##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarter ended June 30, 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

(Do not check if a smaller reporting company)

  

    Smaller reporting company
o
 o þ
  Class
    
    Outstanding at July 25, 2008Common Stock, $0.001 par value
    
    28,233,140




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##### 



COINSTAR, INC.
 FORM 10-Q
Index
 PART I. FINANCIAL INFORMATIONItem 1.
    
    Financial Statements:Consolidated Balance Sheets as of June 30, 2008 (unaudited) and December 31, 2007
    
    Page 3Consolidated Statements of Operations for the six and three month periods ended June 30, 2008 and June 30, 2007 (unaudited)
    
    Page 4Consolidated Statement of Stockholders Equity and Comprehensive Income for the six month period ended June 30, 2008 (unaudited)
    
    Page 5Consolidated Statements of Cash Flows for the six month periods ended June 30, 2008 and June 30, 2007 (unaudited)
    
    Page 6Notes to Consolidated Financial Statements for the six and three month periods ended June 30, 2008 and June 30, 2007 (unaudited)
    
    Page 7Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    Page 17Item 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 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    Page 26Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    Page 26Item 5.
    
    Other Information
    
    Page 26Item 6.
    
    Exhibits
    
    Page 27SIGNATURE
    
    Page 28EXHIBIT 10.5EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 COINSTAR, INC.
 
 CONSOLIDATED BALANCE SHEETS
 (in thousands, except share data)
(unaudited)
 June 30,
    
    
    December 31,2008
    
    
    2007ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    55,985
    
    
    $
    18,497Cash in machine or in transit
    
    
    35,394
    
    
    
    78,097Cash being processed
    
    
    130,931
    
    
    
    99,998Accounts receivable, net of allowance for doubtful accounts of $1,827 and $1,489
at June 30, 2008 and December 31, 2007, respectively
    
    
    72,791
    
    
    
    49,809Inventory
    
    
    76,010
    
    
    
    33,360Deferred income taxes
    
    
    3,286
    
    
    
    3,459Prepaid expenses and other current assets
    
    
    32,938
    
    
    
    18,747Total current assets
    
    
    407,335
    
    
    
    301,967PROPERTY AND EQUIPMENT, NET
    
    
    292,667
    
    
    
    146,041DEFERRED INCOME TAXES
    
    
    9,125
    
    
    
    16,447OTHER ASSETS
    
    
    8,920
    
    
    
    15,150EQUITY INVESTMENTS
    
    
    
    
    
    
    33,052INTANGIBLE ASSETS, NET
    
    
    48,286
    
    
    
    34,457GOODWILL
    
    
    291,678
    
    
    
    221,459TOTAL ASSETS
    
    $
    1,058,011
    
    
    $
    768,573LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    103,292
    
    
    $
    49,829Accrued payable to retailers and agents
    
    
    130,931
    
    
    
    99,998Other accrued liabilities
    
    
    71,782
    
    
    
    40,911Current portion of long-term debt and capital lease obligations
    
    
    37,602
    
    
    
    6,505Total current liabilities
    
    
    343,607
    
    
    
    197,243LONG-TERM DEBT, CAPITAL LEASE OBLIGATIONS AND OTHER
    
    
    353,005
    
    
    
    266,146DEFERRED TAX LIABILITY
    
    
    62
    
    
    
    54MINORITY INTEREST
    
    
    32,477
    
    
    
    TOTAL LIABILITIES
    
    
    729,151
    
    
    
    463,443STOCKHOLDERS EQUITY:Preferred stock, $0.001 par valueAuthorized, 5,000,000 shares; no shares issued
and outstanding at June 30, 2008 and December 31, 2007
    
    
    
    
    
    
    Common stock, $0.001 par valueAuthorized, 45,000,000 shares; 30,159,221 and
29,665,125 issued and 28,233,140 and 27,739,044 shares outstanding at
June 30, 2008 and December 31, 2007, respectively
    
    
    367,158
    
    
    
    354,509Accumulated deficit
    
    
    (11,403
    )
    
    
    (16,784
    )Treasury stock
    
    
    (40,831
    )
    
    
    (40,831
    )Accumulated other comprehensive income
    
    
    13,936
    
    
    
    8,236Total stockholders equity
    
    
    328,860
    
    
    
    305,130TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    1,058,011
    
    
    $
    768,573
  3




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##### Table of Contents



COINSTAR, INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (in thousands, except per share data)  (unaudited)
 Six Month Periods
    
    
    Three Month PeriodsEnded June 30,
    
    
    Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007REVENUE
    
    $
    410,422
    
    
    $
    269,692
    
    
    $
    219,903
    
    
    $
    137,356EXPENSES:Direct operating
    
    
    284,619
    
    
    
    184,209
    
    
    
    152,009
    
    
    
    92,570Marketing
    
    
    6,618
    
    
    
    4,240
    
    
    
    3,815
    
    
    
    2,614Research and development
    
    
    2,421
    
    
    
    2,686
    
    
    
    1,175
    
    
    
    1,345General and administrative
    
    
    43,002
    
    
    
    25,651
    
    
    
    23,206
    
    
    
    13,404Depreciation and other
    
    
    35,826
    
    
    
    29,017
    
    
    
    18,855
    
    
    
    14,549Amortization of intangible assets
    
    
    4,640
    
    
    
    3,556
    
    
    
    2,298
    
    
    
    1,817Proxy, write-off of acquisition costs,
and litigation settlement
    
    
    3,084
    
    
    
    
    
    
    
    3,084
    
    
    
    Income from operations
    
    
    30,212
    
    
    
    20,333
    
    
    
    15,461
    
    
    
    11,057OTHER INCOME (EXPENSE):Interest income and other (expense), net
    
    
    (1,133
    )
    
    
    248
    
    
    
    (264
    )
    
    
    173Interest expense
    
    
    (10,822
    )
    
    
    (8,099
    )
    
    
    (5,906
    )
    
    
    (4,125
    )(Loss) Income from equity investments
    
    
    (337
    )
    
    
    (1,356
    )
    
    
    243
    
    
    
    (1,101
    )Minority interest
    
    
    (7,442
    )
    
    
    
    
    
    
    (4,269
    )
    
    
    Income before income taxes
    
    
    10,478
    
    
    
    11,126
    
    
    
    5,265
    
    
    
    6,004Income tax expense
    
    
    (5,097
    )
    
    
    (5,222
    )
    
    
    (2,585
    )
    
    
    (2,656
    )NET INCOME
    
    $
    5,381
    
    
    $
    5,904
    
    
    $
    2,680
    
    
    $
    3,348NET INCOME PER SHARE:Basic
    
    $
    0.19
    
    
    $
    0.21
    
    
    $
    0.10
    
    
    $
    0.12Diluted
    
    $
    0.19
    
    
    $
    0.21
    
    
    $
    0.09
    
    
    $
    0.12WEIGHTED SHARES OUTSTANDING:Basic
    
    
    27,903
    
    
    
    27,772
    
    
    
    28,022
    
    
    
    27,766Diluted
    
    
    28,418
    
    
    
    28,301
    
    
    
    28,600
    
    
    
    28,314
  4




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COINSTAR, INC.
 
 CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME
 Six Month Period Ended June 30, 2008
(in thousands, except share data)
(unaudited)
 AccumulatedOtherCommon Stock
    
    
    
    
    
    
    
    
    Comprehensive
    
    
    
    
    
    
    ComprehensiveShares
    
    
    Amount
    
    

Accumulated 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
    
    
    403,480
    
    
    
    8,161
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,161Stock-based compensation expense
    
    
    90,616
    
    
    
    3,191
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,191Tax benefit on share-based
compensation
    
    
    
    
    
    
    1,297
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,297Net income
    
    
    
    
    
    
    
    
    
    
    5,381
    
    
    
    
    
    
    
    
    
    
    
    5,381
    
    
    $
    5,381Loss on short-term investments
net of tax benefit of $11
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20
    )
    
    
    (20
    )
    
    
    (20
    )Foreign currency translation
adjustments
net of tax benefit of $4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,442
    
    
    
    4,442
    
    
    
    4,442Interest rate hedges on
long-term debt
net of tax expense of $1,227
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,278
    
    
    
    1,278
    
    
    
    1,278Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    11,081BALANCE, June 30, 2008
    
    
    28,233,140
    
    
    $
    367,158
    
    
    $
    (11,403
    )
    
    $
    (40,831
    )
    
    $
    13,936
    
    
    $
    328,860
  5




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##### Table of Contents



COINSTAR, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands)
(unaudited)
 Six Month PeriodsEnded June 30,2008
    
    
    2007OPERATING ACTIVITIES:Net income
    
    $
    5,381
    
    
    $
    5,904Adjustments to reconcile income from operations to net cash provided by
operating activities:Depreciation and other
    
    
    35,826
    
    
    
    29,017Amortization of intangible assets and deferred financing fees
    
    
    4,923
    
    
    
    3,931Write-off of acquisition related fees
    
    
    1,004
    
    
    
    Non-cash stock-based compensation
    
    
    3,984
    
    
    
    3,279Excess tax benefit on share-based awards
    
    
    (531
    )
    
    
    (1,754
    )Deferred income taxes
    
    
    5,276
    
    
    
    4,032Loss from equity investments and other
    
    
    3,449
    
    
    
    750Minority interest
    
    
    7,442
    
    
    
    Other
    
    
    575
    
    
    
    (110
    )Cash (used) provided by changes in operating assets and liabilities, net of
effects of business acquisitions:Accounts receivable
    
    
    5,418
    
    
    
    (117
    )Inventory
    
    
    (16,308
    )
    
    
    1,726Prepaid expenses and other current assets
    
    
    (4,031
    )
    
    
    (2,467
    )Other assets
    
    
    (311
    )
    
    
    (2,108
    )Accounts payable
    
    
    24,494
    
    
    
    (7,283
    )Accrued payable to retailers and agents
    
    
    2,192
    
    
    
    (6,014
    )Other accrued liabilities
    
    
    (17,021
    )
    
    
    (1,291
    )Net cash provided by operating activities
    
    
    61,762
    
    
    
    27,495INVESTING ACTIVITIES:Purchase of property and equipment
    
    
    (72,793
    )
    
    
    (42,449
    )Acquisitions, net of cash acquired of $40,277 in 2008
    
    
    (24,834
    )
    
    
    (81
    )Loan to equity investee
    
    
    
    
    
    
    (10,000
    )Proceeds from sale of fixed assets
    
    
    1,898
    
    
    
    399Net cash used by investing activities
    
    
    (95,729
    )
    
    
    (52,131
    )FINANCING ACTIVITIES:Principal payments on revolving line of credit and capital lease obligations
    
    
    (205,448
    )
    
    
    (4,744
    )Additional borrowings on credit facility
    
    
    254,500
    
    
    
    7,000Excess tax benefit on share-based awards
    
    
    531
    
    
    
    1,754Repurchase of common stock
    
    
    
    
    
    
    (3,495
    )Proceeds from exercise of stock options
    
    
    8,149
    
    
    
    2,743Net cash provided by financing activities
    
    
    57,732
    
    
    
    3,258Effect of exchange rate changes on cash
    
    
    1,953
    
    
    
    729NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS, CASH IN
MACHINE OR IN TRANSIT, AND CASH BEING PROCESSED
    
    
    25,718
    
    
    
    (20,649
    )CASH AND CASH EQUIVALENTS, CASH IN MACHINE OR IN TRANSIT, AND
CASH BEING PROCESSED:Beginning of period
    
    
    196,592
    
    
    
    178,164End of period
    
    $
    222,310
    
    
    $
    157,515SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid during the period for interest
    
    $
    6,297
    
    
    $
    7,766Cash paid during the period for income taxes
    
    
    4,963
    
    
    
    1,868SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING
ACTIVITIES:Purchase of vehicles financed by capital lease obligations
    
    $
    727
    
    
    $
    4,105Accrued acquisition costs
    
    
    10,039
    
    
    
    71
  6




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COINSTAR, INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Six and Three Month Periods Ended June 30, 2008 and 2007
(unaudited)
 NOTE 1: ORGANIZATION, BUSINESS, AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Description of company:
 Coin-counting machines
    
    
    16,500Entertainment services machines
    
    
    160,000DVD kiosks
    
    
    9,600Money transfer services locations
    
    
    36,000E-payment point-of-sale terminals
    
    
    18,900E-payment enabled coin-counting kiosks
    
    
    10,900
 Basis of presentation:
  Principles of consolidation:
  Use of estimates .
 7




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##### Table of Contents



Revenue recognition:
 
    
    Coin-counting revenue is recognized at the time the consumers coins are counted by
our coin-counting machines. Our revenue represents the fee charged for coin-counting;
    
    DVD revenue is recognized during the term of a customers rental 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 under the caption
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 $4.3 million and $8.4 million at June 30, 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 June 30, 2008Level 1
    
    Level 2
    
    Level 3Short-term investment
    
    $
    2,321
    
    
    
    
    
    
    
    Interest rate swap asset
    
    
    
    
    
    $
    2,517
    
    
    
    
 Business Combinations
 8




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Noncontrolling Interests in
Consolidated Financial StatementsAn Amendment of ARB No. 51
 Disclosures about Derivative Instruments and Hedging Activities
  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
  9




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##### Table of Contents



(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
 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
  10




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(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
    
    
    (3,689
    )Total investment in Redbox at the acquisition date
    
    $
    33,809
  (in thousands)Assets acquired:Cash and cash equivalents
    
    $
    13,470Trade accounts receivable
    
    
    10,175Inventory
    
    
    27,072Prepaid expenses and other assets
    
    
    7,142Property and equipment
    
    
    100,691Intangible assets
    
    
    1,905Goodwill
    
    
    11,898172,353Liabilities assumed:Accounts payable and accrued liabilities
    
    
    112,521Deferred tax liability
    
    
    2,101Minority
interest
    
    
    23,922Total investment in Redbox
    
    $
    33,809
 Business Combination Consolidated Financial Statement
  (in thousands)2008
    
    $
    4892009
    
    
    4962010
    
    
    4152011
    
    
    1922012
    
    
    192Thereafter
    
    
    121$
    1,905
 11




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Six Month Periods
    
    
    Three Month PeriodsEnded June 30,
    
    
    Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(in thousands)
    
    
    (in thousands)Revenue
    
    $
    421,432
    
    
    $
    316,222
    
    
    $
    219,903
    
    
    $
    163,991Net income
    
    $
    5,393
    
    
    $
    5,874
    
    
    $
    2,680
    
    
    $
    3,311Net income per shareBasic
    
    $
    0.19
    
    
    $
    0.21
    
    
    $
    0.10
    
    
    $
    0.12Diluted
    
    $
    0.19
    
    
    $
    0.21
    
    
    $
    0.09
    
    
    $
    0.12
 NOTE 3: PROPERTY AND EQUIPMENT
 June 30,
    
    
    December 31,2008
    
    
    2007(in thousands)Machines
    
    $
    557,475
    
    
    $
    364,564Computers
    
    
    26,968
    
    
    
    15,238Office furniture and equipment
    
    
    11,713
    
    
    
    10,119Vehicles
    
    
    21,957
    
    
    
    24,655Leasehold improvements
    
    
    3,057
    
    
    
    2,548621,170
    
    
    
    417,124Accumulated depreciation and amortization
    
    
    (328,503
    )
    
    
    (271,083
    )$
    292,667
    
    
    $
    146,041
 NOTE 4: STOCK-BASED COMPENSATION
 Stock-based compensation: ), Share-Based Payment
  Six Month Periods
    
    Three Month PeriodsEnded June 30,
    
    Ended June 30,2008
    
    2007
    
    2008
    
    2007Expected term (in years)
    
    
    3.7
    
    
    
    3.7
    
    
    
    3.7
    
    
    
    3.7Expected stock price volatility
    
    
    35
    %
    
    
    41
    %
    
    
    35
    %
    
    
    41
    %Risk-free interest rate
    
    
    2.5
    %
    
    
    4.5
    %
    
    
    3.1
    %
    
    
    5.0
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Estimated fair value per option granted
    
    $
    9.54
    
    
    $
    11.11
    
    
    $
    9.80
    
    
    $
    11.75
  12




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##### Table of Contents



Six Month Periods
    
    Three Month PeriodsEnded June 30,
    
    Ended June 30,2008
    
    2007
    
    2008
    
    2007(in thousands)
    
    (in thousands)Stock-based compensation expense
    
    $
    3,191
    
    
    $
    3,279
    
    
    $
    1,572
    
    
    $
    1,595Related deferred tax benefit
    
    
    877
    
    
    
    855
    
    
    
    443
    
    
    
    418
 Stock options:
  Weightedaverage exerciseShares
    
    
    priceOUTSTANDING, December 31, 2007
    
    
    2,668
    
    
    $
    23.07Granted
    
    
    414
    
    
    
    32.00Exercised
    
    
    (412
    )
    
    
    20.42Cancelled, expired or forfeited
    
    
    (11
    )
    
    
    26.79OUTSTANDING, June 30, 2008
    
    
    2,659
    
    
    
    24.85EXERCISABLE, June 30, 2008
    
    
    1,646
    
    
    
    22.22
  Restricted stock awards:
  Weightedaveragegrant dateShares
    
    
    fair valueNON-VESTED, December 31, 2007
    
    
    105
    
    
    $
    28.25Granted
    
    
    91
    
    
    
    33.67Vested
    
    
    (42
    )
    
    
    29.37NON-VESTED, June 30, 2008
    
    
    154
    
    
    
    31.13
  13




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##### Table of Contents



NOTE 5: INCOME PER SHARE
   Six Month Periods
    
    
    Three Month PeriodsEnded June 30,
    
    
    Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(in thousands)
    
    
    (in thousands)Numerator:Net income
    
    $
    5,381
    
    
    $
    5,904
    
    
    $
    2,680
    
    
    $
    3,348Denominator:Weighted average shares for basic calculation
    
    
    27,903
    
    
    
    27,772
    
    
    
    28,022
    
    
    
    27,766Incremental shares from employee stock options and awards
    
    
    515
    
    
    
    529
    
    
    
    578
    
    
    
    548Weighted average shares for diluted calculation
    
    
    28,418
    
    
    
    28,301
    
    
    
    28,600
    
    
    
    28,314
  NOTE 6: BUSINESS SEGMENT INFORMATION
 Disclosure about Segments of an Enterprise and Related Information
  14




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##### Table of Contents



Six Month Periods
    
    
    Three Month PeriodsEnded June 30,
    
    
    Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(in thousands)
    
    
    (in thousands)Revenue:Coin and entertainment services:Coin revenue
    
    $
    123,744
    
    
    $
    117,208
    
    
    $
    64,502
    
    
    $
    62,412Entertainment revenue
    
    
    80,057
    
    
    
    126,061
    
    
    
    35,831
    
    
    
    61,023Subtotal
    
    
    203,801
    
    
    
    243,269
    
    
    
    100,333
    
    
    
    123,435DVD services
    
    
    150,469
    
    
    
    5,666
    
    
    
    89,956
    
    
    
    3,064Money transfer services
    
    
    44,256
    
    
    
    10,490
    
    
    
    23,786
    
    
    
    5,706E-payment services
    
    
    11,896
    
    
    
    10,267
    
    
    
    5,828
    
    
    
    5,151Consolidated revenue
    
    $
    410,422
    
    
    $
    269,692
    
    
    $
    219,903
    
    
    $
    137,356
   Six Month Period
    
    
    Three Month PeriodEnded June 30,
    
    
    Ended June 30,2008
    
    
    2008(in thousands)Operating income before depreciation/amortization and unallocated expenses:Coin and entertainment services
    
    $
    46,814
    
    
    $
    21,983DVD services
    
    
    32,074
    
    
    
    19,205Money transfer services
    
    
    (5,944
    )
    
    
    (4,121
    )E-payment services
    
    
    1,798
    
    
    
    1,469Subtotal
    
    
    74,742
    
    
    
    38,536Depreciation/amortization and unallocated corporate expenses:Depreciation and amortization
    
    
    (40,546
    )
    
    
    (21,205
    )Unallocated expense  stock-based compensation
    
    
    (3,984
    )
    
    
    (1,870
    )Subtotal
    
    
    (44,530
    )
    
    
    (23,075
    )Consolidated income from operations
    
    $
    30,212
    
    
    $
    15,461
 June 30,2008(in thousands)Total assets:Coin and entertainment services
    
    $
    489,459DVD services
    
    
    221,276Money transfer services
    
    
    214,472E-payment services
    
    
    41,425Unallocated corporate assets
    
    
    91,379Consolidated assets
    
    $
    1,058,011
  15




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##### Table of Contents



Six Month Periods
    
    
    Three Month PeriodsEnded June 30,
    
    
    Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(in thousands)
    
    
    (in thousands)Revenue:North America
    
    $
    376,655
    
    
    $
    244,527
    
    
    $
    202,281
    
    
    $
    123,835International
    
    
    33,767
    
    
    
    25,165
    
    
    
    17,622
    
    
    
    13,521Total revenue
    
    $
    410,422
    
    
    $
    269,692
    
    
    $
    219,903
    
    
    $
    137,356Net income (loss):North America
    
    $
    11,211
    
    
    $
    10,393
    
    
    $
    5,793
    
    
    $
    5,217International
    
    
    (5,830
    )
    
    
    (4,489
    )
    
    
    (3,113
    )
    
    
    (1,869
    )Total net income
    
    $
    5,381
    
    
    $
    5,904
    
    
    $
    2,680
    
    
    $
    3,348
 June 30,
    
    
    December 31,2008
    
    
    2007(in thousands)Total assets:North America
    
    $
    993,361
    
    
    $
    726,098International
    
    
    149,842
    
    
    
    129,092Intercompany eliminations
    
    
    (85,192
    )
    
    
    (86,617
    )Total assets
    
    $
    1,058,011
    
    
    $
    768,573
  Six Month Periods
    
    Three Month PeriodsEnded June 30,
    
    Ended June 30,2008
    
    2007
    
    2008
    
    2007Wal-Mart Stores Inc
    
    
    16.9
    %
    
    
    26.3
    %
    
    
    16.3
    %
    
    
    25.0
    %McDonalds
    
    
    10.1
    %
    
    
    
    
    
    
    11.2
    %
    
    
    The Kroger Company
    
    
    8.1
    %
    
    
    11.6
    %
    
    
    7.7
    %
    
    
    12.0
    %
 NOTE 7: RELATED PARTY AND OTHER TRANSACTIONS
   16




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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.
 Overview
 th
 Coin and entertainment services
     DVD services
  17




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##### Table of Contents



Money transfer services
  E-payment services
   Strategy
 th
 th
 Results of Operations  Six and Three Month Periods Ended June 30, 2008 and 2007
 Revenue
 Six Month Periods Ended June 30,
    
    Three Month Periods Ended June 30,(In millions, except percentages)
    
    2008
    
    2007
    
    $ Chng
    
    % Chng
    
    2008
    
    2007
    
    $ Chng
    
    % ChngCoin revenues
    
    $
    123.7
    
    
    $
    117.2
    
    
    $
    6.5
    
    
    
    5.5
    %
    
    $
    64.5
    
    
    $
    62.4
    
    
    $
    2.1
    
    
    
    3.4
    %Entertainment revenues
    
    
    80.1
    
    
    
    126.1
    
    
    
    (46.0
    )
    
    
    -36.5
    %
    
    
    35.8
    
    
    
    61.0
    
    
    
    (25.2
    )
    
    
    -41.3
    %DVD revenues
    
    
    150.4
    
    
    
    5.6
    
    
    
    144.8
    
    
    
    2585.7
    %
    
    
    90.0
    
    
    
    3.1
    
    
    
    86.9
    
    
    
    2803.2
    %Money transfer revenues
    
    
    44.3
    
    
    
    10.5
    
    
    
    33.8
    
    
    
    321.9
    %
    
    
    23.8
    
    
    
    5.7
    
    
    
    18.1
    
    
    
    317.5
    %E-payment revenues
    
    
    11.9
    
    
    
    10.3
    
    
    
    1.6
    
    
    
    15.5
    %
    
    
    5.8
    
    
    
    5.2
    
    
    
    0.6
    
    
    
    11.5
    %Total Revenue
    
    $
    410.4
    
    
    $
    269.7
    
    
    $
    140.7
    
    
    
    52.2
    %
    
    $
    219.9
    
    
    $
    137.4
    
    
    $
    82.5
    
    
    
    60.0
    %
   18




---



##### Table of Contents



Direct Operating Expenses
  Six Month Periods Ended June 30,
    
    Three Month Periods Ended June 30,(In millions, except percentages)
    
    2008
    
    2007
    
    $ Chng
    
    % Chng
    
    2008
    
    2007
    
    $ Chng
    
    % ChngDirect operating expenses
    
    $
    284.6
    
    
    $
    184.2
    
    
    $
    100.4
    
    
    
    54.5
    %
    
    $
    152.0
    
    
    $
    92.6
    
    
    $
    59.4
    
    
    
    64.1
    %as a % of Total Revenue
    
    
    69.3
    %
    
    
    68.3
    %
    
    
    
    
    
    
    
    
    
    
    69.1
    %
    
    
    67.4
    %
  Marketing
  19




---



##### Table of Contents



Six Month Periods Ended June 30,
    
    Three Month Periods Ended June 30,(In millions, except percentages)
    
    2008
    
    2007
    
    $ Chng
    
    % Chng
    
    2008
    
    2007
    
    $ Chng
    
    % ChngMarketing
    
    $
    6.6
    
    
    $
    4.2
    
    
    $
    2.4
    
    
    
    57.1
    %
    
    $
    3.8
    
    
    $
    2.6
    
    
    $
    1.2
    
    
    
    46.2
    %as a % of Total Revenue
    
    
    1.6
    %
    
    
    1.6
    %
    
    
    
    
    
    
    
    
    
    
    1.7
    %
    
    
    1.9
    %
  Research and Development
  Six Month Periods Ended June 30,
    
    Three Month Periods Ended June 30,(In millions, except percentages)
    
    2008
    
    2007
    
    $ Chng
    
    % Chng
    
    2008
    
    2007
    
    $ Chng
    
    % ChngResearch and development
    
    $
    2.4
    
    
    $
    2.7
    
    
    $
    (0.3
    )
    
    
    -11.1
    %
    
    $
    1.2
    
    
    $
    1.3
    
    
    $
    (0.1
    )
    
    
    -7.7
    %as a % of Total Revenue
    
    
    0.6
    %
    
    
    1.0
    %
    
    
    
    
    
    
    
    
    
    
    0.5
    %
    
    
    0.9
    %
  General and Administrative
  Six Month Periods Ended June 30,
    
    Three Month Periods Ended June 30,(In millions, except percentages)
    
    2008
    
    2007
    
    $ Chng
    
    % Chng
    
    2008
    
    2007
    
    $ Chng
    
    % ChngGeneral and administrative
    
    $
    43.0
    
    
    $
    25.7
    
    
    $
    17.3
    
    
    
    67.3
    %
    
    $
    23.2
    
    
    $
    13.4
    
    
    $
    9.8
    
    
    
    73.1
    %as a % of Total Revenue
    
    
    10.5
    %
    
    
    9.5
    %
    
    
    
    
    
    
    
    
    
    
    10.6
    %
    
    
    9.8
    %
  Proxy, write-off of acquisition costs, and litigation settlement
  Six Month Periods Ended June 30,
    
    Three Month Periods Ended June 30,(In millions, except percentages)
    
    2008
    
    2007
    
    $ Chng
    
    % Chng
    
    2008
    
    2007
    
    $ Chng
    
    % ChngProxy, write-off of acquisition costs, and litigation settlement
    
    $
    3.1
    
    
    $
    
    
    
    $
    3.1
    
    
    
    100.0
    %
    
    $
    3.1
    
    
    $
    
    
    
    $
    3.1
    
    
    
    100.0
    %as a % of Total Revenue
    
    
    0.8
    %
    
    
    0.0
    %
    
    
    
    
    
    
    
    
    
    
    1.4
    %
    
    
    0.0
    %
  20




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##### Table of Contents




    
    We settled the proxy contest which resulted in one additional member to our Board of
Directors and one additional independent director to be added by March 1, 2009. Expenses
related to this proxy contest, including the solicitation of stockholders, were
approximately $4.1 million.
    
    We incurred expenses associated with the write-off of in-process acquisition expenses of
$1.0 million for due diligence and professional service costs in connection with
acquisitions that were being considered in the past and discussions have now been
terminated.
    
    We entered into a settlement agreement with Incomm Holding, Inc. and certain of its
affiliates (Incomm). As a result, we and Incomm have agreed to dissolve a related party
of our E-payment subsidiary of which we own 49%. A previous liability owed to the related
party was relieved. The net settlement, after attorney fees, was approximately $2.0
million of income.
 Depreciation and Other
  Six Month Periods Ended June 30,
    
    Three Month Periods Ended June 30,(In millions, except percentages)
    
    2008
    
    2007
    
    $ Chng
    
    % Chng
    
    2008
    
    2007
    
    $ Chng
    
    % ChngDepreciation and other
    
    $
    35.8
    
    
    $
    29.0
    
    
    $
    6.8
    
    
    
    23.4
    %
    
    $
    18.9
    
    
    $
    14.5
    
    
    $
    4.4
    
    
    
    30.3
    %as a % of Total Revenue
    
    
    8.7
    %
    
    
    10.8
    %
    
    
    
    
    
    
    
    
    
    
    8.6
    %
    
    
    10.6
    %
  Amortization of Intangible Assets
  Six Month Periods Ended June 30,
    
    Three Month Periods Ended June 30,(In millions, except percentages)
    
    2008
    
    2007
    
    $ Chng
    
    % Chng
    
    2008
    
    2007
    
    $ Chng
    
    % ChngAmortization of intangible assets
    
    $
    4.6
    
    
    $
    3.6
    
    
    $
    1.0
    
    
    
    27.8
    %
    
    $
    2.3
    
    
    $
    1.8
    
    
    $
    0.5
    
    
    
    27.8
    %as a % of Total Revenue
    
    
    1.1
    %
    
    
    1.3
    %
    
    
    
    
    
    
    
    
    
    
    1.0
    %
    
    
    1.3
    %
  Other Income and Expense
 Six Month Periods Ended June 30,
    
    Three Month Periods Ended June 30,(In millions, except percentages)
    
    2008
    
    2007
    
    $ Chng
    
    % Chng
    
    2008
    
    2007
    
    $ Chng
    
    % ChngInterest income and other (expense), net
    
    $
    (1.1
    )
    
    $
    0.2
    
    
    $
    (1.3
    )
    
    
    -650.0
    %
    
    $
    (0.3
    )
    
    $
    0.2
    
    
    $
    (0.5
    )
    
    
    -250.0
    %Interest expense
    
    $
    (10.8
    )
    
    $
    (8.1
    )
    
    $
    (2.7
    )
    
    
    33.3
    %
    
    $
    (5.9
    )
    
    $
    (4.1
    )
    
    $
    (1.8
    )
    
    
    43.9
    %Loss (Income) from equity investments
    
    $
    (0.3
    )
    
    $
    (1.4
    )
    
    $
    1.1
    
    
    
    -78.6
    %
    
    $
    0.2
    
    
    $
    (1.1
    )
    
    $
    1.3
    
    
    
    -118.2
    %Minority interest
    
    $
    (7.4
    )
    
    $
    
    
    
    $
    (7.4
    )
    
    
    100.0
    %
    
    $
    (4.3
    )
    
    $
    
    
    
    $
    (4.3
    )
    
    
    100.0
    %
   21




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##### Table of Contents



Income Tax Expense
  Liquidity and Capital Resources
 Cash and Liquidity
      Credit Facility
  22




---



##### Table of Contents



Accounting for Derivative
Instruments and Hedging Activities
     Redbox Debt
    Off-Balance Sheet Arrangements
  Contractual Obligations
  23




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##### Table of Contents



Quarterly Financial Results
  Three Month Periods EndedJune 30,
    
    
    March 31,
    
    
    Dec. 31,
    
    
    Sept. 30,
    
    
    June 30,
    
    
    March 31,
    
    
    Dec. 31,
    
    
    Sept. 30,2008
    
    
    2008 (1)
    
    
    2007 (2)
    
    
    2007 (3)
    
    
    2007
    
    
    2007
    
    
    2006
    
    
    2006(in thousands, except per share data)(unaudited)Consolidated Statement of Operations:Revenue
    
    $
    219,903
    
    
    $
    190,519
    
    
    $
    133,314
    
    
    $
    143,291
    
    
    $
    137,356
    
    
    $
    132,336
    
    
    $
    138,047
    
    
    $
    140,036Expenses:Direct operating
    
    
    152,009
    
    
    
    132,610
    
    
    
    85,112
    
    
    
    86,721
    
    
    
    92,570
    
    
    
    91,639
    
    
    
    92,792
    
    
    
    91,389Marketing
    
    
    3,815
    
    
    
    2,803
    
    
    
    2,009
    
    
    
    5,650
    
    
    
    2,614
    
    
    
    1,626
    
    
    
    5,481
    
    
    
    4,626Research and development
    
    
    1,175
    
    
    
    1,246
    
    
    
    1,070
    
    
    
    1,397
    
    
    
    1,345
    
    
    
    1,341
    
    
    
    1,155
    
    
    
    1,457General and administrative
    
    
    23,206
    
    
    
    19,796
    
    
    
    13,857
    
    
    
    15,685
    
    
    
    13,404
    
    
    
    12,247
    
    
    
    13,033
    
    
    
    13,984Depreciation and other
    
    
    18,855
    
    
    
    16,971
    
    
    
    14,724
    
    
    
    15,100
    
    
    
    14,549
    
    
    
    14,468
    
    
    
    13,272
    
    
    
    13,410Amortization of intangible assets
    
    
    2,298
    
    
    
    2,342
    
    
    
    1,962
    
    
    
    1,813
    
    
    
    1,817
    
    
    
    1,739
    
    
    
    1,722
    
    
    
    1,661Impairment and excess inventory charges
    
    
    
    
    
    
    
    
    
    
    65,220
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Proxy, write-off of acquisition costs,
and litigation settlement
    
    
    3,084
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income (loss) from operations
    
    
    15,461
    
    
    
    14,751
    
    
    
    (50,640
    )
    
    
    16,925
    
    
    
    11,057
    
    
    
    9,276
    
    
    
    10,592
    
    
    
    13,509Interest income and other (expense), net
    
    
    (264
    )
    
    
    (869
    )
    
    
    292
    
    
    
    1,808
    
    
    
    173
    
    
    
    75
    
    
    
    165
    
    
    
    487Interest expense
    
    
    (5,906
    )
    
    
    (4,916
    )
    
    
    (4,605
    )
    
    
    (4,365
    )
    
    
    (4,125
    )
    
    
    (3,974
    )
    
    
    (3,910
    )
    
    
    (4,120
    )(Loss) income from equity investments and other...
    
    
    243
    
    
    
    (580
    )
    
    
    472
    
    
    
    2,217
    
    
    
    (1,101
    )
    
    
    (255
    )
    
    
    (118
    )
    
    
    (443
    )Minority interest
    
    
    (4,269
    )
    
    
    (3,173
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Early retirement of debt
    
    
    
    
    
    
    
    
    
    
    (1,794
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income (loss) before income taxes
    
    
    5,265
    
    
    
    5,213
    
    
    
    (56,275
    )
    
    
    16,585
    
    
    
    6,004
    
    
    
    5,122
    
    
    
    6,729
    
    
    
    9,433Income taxes
    
    
    (2,585
    )
    
    
    (2,512
    )
    
    
    19,053
    
    
    
    (7,520
    )
    
    
    (2,656
    )
    
    
    (2,566
    )
    
    
    (1,689
    )
    
    
    (4,144
    )Net income (loss)
    
    $
    2,680
    
    
    $
    2,701
    
    
    $
    (37,222
    )
    
    $
    9,065
    
    
    $
    3,348
    
    
    $
    2,556
    
    
    $
    5,040
    
    
    $
    5,289Net income (loss) per share:Basic
    
    $
    0.10
    
    
    $
    0.10
    
    
    $
    (1.34
    )
    
    $
    0.33
    
    
    $
    0.12
    
    
    $
    0.09
    
    
    $
    0.18
    
    
    $
    0.19Diluted
    
    $
    0.09
    
    
    $
    0.10
    
    
    $
    (1.34
    )
    
    $
    0.32
    
    
    $
    0.12
    
    
    $
    0.09
    
    
    $
    0.18
    
    
    $
    0.19
 
 (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. Seasonality
  24




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##### Table of Contents



Critical Accounting Policies
  
 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
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
   
 Item 4. Submission of Matters to a Vote of Security Holders
   For
    
    WithheldDeborah L. Bevier
    
    
    22,716,690
    
    
    
    62,764David M. Eskenazy
    
    
    22,725,190
    
    
    
    54,264Robert L. Sznewajs
    
    
    22,724,690
    
    
    
    54,764
  For
    
    Withheld
    
    Abstain24,389,091
    
    
    
    44,142
    
    
    
    4,337
 
 Item 5. Other Information
   26




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##### Table of Contents



Item 6. Exhibits
 ExhibitNumber
    
    Description3.1
    
    Amended and Restated Bylaws of Coinstar, Inc. (effective April 3, 2008). (1)4.1
    
    Amendment to the Rights Agreement, dated as of April 17, 2008, between Coinstar, Inc. and
Computershare Trust Company N.A. (2)10. 1
    *
    Form of Employment Agreement to be effective April 7, 2008 between Coinstar, Inc. and Paul Davis. (3)10. 2
    *
    Employment Offer Letter for Paul Davis dated March 20, 2008. (3)10. 3
    *
    Form of Change of Control Agreement to be effective April 7, 2008 between Coinstar, Inc. and Paul
Davis. (3)10. 4
    
    Agreement dated May 28, 2008 by and among Coinstar and the Shamrock Group. (4)10.5
    *
    2008 Incentive Compensation Plan.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 April 3, 2008 (File Number
000-22555)(2)
    
    Incorporated by reference to the Registrants Form 8-K filed on April 22, 2008 (File Number
000-22555)(3)
    
    Incorporated by reference to the Registrants Form 8-K filed on April 4, 2008 (File Number
000-22555)(4)
    
    Incorporated by reference to the Registrants Form 8-K filed on May 29, 2008 (File Number
000-22555) 27




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##### Table of Contents



SIGNATURE
  Coinstar, Inc.By:
    /s/ BRIAN V. TURNERBrian V. TurnerChief Financial OfficerAugust 7, 2008 28