##### 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 September 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
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ
  Class
    
    Outstanding at October 24, 2008Common Stock, $0.001 par value
    
    
    28,248,413




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##### 



COINSTAR, INC.
 FORM 10-Q
Index
 PART I. FINANCIAL INFORMATIONItem 1. Financial Statements:Consolidated Balance Sheets as of September 30, 2008 (unaudited) and December 31, 2007
    
    Page 3Consolidated Statements of Operations for the nine and three month periods ended
September 30, 2008 and September 30, 2007 (unaudited)
    
    Page 4Consolidated Statement of Stockholders Equity and Comprehensive Income for the nine
month period ended September 30, 2008 (unaudited)
    
    Page 5Consolidated Statements of Cash Flows for the nine month periods ended September
30, 2008 and September 30, 2007 (unaudited)
    
    Page 6Notes to Consolidated Financial Statements for the nine and three month periods ended
September 30, 2008 and September 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 26Item 4. Controls and Procedures
    
    Page 26PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    Page 26Item 1A. Risk Factors
    
    Page 26Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    Page 27Item 6. Exhibits
    
    Page 28SIGNATURE
    
    Page 29EX-31.1EX-31.2EX-32.1EX-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)
 September 30,
    
    
    December 31,2008
    
    
    2007ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    64,362
    
    
    $
    18,497Cash in machine or in transit
    
    
    45,506
    
    
    
    78,097Cash being processed
    
    
    72,883
    
    
    
    99,998Accounts receivable, net of allowance for doubtful accounts of $1,831 and $1,489
at September 30, 2008 and December 31, 2007, respectively
    
    
    57,435
    
    
    
    49,809Inventory
    
    
    82,169
    
    
    
    33,360Deferred income taxes
    
    
    6,724
    
    
    
    3,459Prepaid expenses and other current assets
    
    
    28,479
    
    
    
    18,747Total current assets
    
    
    357,558
    
    
    
    301,967PROPERTY AND EQUIPMENT, NET
    
    
    331,214
    
    
    
    146,041DEFERRED INCOME TAXES
    
    
    790
    
    
    
    16,447OTHER ASSETS
    
    
    10,195
    
    
    
    15,150EQUITY INVESTMENTS
    
    
    
    
    
    
    33,052INTANGIBLE ASSETS, NET
    
    
    45,714
    
    
    
    34,457GOODWILL
    
    
    289,185
    
    
    
    221,459TOTAL ASSETS
    
    $
    1,034,656
    
    
    $
    768,573LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    120,322
    
    
    $
    49,829Accrued payable to retailers and agents
    
    
    108,914
    
    
    
    99,998Other accrued liabilities
    
    
    76,280
    
    
    
    40,911Current portion of long-term debt and capital lease obligations
    
    
    30,011
    
    
    
    6,505Total current liabilities
    
    
    335,527
    
    
    
    197,243LONG-TERM DEBT, CAPITAL LEASE OBLIGATIONS AND OTHER
    
    
    337,103
    
    
    
    266,146DEFERRED TAX LIABILITY
    
    
    57
    
    
    
    54MINORITY INTEREST
    
    
    34,915
    
    
    
    TOTAL LIABILITIES
    
    
    707,602
    
    
    
    463,443STOCKHOLDERS EQUITY:Preferred stock, $0.001 par valueAuthorized, 5,000,000 shares; no shares issued
and outstanding at September 30, 2008 and December 31, 2007
    
    
    
    
    
    
    Common stock, $0.001 par valueAuthorized, 45,000,000 shares; 30,174,494 and
29,665,125 issued and 28,248,413 and 27,739,044 shares outstanding at
September 30, 2008 and December 31, 2007, respectively
    
    
    369,280
    
    
    
    354,509Accumulated deficit
    
    
    (6,892
    )
    
    
    (16,784
    )Treasury stock
    
    
    (40,831
    )
    
    
    (40,831
    )Accumulated other comprehensive income
    
    
    5,497
    
    
    
    8,236Total stockholders equity
    
    
    327,054
    
    
    
    305,130TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    1,034,656
    
    
    $
    768,573
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##### Table of Contents



COINSTAR, INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (in thousands, except per share data)
 (unaudited)
 Nine Month Periods
    
    
    Three Month PeriodsEnded September 30,
    
    
    Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007REVENUE
    
    $
    650,919
    
    
    $
    412,983
    
    
    $
    240,497
    
    
    $
    143,291EXPENSES:Direct operating (1)
    
    
    453,340
    
    
    
    270,930
    
    
    
    168,721
    
    
    
    86,721Marketing
    
    
    13,992
    
    
    
    9,890
    
    
    
    7,374
    
    
    
    5,650Research and development
    
    
    3,578
    
    
    
    4,083
    
    
    
    1,157
    
    
    
    1,397General and administrative
    
    
    65,762
    
    
    
    41,336
    
    
    
    22,760
    
    
    
    15,685Depreciation and other (1)
    
    
    53,572
    
    
    
    44,117
    
    
    
    17,746
    
    
    
    15,100Amortization of intangible assets
    
    
    6,911
    
    
    
    5,369
    
    
    
    2,271
    
    
    
    1,813Proxy, write-off of acquisition costs, and litigation settlement
    
    
    3,084
    
    
    
    
    
    
    
    
    
    
    
    Income from operations
    
    
    50,680
    
    
    
    37,258
    
    
    
    20,468
    
    
    
    16,925OTHER INCOME (EXPENSE):Foreign currency (loss) gain and other
    
    
    (2,727
    )
    
    
    559
    
    
    
    (709
    )
    
    
    699Interest income
    
    
    1,065
    
    
    
    1,497
    
    
    
    180
    
    
    
    1,109Interest expense
    
    
    (16,226
    )
    
    
    (12,464
    )
    
    
    (5,404
    )
    
    
    (4,365
    )(Loss) Income from equity investments
    
    
    (338
    )
    
    
    861
    
    
    
    (1
    )
    
    
    2,217Minority interest
    
    
    (10,789
    )
    
    
    
    
    
    
    (3,347
    )
    
    
    Income before income taxes
    
    
    21,665
    
    
    
    27,711
    
    
    
    11,187
    
    
    
    16,585Income tax expense
    
    
    (11,773
    )
    
    
    (12,742
    )
    
    
    (6,676
    )
    
    
    (7,520
    )NET INCOME
    
    $
    9,892
    
    
    $
    14,969
    
    
    $
    4,511
    
    
    $
    9,065
 
 (1)
    
    Direct operating above excludes depreciation and other of $48.3 million
and $15.9 million for the nine
and three month periods ended September 30, 2008 and $40.8 million and $13.9 million for the nine and three months ended
September 30, 2007. NET INCOME PER SHARE:Basic
    
    $
    0.35
    
    
    $
    0.54
    
    
    $
    0.16
    
    
    $
    0.33Diluted
    
    $
    0.35
    
    
    $
    0.53
    
    
    $
    0.16
    
    
    $
    0.32WEIGHTED SHARES OUTSTANDING:Basic
    
    
    27,992
    
    
    
    27,796
    
    
    
    28,170
    
    
    
    27,846Diluted
    
    
    28,507
    
    
    
    28,336
    
    
    
    28,685
    
    
    
    28,405
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COINSTAR, INC.
 
 CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME
 Nine Month Period Ended September 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
    
    
    418,753
    
    
    
    8,547
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,547Stock-based compensation expense
    
    
    90,616
    
    
    
    4,809
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,809Tax benefit on share-based
compensation
    
    
    
    
    
    
    1,415
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,415Net income
    
    
    
    
    
    
    
    
    
    
    9,892
    
    
    
    
    
    
    
    
    
    
    
    9,892
    
    
    $
    9,892Loss on short-term investments
net of tax benefit of $16
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (25
    )
    
    
    (25
    )
    
    
    (25
    )Foreign currency translation adjustments
net of tax benefit of $92
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,541
    )
    
    
    (3,541
    )
    
    
    (3,541
    )Interest rate hedges on long-term debt
net of tax expense of $794
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    827
    
    
    
    827
    
    
    
    827Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    7,153BALANCE, September 30, 2008
    
    
    28,248,413
    
    
    $
    369,280
    
    
    $
    (6,892
    )
    
    $
    (40,831
    )
    
    $
    5,497
    
    
    $
    327,054
  5




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COINSTAR, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands)
 (unaudited)
 Nine Month PeriodsEnded September 30,2008
    
    
    2007OPERATING ACTIVITIES:Net income
    
    $
    9,892
    
    
    $
    14,969Adjustments to reconcile income from operations to net cash provided by operating activities:Depreciation and other
    
    
    53,572
    
    
    
    44,117Amortization of intangible assets and deferred financing fees
    
    
    7,297
    
    
    
    5,931Write-off of acquisition costs
    
    
    1,004
    
    
    
    Non-cash stock-based compensation
    
    
    6,288
    
    
    
    4,886Excess tax benefit on share-based awards
    
    
    (615
    )
    
    
    (3,921
    )Deferred income taxes
    
    
    9,231
    
    
    
    10,737Loss (Income) from equity investments
    
    
    3,449
    
    
    
    (1,328
    )Minority interest
    
    
    10,789
    
    
    
    Other
    
    
    834
    
    
    
    (388
    )Cash (used) provided by changes in operating assets and liabilities, net of effects of business acquisitions:Accounts receivable
    
    
    21,613
    
    
    
    (24,343
    )Inventory
    
    
    (22,505
    )
    
    
    (1,212
    )Prepaid expenses and other current assets
    
    
    (11,772
    )
    
    
    (5,428
    )Other assets
    
    
    (593
    )
    
    
    (2,460
    )Accounts payable
    
    
    41,762
    
    
    
    (8,660
    )Accrued payable to retailers and agents
    
    
    (17,485
    )
    
    
    (2,200
    )Other accrued liabilities
    
    
    (2,635
    )
    
    
    4,170Net cash provided by operating activities
    
    
    110,126
    
    
    
    34,870INVESTING ACTIVITIES:Purchase of property and equipment
    
    
    (126,814
    )
    
    
    (64,374
    )Acquisitions, net of cash acquired of $40,277 in 2008
    
    
    (24,829
    )
    
    
    (81
    )Loan to equity investee
    
    
    
    
    
    
    (10,000
    )Proceeds from sale of fixed assets
    
    
    3,235
    
    
    
    937Net cash used by investing activities
    
    
    (148,408
    )
    
    
    (73,518
    )FINANCING ACTIVITIES:Principal payments on revolving line of credit and capital lease obligations
    
    
    (299,759
    )
    
    
    (30,667
    )Additional borrowings on credit facility
    
    
    317,500
    
    
    
    46,500Excess tax benefit on share-based awards
    
    
    615
    
    
    
    3,921Repurchase of common stock
    
    
    
    
    
    
    (3,495
    )Proceeds from exercise of stock options
    
    
    8,547
    
    
    
    3,936Net cash provided by financing activities
    
    
    26,903
    
    
    
    20,195Effect of exchange rate changes on cash
    
    
    (2,462
    )
    
    
    1,435NET DECREASE IN CASH AND CASH EQUIVALENTS, CASH IN
MACHINE OR IN TRANSIT, AND CASH BEING PROCESSED
    
    
    (13,841
    )
    
    
    (17,018
    )CASH AND CASH EQUIVALENTS, CASH IN MACHINE OR IN TRANSIT, AND
CASH BEING PROCESSED:Beginning of period
    
    
    196,592
    
    
    
    178,164End of period
    
    $
    182,751
    
    
    $
    161,146SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid during the period for interest
    
    $
    9,728
    
    
    $
    11,848Cash paid during the period for income taxes
    
    
    5,552
    
    
    
    2,297SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING
ACTIVITIES:Purchase of vehicles financed by capital lease obligations
    
    $
    961
    
    
    $
    6,515Accrued acquisition costs
    
    
    10,000
    
    
    
    41
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COINSTAR, INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Nine and Three Month Periods Ended September 30, 2008 and 2007
(unaudited)
 NOTE 1: ORGANIZATION, BUSINESS, AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Description of company:
 Coin-counting machines
    
    
    17,500
    *Entertainment services machines
    
    
    150,000DVD kiosks
    
    
    11,800Money transfer services locations
    
    
    35,000E-payment point-of-sale terminals
    
    
    20,800E-payment enabled coin-counting kiosks
    
    
    10,900
 
 *
    
    Amount includes 10,900 E-payment coin-counting kiosks. Basis of presentation:
  Principles of consolidation:
  Use of estimates .
 7




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##### Table of Contents



Revenue recognition:
 
    
    Coin-counting revenue, which is collected from either consumers or card issuers (in
stored value card or e-certificate transactions), 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 $3.8 million and $8.4 million at September 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.
 Interest
rate swap Accounting for
Derivative Instruments and Hedging Activities.
 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 September 30, 2008Level 1
    
    Level 2
    
    Level 3Short-term investment
    
    $
    1,742
    
    
    
    
    
    
    
    Interest rate swap asset
    
    
    
    
    
    $
    1,627
    
    
    
    
 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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##### Table of Contents



(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 Statements
  (in thousands)2008
    
    $
    4892009
    
    
    4962010
    
    
    4152011
    
    
    1922012
    
    
    192Thereafter
    
    
    121$
    1,905
 11




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##### Table of Contents



Nine Month Periods
    
    Three Month PeriodsEnded September 30,
    
    Ended September 30,2008
    
    2007
    
    2008
    
    2007(in thousands)
    
    (in thousands)Revenue
    
    $
    661,929
    
    
    $
    497,166
    
    
    $
    240,497
    
    
    $
    180,944Net income
    
    $
    9,903
    
    
    $
    14,906
    
    
    $
    4,511
    
    
    $
    9,032Net income per shareBasic
    
    $
    0.35
    
    
    $
    0.54
    
    
    $
    0.16
    
    
    $
    0.32Diluted
    
    $
    0.35
    
    
    $
    0.53
    
    
    $
    0.16
    
    
    $
    0.32Shares:Basic
    
    
    27,992
    
    
    
    27,796
    
    
    
    28,170
    
    
    
    27,846Diluted
    
    
    28,507
    
    
    
    28,336
    
    
    
    28,685
    
    
    
    28,405
 NOTE 3: PROPERTY AND EQUIPMENT
 September 30,
    
    
    December 31,2008
    
    
    2007(in thousands)Machines
    
    $
    603,588
    
    
    $
    364,564Computers
    
    
    29,242
    
    
    
    15,238Office furniture and equipment
    
    
    12,849
    
    
    
    10,119Vehicles
    
    
    22,011
    
    
    
    24,655Leasehold improvements
    
    
    3,054
    
    
    
    2,548670,744
    
    
    
    417,124Accumulated depreciation and amortization
    
    
    (339,530
    )
    
    
    (271,083
    )$
    331,214
    
    
    $
    146,041
 NOTE 4: STOCK-BASED COMPENSATION
 Stock-based compensation: ), Share-Based Payment
  Nine Month Periods
    
    Three Month PeriodsEnded September 30,
    
    Ended September 30,2008
    
    2007
    
    2008
    
    2007Expected term (in years)
    
    
    3.7
    
    
    
    3.7
    
    
    
    3.7
    
    
    
    3.7Expected stock price volatility
    
    
    35
    %
    
    
    41
    %
    
    
    35
    %
    
    
    35
    %Risk-free interest rate
    
    
    2.5
    %
    
    
    4.5
    %
    
    
    2.6
    %
    
    
    4.1
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Estimated fair value per option granted
    
    $
    9.66
    
    
    $
    11.09
    
    
    $
    10.08
    
    
    $
    10.39
  12




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##### Table of Contents



Nine Month Periods
    
    Three Month PeriodsEnded September 30,
    
    Ended September 30,2008
    
    2007
    
    2008
    
    2007(in thousands)
    
    (in thousands)Stock-based compensation expense
    
    $
    4,809
    
    
    $
    4,886
    
    
    $
    1,618
    
    
    $
    1,607Related deferred tax benefit
    
    
    1,362
    
    
    
    1,303
    
    
    
    485
    
    
    
    448
 Stock options:
  Weightedaverage exerciseShares
    
    priceOUTSTANDING, December 31, 2007
    
    
    2,668
    
    
    $
    23.07Granted
    
    
    525
    
    
    
    32.34Exercised
    
    
    (433
    )
    
    
    20.31Cancelled, expired or forfeited
    
    
    (56
    )
    
    
    27.31OUTSTANDING, September 30, 2008
    
    
    2,704
    
    
    
    25.22EXERCISABLE, September 30, 2008
    
    
    1,648
    
    
    
    22.31
  Restricted stock awards:
  Weightedaveragegrant dateShares
    
    fair valueNON-VESTED, December 31, 2007
    
    
    105
    
    
    $
    28.25Granted
    
    
    91
    
    
    
    33.67Vested
    
    
    (46
    )
    
    
    29.73Forfeited
    
    
    (6
    )
    
    
    32.37NON-VESTED, September 30, 2008
    
    
    144
    
    
    
    31.01
 13




---



##### Table of Contents



NOTE 5: INCOME PER SHARE
   Nine Month Periods
    
    
    Three Month PeriodsEnded September 30,
    
    
    Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(in thousands)
    
    
    (in thousands)Numerator:Net income
    
    $
    9,892
    
    
    $
    14,969
    
    
    $
    4,511
    
    
    $
    9,065Denominator:Weighted average shares for basic calculation
    
    
    27,992
    
    
    
    27,796
    
    
    
    28,170
    
    
    
    27,846Incremental shares from employee stock options and awards
    
    
    515
    
    
    
    540
    
    
    
    515
    
    
    
    559Weighted average shares for diluted calculation
    
    
    28,507
    
    
    
    28,336
    
    
    
    28,685
    
    
    
    28,405
  NOTE 6: BUSINESS SEGMENT INFORMATION
 Disclosure about Segments of an Enterprise and Related Information
 14




---



##### Table of Contents



Nine Month Periods
    
    
    Three Month PeriodsEnded September 30,
    
    
    Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(in thousands)
    
    
    (in thousands)Revenue:Coin and entertainment services:Coin revenue
    
    $
    194,771
    
    
    $
    184,607
    
    
    $
    71,027
    
    
    $
    67,400Entertainment revenue
    
    
    117,102
    
    
    
    188,494
    
    
    
    37,046
    
    
    
    62,432Subtotal
    
    
    311,873
    
    
    
    373,101
    
    
    
    108,073
    
    
    
    129,832DVD services
    
    
    254,661
    
    
    
    7,315
    
    
    
    104,192
    
    
    
    1,649Money transfer services
    
    
    66,273
    
    
    
    16,729
    
    
    
    22,016
    
    
    
    6,239E-payment services
    
    
    18,112
    
    
    
    15,838
    
    
    
    6,216
    
    
    
    5,571Consolidated revenue
    
    $
    650,919
    
    
    $
    412,983
    
    
    $
    240,497
    
    
    $
    143,291
   Nine Month Period
    
    
    Three Month PeriodEnded September 30,
    
    
    Ended September 30,2008
    
    
    2008(in thousands)Operating income before depreciation/amortization and unallocated expenses:Coin and entertainment services
    
    $
    74,017
    
    
    $
    27,203DVD services
    
    
    50,070
    
    
    
    17,996Money transfer services
    
    
    (8,141
    )
    
    
    (2,197
    )E-payment services
    
    
    1,584
    
    
    
    (214
    )Subtotal
    
    
    117,530
    
    
    
    42,788Depreciation/amortization and unallocated corporate expenses:Depreciation, amortization and other
    
    
    (60,562
    )
    
    
    (20,017
    )Unallocated expense  stock-based compensation
    
    
    (6,288
    )
    
    
    (2,303
    )Subtotal
    
    
    (66,850
    )
    
    
    (22,320
    )Consolidated income from operations
    
    $
    50,680
    
    
    $
    20,468
 September 30,2008(in thousands)Total assets:Coin and entertainment services
    
    $
    480,646DVD services
    
    
    252,879Money transfer services
    
    
    186,563E-payment services
    
    
    40,728Unallocated corporate assets
    
    
    73,840Consolidated assets
    
    $
    1,034,656
  15




---



##### Table of Contents



Nine Month Periods
    
    
    Three Month PeriodsEnded September 30,
    
    
    Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(in thousands)
    
    
    (in thousands)Revenue:North America
    
    $
    599,354
    
    
    $
    372,624
    
    
    $
    222,749
    
    
    $
    128,140International
    
    
    51,565
    
    
    
    40,359
    
    
    
    17,748
    
    
    
    15,151Total revenue
    
    $
    650,919
    
    
    $
    412,983
    
    
    $
    240,497
    
    
    $
    143,291Net income (loss):North America
    
    $
    21,181
    
    
    $
    22,900
    
    
    $
    9,970
    
    
    $
    12,226International
    
    
    (11,289
    )
    
    
    (7,931
    )
    
    
    (5,459
    )
    
    
    (3,161
    )Total net income
    
    $
    9,892
    
    
    $
    14,969
    
    
    $
    4,511
    
    
    $
    9,065
 September 30,
    
    
    December 31,2008
    
    
    2007(in thousands)Total assets:North America
    
    $
    998,356
    
    
    $
    726,098International
    
    
    133,344
    
    
    
    129,092Intercompany eliminations
    
    
    (97,044
    )
    
    
    (86,617
    )Total assets
    
    $
    1,034,656
    
    
    $
    768,573
  Nine Month Periods
    
    Three Month PeriodsEnded September 30,
    
    Ended September 30,2008
    
    2007
    
    2008
    
    2007Wal-Mart
Stores Inc.
    
    
    17.6
    %
    
    
    25.5
    %
    
    
    18.7
    %
    
    
    24.2
    %McDonalds
    
    
    10.0
    %
    
    
    
    
    
    
    10.0
    %
    
    
    The Kroger Company
    
    
    7.9
    %
    
    
    11.4
    %
    
    
    7.5
    %
    
    
    11.0
    %
 NOTE 7: RELATED PARTY AND OTHER TRANSACTIONS
   16




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##### Table of Contents



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




---



##### Table of Contents



Money transfer services
  E-payment services
   Strategy
 th
 th
 Results of Operations  Nine and Three Month Periods Ended September 30, 2008 and 2007
 Revenue
 Nine Month Periods Ended September 30,
    
    Three Month Periods Ended September 30,(In millions, except percentages)
    
    2008
    
    2007
    
    $ Chng
    
    % Chng
    
    2008
    
    2007
    
    $ Chng
    
    % ChngCoin revenues
    
    $
    194.8
    
    
    $
    184.6
    
    
    $
    10.2
    
    
    
    5.5
    %
    
    $
    71.0
    
    
    $
    67.4
    
    
    $
    3.6
    
    
    
    5.3
    %Entertainment revenues
    
    
    117.1
    
    
    
    188.5
    
    
    
    (71.4
    )
    
    
    -37.9
    %
    
    
    37.1
    
    
    
    62.4
    
    
    
    (25.3
    )
    
    
    -40.5
    %DVD revenues
    
    
    254.6
    
    
    
    7.3
    
    
    
    247.3
    
    
    
    3387.7
    %
    
    
    104.2
    
    
    
    1.6
    
    
    
    102.6
    
    
    
    6412.5
    %Money transfer revenues
    
    
    66.3
    
    
    
    16.7
    
    
    
    49.6
    
    
    
    297.0
    %
    
    
    22.0
    
    
    
    6.2
    
    
    
    15.8
    
    
    
    254.8
    %E-payment revenues
    
    
    18.1
    
    
    
    15.9
    
    
    
    2.2
    
    
    
    13.8
    %
    
    
    6.2
    
    
    
    5.7
    
    
    
    0.5
    
    
    
    8.8
    %Total Revenue
    
    $
    650.9
    
    
    $
    413.0
    
    
    $
    237.9
    
    
    
    57.6
    %
    
    $
    240.5
    
    
    $
    143.3
    
    
    $
    97.2
    
    
    
    67.8
    %
   18




---



##### Table of Contents



Direct Operating Expenses
  Nine Month Periods Ended September 30,
    
    Three Month Periods Ended September 30,(In millions, except percentages)
    
    2008
    
    2007
    
    $ Chng
    
    % Chng
    
    2008
    
    2007
    
    $ Chng
    
    % ChngDirect operating expenses
    
    $
    453.3
    
    
    $
    270.9
    
    
    $
    182.4
    
    
    
    67.3
    %
    
    $
    168.7
    
    
    $
    86.7
    
    
    $
    82.0
    
    
    
    94.6
    %as a % of Total Revenue
    
    
    69.6
    %
    
    
    65.6
    %
    
    
    
    
    
    
    
    
    
    
    70.1
    %
    
    
    60.5
    %
  19




---



##### Table of Contents



Marketing
  Nine Month Periods Ended September 30,
    
    Three Month Periods Ended September 30,(In millions, except percentages)
    
    2008
    
    2007
    
    $ Chng
    
    % Chng
    
    2008
    
    2007
    
    $ Chng
    
    % ChngMarketing
    
    $
    14.0
    
    
    $
    9.9
    
    
    $
    4.1
    
    
    
    41.4
    %
    
    $
    7.4
    
    
    $
    5.7
    
    
    $
    1.7
    
    
    
    29.8
    %as a % of Total Revenue
    
    
    2.2
    %
    
    
    2.4
    %
    
    
    
    
    
    
    
    
    
    
    3.1
    %
    
    
    4.0
    %
  Research and Development
  Nine Month Periods Ended September 30,
    
    Three Month Periods Ended September 30,(In millions, except percentages)
    
    2008
    
    2007
    
    $ Chng
    
    % Chng
    
    2008
    
    2007
    
    $ Chng
    
    % ChngResearch and development
    
    $
    3.6
    
    
    $
    4.1
    
    
    $
    (0.5
    )
    
    
    -12.2
    %
    
    $
    1.2
    
    
    $
    1.4
    
    
    $
    (0.2
    )
    
    
    -14.3
    %as a % of Total Revenue
    
    
    0.6
    %
    
    
    1.0
    %
    
    
    
    
    
    
    
    
    
    
    0.5
    %
    
    
    1.0
    %
  General and Administrative
  Nine Month Periods Ended September 30,
    
    Three Month Periods Ended September 30,(In millions, except percentages)
    
    2008
    
    2007
    
    $ Chng
    
    % Chng
    
    2008
    
    2007
    
    $ Chng
    
    % ChngGeneral and administrative
    
    $
    65.8
    
    
    $
    41.3
    
    
    $
    24.5
    
    
    
    59.3
    %
    
    $
    22.8
    
    
    $
    15.7
    
    
    $
    7.1
    
    
    
    45.2
    %as a % of Total Revenue
    
    
    10.1
    %
    
    
    10.0
    %
    
    
    
    
    
    
    
    
    
    
    9.5
    %
    
    
    11.0
    %
  20




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##### Table of Contents



Proxy, write-off of acquisition costs, and litigation settlement
  Nine Month Periods Ended September 30,
    
    Three Month Periods Ended September 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
    %
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    
    0.0
    %as a % of Total Revenue
    
    
    0.5
    %
    
    
    0.0
    %
    
    
    
    
    
    
    
    
    
    
    0.0
    %
    
    
    0.0
    %
  
    
    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
  Nine Month Periods Ended September 30,
    
    Three Month Periods Ended September 30,(In millions, except percentages)
    
    2008
    
    2007
    
    $ Chng
    
    % Chng
    
    2008
    
    2007
    
    $ Chng
    
    % ChngDepreciation and other
    
    $
    53.6
    
    
    $
    44.1
    
    
    $
    9.5
    
    
    
    21.5
    %
    
    $
    17.7
    
    
    $
    15.1
    
    
    $
    2.6
    
    
    
    17.2
    %as a % of Total Revenue
    
    
    8.2
    %
    
    
    10.7
    %
    
    
    
    
    
    
    
    
    
    
    7.4
    %
    
    
    10.5
    %
  Amortization of Intangible Assets
  Nine Month Periods Ended September 30,
    
    Three Month Periods Ended September 30,(In millions, except percentages)
    
    2008
    
    2007
    
    $ Chng
    
    % Chng
    
    2008
    
    2007
    
    $ Chng
    
    % ChngAmortization of intangible assets
    
    $
    6.9
    
    
    $
    5.4
    
    
    $
    1.5
    
    
    
    27.8
    %
    
    $
    2.3
    
    
    $
    1.8
    
    
    $
    0.5
    
    
    
    27.8
    %as a % of Total Revenue
    
    
    1.1
    %
    
    
    1.3
    %
    
    
    
    
    
    
    
    
    
    
    1.0
    %
    
    
    1.3
    %
  21




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##### Table of Contents



Other Income and Expense
 Nine Month Periods Ended September 30,
    
    Three Month Periods Ended September 30,(In millions, except percentages)
    
    2008
    
    2007
    
    $ Chng
    
    % Chng
    
    2008
    
    2007
    
    $ Chng
    
    % ChngForeign currency (loss) gain and other
    
    $
    (2.7
    )
    
    $
    0.6
    
    
    $
    (3.3
    )
    
    
    -550.0
    %
    
    $
    (0.7
    )
    
    $
    0.7
    
    
    $
    (1.4
    )
    
    
    -200.0
    %Interest income
    
    $
    1.1
    
    
    $
    1.5
    
    
    $
    (0.4
    )
    
    
    -26.7
    %
    
    $
    0.2
    
    
    $
    1.1
    
    
    $
    (0.9
    )
    
    
    -81.8
    %Interest expense
    
    $
    (16.2
    )
    
    $
    (12.5
    )
    
    $
    (3.7
    )
    
    
    29.6
    %
    
    $
    (5.4
    )
    
    $
    (4.4
    )
    
    $
    (1.0
    )
    
    
    22.7
    %Loss (Income) from equity investments
    
    $
    (0.3
    )
    
    $
    0.9
    
    
    $
    (1.2
    )
    
    
    -133.3
    %
    
    $
    
    
    
    $
    2.2
    
    
    $
    (2.2
    )
    
    
    -100.0
    %Minority interest
    
    $
    (10.8
    )
    
    $
    
    
    
    $
    (10.8
    )
    
    
    100.0
    %
    
    $
    (3.3
    )
    
    $
    
    
    
    $
    (3.3
    )
    
    
    100.0
    %
      Income Tax Expense
  Liquidity and Capital Resources
 Cash and Liquidity
    22




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##### Table of Contents



Credit Facility
  Accounting for Derivative Instruments and Hedging
Activities
    23




---



##### Table of Contents



Redbox Debt
    Off-Balance Sheet Arrangements
  Contractual Obligations
  Quarterly Financial Results
  24




---



##### Table of Contents



Three Month Periods EndedSept. 30,
    
    June 30,
    
    March 31,
    
    Dec. 31,
    
    Sept. 30,
    
    June 30,
    
    March 31,
    
    Dec. 31,2008
    

2008 (4)
    
    2008 (1)
    
    2007 (2)
    
    2007 (3)
    
    2007
    
    2007
    
    2006(in thousands, except per share data)(unaudited)Consolidated Statement of Operations:Revenue
    
    $
    240,497
    
    
    $
    219,903
    
    
    $
    190,519
    
    
    $
    133,314
    
    
    $
    143,291
    
    
    $
    137,356
    
    
    $
    132,336
    
    
    $
    138,047Expenses:Direct operating
    
    
    168,721
    
    
    
    152,009
    
    
    
    132,610
    
    
    
    85,112
    
    
    
    86,721
    
    
    
    92,570
    
    
    
    91,639
    
    
    
    92,792Marketing
    
    
    7,374
    
    
    
    3,815
    
    
    
    2,803
    
    
    
    2,009
    
    
    
    5,650
    
    
    
    2,614
    
    
    
    1,626
    
    
    
    5,481Research and development
    
    
    1,157
    
    
    
    1,175
    
    
    
    1,246
    
    
    
    1,070
    
    
    
    1,397
    
    
    
    1,345
    
    
    
    1,341
    
    
    
    1,155General and administrative
    
    
    22,760
    
    
    
    23,206
    
    
    
    19,796
    
    
    
    13,857
    
    
    
    15,685
    
    
    
    13,404
    
    
    
    12,247
    
    
    
    13,033Depreciation and other
    
    
    17,746
    
    
    
    18,855
    
    
    
    16,971
    
    
    
    14,724
    
    
    
    15,100
    
    
    
    14,549
    
    
    
    14,468
    
    
    
    13,272Amortization of intangible assets
    
    
    2,271
    
    
    
    2,298
    
    
    
    2,342
    
    
    
    1,962
    
    
    
    1,813
    
    
    
    1,817
    
    
    
    1,739
    
    
    
    1,722Impairment and excess inventory charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    65,220
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Proxy, write-off of acquisition costs, and litigation settlement
    
    
    
    
    
    
    3,084
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income (loss) from operations
    
    
    20,468
    
    
    
    15,461
    
    
    
    14,751
    
    
    
    (50,640
    )
    
    
    16,925
    
    
    
    11,057
    
    
    
    9,276
    
    
    
    10,592Foreign currency (loss) gain and other
    
    
    (709
    )
    
    
    (890
    )
    
    
    (1,128
    )
    
    
    91
    
    
    
    699
    
    
    
    (20
    )
    
    
    (120
    )
    
    
    (35
    )Interest income
    
    
    180
    
    
    
    626
    
    
    
    259
    
    
    
    201
    
    
    
    1,109
    
    
    
    193
    
    
    
    195
    
    
    
    200Interest expense
    
    
    (5,404
    )
    
    
    (5,906
    )
    
    
    (4,916
    )
    
    
    (4,605
    )
    
    
    (4,365
    )
    
    
    (4,125
    )
    
    
    (3,974
    )
    
    
    (3,910
    )(Loss) income from equity investments and other
    
    
    (1
    )
    
    
    243
    
    
    
    (580
    )
    
    
    472
    
    
    
    2,217
    
    
    
    (1,101
    )
    
    
    (255
    )
    
    
    (118
    )Minority interest
    
    
    (3,347
    )
    
    
    (4,269
    )
    
    
    (3,173
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Early retirement of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,794
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income (loss) before income taxes
    
    
    11,187
    
    
    
    5,265
    
    
    
    5,213
    
    
    
    (56,275
    )
    
    
    16,585
    
    
    
    6,004
    
    
    
    5,122
    
    
    
    6,729Income taxes
    
    
    (6,676
    )
    
    
    (2,585
    )
    
    
    (2,512
    )
    
    
    19,053
    
    
    
    (7,520
    )
    
    
    (2,656
    )
    
    
    (2,566
    )
    
    
    (1,689
    )Net income (loss)
    
    $
    4,511
    
    
    $
    2,680
    
    
    $
    2,701
    
    
    $
    (37,222
    )
    
    $
    9,065
    
    
    $
    3,348
    
    
    $
    2,556
    
    
    $
    5,040Net income (loss) per share:Basic
    
    $
    0.16
    
    
    $
    0.10
    
    
    $
    0.10
    
    
    $
    (1.34
    )
    
    $
    0.33
    
    
    $
    0.12
    
    
    $
    0.09
    
    
    $
    0.18Diluted
    
    $
    0.16
    
    
    $
    0.09
    
    
    $
    0.10
    
    
    $
    (1.34
    )
    
    $
    0.32
    
    
    $
    0.12
    
    
    $
    0.09
    
    
    $
    0.18
 
 (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. The net income
effect of the refund, net of taxes, monies owed to a joint venture and other effects was
approximately $6.5 million in the third quarter of 2007.(4)
    
    In the second quarter of 2008, we recognized
$3.1 million in expense related to a proxy contest, the
write-off of in-process acquisition costs and a litigation settlement. Seasonality
  Critical Accounting Policies
  25




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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
  
 Item 1A. Risk Factors
  26




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##### Table of Contents



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    Total Number of
    
    Maximum ApproximateShares Purchased as
    
    Dollar Value of SharesTotal Number of
    
    
    
    
    
    part of the Publicly
    
    that May Yet beShares Repurchased
    
    Average Price Paid
    
    Announced
    
    Purchased Under the(1)
    
    per Share
    
    Repurchase Plans
    
    Programs7/1/08 - 7/31/08
    
    
    265
    
    
    $
    34.49
    
    
    
    
    
    
    $
    23,363,8508/1/08 - 8/31/08
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,438,3139/1/08 - 9/30/08
    
    
    265
    
    
    
    32.00
    
    
    
    
    
    
    
    23,764,092530
    
    
    $
    33.25
    
    
    
    
    
    
    $
    23,764,092
 
 (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. 27




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##### Table of Contents



Item 6. Exhibits
 ExhibitNumber
    
    Description31.1
    
    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.
 28




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##### Table of Contents



SIGNATURE
  Coinstar,
Inc.By:
    /s/ BRIAN V. TURNERBrian V. TurnerChief Financial
OfficerNovember 10, 2008 29