.7%
Robert O. Aders(13)....................................................................... 10,000 *
All directors and executive officers as a group (10 persons).............................. 2,600,030 16.0%
- ------------------------
* 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 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, the Company believes 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) Includes 900,000 shares that may be acquired upon the exercise of warrants
issued in connection with a prior Preferred Stock financing. Fifty percent
(50%) of the shares issued upon the exercise of such
18
warrants are subject to a repurchase option in favor of the Company in the
event that the Company has not attained a specified valuation on certain
dates.
(3) 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
Entrepreneur's Fund. Mr. Clute, a director of the Company, is a general
partner of the general partner of OVP III and OVP III Entrepreneurs Fund.
Mr. Clute disclaims beneficial ownership of the shares except to the extent
of his pro rata ownership therein.
(4) Includes 283,308 shares issuable upon the exercise of options exercisable
within 60 days of March 31, 1999, but a portion of these shares are subject
to repurchase by the Company through April 2000 or 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.
(5) Consists of 137,269 shares issuable upon the exercise of options
exercisable within 60 days of March 31, 1999, but a portion of these shares
are subject to repurchase by the Company through February 2001.
(6) 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 the Company through March 1999, April 2000 and February
2001. Also includes 100 shares held by 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.
(7) 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 the Company through April 2000 and February 2001.
(8) 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, a director of the Company, is a general partner of the
general partner of OVP III and OVP III Entrepreneurs Fund. Mr. Clute
disclaims beneficial ownership of the shares except to the extent of his
pro rata ownership therein. Also includes 15,000 shares issuable upon the
exercise of options exercisable within 60 days of March 31, 1999.
(9) Includes 30,000 shares issuable upon the exercise of options exercisable
within 60 days of March 31, 1999.
(10) Also includes 15,000 shares issuable upon the exercise of options
exercisable within 60 days of March 31, 1999.
(11) Includes 12,726 shares issuable upon exercise of an option exercisable
within 60 days of March 31, 1999.
(12) 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.
(13) Includes 10,000 shares subject to stock options exercisable within 60 days
of March 31, 1999.
SECTION 16 BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the "1934
Act"), requires the Company's directors and executive officers, and persons who
own more than ten percent of a registered class of the Company's equity
securities, to file with the SEC initial reports of ownership and reports of
19
changes in ownership of Common Stock and other equity securities of the Company.
Officers, directors and greater than ten percent stockholders are required by
SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended December 31, 1998, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than ten percent beneficial owners were complied with.
EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
The Company's directors currently do not receive any cash compensation for
service on the Board of Directors or any committee thereof. Directors are,
however, eligible for reimbursement for expenses they incur in connection with
attendance at Board meetings in accordance with Company policy.
Each non-employee director of the Company also receives stock option grants
under the 1997 Non-Employee Directors' Stock Option Plan (the "Directors'
Plan"). The Directors' Plan provides for automatic grants of options to purchase
shares of Common Stock to eligible non-employee directors of the Company. The
maximum number of shares of Common Stock that may be issued pursuant to options
granted under the Directors' Plan currently is 100,000. The Board has proposed
to increase the maximum number of shares of Common Stock that may be issued
pursuant to options granted under the Directors' Plan to 200,000; this proposal
is subject to stockholder approval at the Annual Meeting of Stockholders.
Options granted under the Directors' Plan are not intended by the Company to
qualify as incentive stock options under the Internal Revenue Code as amended
(the "Code"). See "1997 Non-Employee Directors' Stock Option Plan."
During 1998, the Company granted, under the Directors' Plan, options to
purchase 5,000 shares of the Company's Common Stock to each of Messrs. Clute,
Hodges, Stitt and Weinstein, and options to purchase 2,726 shares to Mr.
Ruckelshaus, each at exercise price of $7.75, the fair market value of such
stock on the date of grant. As of December 31, 1998, no options had been
exercised under the Directors' Plan.
20
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Compensation Committe of the Company serves as a member of
the board of directors or compensation committee of any entity that has one or
more executive officers serving as a member of the Company's Board of Directors
or Compensation Committee. See "Certain Relationships and Related Transactions"
for a description of transactions between the Company and entities affiliated
with members of the Compensation Committee.
SUMMARY OF COMPENSATION
The following table shows for the fiscal years ended December 31, 1996, 1997
and 1998, compensation awarded or paid to, or earned by, the Company's Chief
Executive Officer and its other four most highly compensated executive officers
at December 31, 1998 and two former executive officers who departed from the
Company in Fiscal year 1998 (the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION AWARDS
ANNUAL --------------------
COMPENSATION(1) SECURITIES
--------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) COMPENSATION($)
- ------------------------------------------ --------- ---------- --------- -------------------- ----------------
Jens H. Molbak............................ 1998 $ 180,000 108,308
Chairman and Chief Executive 1997 129,166 50,000
Officer and Director 1996 97,801 25,000
Daniel A. Gerrity(2)...................... 1998 189,135 122,512
President and Chief 1997 149,166 30,000
Operating Officer 1996 126,309 15,000 30,000
Aaron R. Finch(3)......................... 1998 34,788
Vice President of Operations 1997 130,000 30,000
1996 100,636 15,000
Rod W. Brooks(4).......................... 1998 207,208 58,723
Vice President of Sales 1997 193,170 30,000
and Marketing 1996 153,730 25,000
Kirk A. Collamer(5)....................... 1998 157,500 57,269
Vice President and 1997 120,961 50,000
Chief Financial Officer 1996 -- --
Michael W. Parks.......................... 1998 124,136 40,538
Vice President, Operations 1997 102,525 1,125 10,000
1996 86,250 7,000
- ------------------------
(1) As permitted by rules established by the Commission, no amounts are shown
with respect to certain perquisites where such amounts do not exceed the
lesser of 10% of the sum of the amount in the salary and bonus columns or
$50,000.
(2) Mr Gerrity was promoted to President and Chief Operating Officer on April
13, 1998.
(3) Mr. Finch resigned as of April 1998.
(4) Mr. Brooks was terminated effective July 14, 1998.
(5) Mr. Collamer was hired as Vice President and Chief Financial Officer in
February 1997.
21
STOCK OPTION GRANTS AND EXERCISES
The Company grants options to its executive officers under its 1997 Equity
Incentive Plan (the "Equity Incentive Plan"). As of December 31, 1998, options
to purchase a total of 1,365,835 shares were outstanding under the Equity
Incentive Plan and options to purchase 983,617 shares remained available for
grant thereunder.
The following tables show, for the fiscal year ended December 31, 1998,
certain information regarding options granted to, exercised by, and held at year
end by, the Named Executive Officers:
OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
---------------------------- ANNUAL RATES OF STOCK
NUMBER OF PERCENTAGE OF PRICE APPRECIATION
SECURITIES TOTAL OPTIONS FOR
UNDERLYING GRANTED IN EXERCISE OPTION TERM($)(3)
OPTIONS FISCAL PRICE EXPIRATION ---------------------
NAME GRANTED(#)(1) 1998(%)(#)(2) ($/SH) DATE 5% 10%
- ----------------------------------- ------------- --------------- ----------- ----------- --------- ----------
Jens H. Molbak..................... 108,308 10.48 8.00 2/09/2008 544,915 1,380,920
Daniel A. Gerrity.................. 122,512 11.84 8.00 2/09/2008 639,961 1,621,786
Aaron R. Finch..................... -- -- -- -- --
Rod W. Brooks...................... 58,723 5.67 8.00 2/09/2008 295,445 748,715
Kirk A. Collamer................... 57,269 5.54 8.00 2/09/2008 288,129 730,176
Michael W. Parks................... 40,538 3.92 8.00 2/09/2008 203,953 516,857
- ------------------------
(1) Options generally have a term of 10 years and are immediately exercisable,
but shares purchased thereunder are subject to repurchase by the Company in
the event service is terminated at the rate of 100% until the first
anniversary of the date of grant, decreasing by 2.08333% of the shares upon
completion of each full month thereafter. The shares are released from the
repurchase option four years after the date of grant.
(2) Based on an aggregate of 1,033,944 shares subject to options granted to
employees of the Company in the fiscal year ended December 31, 1998,
including the Named Executive Officers.
(3) The potential realizable value calculated based on the term of the option at
the time of grant (10 years). Stock price appreciation of 5% and 10% is
assumed pursuant to rules promulgated by the Commission and does not
represent the Company's prediction of its stock price performance. Actual
gains, if any, are dependent on the actual future performance of the
Company's Common Stock and no gain to the optionee is possible unless the
stock price increases over the option term, which will benefit all
stockholders.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR, AND YEAR-END OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES VALUE DECEMBER 31, 1998(#) DECEMBER 31, 1998($)(2)
ACQUIRED ON REALIZED -------------------------- -------------------------
NAME EXERCISE(#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------- ----------- --------- ----------- ------------- ---------- -------------
Jens H. Molbak.................... 183,308 586,597
Daniel A. Gerrity................. 45,375 367,920 173,137 531,439
Aaron R. Finch....................
Rod W. Brooks..................... 168,723 1,004,488
Kirk A. Collamer.................. 107,269 194,990
Michael W. Parks 50,538 118,980
- ------------------------
(1) Based on the difference between the fair market value on the date of
exercise and the exercise price.
(2) Based on the difference between the fair market value on December 31, 1998
($10.75 per share) and the exercise price.
22
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
ON EXECUTIVE COMPENSATION
COMPENSATION COMMITTEE REPORT
The Compensation Committee of the Board of Directors (the "Committee") is
composed of three outside directors who are not employed by the organization and
are free of any relationship that would interfere with their exercise of
independent judgment. The Committee is responsible for setting and administering
the policies that govern executive compensation and provides the following
report to shareholders.
PHILOSOPHY
The Company's executive compensation program is designed to attract, retain
and motivate the talent the Company needs to achieve its aggressive business
goals and to build shareholder value. A significant portion of executive
compensation is linked to key measures of corporate performance as defined
annually in Coinstar's business plan and to increased valuation of the company's
stock. The goal is to align executive pay with increased value for stockholders.
The Company takes a "total compensation" approach, evaluating the
competitiveness of each executive compensation package based on all components
of compensation: base salary, bonus pay (short-term incentive program), stock
options (long-term incentive program) and benefits. In 1998 the committee
employed an independent consultant to assist in the review of the Company's
executive pay practices and recommendations for 1999 pay levels. Among other
activities, the consultant prepared a report comparing Coinstar's executive
compensation to that of other companies.
The following is a discussion of each of the elements of the Company's
executive program including a description of the decisions and actions taken by
the Committee to determine compensation in 1998 for the Chief Executive Officer,
the President and the seven officers and directors reporting to the President.
1998 EXECUTIVE COMPENSATION PROGRAM
Compensation paid to the Company's executive officers in 1998 (as reflected
in the foregoing tables for Named Executive Officers) consisted of the following
elements:
BASE SALARY. Base salaries for executives are determined by evaluating (1)
the responsibilities of the position, (2) the strategic value of the position to
the Company, (3) the experience and skills of the individual filling the
position and (4) market data for comparable positions in other companies with a
similar revenue base. The base salaries for the Company's executive officers are
generally at or below the median when this comparison with the market data is
made, but this result is consistent with the company's philosophy to weight
compensation more heavily towards incentive pay programs which link executive
rewards with shareholder value.
BONUS PAY (SHORT-TERM INCENTIVE PROGRAM). The executive bonus plan is tied
to specific business objectives developed annually in the Company's business
plan and approved by the Board of Directors. The size of the bonus to the Chief
Executive Officer, the President and the seven members of the senior management
team is determined as a percentage of base salary. In 1998, Coinstar achieved
its earnings objectives and executive managers employed on December 31, 1998,
were eligible to receive their bonus. In some cases, the bonus was based on the
achievement of both company and individual goals and was awarded in both cash
and stock options.
STOCK OPTIONS (LONG-TERM INCENTIVE PROGRAM). The Company believes that a
significant percentage of compensation to executive officers should be delivered
in the form of stock options. Stock options utilized by the Company for this
purpose align management interests with shareholders by allowing them to share
in the long-term increase in value of the Company. Coinstar believes these stock
options play a key role in
23
attracting, motivating and retaining the services of its executive employees.
The Company has historically rewarded its executive employees through the grant
of Incentive Stock Options and Non-statutory Stock Options.
Incentive Stock Options and Non-statutory Stock Options are awarded to both
executive and non-executive employees on an annual basis by the Compensation
Committee or the Board of Directors. The Company's Equity Incentive Plan
provides for the grant of up to 2,900,000 shares of the Company's Common Stock,
of which there were, as of December 31, 1998, 350,548 shares issued upon
exercise of options, 1,565,835 options to purchase outstanding 983,617 shares
available for future grant. Stock options are typically granted with exercise
prices equal to the prevailing market value of the Company's Common Stock on the
date of the grant, have 10-year terms and are subject to vesting periods
established by the Committee.
The Compensation Committee employs no set of mechanical criteria in awarding
stock options. Rather it evaluates a series of factors including (1) the overall
performance of the Company for the fiscal year in question; (2) the anticipated
contribution by the individual to the Company, (3) the stock options required
from a competitive point of view to retain the services of a valued executive
officer, and (4) market data for comparable positions in other companies with a
similar revenue base. Stock options awarded for the Company's executive officers
are generally above the median when this comparison with the market data is
made. This result is consistent with the company's philosophy to weight
compensation more heavily towards incentive pay programs that link executive
rewards with shareholder value.
CHIEF EXECUTIVE OFFICER COMPENSATION
Through April 1998, Mr. Jens H. Molbak served as President, Chief Executive
Officer and a director of the Company. On April 15, 1998, Mr. Daniel A. Gerrity
became President of the Company, and Mr. Molbak has continued to serve as
Chairman & Chief Executive Officer since that time. Mr. Molbak was eligible to
participate in the same executive compensation plans as were available to other
executive officers of the Company. Based on the performance of the Company in
the prior fiscal year and the Committee's assessment of Mr. Molbak's ongoing
personal performance in the position of Chief Executive Officer, Mr. Molbak
received a salary increase during fiscal 1998. Among the factors considered by
the Committee in its consideration of Mr. Molbak's performance were the
continued expansion of the Company's Coinstar network, the continued success of
the Company's sales and marketing efforts.
The Board granted Mr. Molbak stock options under the Equity Incentive Plan
for 100,000 shares of Common Stock on Februrary 9, 1998, at the option price of
$8.00 per share. This option was based on the continuing success through
internally generated growth of the Company. He is eligible to receive additional
option grants in the future at the discretion of the Committee.
CONCLUSION
Through the plans described above, a significant portion of the Company's
compensation program and Mr. Molbak's compensation are contingent on Company
performance, and realization of benefits is closely linked to increases in
long-term stockholder value. The Company remains committed to this philosophy of
pay for performance, recognizing that the competitive market for talented
executives and the volatility of the Company's business may result in highly
variable compensation for a particular time period.
COMPENSATION COMMITTEE
William Ruckelshaus
David E. Stitt
Ronald A. Weinstein
24
EMPLOYMENT AGREEMENTS, TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL
ARRANGEMENTS
On July 14, 1998 Mr. Brooks left employment with the Company. Under the
terms of a seperation agreement dated as July 14, 1998, Mr. Brooks continued to
receive full pay and benefits until January 14, 1999, however, Mr. Brooks had no
corporate responsibilities during this time.
PERFORMANCE MEASUREMENT COMPARISON
The following graph shows the total stockholder return of an investment of
$100 in cash on July 3, 1997 (the date on which the Company's Common Stock was
first traded on the Nasdaq National Market) for (i) the Company's Common Stock,
(ii) the Nasdaq Stock Market Index and (iii) the Russell 2000 Index ("Russell
2000"). All values assume reinvestment of the full amount of all dividends and
are calculated as of December 31, 1998.
COMPARISON OF CUMULATIVE TOTAL RETURN*
AMONG COINSTAR, INC., THE NASDAQ STOCK MARKET (U.S.) INDEX
AND THE RUSSELL 2000 INDEX
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
COINSTAR, INC. NASDAQ STOCK MARKET (U.S.) RUSSELL 2000
Start $100.00 $100.00 $100.00
7-97 $95.00 $111.00 $105.00
8-97 $113.00 $110.00 $107.00
9-97 $124.00 $117.00 $115.00
10-97 $96.00 $111.00 $110.00
11-97 $92.00 $111.00 $109.00
12-97 $87.00 $110.00 $111.00
1-98 $82.00 $113.00 $109.00
2-98 $80.00 $124.00 $117.00
3-98 $87.00 $128.00 $122.00
4-98 $94.00 $130.00 $123.00
5-98 $82.00 $123.00 $119.00
6-98 $88.00 $132.00 $119.00
7-98 $88.00 $131.00 $109.00
8-98 $70.00 $105.00 $88.00
9-98 $59.00 $119.00 $95.00
10-98 $70.00 $124.00 $99.00
11-98 $61.00 $137.00 $104.00
12-98 $102.00 $154.00 $110.00
7/3/97 7/31/97 8/31/97 9/30/97 10/31/97 11/30/97 12/31/97 1/31/98
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Coinstar, Inc..... 100 95 113 124 96 92 87 82
NASDAQ STOCK
MARKET (U.S.)... 100 111 110 117 111 111 110 113
RUSSELL 2000...... 100 105 107 115 110 109 111 109
2/28/98 3/31/98 4/30/98 5/31/98 6/30/98 7/31/98 8/31/98 9/30/98
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Coinstar, Inc..... 80 87 94 82 88 88 70 59
NASDAQ STOCK
MARKET (U.S.)... 124 128 130 123 132 131 105 119
RUSSELL 2000...... 117 122 123 119 119 109 88 95
10/31/98 11/30/98 12/31/98
----------- ----------- -----------
Coinstar, Inc..... 70 61 102
NASDAQ STOCK
MARKET (U.S.)... 124 137 154
RUSSELL 2000...... 99 104 110
- ----------------------------------
* $100 invested on 7/03/97 in stock or on 8/30/97 in index including
reinvestment of dividends. Fiscal year ending December 31. Stock price
performance shown above for the Company's Common Stock is historical and not
necessarily indicative of future price performance.
25
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On July 14, 1998 Mr. Brooks left employment with the Company. Under the
terms of a seperation agreement dated as July 14, 1998, Mr. Brooks continued to
receive full pay and benefits until January 14, 1999, however, Mr. Brooks had no
corporate responsibilities during this time.
In January 1994, the Board of Directors granted to Ronald Weinstein an
option to purchase 10,000 shares of the Company's Series B Preferred Stock,
which has an exercise price of $4.00 per share and was fully vested on the date
of grant. At that time, Mr. Weinstein was a member of the Company's Board of
Directors. In connection with the Company's initial public offering, the Series
B Preferred Stock converted into Common Stock at the rate of 1.142857 shares of
Common Stock to one share of Series B Preferred Stock.
As of December 31, 1998, the Company had approximately 86 Coinstar units
installed in QFC grocery stores, including stores operated by Hughes Markets,
Inc., its subsidiary ("QFC-Hughes"). During 1998, the Coinstar units installed
in QFC-Hughes were responsible for approximately 2.5% of the Company's revenue.
Mr. Weinstein, a director of the Company, was a director of QFC during 1998.
The Company believes that the foregoing transactions were on terms no less
favorable to the Company than could be obtained from unaffiliated third parties.
OTHER MATTERS
The Board of Directors knows of no other matters that will be presented for
consideration at the Annual Meeting. If any other matters are properly brought
before the meeting, it is the intention of the persons named in the accompanying
proxy to vote on such matters in accordance with their best judgment.
By Order of the Board of Directors
[SIG]
Mark P. Tanoury
Secretary
April 30, 1998
A COPY OF THE COMPANY'S ANNUAL REPORT TO THE SECURITIES AND EXCHANGE
COMMISSION ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 IS AVAILABLE
WITHOUT CHARGE UPON WRITTEN REQUEST TO: CORPORATE SECRETARY, COINSTAR, INC.,
1800 114TH AVENUE S.E., BELLEVUE, WASHINGTON 98004.
(1) The material in this report and under the caption "Performance Measurement
Comparison" are not "soliciting material," are not deemed filed with the SEC
and are not to be incorporated by reference in any filing of the Company
under the Securities Act of 1933, as amended, or Exchange Act whether made
before or after the date of this Proxy Statement and irrespective of any
general incorporation language herein.
26
COINSTAR, INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON JUNE 16, 1999
The undersigned hereby appoints Jens H. Molbak and Kirk A. Collamer, and
each of them, as attorneys and proxies of the undersigned, with full power of
substitution, to vote all of the shares of Coinstar, Inc. which the undersigned
may be entitled to vote at the Annual Meeting of Stockholders of Coinstar, Inc.
to be held at the Company's offices located at 1800 114th Avenue SE, Bellevue,
Washington 98004 on Wednesday, June 16, 1999 at 10:00 a.m., (local time), and at
any and all postponements, continuations and adjournments thereof, with all
powers that the undersigned would possess if personally present, upon and in
respect of the following matters and in accordance with the following
instructions, with discretionary authority as to any and all other matters that
may properly come before the meeting.
MANAGEMENT RECOMMENDS A VOTE FOR THE NOMINEES FOR DIRECTOR LISTED BELOW
PROPOSAL 1: To elect two directors to hold office until the 2002 Annual Meeting
of Shareholders.
FOR all nominees listed below WITHHOLD AUTHORITY
(except as marked to the contrary below). / / TO VOTE FOR ALL NOMINEES LISTED BELOW. / /
Nominees: David E. Stitt and Ronald A. Weinstein
TO WITHHOLD AUTHORITY TO VOTE FOR ANY NOMINEE(S) WRITE SUCH NOMINEE(S)' NAME(S)
BELOW:
- --------------------------------------------------------------------------------
MANAGEMENT RECOMMENDS A VOTE FOR PROPROSAL 2
PROPOSAL 2: To approve the Company's 1997 Equity Incentive Plan (i) as amended
to increase the number of shares authorized for issuance under the plan from
2,900,000 shares to 3,580,000 shares and (ii) to approve the grant limitations
under the plan for purposes of Section 162(m) of the Internal Revenue Code of
1986, as amended.
/ / FOR / / AGAINST / / ABSTAIN
MANAGEMENT RECOMMENDS A VOTE FOR PROPROSAL 3
PROPOSAL 3: To approve an amendment to the Company's Employee Stock Purchase
Plan to increase the number of shares authorized for issuance under the plan
from 200,000 to 400,000 shares.
/ / FOR / / AGAINST / / ABSTAIN
MANAGEMENT RECOMMENDS A VOTE FOR PROPROSAL 4
PROPOSAL 4: To approve the 1997 Non-Employee Directors' Stock Option Plan, as
amended and restated to increase the number of shares authorized for issuance
under the plan from 100,000 to 200,000 shares.
/ / FOR / / AGAINST / / ABSTAIN
MANAGEMENT RECOMMENDS A VOTE FOR PROPROSAL 5
PROPOSAL 5: To ratify the selection of Deloitte & Touche LLP as independent
auditors of the Company for its fiscal year ending December 31, 1999.
/ / FOR / / AGAINST / / ABSTAIN
UNLESS A CONTRARY DIRECTION IS INDICATED, THIS PROXY WILL BE VOTED FOR ALL
NOMINEES LISTED IN PROPOSAL 1 AND FOR PROPOSAL 2, PROPOSAL 3, PROPOSAL 4, AND
PROPOSAL 5, AS MORE SPECIFICALLY DESCRIBED IN THE PROXY STATEMENT. IF SPECIFIC
INSTRUCTIONS ARE INDICATED, THIS PROXY WILL BE VOTED IN ACCORDANCE THEREWITH.
Please vote, date and return this proxy in the enclosed return envelope
which is postage prepaid if mailed in the United States.
Dated _________________________, 1998
_____________________________________
_____________________________________
Signature(s)
Please sign exactly as your name
appears hereon. If the stock is
registered in the names of two or
more persons, each should sign.
Executors, administrators, trustees,
guardians and attorneys-in-fact
should add their titles. If signer is
a corporation, please give full
corporate name and have a duly
authorized officer sign, stating
title. If signer is a partnership,
please sign in partnership name by
authorized person.