##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarter ended March 31, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission File Number: 000-22555
 
 COINSTAR, INC.
 (Exact name of registrant as specified in its charter)
 
 Delaware
    
    94-3156448(State or other jurisdiction of
    
    (IRS Employerincorporation or organization)
    
    Identification No.)1800 114th Avenue SE, Bellevue, Washington
    
    98004(Address of principal executive offices)
    
    (Zip Code)
 (425) 943-8000
(Registrants telephone number, including area code)
 
 þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ
  Class
    
    Outstanding at April 25, 2008Common Stock, $0.001 par value
    
    27,926,649




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##### 



COINSTAR, INC.
 FORM 10-Q
Index
 PART I. FINANCIAL INFORMATIONItem 1. Financial Statements:Consolidated Balance Sheets as of March 31, 2008 (unaudited) and December 31, 2007
    
    Page 3Consolidated Statements of Operations for the three month periods ended
March 31, 2008 and March 31, 2007 (unaudited)
    
    Page 4Consolidated Statement of Stockholders Equity and Comprehensive Income for the
three month period ended March 31, 2008 (unaudited)
    
    Page 5Consolidated Statements of Cash Flows for the three month periods ended
March 31, 2008 and March 31, 2007 (unaudited)
    
    Page 6Notes to Consolidated Financial Statements for the three month periods ended
March 31, 2008 and March 31, 2007 (unaudited)
    
    Page 7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    Page 16Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    Page 25Item 4. Controls and Procedures
    
    Page 25PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    Page 25Item 1A. Risk Factors
    
    Page 26Item 6. Exhibits
    
    Page 27SIGNATURE
    
    Page 28EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 COINSTAR, INC.
 
 CONSOLIDATED BALANCE SHEETS
 (in thousands, except share data)
 (unaudited)
 March 31,
    
    
    December 31,2008
    
    
    2007ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    29,021
    
    
    $
    18,497Cash in machine or in transit
    
    
    54,619
    
    
    
    78,097Cash being processed
    
    
    117,903
    
    
    
    99,998Accounts receivable, net of allowance for doubtful accounts of $1,685 and $1,489
at March 31, 2008 and December 31, 2007, respectively
    
    
    63,093
    
    
    
    49,809Inventory
    
    
    63,786
    
    
    
    33,360Deferred income taxes
    
    
    853
    
    
    
    3,459Prepaid expenses and other current assets
    
    
    31,631
    
    
    
    18,747Total current assets
    
    
    360,906
    
    
    
    301,967PROPERTY AND EQUIPMENT, NET
    
    
    264,453
    
    
    
    146,041DEFERRED INCOME TAXES
    
    
    14,260
    
    
    
    16,447OTHER ASSETS
    
    
    9,450
    
    
    
    15,150EQUITY INVESTMENTS
    
    
    3,461
    
    
    
    33,052INTANGIBLE ASSETS, NET
    
    
    50,480
    
    
    
    34,457GOODWILL
    
    
    290,890
    
    
    
    221,459TOTAL ASSETS
    
    $
    993,900
    
    
    $
    768,573LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    83,977
    
    
    $
    49,829Accrued payable to retailers and agents
    
    
    119,906
    
    
    
    99,998Other accrued liabilities
    
    
    69,409
    
    
    
    40,911Current portion of long-term debt and capital lease obligations
    
    
    15,101
    
    
    
    6,505Total current liabilities
    
    
    288,393
    
    
    
    197,243LONG-TERM DEBT, CAPITAL LEASE OBLIGATIONS AND OTHER
    
    
    361,674
    
    
    
    266,146DEFERRED TAX LIABILITY
    
    
    67
    
    
    
    54MINORITY INTEREST
    
    
    27,587
    
    
    
    TOTAL LIABILITIES
    
    
    677,721
    
    
    
    463,443STOCKHOLDERS EQUITY:Preferred stock, $0.001 par valueAuthorized, 5,000,000 shares; no shares issued
and outstanding at March 31, 2008 and December 31, 2007
    
    
    
    
    
    
    Common stock, $0.001 par valueAuthorized, 45,000,000 shares; 29,852,730 and
29,665,125 issued and 27,926,649 and 27,739,044 shares outstanding at
March 31, 2008 and December 31, 2007, respectively
    
    
    359,578
    
    
    
    354,509Accumulated deficit
    
    
    (14,083
    )
    
    
    (16,784
    )Treasury stock
    
    
    (40,831
    )
    
    
    (40,831
    )Accumulated other comprehensive income
    
    
    11,515
    
    
    
    8,236Total stockholders equity
    
    
    316,179
    
    
    
    305,130TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    993,900
    
    
    $
    768,573
  3




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COINSTAR, INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
 Three Month PeriodsEnded March 31,2008
    
    
    2007REVENUE
    
    $
    190,519
    
    
    $
    132,336EXPENSES:Direct operating
    
    
    132,610
    
    
    
    91,639Marketing
    
    
    2,803
    
    
    
    1,626Research and development
    
    
    1,246
    
    
    
    1,341General and administrative
    
    
    19,796
    
    
    
    12,247Depreciation and other
    
    
    16,971
    
    
    
    14,468Amortization of intangible assets
    
    
    2,342
    
    
    
    1,739Income from operations
    
    
    14,751
    
    
    
    9,276OTHER INCOME (EXPENSE):Interest income and other (expense), net
    
    
    (869
    )
    
    
    75Interest expense
    
    
    (4,916
    )
    
    
    (3,974
    )Loss from equity investments
    
    
    (580
    )
    
    
    (255
    )Minority interest
    
    
    (3,173
    )
    
    
    Income before income taxes
    
    
    5,213
    
    
    
    5,122Income tax expense
    
    
    (2,512
    )
    
    
    (2,566
    )NET INCOME
    
    $
    2,701
    
    
    $
    2,556NET INCOME PER SHARE:Basic
    
    $
    0.10
    
    
    $
    0.09Diluted
    
    $
    0.10
    
    
    $
    0.09WEIGHTED SHARES OUTSTANDING:Basic
    
    
    27,783
    
    
    
    27,777Diluted
    
    
    28,236
    
    
    
    28,287
  4




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##### Table of Contents



COINSTAR, INC.
 
 CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME
Three Month Period Ended March 31, 2008
(in thousands, except share data)
(unaudited)
 AccumulatedCommon Stock
    
    
    
    
    
    
    
    
    
    
    OtherAccumulated
    
    
    
    
    
    
    Comprehensive
    
    
    
    
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Deficit
    
    
    Treasury Stock
    
    
    Income (Loss)
    
    
    Total
    
    
    Income (Loss)BALANCE, December 31, 2007
    
    
    27,739,044
    
    
    $
    354,509
    
    
    $
    (16,784
    )
    
    $
    (40,831
    )
    
    $
    8,236
    
    
    $
    305,130Proceeds from exercise of stock
options, net
    
    
    156,553
    
    
    
    3,093
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,093Stock-based compensation expense
    
    
    31,052
    
    
    
    1,618
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,618Tax benefit on share-based
compensation
    
    
    
    
    
    
    358
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    358Net income
    
    
    
    
    
    
    
    
    
    
    2,701
    
    
    
    
    
    
    
    
    
    
    
    2,701
    
    
    $
    2,701Loss on short-term investments
net of tax benefit of $9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13
    )
    
    
    (13
    )
    
    
    (13
    )Foreign currency translation
adjustments

net of tax benefit of $87
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,376
    
    
    
    4,376
    
    
    
    4,376Interest rate hedges on long-term debt
net of tax benefit of $727
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,084
    )
    
    
    (1,084
    )
    
    
    (1,084
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    5,980BALANCE, March 31, 2008
    
    
    27,926,649
    
    
    $
    359,578
    
    
    $
    (14,083
    )
    
    $
    (40,831
    )
    
    $
    11,515
    
    
    $
    316,179
  5




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COINSTAR, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands)
 (unaudited)
 Three Month PeriodsEnded March 31,2008
    
    
    2007OPERATING ACTIVITIES:Net income
    
    $
    2,701
    
    
    $
    2,556Adjustments to reconcile income from operations to net cash
provided (used) by operating activities:Depreciation and other
    
    
    16,971
    
    
    
    14,468Amortization of intangible assets
    
    
    2,342
    
    
    
    1,739Amortization of deferred financing fees
    
    
    102
    
    
    
    188Non-cash stock-based compensation
    
    
    2,114
    
    
    
    1,684Excess tax
benefit on share-based awards
    
    
    (148
    )
    
    
    (884
    )Deferred income taxes
    
    
    2,449
    
    
    
    1,942Loss (income) from equity investments
    
    
    580
    
    
    
    (74
    )Minority interest
    
    
    3,173
    
    
    
    Other
    
    
    (4
    )
    
    
    84Cash (used) provided by changes in operating assets and liabilities, net of
effects of business acquisitions:Accounts receivable
    
    
    13,989
    
    
    
    2,280Inventory
    
    
    (3,380
    )
    
    
    3,287Prepaid expenses and other current assets
    
    
    (4,008
    )
    
    
    (1,336
    )Other assets
    
    
    (138
    )
    
    
    (1,362
    )Accounts payable
    
    
    1,848
    
    
    
    (15,717
    )Accrued payable to retailers and agents
    
    
    (8,864
    )
    
    
    (16,966
    )Accrued liabilities
    
    
    (7,211
    )
    
    
    (4,518
    )Net cash provided (used) by operating activities
    
    
    22,516
    
    
    
    (12,629
    )INVESTING ACTIVITIES:Purchase of property and equipment
    
    
    (31,883
    )
    
    
    (18,126
    )Acquisitions, net of cash acquired of $43,621 in 2008
    
    
    (21,485
    )
    
    
    (227
    )Proceeds from sale of fixed assets
    
    
    769
    
    
    
    241Net cash used by investing activities
    
    
    (52,599
    )
    
    
    (18,112
    )FINANCING ACTIVITIES:Principal payments on revolving line of credit and capital lease obligations
    
    
    (115,079
    )
    
    
    (2,291
    )Borrowings on current credit facility
    
    
    145,500
    
    
    
    Excess tax
benefit on share-based awards
    
    
    148
    
    
    
    884Repurchase of common stock
    
    
    
    
    
    
    (3,495
    )Proceeds from exercise of stock options
    
    
    3,093
    
    
    
    1,028Net cash provided (used) by financing activities
    
    
    33,662
    
    
    
    (3,874
    )Effect of exchange rate changes on cash
    
    
    1,372
    
    
    
    61NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS, CASH IN
MACHINE OR IN TRANSIT, AND CASH BEING PROCESSED
    
    
    4,951
    
    
    
    (34,554
    )CASH AND CASH EQUIVALENTS, CASH IN MACHINE OR IN TRANSIT, AND
CASH BEING PROCESSED:Beginning of period
    
    
    196,592
    
    
    
    178,164End of period
    
    $
    201,543
    
    
    $
    143,610SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid during the period for interest
    
    $
    2,498
    
    
    $
    3,771Cash paid during the period for income taxes
    
    
    4,155
    
    
    
    627SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING
ACTIVITIES:Purchase of vehicles financed by capital lease obligations
    
    $
    640
    
    
    $
    2,262Accrued acquisition costs
    
    
    10,170
    
    
    
    20
  6




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COINSTAR, INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Three Month Periods Ended March 31, 2008 and 2007
(unaudited)
 NOTE 1: ORGANIZATION, BUSINESS, AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Description of company:
 Coin-counting machines
    
    
    15,500Entertainment services machines
    
    
    230,000DVD kiosks
    
    
    7,900Money transfer services locations
    
    
    35,000E-payment point-of-sale terminals
    
    
    18,500E-payment
enabled coin-counting kiosks
    
    
    10,700
 Basis of presentation:
  Principles of consolidation:
  Use of estimates .
 7




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Revenue recognition:
 
    
    Coin-counting revenue is recognized at the time the consumers coins are counted by
our coin-counting machines. Our revenue is the fee charged for coin-counting;
    
    DVD revenue primarily represents rental charges and is recognized at the time the
customer completes the transaction;
    
    Money transfer revenue represents the commissions earned on a money transfer
transaction and is recognized at the time the customer completes the transaction;
    
    Entertainment revenue is recognized at the time cash is deposited in our machines.
Cash deposited in the machines that has not yet been collected is referred to as cash in
machine and is estimated at period end and reported on the balance sheet as cash in
machine or in transit. This estimate is based on the average daily revenue per machine,
multiplied by the number of days since the coin in the machine has been collected. The
estimated value of our entertainment services coin-in-machine was approximately $7.6
million and $8.4 million at March 31, 2008 and December 31, 2007, respectively;
    
    E-payment revenue is recognized at the point of sale based on our commissions earned,
net of retailer fees.
 Recent accounting pronouncements Fair Value Measures Effective Date of FASB Statement No. 157
  
    
    Level 1: Observable inputs such as quoted prices in active markets for identical
assets or liabilities
    
    Level 2: Inputs other than quoted prices that are observable for the asset or
liability, either directly or indirectly; these include quoted prices for similar assets
or liabilities in active markets and quoted prices for identical or similar assets or
liabilities in markets that are not active
    
    Level 3: Unobservable inputs that reflect the reporting entitys own assumptions
  Balance as of March 31, 2008Level 1
    
    Level 2
    
    Level 3Short-term Investment
    
    $
    1,573
    
    
    
    
    
    
    
    Interest
rate swap liability
    
    $
    
    
    
    
    (1,837)
    
    
    
    
 Business Combinations
 Noncontrolling Interests in
Consolidated Financial StatementsAn Amendment of ARB No. 51
 8




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Disclosures about Derivative Instruments and Hedging Activities
 Contingency
 NOTE 2: ACQUISITIONS
 Groupex
    (in thousands)Cash paid for acquisition of GroupEx
    
    $
    60,000Estimated additional payout
    
    
    10,000Estimated acquisition related costs
    
    
    2,100$
    72,100
  (in thousands)Assets acquired:Cash and cash equivalents
    
    $
    26,807Trade accounts receivable
    
    
    13,531Prepaid expenses and other assets
    
    
    2,053Property and equipment
    
    
    4,015Intangible assets
    
    
    15,300Goodwill
    
    
    55,730117,436Liabilities assumed:Accounts payable and accrued liabilities
    
    
    45,336$
    72,100
 9




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Goodwill and Other Intangible Assets
  EstimatedFair value
    
    
    Useful Lives(in thousands)
    
    
    (in years)Intangible assets:Internal use software
    
    $
    1,600
    
    
    
    5Agent relationships
    
    
    12,300
    
    
    
    10Trademark
    
    
    1,400
    
    
    
    3Total
    
    $
    15,300
  (in thousands)2008
    
    $
    2,0172009
    
    
    2,0172010
    
    
    2,0172011
    
    
    1,5502012
    
    
    1,550Thereafter
    
    
    6,149$
    15,300
 Redbox
   (in thousands)Cash paid for the initial Redbox investment of 47.3% ownership in December 2005
    
    $
    32,000Cash paid for the additional investment of 3.7% ownership in January 2008
    
    
    5,106Estimated acquisition related costs
    
    
    392Equity investment (loss) from December 2005 to January 2008
    
    
    (3,855
    )Total Investment in Redbox at the acquisition date
    
    $
    33,643
  10




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(in thousands)Assets acquired:Cash and cash equivalents
    
    $
    16,814Trade accounts receivable
    
    
    10,118Inventory
    
    
    26,627Prepaid expenses and other assets
    
    
    7,258Property and equipment
    
    
    100,056Intangible assets
    
    
    2,233Goodwill
    
    
    11,113174,219Liabilities assumed:Accounts payable and accrued liabilities
    
    
    114,798Deferred tax liability
    
    
    2,101Minority interest
    
    
    23,677Total Investment in Redbox
    
    $
    33,643
 Business Combination Consolidated Financial Statement
  11




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Three Month PeriodsEnded March 31,2008
    
    2007(in thousands)Total Revenue
    
    $
    201,552
    
    
    $
    152,231Net income
    
    $
    2,710
    
    
    $
    2,562Net income per shareBasic
    
    $
    0.10
    
    
    $
    0.09Diluted
    
    $
    0.10
    
    
    $
    0.09
 NOTE 3: PROPERTY AND EQUIPMENT
 March 31,
    
    
    December 31,2008
    
    
    2007(in thousands)Machines
    
    $
    510,205
    
    
    $
    364,564Computers
    
    
    23,767
    
    
    
    15,238Office furniture and equipment
    
    
    10,676
    
    
    
    10,119Vehicles
    
    
    23,852
    
    
    
    24,655Leasehold improvements
    
    
    2,970
    
    
    
    2,548571,470
    
    
    
    417,124Accumulated depreciation and amortization
    
    
    (307,017
    )
    
    
    (271,083
    )$
    264,453
    
    
    $
    146,041
 NOTE 4: STOCK-BASED COMPENSATION
 Stock-based compensation: ), Share-Based Payment
  Three Month PeriodsEnded March 31,2008
    
    2007Expected term (in years)
    
    
    3.7
    
    
    
    3.7Expected stock price volatility
    
    
    35
    %
    
    
    41
    %Risk-free interest rate
    
    
    2.1
    %
    
    
    4.5
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %Estimated fair value per option granted
    
    $
    9.42
    
    
    $
    11.06
  12




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Three Month PeriodsEnded March 31,2008
    
    2007(in thousands)Stock-based compensation expense
    
    $
    1,618
    
    
    $
    1,684Related deferred tax benefit
    
    
    434
    
    
    
    437
 Stock options:
  Weighted averageShares
    
    exercise priceOUTSTANDING, December 31, 2007
    
    
    2,668,287
    
    
    $
    23.07Granted
    
    
    265,549
    
    
    
    31.88Exercised
    
    
    (164,739
    )
    
    
    19.37Cancelled, expired or forfeited
    
    
    (7,149
    )
    
    
    26.21OUTSTANDING, March 31, 2008
    
    
    2,761,948
    
    
    
    24.13EXERCISABLE, March 31, 2008
    
    
    1,854,157
    
    
    
    22.07
   Options Outstanding
    
    Options ExercisableWeighted averageNumber of options
    
    remaining
    
    Weighted average
    
    Number of options
    
    Weighted averageExercise price
    
    outstanding
    
    contractual life
    
    exercise price
    
    exercisable
    
    exercise price$7.38$18.59
    
    
    469,289
    
    
    
    4.85
    
    
    $
    17.18
    
    
    
    458,242
    
    
    $
    17.1618.60    22.60
    
    
    559,820
    
    
    
    4.15
    
    
    
    20.81
    
    
    
    530,871
    
    
    
    20.8922.61    23.90
    
    
    545,820
    
    
    
    3.21
    
    
    
    23.39
    
    
    
    405,830
    
    
    
    23.3123.91    30.00
    
    
    508,229
    
    
    
    5.10
    
    
    
    25.83
    
    
    
    348,461
    
    
    
    25.9630.01    34.45
    
    
    678,790
    
    
    
    4.28
    
    
    
    30.97
    
    
    
    110,753
    
    
    
    30.402,761,948
    
    
    
    4.29
    
    
    
    24.13
    
    
    
    1,854,157
    
    
    
    22.07
 Restricted stock awards:
 13




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Weightedaveragegrant dateShares
    
    fair valueNON-VESTED, December 31, 2007
    
    
    105,545
    
    
    $
    28.25Granted
    
    
    31,052
    
    
    
    31.62Vested
    
    
    (26,975
    )
    
    
    27.87NON-VESTED, March 31, 2008
    
    
    109,622
    
    
    
    29.30
  NOTE 5: INCOME PER SHARE
   Three Month PeriodsEnded March 31,2008
    
    
    2007(in thousands)Numerator:Net income
    
    $
    2,701
    
    
    $
    2,556Denominator:Weighted average shares for basic calculation
    
    
    27,783
    
    
    
    27,777Incremental shares from employee stock options and awards
    
    
    453
    
    
    
    510Weighted average shares for diluted calculation
    
    
    28,236
    
    
    
    28,287
  NOTE 6: BUSINESS SEGMENT INFORMATION
 Disclosure about Segments of an Enterprise and Related Information
 14




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##### Table of Contents



Three Month PeriodsEnded March 31,2008
    
    
    2007(in thousands)Revenues:Coin and entertainment services:Coin revenues
    
    $
    59,243
    
    
    $
    54,796Entertainment revenues
    
    
    44,225
    
    
    
    65,039Subtotal
    
    
    103,468
    
    
    
    119,835DVD services
    
    
    60,513
    
    
    
    2,602Money transfer services
    
    
    20,470
    
    
    
    4,783E-payment services
    
    
    6,068
    
    
    
    5,116Consolidated revenue
    
    $
    190,519
    
    
    $
    132,336
   Three Month PeriodEnded March 31,2008Operating income before depreciation/amortization and unallocated
expenses:Coin and entertainment services
    
    $
    24,803DVD services
    
    
    12,869Money transfer services
    
    
    (1,823
    )E-payment services
    
    
    329Subtotal
    
    
    36,178Depreciation/Amortization and Unalloccated Corporate expenses:Depreciation and amortization
    
    
    (19,313
    )Unallocated expense  stock-based compensation
    
    
    (2,114
    )Subtotal
    
    
    (21,427
    )Consolidated income from operations
    
    $
    14,751
 March 31,2008(in thousands)Total assets:Coin and entertainment services
    
    $
    475,347DVD services
    
    
    191,158Money transfer services
    
    
    202,939E-payment services
    
    
    42,820Unallocated corporate assets
    
    
    81,636Consolidated assets
    
    $
    993,900
  15




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##### Table of Contents



Three Month PeriodsEnded March 31,2008
    
    
    2007(in thousands)Revenue:North America
    
    $
    174,375
    
    
    $
    120,692International
    
    
    16,144
    
    
    
    11,644Total revenue
    
    $
    190,519
    
    
    $
    132,336Net income (loss):North America
    
    $
    5,820
    
    
    $
    5,175International
    
    
    (3,119
    )
    
    
    (2,619
    )Total net income
    
    $
    2,701
    
    
    $
    2,556
 March 31,
    
    
    December 31,2008
    
    
    2007(in thousands)Total assets:North America
    
    $
    940,396
    
    
    $
    726,098International
    
    
    138,696
    
    
    
    129,092Intercompany eliminations
    
    
    (85,192
    )
    
    
    (86,617
    )Total assets
    
    $
    993,900
    
    
    $
    768,573
  Three Month PeriodsEnded March 31,2008
    
    2007Wal-Mart Stores Inc
    
    
    17.5
    %
    
    
    27.6
    %The Kroger Company
    
    
    8.5
    %
    
    
    11.2
    %
 NOTE 7: RELATED PARTY TRANSACTIONS
  
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 The following discussion and analysis should be read in conjunction with the Consolidated
Financial Statements and related Notes included elsewhere in this Quarterly Report on Form 10-Q .
Except for the consolidated historical information, the following discussion contains
forward-looking statements that involve risks and uncertainties, such as our objectives,
expectations and intentions. Our actual results could differ materially from results that may be
anticipated by such forward-looking statements and discussed elsewhere herein. Factors that could
cause or contribute to such differences include, but are not limited to, those discussed below and
those discussed under Risk Factors in Item IA of Part II of this Quarterly Report on Form 10-Q
and in Item IA of Part I of our Annual Report on Form 10-K for the fiscal year ended
December 31, 2007. Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date of this report. We undertake no obligation to revise
any forward-looking statements in order to reflect events or circumstances that may subsequently
arise. Readers are urged to carefully review and consider the various disclosures made in this
report and in our other reports filed with the SEC that attempt to advise interested parties of the
risks and factors that may affect our business, prospects and results of operations.
 16




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##### Table of Contents



Overview
 th
 Coin and entertainment services
     DVD services
  Money transfer services
  E-payment services
  17




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##### Table of Contents



Strategy
 th
 th
 Results of Operations  Three Month Periods Ended March 31, 2008 and 2007
 Revenue
 Three Month Periods Ended March 31,(In millions, except percentages)
    
    2008
    
    2007
    
    $ Chng
    
    % ChngCoin revenues
    
    $
    59.2
    
    
    $
    54.8
    
    
    $
    4.4
    
    
    
    8.0
    %Entertainment revenues
    
    
    44.2
    
    
    
    65.0
    
    
    
    (20.8
    )
    
    
    -32.0
    %DVD revenues
    
    
    60.5
    
    
    
    2.6
    
    
    
    57.9
    
    
    
    2226.9
    %Money transfer revenues
    
    
    20.5
    
    
    
    4.8
    
    
    
    15.7
    
    
    
    327.1
    %E-payment revenues
    
    
    6.1
    
    
    
    5.1
    
    
    
    1.0
    
    
    
    19.6
    %Total Revenue
    
    $
    190.5
    
    
    $
    132.3
    
    
    $
    58.2
    
    
    
    44.0
    %
     18




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##### Table of Contents



Direct Operating Expenses
  Three Month Periods Ended March 31,(In millions, except percentages)
    
    2008
    
    2007
    
    $ Chng
    
    % ChngDirect operating expenses
    
    $
    132.6
    
    
    $
    91.6
    
    
    $
    41.0
    
    
    
    44.8
    %as a % of Total Revenue
    
    
    69.6
    %
    
    
    69.2
    %
  Marketing
  Three Month Periods Ended March 31,(In millions, except percentages)
    
    2008
    
    2007
    
    $ Chng
    
    % ChngMarketing
    
    $
    2.8
    
    
    $
    1.6
    
    
    $
    1.2
    
    
    
    75.0
    %as a % of Total Revenue
    
    
    1.5
    %
    
    
    1.2
    %
  Research and Development
  Three Month Periods Ended March 31,(In millions, except percentages)
    
    2008
    
    2007
    
    $ Chng
    
    % ChngResearch and development
    
    $
    1.2
    
    
    $
    1.3
    
    
    $
    (0.1
    )
    
    
    -7.7
    %as a % of Total Revenue
    
    
    0.6
    %
    
    
    1.0
    %
 19




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##### Table of Contents



General and Administrative
  Three Month Periods Ended March 31,(In millions, except percentages)
    
    2008
    
    2007
    
    $ Chng
    
    % ChngGeneral and administrative
    
    $
    19.8
    
    
    $
    12.2
    
    
    $
    7.6
    
    
    
    62.3
    %as a % of Total Revenue
    
    
    10.4
    %
    
    
    9.2
    %
  Depreciation and Other
  Three Month Periods Ended March 31,(In millions, except percentages)
    
    2008
    
    2007
    
    $ Chng
    
    % ChngDepreciation and other
    
    $
    17.0
    
    
    $
    14.5
    
    
    $
    2.5
    
    
    
    17.2
    %as a % of Total Revenue
    
    
    8.9
    %
    
    
    11.0
    %
  Amortization of Intangible Assets
  Three Month Periods Ended March 31,(In millions, except percentages)
    
    2008
    
    2007
    
    $ Chng
    
    % ChngAmortization of intangible assets
    
    $
    2.3
    
    
    $
    1.7
    
    
    $
    0.6
    
    
    
    35.3
    %as a % of Total Revenue
    
    
    1.2
    %
    
    
    1.3
    %
  20




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##### Table of Contents



Other Income and Expense
 Three Month Periods Ended March 31,(In millions, except percentages)
    
    2008
    
    2007
    
    $ Chng
    
    % ChngInterest income and other (expense), net
    
    $
    (0.9
    )
    
    $
    0.1
    
    
    $
    (1.0
    )
    
    
    -1000.0
    %Interest expense
    
    $
    (4.9
    )
    
    $
    (4.0
    )
    
    $
    (0.9
    )
    
    
    22.5
    %Loss from equity investments
    
    $
    (0.6
    )
    
    $
    (0.3
    )
    
    $
    (0.3
    )
    
    
    100.0
    %Minority interest
    
    $
    (3.2
    )
    
    $
    
    
    
    $
    (3.2
    )
    
    
    100.0
    %
     Income Tax Expense
  Liquidity and Capital Resources
 Cash and Liquidity
     21




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##### Table of Contents



Credit Facility
  Accounting for Derivative Instruments and Hedging Activities
     22




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##### Table of Contents



Off-Balance Sheet Arrangements
  Contractual Obligations
  Quarterly Financial Results
  Three Month Periods EndedMar. 31,
    
    Dec. 31,
    
    Sept. 30,
    
    June 30,
    
    March 31,
    
    Dec. 31,
    
    Sept. 30,
    
    June 30,2008 (1)
    
    2007 (2)
    
    2007 (3)
    
    2007
    
    2007
    
    2006
    
    2006
    
    2006 (4)(in thousands, except per share data)(unaudited)Consolidated Statement of Operations:Revenue
    
    $
    190,519
    
    
    $
    133,314
    
    
    $
    143,291
    
    
    $
    137,356
    
    
    $
    132,336
    
    
    $
    138,047
    
    
    $
    140,036
    
    
    $
    130,327Expenses:Direct operating
    
    
    132,610
    
    
    
    83,166
    
    
    
    96,209
    
    
    
    89,941
    
    
    
    89,192
    
    
    
    90,856
    
    
    
    88,943
    
    
    
    84,932Operating taxes, net
    
    
    
    
    
    
    1,946
    
    
    
    (9,488
    )
    
    
    2,629
    
    
    
    2,447
    
    
    
    1,936
    
    
    
    2,446
    
    
    
    2,722Marketing
    
    
    2,803
    
    
    
    2,009
    
    
    
    5,650
    
    
    
    2,614
    
    
    
    1,626
    
    
    
    5,481
    
    
    
    4,626
    
    
    
    3,389Research and development
    
    
    1,246
    
    
    
    1,070
    
    
    
    1,397
    
    
    
    1,345
    
    
    
    1,341
    
    
    
    1,155
    
    
    
    1,457
    
    
    
    1,393General and administrative
    
    
    19,796
    
    
    
    13,857
    
    
    
    15,685
    
    
    
    13,404
    
    
    
    12,247
    
    
    
    13,033
    
    
    
    13,984
    
    
    
    12,594Depreciation and other
    
    
    16,971
    
    
    
    14,724
    
    
    
    15,100
    
    
    
    14,549
    
    
    
    14,468
    
    
    
    13,272
    
    
    
    13,410
    
    
    
    13,295Amortization of intangible assets
    
    
    2,342
    
    
    
    1,962
    
    
    
    1,813
    
    
    
    1,817
    
    
    
    1,739
    
    
    
    1,722
    
    
    
    1,661
    
    
    
    1,510Impairment and excess inventory charges
    
    
    
    
    
    
    65,220
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income (loss) from operations
    
    
    14,751
    
    
    
    (50,640
    )
    
    
    16,925
    
    
    
    11,057
    
    
    
    9,276
    
    
    
    10,592
    
    
    
    13,509
    
    
    
    10,492Interest income and other(expense), net
    
    
    (869
    )
    
    
    292
    
    
    
    1,808
    
    
    
    173
    
    
    
    75
    
    
    
    165
    
    
    
    487
    
    
    
    420Interest expense
    
    
    (4,916
    )
    
    
    (4,605
    )
    
    
    (4,365
    )
    
    
    (4,125
    )
    
    
    (3,974
    )
    
    
    (3,910
    )
    
    
    (4,120
    )
    
    
    (3,986
    )(Loss) income from equity investments and
other
    
    
    (580
    )
    
    
    472
    
    
    
    2,217
    
    
    
    (1,101
    )
    
    
    (255
    )
    
    
    (118
    )
    
    
    (443
    )
    
    
    304Minority interest
    
    
    (3,173
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Early retirement of debt
    
    
    
    
    
    
    (1,794
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income (loss) before income taxes
    
    
    5,213
    
    
    
    (56,275
    )
    
    
    16,585
    
    
    
    6,004
    
    
    
    5,122
    
    
    
    6,729
    
    
    
    9,433
    
    
    
    7,230Income taxes
    
    
    (2,512
    )
    
    
    19,053
    
    
    
    (7,520
    )
    
    
    (2,656
    )
    
    
    (2,566
    )
    
    
    (1,689
    )
    
    
    (4,144
    )
    
    
    (3,111
    )Net income (loss)
    
    $
    2,701
    
    
    $
    (37,222
    )
    
    $
    9,065
    
    
    $
    3,348
    
    
    $
    2,556
    
    
    $
    5,040
    
    
    $
    5,289
    
    
    $
    4,119Net income (loss) per share:Basic
    
    $
    0.10
    
    
    $
    (1.34
    )
    
    $
    0.33
    
    
    $
    0.12
    
    
    $
    0.09
    
    
    $
    0.18
    
    
    $
    0.19
    
    
    $
    0.15Diluted
    
    $
    0.10
    
    
    $
    (1.34
    )
    
    $
    0.32
    
    
    $
    0.12
    
    
    $
    0.09
    
    
    $
    0.18
    
    
    $
    0.19
    
    
    $
    0.15
 
 (1)
    
    In the first quarter of 2008, we acquired GroupEx and the majority ownership interest of
Redbox.(2)
    
    In the fourth quarter of 2007, we recorded an impairment and excess inventory charge.(3)
    
    In the third quarter of 2007, we recognized a telecommunication fee refund.(4)
    
    In the second quarter of 2006, we acquired CMT. 23




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##### Table of Contents



Seasonality
  Critical Accounting Policies
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    Total Number ofShares Purchasedas Part of thePublicly
    
    Maximum ApproximateTotal Number of
    
    
    
    
    
    Announced
    
    Dollar Value of Shares thatShares
    
    Average Price
    
    Repurchase
    
    May Yet be Purchased UnderRepurchased (1)
    
    Paid per Share
    
    Programs
    
    the ProgramsJanuary 1 - 31, 2008
    
    
    3,563
    
    
    $
    27.27
    
    
    
    
    
    
    $
    15,001,745February 1 - 29, 2008
    
    
    4,551
    
    
    
    29.60
    
    
    
    
    
    
    
    16,188,205March 1 - 31, 2008
    
    
    72
    
    
    
    28.38
    
    
    
    
    
    
    
    18,155,8768,186
    
    
    $
    28.58
    
    
    
    
    
    
    $
    18,155,876
 
 (1)
    
    Represents shares tendered for tax withholding on vesting of restricted stock awards. Prior to
January 1, 2008, 12,083 shares had been tendered for tax withholding on vesting of restricted stock
awards. However, none of these transactions are included against the dollar value of shares that
may yet be purchased under the programs. 24




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures about Market Risk
 The following discussion about our market risk involves forward-looking statements. Actual
results could differ from those projected in our forward-looking statements.
    
 Item 4. Controls and Procedures
   
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  25




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##### Table of Contents



Item 1A. Risk Factors
  Our DVD services business has a limited operating history and a history of operating losses.
  If we do not manage our DVD inventory effectively, our business, financial condition and results of
operations could be materially and adversely affected.
  If our sell-back prices to distributors continue to decrease or if there is an increase in customer
demand for titles or formats that are more expensive for us to acquire, our gross margins in the
DVD services business could be adversely affected.
  We may be unable to attract new retailers and penetrate new markets and distribution channels.
  26




---



##### Table of Contents



Payment of increased service fees to retailers could negatively affect our business results.
  
 Item 6. Exhibits
 ExhibitNumber
    
    Description2.6
    
    
    First Amendment of Stock Purchase Agreement dated January 1, 2008 by and among Coinstar E-payment Services Inc., Jose
Francisco Leon, Benjamin Knoll, Martin Barrett, Frank Joseph Lawrence, David Mard and Robert Duran. (1)3.2
    
    
    Amended and Restated Bylaws. (2)4.7
    
    
    Amendment to the Rights Agreement, dated as of April 17, 2008, between Coinstar, Inc. and
Computershare Trust Company N.A. (3)10.42
    *
    
    Form of Employment Agreement between Coinstar, Inc. and Paul Davis. (4)10.43
    *
    
    Employment Offer Letter for Paul Davis dated March 20, 2008. (4)10.44
    *
    
    Form of Change of Control Agreement between Coinstar, Inc. and Paul Davis. (4)31.1
    
    
    Certification of Chief Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.31.2
    
    
    Certification of Chief Financial Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.32.1
    
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
 
 *
    
    Indicates a management contract or compensatory plan or arrangement.(1)
    
    Incorporated by reference to the Registrants Form 8-K filed on January 7,
2008 (File Number 000-22555).(2)
    
    Incorporated by reference to the Registrants Form 8-K filed on April 3, 2008
(File Number 000-22555).(3)
    
    Incorporated by reference to the Registrants Form 8-K filed on April 22,
2008 (File Number 000-22555).(4)
    
    Incorporated by reference to the Registrants Form 8-K filed on April 4,
2008 (File Number 000-22555). 27




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SIGNATURE
  Coinstar, Inc.By:
    /s/ BRIAN V. TURNERBrian V. TurnerChief Financial Officer

May 9, 2008 28