Edgar Filing: COINSTAR INC

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

______________

FORM 10-Q

(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934

For The Quarter Ended September 30, 2001

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
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 Employer
incorporation 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)

______________

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No _

Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.

Class Outstanding at October 31, 2001
Common Stock, $0.001 par value 21,307,276

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COINSTAR, INC. AND SUBSIDIARIES

FORM 10-Q
Index

PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements:

Consolidated Balance Sheets as of September 30, 2001 (unaudited) and
December 31, 2000 ............................................................... Page 3

Consolidated Statements of Operations for the three and nine month
periods ended September 30, 2001 and September 30, 2000 (unaudited) ............. Page 4

Consolidated Statement of Stockholders' Equity for the nine month
period ended September 30, 2001 (unaudited) ..................................... Page 5

Consolidated Statements of Cash Flows for the nine month periods ended
September 30, 2001 and September 30, 2000 (unaudited) ........................... Page 6

Notes to Consolidated Financial Statements for the three and nine month
periods ended September 30, 2001 and September 30, 2000 (unaudited) ............. Page 7

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations ................................................................... Page 11

PART II. OTHER INFORMATION

Item 2. Changes in Securities and Use of Proceeds .......................................... Page 24

Item 4. Submission of Matters to a Vote of Security Holders ................................ Page 24

Item 6. Exhibits and Reports on Form 8-K ................................................... Page 25

SIGNATURE ................................................................................... Page 26

EXHIBIT INDEX ............................................................................... Page 27

PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements

COINSTAR, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

September 30, December 31,
2001 2000
------------ ------------
(Unaudited)
ASSETS

CURRENT ASSETS:
Cash and cash equivalents ........................................................ $ 94,846,686 $ 70,683,800
Prepaid expenses and other current assets ........................................ 2,196,946 1,988,548
Cash and other current assets of discontinued operations, net .................... 404,618 7,137,383
------------- -------------
Total current assets ......................................................... 97,448,250 79,809,731
PROPERTY AND EQUIPMENT:
Coinstar units ................................................................... 133,657,402 122,834,742
Computers ........................................................................ 7,385,233 5,798,635
Office furniture and equipment ................................................... 1,493,616 1,421,804
Leased vehicles .................................................................. 4,091,624 3,941,144
Leasehold improvements ........................................................... 569,811 478,044
------------- -------------
147,197,686 134,474,369
Accumulated depreciation ......................................................... (83,826,784) (66,142,376)
------------- -------------
63,370,902 68,331,993
OTHER ASSETS ....................................................................... 1,207,141 1,496,566
ASSETS OF DISCONTINUED OPERATIONS .................................................. -- 6,399,073
------------- -------------
TOTAL ASSETS ....................................................................... $ 162,026,293 $ 156,037,363
============= =============

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Accounts payable ................................................................. $ 4,807,927 $ 4,045,359
Accrued liabilities .............................................................. 61,976,411 50,581,669
Current portion of long-term debt and capital lease obligations .................. 920,198 920,603
------------- -------------
Total current liabilities .................................................... 67,704,536 55,547,631
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS ....................................... 61,680,773 61,815,043
------------- -------------
Total liabilities ............................................................ 129,385,309 117,362,674

MINORITY INTEREST-CONVERTIBLE PREFERRED STOCK ...................................... -- 3,833,152
STOCKHOLDERS' EQUITY:
Common stock ..................................................................... 166,517,680 159,517,516
Contributed capital .............................................................. 1,273,601 1,821,647
Accumulated other comprehensive income (loss)..................................... 70,126 (17,381)
Accumulated deficit .............................................................. (135,220,423) (126,480,245)
------------- -------------
Total stockholders' equity ....................................................... 32,640,984 34,841,537
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ......................................... $ 162,026,293 $ 156,037,363
============= =============

See notes to consolidated financial statements.

COINSTAR, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

Nine Months Ended Three Months Ended
September 30, September 30,
2001 2000 2001 2000
------- -------- ------- --------

REVENUE........................................................ $ 93,621,504 $ 74,358,073 $35,175,761 $28,663,305

EXPENSES:
Direct operating............................................ 42,343,204 35,200,199 15,667,133 13,045,188
Regional sales and marketing................................ 6,048,046 8,965,756 3,176,654 4,906,064
Product research and development............................ 3,094,501 2,580,641 1,107,718 906,534
Selling, general and administrative......................... 16,313,717 12,666,728 5,400,126 4,416,104
Depreciation and amortization............................... 19,640,146 17,824,483 6,393,802 6,017,697
------------- ------------ ----------- -----------
Income (loss) from operations............................. 6,181,890 (2,879,734) 3,430,328 (628,282)
OTHER INCOME (EXPENSE):
Interest income............................................. 597,768 1,171,871 214,640 355,195
Interest expense............................................ (6,237,056) (6,154,372) (2,077,753) (2,093,742)
Other income................................................ 5,706 197,632 1,272 70,182
------------- ------------ ----------- -----------
Income (loss) from continuing operations.................. 548,308 (7,664,603) 1,568,487 (2,296,647)
DISCONTINUED OPERATIONS:
Loss from discontinued operations........................... (5,736,242) (7,618,610) -- (3,588,752)
Loss on disposal of discontinued operations................. (3,552,244) -- -- --
------------- ------------ ----------- -----------
Loss from discontinued operations......................... (9,288,486) (7,618,610) -- (3,588,752)
------------- ------------ ----------- -----------

NET INCOME (LOSS).............................................. $ (8,740,178) $(15,283,213) $ 1,568,487 $(5,885,399)
============= ============ =========== ===========

INCOME (LOSS) PER SHARE:
Basic:
Continuing operations...................................... $ 0.03 $ (0.38) $ 0.07 $ (0.11)
Discontinued operations.................................... (0.45) (0.37) -- (0.18)
------------- ------------ ----------- -----------
Net income (loss) per share................................. $ (0.42) $ ( 0.75) $ 0.07 $ (0.29)
============= ============ =========== ===========
Diluted:
Continuing operations...................................... $ 0.03 $ (0.38) $ 0.07 $ (0.11)
Discontinued operations.................................... (0.43) (0.37) -- (0.18)
------------- ------------ ----------- -----------
Net income (loss) per share................................. $ (0.40) $ ( 0.75) $ 0.07 $ (0.29)
============= ============ =========== ===========

Weighted average shares outstanding:
Basic...................................................... 20,718,451 20,244,246 20,927,529 20,299,060
============= ============ =========== ===========
Diluted.................................................... 21,725,055 20,244,246 22,056,750 20,299,060
============= ============ =========== ===========

See notes to consolidated financial statements.

COINSTAR, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

For the Nine Month Period Ended September 30, 2001
(Unaudited)

Accumulated
Common Stock Other
-------------- Contributed Comprehensive Accumulated
Shares Amount Capital Income (Loss) Deficit Total
------ ------ ------- ------------- ------- -----

Balance at January 1, 2001. ......... 20,388,705 $159,517,516 $1,821,647 $ (17,381) $(126,480,245) $ 34,841,537
Issuance of common stock ............ 3,324 63,987 63,987
Issuance of shares under employee
stock purchase plan ............. 54,319 760,330 760,330
Exercise of stock options ........... 510,744 4,452,636 4,452,636
Net exercise of common
stock warrants .................. 36,955 723,211 (723,211) --
Stock issued in connection with
purchase of minority interest of
subsidiary ...................... 52,656 1,000,000 1,000,000
Non-cash stock-based
compensation expense ............ 175,165 175,165
Comprehensive income (loss):
Unrealized gain on foreign
currency translation ......... 87,507 87,507
-----------
Other comprehensive income ...... 87,507
Net loss ............................ (8,740,178) (8,740,178)
-----------
Comprehensive loss .................. (8,652,671)
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Balance at September 30, 2001 ....... 21,046,703 $166,517,680 $1,273,601 $ 70,126 $(135,220,423) $ 32,640,984
============ ============ ========== ========= ============= ============

See notes to consolidated financial statements.

COINSTAR, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

Nine Months Ended
September 30,
2001 2000
------------ -----------

OPERATING ACTIVITIES:
Net loss ..................................................................................... $ (8,740,178) $(15,283,213)
Net loss from discontinued operations ................................................ 5,736,242 7,618,610
Net loss from disposal of discontinued operations .................................... 3,552,244 --
------------ ------------
Net income (loss) from continuing operations ......................................... 548,308 (7,664,603)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization ........................................................ 19,640,146 17,824,483
Debt discount amortization ........................................................... 94,138 139,984
Non-cash stock-based compensation .................................................... 175,165 --
Unrealized loss on short-term investments available for sale ......................... -- (3,967)
Unrealized gain (loss) on foreign currency translation ............................... 87,507 (9,614)
Changes in operating assets and liabilities:
Investment interest receivable ....................................................... -- 131,984
Prepaid expenses and other current assets ............................................ (15,781) 102,192
Other assets ......................................................................... 612 168,055
Accounts payable ..................................................................... 784,646 838,038
Accrued liabilities .................................................................. 11,394,742 2,721,349
------------ ------------
Net cash provided by continuing operations ........................................ 32,709,483 14,247,901
Net cash provided by (used in) discontinued operations ............................ 862,311 (12,309,841)
------------ ------------
Net cash provided by operations ...................................................... 33,571,794 1,938,060
------------ ------------
INVESTING ACTIVITIES:
Sale of short-term investments ....................................................... -- 9,162,841
Purchase of property and equipment ................................................... (13,309,868) (18,288,359)
Net proceeds from the sale of property and equipment ................................. 5,341 12,884
Purchase of intangible assets ........................................................ -- (345,670)
------------ ------------
Net cash used in continuing operations ............................................ (13,304,527) (9,458,304)
Net cash used in discontinued operations .......................................... (617,077) (4,562,291)
------------ ------------
Net cash used in investing activities ................................................ (13,921,604) (14,020,595)
------------ ------------
FINANCING ACTIVITIES:
Principle payments on capital lease obligations ...................................... (764,257) (576,887)
Proceeds from exercise of stock options and issuance of shares under employee stock
purchase plan ..................................................................... 5,276,953 1,406,700
------------ ------------
Net cash provided by continuing operations ........................................ 4,512,696 829,813
Net cash provided by discontinued operations ...................................... -- 5,500,600
------------ ------------
Net cash provided by financing operations ............................................ 4,512,696 6,330,413
------------ ------------
Net cash provided by continuing operations ................................................... 23,917,652 5,619,410
Net cash provided by (used in) discontinued operations ....................................... 245,234 (11,371,532)
------------ ------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ......................................... 24,162,886 (5,752,122)

CASH AND CASH EQUIVALENTS:
Beginning of period .................................................................. 70,683,800 78,696,252
------------ ------------
End of period ........................................................................ $ 94,846,686 $ 72,944,130
============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest ............................................. $ 4,126,616 $ 8,039,584

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Purchase of vehicles financed by capital lease obligation ............................ $ 663,619 $ 863,420
Stock issued in connection with purchase of minority interest of subsidiary .......... $ 1,000,000 $ --
Net exercise of common stock warrants ................................................ $ 723,211 $ --

See notes to consolidated financial statements.

COINSTAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Three and Nine Month Periods Ended September 30, 2001 and 2000
(Unaudited)

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation: The unaudited consolidated financial statements of
Coinstar, Inc. and subsidiaries (collectively, the "Company") included herein
reflect all adjustments, consisting only of normal recurring adjustments which,
in the opinion of management, are necessary to present fairly the Company's
consolidated financial position, results of operations and cash flows for the
periods presented.

These financial statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission (the "SEC") and in
accordance with accounting principles generally accepted in the United States of
America for interim financial information. Certain information and footnote
disclosures, normally included in annual financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America, have been omitted pursuant to such SEC rules and regulations. These
financial statements should be read in conjunction with the Company's audited
financial statements and the accompanying notes included in the Company's Form
10-K for the year ended December 31, 2000, filed with the SEC. The results of
operations for the three and nine month periods ended September 30, 2001 are not
necessarily indicative of the results to be expected for any subsequent quarter
or for the entire fiscal year.

Principles of Consolidation: The financial statements include the accounts
of the Company. All intercompany transactions have been eliminated upon
consolidation.

Net Income (Loss) Per Share: Basic net income (loss) per share is computed
by dividing the net income (loss) available to common stockholders for the
period by the weighted average number of common shares outstanding during the
period. Diluted net income (loss) per share is computed by dividing the net
income (loss) for the period by the weighted average number of common and
potential common shares outstanding (if dilutive) during the period. Potential
common shares, composed of incremental common shares issuable upon the exercise
of stock options and warrants, are included in the calculation of diluted net
income (loss) per share to the extent such shares are dilutive.

The following table sets forth the computation of basic and diluted net
income (loss) per share for the periods indicated:

Nine Months Ended Three Months Ended
September 30, September 30,
2001 2000 2001 2000
------------------------- -----------------------
Numerator: (In thousands) (In thousands)

Net income (loss) from continuing operations $ 548 $ (7,664) $ 1,568 $ (2,296)
Net loss from discontinued operations (9,288) (7,619) -- (3,589)
--------- ----------- --------- --------
Net income (loss) $(8,740) $(15,283) $ 1,568 $ (5,885)
========= =========== ========= ========

Denominator:
Weighted average shares for basic calculation 20,718 20,244 20,928 20,299
--------- ----------- --------- --------

Warrants 25 -- 30 --
Incremental shares from employee stock options 982 -- 1,099 --
--------- ----------- --------- --------
Weighted average shares for diluted calculation 21,725 20,244 22,057 20,299
========= =========== ========= ========

Recent Accounting Pronouncements: In June 1998, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities,
which was amended by SFAS No. 138. This pronouncement, as amended, requires an
entity to recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
Company has adopted the provisions of SFAS No. 133 and SFAS No. 138 as of
January 1, 2001. The impact of adoption was not material to the financial
statements, taken as a whole.

In July 2001, the FASB issued SFAS No. 141, Business Combinations ("SFAS
No. 141"), and SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS No.
142"). SFAS No. 141 requires the purchase method of accounting for business
combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method. SFAS No. 142, which is effective January 1, 2002,
requires, among other things, the discontinuance of goodwill amortization. In
addition, the standard includes provisions for the reclassification of certain
existing recognized intangibles as goodwill, reassessment of the useful lives of
existing recognized intangibles, reclassification of certain intangibles out of
previously reported goodwill and the identification of reporting units for
purposes of assessing potential future impairments of goodwill. SFAS No. 142
also requires the Company to complete a transitional goodwill impairment test
six months from the date of adoption. The Company does not believe that the
adoption of SFAS Nos. 141 or 142 will have a significant impact on its financial
position or results of its operations.

In August 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. SFAS No. 143 requires that the fair value of a liability
for an asset retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. Additionally, the
associated asset retirement costs will be capitalized as part of the carrying
amount of the long-lived asset. The Company does not believe that the adoption
of SFAS No. 143, which is effective for companies with fiscal years beginning
after June 15, 2002, will have a significant impact on its financial position or
results of operations.

In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets,
and supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and For Long-Lived Assets To Be Disposed Of, and APB No. 30, Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions. SFAS No. 144 requires the use of one accounting model for
long-lived assets to be disposed of by sale, whether previously held and used or
newly acquired, and broadens the presentation of discontinued operations to
include more disposal transactions. The Company does not believe that the
adoption of SFAS No. 144, which is effective for companies with fiscal years
beginning after December 15, 2001, will have a significant impact on its
financial position or results of operations.

Reclassifications: Certain reclassifications have been made to the prior
year balances to conform to the current year presentation.

NOTE 2: DISCONTINUED OPERATIONS

In June 2001, the Company adopted plans to discontinue the operations of
its Meals.com subsidiary. This business segment is accounted for as discontinued
operations in accordance with APB Opinion No. 30, Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions ("APB
No. 30"). Amounts in the financial statements and related notes for all periods
shown have been reclassified to reflect the discontinued operations.

In October 2001, the Company sold certain assets of Meals.com to Nestle
USA, Inc., including certain contracts, web site content and database
information, applicable trademarks, as well as specified software and licenses
relating to the Meals.com branded and Nestle branded web sites. All other web
site operations of Meals.com ceased as of September 30, 2001.

At June 30, 2001, consistent with accounting for discontinued operations,
the Company recorded an estimated loss in connection with the disposal of its
Meals.com business of approximately $3.6 million. Included in the estimate was a
$2.4 million loss related primarily to the write-down of Meals.com assets. Also
included in the loss at June 30, 2001 was an estimate of future operating losses
of $1.2 million resulting from the wind-down of the Meals.com business.
Management believes that the estimated losses are reasonable, however, they are
based on preliminary data and are subject to revision.

Summarized below are the operating results for the Meals.com business,
which are included in the accompanying consolidated statements of operations,
under the caption "Loss from discontinued operations." Also included below is
the estimated loss on the disposal of the Meals.com business, which is reported
in the accompanying consolidated statements of operations under the caption
"Loss on disposal of discontinued operations."

Nine Months Ended Three Months Ended
September 30, September 30,
2001 2000 2001 2000
--------------------------- ------------- ----------
(In thousands) (In thousands)

Revenue $ 619 $ 101 $ -- $ 44
Operating expenses 7,321 9,125 -- 4,281
---------- ------------ ----------- ----------
Operating loss (6,702) (9,024) -- (4,237)
Interest, other income and
minority interest, net (966) (1,405) -- (648)
---------- ------------ ----------- ----------
Loss from discontinued operations (5,736) (7,619) -- (3,589)
Loss on disposal of discontinued operations (3,552) -- -- --
---------- ------------ ----------- ----------
Loss from discontinued operations $(9,288) $ (7,619) $ -- $(3,589)
========== ============ =========== ==========

For financial reporting purposes, the assets, liabilities and provision
for losses of the discontinued operations are combined and classified in the
accompanying consolidated balance sheets as of September 30, 2001 and December
31, 2000 under the captions "Cash and other current assets of discontinued
operations, net" and "Assets of discontinued operations." Cash flows from the
discontinued operations are also stated separately on the accompanying
consolidated statements of cash flows.

Summarized below are the assets and liabilities of the Meals.com
business, which are included in the accompanying consolidated balance sheets
under the captions "Cash and other assets of discontinued operations, net" and
"Assets of discontinued operations."

September 30, December 31,
2001 2000
--------------- ---------------
(In thousands)

Current:
Cash and cash equivalents $ 881 $ 7,990
Prepaid expenses and
other current assets 373 897
Accounts payable (28) (837)
Accrued liabilities (821) (913)
------------- -------------
$ 405 $ 7,137
============= =============

Non-current:
Property and equipment $ -- $ 6,399
============= =============

NOTE 3: AGREEMENTS WITH MINORITY STOCKHOLDERS OF MEALS.COM

The Company entered into a Securities Purchase Agreement dated June 21,
2001, with the minority stockholders of its majority owned subsidiary,
Meals.com, pursuant to which the Company agreed to purchase all outstanding
securities (including preferred stock and warrants) of Meals.com held by the
minority stockholders for a purchase price of $1.0 million. The purchase price
was payable in Coinstar's common stock based on the closing price of the stock
on June 8, 2001, which was $18.99. The common stock issued to the minority
stockholders of Meals.com was registered with the SEC on Form S-3 in August
2001.

NOTE 4: BUSINESS SEGMENT INFORMATION

Operating segments as defined in SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information, are components of an enterprise for
which separate financial information is available and regularly reviewed by the
chief operating decision-maker.

The Company is organized into two reportable business segments; the North
American core business (which includes the United States and Canada) and the
International business (which includes the United Kingdom). As mentioned in Note
2, the Company decided to discontinue operations of its Meals.com segment in
June 2001. Accordingly, information regarding Meals.com is not included in the
segment disclosure information below.

Nine Months Ended Three Months Ended
September 30, September 30,
2001 2000 2001 2000
------------- ------------- --------- ---------
(In thousands) (In thousands)

Revenue:
North American core business ................ $ 92,703 $ 74,094 $ 34,652 $ 28,546
International business ...................... 919 264 524 117
--------- --------- --------- ---------

Total revenue ............................ $ 93,622 $ 74,358 $ 35,176 $ 28,663
========= ========= ========= =========

Net income (loss) from continuing operations:
North American core business ................ $ 1,519 $ (6,946) $ 2,116 $ (2,024)
International business ...................... (971) (719) (548) (273)
--------- --------- --------- ---------
Total net income (loss) from
continuing operations .............. $ 548 $ (7,665) $ 1,568 $ (2,297)
========= ========= ========= =========

Total assets: September 30, December 31,
2001 2000
----------- -----------

North American core business ................ $ 163,314 $ 157,765
International business ...................... 3,903 758
Net assets from discontinued operations ..... 405 13,536
Intercompany eliminations ................... (5,596) (16,022)
---------- -----------
Total assets ............................. $ 162,026 $ 156,037
========== ===========

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 Financial Statements and related Notes thereto included elsewhere in this
Quarterly Report on Form 10-Q. Except for the 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, those discussed under the caption "Risk Factors", and those
discussed elsewhere in this Quarterly Report on Form 10-Q and our Annual Report
on Form 10-K for the year ended December 31, 2000. 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
Securities and Exchange Commission that attempt to advise interested parties of
the risks and factors that may affect our business, prospects and results of
operations.

Overview

We currently derive our revenue from coin processing services generated by
our installed base of Coinstar coin-counting machines located in supermarket
chains in 46 states across the United States, the District of Columbia as well
as in the United Kingdom and Canada. We generate revenue based on a processing
fee charged on the total dollar amount of coins processed in a transaction. Coin
processing fee revenue is recognized at the time the customers' coins are
counted by the Coinstar unit. Overall revenue growth is primarily dependent on
the growth in coin processing volumes of our installed base and, to a lesser
degree, the rate of new installations. Our results to date show that coin
processing volumes per unit generally increase with the length of time the unit
is in operation as trial levels of the service increase, driving initial trial
and repeat usage for the service. There can be no assurance, however, that unit
volumes will continue to increase as a function of the time the unit is in
operation. We believe that coin processing volumes per unit may also be affected
by other factors such as (i) public relations, advertising and other activities
that promote trials of the units, (ii) the amount of consumer traffic in the
stores in which the units are located, and (iii) seasonality. We believe the
seasonality affecting our coin processing volumes mirrors the seasonality
patterns of our supermarket partners.

On May 1, 2001, we announced plans to rollout the Coinstar coin-counting
service in the United Kingdom and reached agreements with Asda Stores Ltd and
Sainsbury's Supermarkets Ltd to begin installing additional machines in their
stores. To date, we have installed approximately 150 machines in the United
Kingdom and have also installed approximately 60 machines in Canada.

In June 2001, we announced that we were taking steps to sell the assets of
our Meals.com subsidiary in order to pursue an orderly wind-down of the
business. In October 2001, we sold certain assets of Meals.com to Nestle USA,
Inc., including certain contracts, web site content and database information,
applicable trademarks, as well as specified software and licenses relating to
the Meals.com branded and Nestle branded web sites. All other operations of
Meals.com ceased as of September 30, 2001.

Our direct operating expenses are comprised of the regional expenses
associated with Coinstar coin-counting unit operations and support and consist
primarily of coin pick-up and processing, field operations support and related
expenses, retail operations support and the amount of our service fee that we
share with our retail partners. Coin pick-up and processing costs, which
represent a large portion of our direct operating expenses, vary based on the
level of total coin processing volume and the density of the units within a
region. Field service operations and related expenses vary depending on the
number of geographic regions in which Coinstar units are located as well as the
density of the units within a region. Regional sales and marketing expenses are
comprised of ongoing marketing, advertising and public relations efforts in
existing market regions and startup marketing expenses incurred to launch our
services in new regional markets. Product research and development expense
consists of the development costs of the Coinstar unit software, network
applications, Coinstar unit improvements and new product development. Selling,
general and administrative expenses are comprised of management compensation,
administrative support for field operations, the customer service center, sales
and marketing support, systems and engineering support, computer network
operations, finance and accounting, human resources and occupancy expenses.
Depreciation and amortization consists primarily of depreciation charges on
Coinstar units and, to a lesser extent, depreciation on furniture and fixtures,
leased

automobiles and computer equipment. Other income in the prior year quarter
consisted primarily of sublease rental income of unused and excess office space.

Since 1995, we have devoted significant resources to building the sales and
marketing organization, adding administrative personnel and developing the
network systems and infrastructure to support the rapid growth of our installed
base of Coinstar coin-counting units. In 2000, we devoted significant resources
and capital to develop and market the Meals.com products and services, which we
discontinued in June 2001. The cost of this expansion and the significant
depreciation expense of our installed network have resulted in significant
operating losses to date and an accumulated deficit of $135.2 million as of
September 30, 2001. We expect to continue to evaluate new marketing and
promotional programs to increase the breadth and rate of customer utilization of
our Coinstar service and to engage in systems and product research and
development. We expect these expenses will negatively impact our operating
results. We believe that our future coin counting revenue growth, operating
margin gains and profitability will be dependent upon the penetration of our
installed base with retail partners in existing markets, expansion and
penetration of installations in new market regions and successful ongoing
marketing and promotional activities to sustain the growth in unit coin volume
over time. Given the unpredictability of the timing of installations with retail
partners and the resulting revenues, the growth in coin processing volumes of
our installed base and the continued market acceptance of our services by
consumers and retail partners, our operating results for any quarter are subject
to significant variation, and we believe that period-to-period comparisons of
our results of operations are not necessarily meaningful and should not be
relied upon as indications of future performance.

Discontinued Operations

We have discontinued the operations of our subsidiary, Meals.com. This
business segment is accounted for as discontinued operations in accordance with
APB Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions ("APB No. 30").

In accordance with APB No. 30, we have estimated that the disposal of our
Meals.com business will result in a loss of approximately $3.6 million, which
was recorded in the quarter ended June 30, 2001. Included in the estimate is a
$2.4 million loss primarily related to the write-down of assets of the Meals.com
business. In addition, we have recorded anticipated operating losses of $1.2
million resulting from the wind-down of the Meals.com business. We believe that
the estimated losses continue to be reasonable, however, they are based on
preliminary data and are subject to revision.

Results of Continuing Operations

Our consolidated financial information presents the net effect of
discontinued operations separate from the results of our continuing operations.
Historical financial information has been reclassified to present consistently
the discontinued operations. The discussion and analysis that follows generally
focuses on continuing operations.

The following table shows revenue and expense as a percent of revenue for
the periods ended:

Nine Months Ended Three Months Ended
September 30, September 30,
2001 2000 2001 2000
-------- --------- -------- --------

Revenue. .................................... 100.0% 100.0% 100.0% 100.0%
Expenses:
Direct operating ....................... 45.2 47.3 44.5 45.5
Regional sales and marketing ........... 6.5 12.1 9.0 17.1
Product research and development ....... 3.3 3.5 3.1 3.2
Selling, general and administrative .... 17.4 17.0 15.4 15.4
Depreciation and amortization .......... 21.0 24.0 18.2 21.0
-------- -------- ------ -----
Income (loss) from continuing operations .... 6.6% (3.9)% 9.8% (2.2)%
======== ======== ====== =====

Three Months Ended September 30, 2001 and 2000

Revenue

Revenue increased to $35.2 million for the three months ended September 30,
2001 from $28.7 million for the comparable 2000 period. The increase was due
principally to the increase in the number of Coinstar units in service during
the 2001 period and the increase in the volume of coins processed by the units
in service during this period. The total installed base of Coinstar units
increased to 8,990 at September 30, 2001 from 8,091 units at September 30, 2000.
The total dollar value of coins processed worldwide increased to $396.2 million
during the three month period ended September 30, 2001 from $322.2 million in
the comparable period in the prior year.

Direct Operating Expenses

Direct operating expenses increased to $15.7 million in the three months
ended September 30, 2001 from $13.0 million in the comparable prior year period.
The increase in direct operating expenses was attributable primarily to an
increase in the amount paid to our retail partners in the form of revenue
sharing resulting from a 22.7% increase in coin processing revenue, an increase
in coin pick-up and processing costs resulting from the increased dollar volumes
processed during the quarter, and increases in field service and machine
refurbishment expenses. Direct operating expenses as a percentage of revenue
decreased to 44.5% in the three months ended September 30, 2001 from 45.5% in
the same period of 2000. The decrease in direct operating expenses as a
percentage of revenue resulted from (i) the realization of coin pick-up and
processing cost economies attributable to regional densities and utilization of
less expensive and more efficient coin pick-up methods, and (ii) a decrease in
per unit field service expenses as a percentage of revenue as we increased our
density in our existing markets.

Regional Sales and Marketing

Regional sales and marketing expenses decreased to $3.2 million in the
quarter ended September 30, 2001 from $4.9 million in the comparable prior year
quarter. The decrease in regional marketing expense was the result of a
decreased level of television advertising. Regional sales and marketing as a
percentage of revenue decreased to 9.0% in the three months ended September 30,
2001 from 17.1% in the same period of 2000.

Product Research and Development

Product research and development expenses increased to $1.1 million in the
quarter ended September 30, 2001 from $0.9 million in the comparable prior year
quarter. The increase in product research and development expense was due
primarily to

staffing increases and consulting services related to researching new product
ideas. Product research and development as a percentage of revenue decreased
slightly to 3.1% in the three months ended September 30, 2001 from 3.2% in the
same period of 2000.

Selling, General and Administrative

Selling, general and administrative expenses increased to $5.4 million in
the quarter ended September 30, 2001 from $4.4 million in the comparable prior
year quarter. The principal component of such expenses was employee
compensation, including salaries, benefits, and related costs. Selling, general
and administrative expense as a percentage of revenue remained the same for both
the quarter ended September 30, 2001 and the quarter ended September 30, 2000 at
15.4%.

Depreciation and Amortization

Depreciation and amortization expense increased to $6.4 million in the
quarter ended September 30, 2001 from $6.0 million in the comparable prior year
quarter. The increase was due primarily to the increase in the installed base of
Coinstar coin-counting units. Depreciation and amortization as a percentage of
revenue decreased to 18.2% in the three months ended September 30, 2001 from
21.0% in the same period in the prior year. The decrease in depreciation and
amortization as a percentage of revenue was the result of a larger increase in
coin processing volumes processed through the network (resulting in higher
revenue) compared to a smaller increase in depreciation and amortization
expense.

Other Income and Expense

Other income generated in the three months ended September 30, 2001 was
insignificant. In the quarter ended September 30, 2000, other income was $70,000
resulting from subleasing excess office space.

Interest income decreased to $215,000 in the three months ended September
30, 2001 from $355,000 in the comparable period in 2000. The decrease in
interest income is attributed to lower interest earned on 2001 investments due
to falling interest rates compared to interest earned in the prior year period.

Interest expense of $2.1 million remained consistent in the three month
periods ended September 30, 2001 and 2000.

Income (Loss) from Continuing Operations

In the three months ended September 30, 2001, income from continuing
operations was $1.6 million compared to a loss in the prior year quarter of $2.3
million. Income from continuing operations in the current quarter was due
primarily to our improved direct operating margin and a reduction in regional
sales and marketing expenditures. We expect that our coin processing business
segments will continue to reflect improved operating leverage of the Coinstar
network.

Nine Months Ended September 30, 2001 and 2000

Revenue

Revenue increased to $93.6 million for the nine months ended September 30,
2001 from $74.4 million for the comparable 2000 period. The increase was due
principally to the increase in the number of Coinstar units in service during
the 2001 period and the increase in the volume of coins processed by the units
in service during this period. The total installed base of Coinstar units
increased to 8,990 at September 30, 2001 from 8,091 units at September 30, 2000.
The total dollar value of coins processed worldwide increased to $1.1 billion
during the nine month period ended September 30, 2001 from $835.8 million in the
comparable period in the prior year.

Direct Operating Expenses

Direct operating expenses increased to $42.3 million in the nine months
ended September 30, 2001 from $35.2 million in the comparable prior year period.
The increase in direct operating expenses was attributable primarily to an
increase in the amount paid to our retail partners in the form of revenue
sharing resulting from a 25.9% increase in coin processing revenue, an increase
in coin pick-up and processing costs resulting from the increased dollar volumes
processed during the year, and

increases in field service and machine refurbishment expenses. Direct operating
expenses as a percentage of revenue decreased to 45.2% in the nine months ended
September 30, 2001 from 47.3% in the same period of 2000. The decrease in direct
operating expenses as a percentage of revenue resulted from (i) the realization
of coin pick-up and processing cost economies attributable to regional densities
and utilization of less expensive and more efficient coin pick-up methods, and
(ii) a decrease in per unit field service expenses as a percentage of revenue as
we increased our density in our existing markets.

Regional Sales and Marketing

Regional sales and marketing expenses decreased to $6.0 million in the nine
months ended September 30, 2001 from $9.0 million in the comparable prior year
period. The decrease in regional marketing expense was the result of a decreased
level of television advertising. Regional sales and marketing as a percentage of
revenue decreased to 6.5% in the nine months ended September 30, 2001 from 12.1%
in the same period of 2000.

Product Research and Development

Product research and development expenses increased to $3.1 million in the
nine months ended September 30, 2001 from $2.6 million in the comparable prior
year period. The increase in product research and development expense was due
primarily to (i) staffing and consulting services costs related to researching
new product ideas and (ii) staffing and consulting costs related to enhancing
our existing coin processing system. Product research and development as a
percentage of revenue decreased to 3.3% in the nine months ended September 30,
2001 from 3.5% in the same period of 2000.

Selling, General and Administrative

Selling, general and administrative expenses increased to $16.3 million in
the nine months ended September 30, 2001 from $12.7 million in the comparable
prior year period. Selling, general and administrative expense as a percentage
of revenue increased to 17.4% in the nine months ended September 30, 2001 from
17.0% in the same period in the prior year. The increase in selling, general and
administrative expense as a percentage of revenue was primarily the result of
(i) increased staffing and compensation, (ii) increased administrative expenses
related to professional fees and other general administrative costs associated
with our ongoing operations and (iii) special fees and expenses paid to
professional service providers, including JPMorgan, to assist us in exploring
strategic alternatives.

Depreciation and Amortization

Depreciation and amortization expense increased to $19.6 million in the
nine months ended September 30, 2001 from $17.8 million in the comparable prior
year period. The increase was due primarily to the increase in the installed
base of Coinstar coin-counting units as well as expenses associated with the
periodic replacement of certain machine components. Depreciation and
amortization as a percentage of revenue decreased to 21.0% in the nine months
ended September 30, 2001 from 24.0% in the same period in the prior year. The
decrease in depreciation and amortization as a percentage of revenue was the
result of a larger increase in coin processing volumes processed through the
network (resulting in higher revenue) compared to a smaller increase in
depreciation and amortization expense.

Other Income and Expense

Other income generated in the nine months ended September 30, 2001 was
insignificant. In the nine months ended September 30, 2000, other income was
$198,000 resulting from subleasing excess office space.

Interest income decreased to $598,000 in the nine months ended September
30, 2001 from $1.2 million in the comparable period in 2000. The decrease in
interest income is attributed to lower interest rates earned on 2001 investments
in the nine months ended September 30, 2001 than in the same period in the prior
year.

Interest expense of $6.2 million remained materially consistent in the nine
month periods ended September 30, 2001 and 2000.

Income (Loss) from Continuing Operations

In the nine months ended September 30, 2001, income from continuing
operations was $548,000 compared to a loss from continuing operations of $7.7
million in the first nine months of the prior year. Income from continuing
operations was due primarily to our improved direct operating margin and a
reduction in regional sales and marketing expenditures. We expect that our coin
processing business segments will continue to reflect improved operating
leverage of the Coinstar network.

Liquidity and Capital Resources

As of September 30, 2001, we had cash and cash equivalents of $94.8 million
and working capital of $29.3 million from continuing operations. Cash and cash
equivalents include $50.2 million of funds in transit to our retail partners.
Net cash provided by continuing operations was $32.7 million for the nine months
ended September 30, 2001, compared to net cash provided by continuing operations
of $14.2 million for the nine months ended September 30, 2000.

Net cash used by investing activities from continuing operations for the
nine months ended September 30, 2001 was $13.3 million compared to $9.5 million
in the prior year period. In 2000, cash used by investing activities for the
nine months ending September 30, 2000 resulted primarily from purchases of
Coinstar units offset by cash generated by sales of marketable securities
totaling $9.2 million. There were no sales of marketable securities in the
current year. Capital expenditures during the nine months ended September 30,
2001, were $13.3 million compared with $18.3 million in the comparable period in
2000. Capital expenditures decreased due primarily to a decrease in Coinstar
unit purchases during the nine months ended September 30, 2001. As we continue
to selectively install new units nationwide in order to optimize our Coinstar
network and increase our profitability, we expect the rate of installations to
slow compared to historical levels.

Net cash provided by financing activities from continuing operations for
the nine months ended September 30, 2001 was $4.5 million, which was primarily
the result of proceeds from the exercise of stock options and employee stock
purchases of $5.3 million offset by principal payments on capital lease
obligations. Net cash provided by financing activities from continuing
operations for the nine months ended September 30, 2000 was $830,000 resulting
from proceeds received from the exercise of employee stock options and employee
stock purchases of $1.4 million offset by principal payments on capital lease
obligations.

As of September 30, 2001, we had outstanding $61.0 million of our senior
subordinated discount notes. We have debt service obligations of approximately
$7.9 million per year until October 2006 when the principal amount of $61.0
million plus accrued interest will be due. The indenture governing the notes
contains restrictive covenants that, among other restrictions, limit our ability
to pay dividends or make other restricted payments, engage in transactions with
affiliates, incur additional indebtedness, effect asset dispositions, or merge
or sell substantially all our assets. As of September 30, 2001, we had secured
irrevocable letters of credit with two banks that totaled $5.8 million. These
letters of credit, which expire at various times through November 2001, are
available to collateralize certain obligations to third parties. As of September
30, 2001, no amounts were outstanding under these letters of credit agreements.

On February 19, 1999, we entered into a credit agreement with Imperial
Bank, for itself and as agent of Bank Austria Creditanstalt Corporate Finance,
Inc. On September 26, 2000, we amended the credit agreement to release Bank
Austria from its obligations under the credit agreement and to release us from
our obligation to maintain minimum deposits with Imperial Bank. The amended
credit agreement provides for a credit facility of up to $13.0 million,
consisting of a revolving loan of $10.0 million and a term loan of $3.0 million.
The amended credit agreement expires on September 25, 2006.

In connection with the credit agreement, we issued to each of the lenders a
warrant to purchase 51,326 shares of our common stock. The exercise price for
the warrants was $12.177 per share. The value of these warrants were recorded as
contributed capital and represent discounts, which are being amortized ratably
over the term of the related debt. In February 2001, one of the lenders net
exercised its warrant in full to purchase 18,963 shares of our common stock. In
September 2001, the remaining lender net exercised its warrant in full to
purchase 17,992 shares of our common stock.

We believe existing cash equivalents, short-term investments, and amounts
available to us under our credit agreement with Imperial Bank will be sufficient
to fund our cash requirements and capital expenditure needs for at least the
next 12 months. After that time, the extent of additional financing needed will
depend on the success of our business. If we significantly increase
installations beyond planned levels or if unit coin processing volumes generated
are lower than historical levels, our cash needs will increase. Our future
capital requirements will depend on a number of factors, including the timing
and number of installations, the type and scope of service enhancements, the
level of market acceptance of our service, the feasibility of international
expansion, and the cost of developing potential new product and service
offerings and product and service enhancements.

Quarterly Financial Results

The following table sets forth selected unaudited quarterly financial
information and operating data for the last eight quarters. This information has
been prepared on the same basis as our unaudited consolidated financial
statements and includes, in the opinion of management, all normal and recurring
adjustments that management considers necessary for a fair statement of the
quarterly results for the periods. The operating results and data for any
quarter are not necessarily indicative of the results for future periods.

Three Months Ended
------------------------------------------------------------------------------------
Sept. 30, June 30, March 31, Dec. 31, Sept. 30, June 30, March 31, Dec. 31,
2001 2001 2001 2000 2000 2000 2000 1999
-------- -------- -------- -------- -------- -------- -------- --------
(Dollars in thousands except per unit data)

Consolidated Statements of Operations:
Revenue ..................................... $ 35,176 $ 31,245 $ 27,200 $ 28,251 $ 28,663 $ 24,671 $ 21,024 $ 21,921
Expenses:
Direct operating .......................... 15,667 13,798 12,878 12,984 13,045 11,733 10,422 10,938
Regional sales and marketing .............. 3,176 2,501 370 2,402 4,906 3,567 493 2,704
Product research and development .......... 1,108 989 997 916 907 867 807 1,045
Selling, general and administrative 5,400 5,946 4,968 5,510 4,416 4,111 4,140 3,334
Depreciation and amortization ............. 6,394 6,483 6,763 6,635 6,018 6,021 5,786 5,588
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) from continuing operations .... 3,431 1,528 1,224 (196) (629) (1,628) (624) (1,688)
Other expense, net .......................... (1,862) (1,873) (1,899) (1,992) (1,669) (1,682) (1,434) (2,187)
-------- --------- -------- -------- -------- -------- -------- --------
Income (loss) before discontinued
operations and extraordinary item ......... 1,569 (345) (675) (2,188) (2,298) (3,310) (2,058) (3,875)
Discontinued operations:
Loss related to discontinued operations ... -- (5,928) (3,361) (5,222) (3,588) (2,148) (1,882) (1,660)
Extraordinary item:
Loss related to early retirement of debt .. -- -- -- -- -- -- -- (2,507)
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) ........................... $ 1,569 $ (6,273) $ (4,036) $ (7,410) $ (5,886) $ (5,458) $ (3,940) $ (8,042)
======== ======== ======== ======== ======== ======== ======== ========

North American core business:
Number of new Coinstar units installed
during the period ......................... 70 193 95 413 359 337 430 495
Installed base of Coinstar units at
end of period ............................. 8,840 8,770 8,577 8,482 8,069 7,710 7,373 6,934
Average age of network for the period
(months) .................................. 33.8 31.9 29.7 27.6 26.2 24.5 22.9 21.4
Number of regional markets .................. 124 123 123 122 118 110 106 104
Dollar value of coins processed ............. $389,208 $348,255 $303,799 $315,715 $320,655 $276,073 $235,594 $245,703
Revenue ..................................... 34,652 31,029 27,130 28,107 28,546 24,576 20,972 21,871
Annualized revenue per average
installed unit (1) ........................ 15,737 14,406 12,696 13,565 14,495 13,091 11,740 13,041

Direct contribution (2) ..................... 19,412 17,461 14,373 15,195 15,569 12,890 10,638 10,973
Direct contribution margin (%) .............. 56.0% 56.3% 53.0% 54.1% 54.5% 52.4% 50.7% 50.2%
Annualized direct contribution per
average installed unit (1)(2) ............. $ 8,816 $ 8,102 $ 6,747 $ 7,333 $ 7,906 $ 6,866 $ 5,955 $ 6,543
Regional sales and marketing ................ 3,000 2,535 377 2,402 4,906 3,567 493 2,756
Product research and development ............ 1,083 945 915 886 825 804 751 919
Selling, general and administrative ......... 4,958 5,685 4,942 4,789 4,281 3,993 4,077 3,172
EBITDA (3) .................................. 10,371 8,296 8,139 7,118 5,557 4,526 5,317 4,126
EBITDA margin (%) ........................... 30% 27% 30% 25% 19% 18% 25% 19%

____________

(1) Calculated based on annualized quarterly results divided by the monthly
averages of units in operation over the applicable period.

(2) Direct contribution is defined as revenue less direct operating expenses. We
use direct contribution as a measure of operating performance to assist in
understanding our operating results. Direct contribution is not a measure of
financial performance under accounting principles generally accepted in the
United States of America (GAAP) and should not be considered in isolation or
an alternative to gross margin, income (loss) from operations, net income
(loss), or any other measure of performance under GAAP.

(3) EBITDA represents earnings before interest expense, income taxes,
depreciation, amortization and other income/expense. EBITDA does not
represent and should not be considered as an alternative to net income or
cash flow from operations as determined by GAAP. However, we believe that
EBITDA provides useful information regarding our ability to service and/or
incur indebtedness.

Our coin processing volumes appear to be affected by seasonality that
mirrors the seasonality of our supermarket partners. There can be no assurance,
however, that such seasonal trends will continue. Any projections of future
seasonality are inherently uncertain due to our lack of comparable companies
engaged in the coin processing business.

In addition to fluctuations in revenue resulting from factors affecting
customer usage, timing of unit installations will result in significant
fluctuations in quarterly results. The rate of installations does not follow a
regular pattern, as it depends principally on installation schedules determined
by agreements between us and our retail distribution partners, variable length
of partner trial periods and the planned coordination of multiple partner
installations in a given geographic region.

Risk Factors

You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones facing our company. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial also may impair our business
operations. If any of the following risks actually occur, our business could be
harmed. In such case, the trading price of our common stock could decline and
you may lose all or part of your investment.

Our future profitability and operating results remain uncertain. We cannot
be certain that we will install a sufficient number of our Coinstar units or
maintain existing levels of customer utilization to sustain the level of
profitability that we achieved in the current quarter, or generate sufficient
cash flow to continue to meet our capital and operating expenses and debt
service obligations. You should not consider prior growth rates in our revenue
to be indicative of our future operating results. The timing and amount of
future revenues will depend almost entirely on our ability to obtain new
agreements with potential retail partners for the installation of Coinstar
units, the successful deployment and operation of our coin processing network
and customer utilization of our service. Our future operating results will
depend upon many other factors, including:

. the timing and number of new installations,

. the level of product and price competition,

. the processing fee we charge consumers to use our service and the amount
of our fee that we share with our retail partners,

. our success in expanding our network and managing our growth,

. our ability to develop and market product enhancements and new products
and the timing of such product enhancements,

. our ability to successfully enter into and penetrate new international
markets, such as the United Kingdom, and other selected foreign markets,

. activities of and acquisitions by competitors,

. the ability to control costs, and

. customer utilization at existing levels.

We rely on one source of revenue. We have derived, and expect to derive for
the foreseeable future, substantially all of our revenue from the operation of
Coinstar coin-counting units. Accordingly, continued market acceptance of our
coin processing service is critical to our future success. If demand for our
coin processing service does not continue to grow due to technological changes,
competition, market saturation or other factors, our business, financial
condition and results of operations and ability to achieve sufficient cash flow
to service our indebtedness could be seriously harmed. As a consequence, our
future success may be dependent on our ability to develop and commercialize new
products and services. New products, services and enhancements may pose a
variety of technical challenges and require us to enhance the capabilities of
our network and attract additional qualified employees. The failure to develop
and market new products, services or enhancements successfully could seriously
harm our business, financial condition and results of operations and ability to
achieve sufficient cash flow to service our indebtedness.

There are many risks associated with doing business in international
markets. We intend to continue increasing our deployment of Coinstar units in
the United Kingdom. We have only recently begun our expansion in the United
Kingdom and, accordingly, have limited experience in operating in international
markets. We anticipate that our international operations will become
increasingly significant to our business. International transactions pose a
number of risks, including failure of customer acceptance, risks of regulatory
delays or disapprovals with respect to our products and services, and
competition from potential and current coin-counting businesses. Exposure to
exchange rate risks, restrictions on the repatriation of funds, political
instability, adverse changes in tax, tariff and trade regulations, difficulties
with foreign distributors, difficulties in managing an organization spread over
several countries, and weaker legal protection for intellectual property rights
are risks that could

seriously harm our business, financial condition, and results of operations and
ability to achieve sufficient cash flow to service our indebtedness.

We depend upon key personnel and need to hire additional personnel. Our
performance is substantially dependent on the continued services of our senior
executive officers who have employment contracts, and key employees, whom we
employ on an at-will basis. Our long-term success will depend on our ability to
recruit, retain and motivate highly skilled personnel. Competition for such
personnel is intense. We have at times experienced difficulties in recruiting
qualified personnel, and we may experience difficulties in the future. Our
inability to retain our executive officers or other necessary technical and
managerial personnel could seriously harm our business, financial condition and
results of operations and our ability to achieve sufficient cash flow to service
our indebtedness.

Our stock price has been and may continue to be volatile. Our common stock
price has fluctuated substantially since our initial public offering in July
1997. The market price of our common stock could decline from current levels or
continue to fluctuate. The market price of our common stock may be significantly
affected by the following factors:

. operating results below market expectations,

. trends and fluctuations in the use of our Coinstar units,

. changes in, or our failure to meet, financial estimates by securities
analysts,

. period-to-period fluctuations in our financial results,

. announcements of technological innovations or new products or services
by us or our competitors,

. the termination of one or more retail distribution contracts,

. timing of installations relative to financial reporting periods,

. release of analyst reports,

. industry developments,

. market acceptance of the Coinstar service by retail partners and
consumers, and

. economic and other external factors.

In addition, the securities markets have from time to time experienced
significant price and volume fluctuations that are unrelated to the operating
performance of particular companies. These market fluctuations may seriously
harm the market price of our common stock.

Our business is dependent on maintaining our retail partner relationships
which are highly consolidated. The success of our business depends on the
willingness of potential retail partners, primarily supermarkets, to agree to
installation of Coinstar units in their stores and to the continued retention of
those units. We must continue to demonstrate that our Coinstar units provide a
benefit to our retail partners to ensure that such partners do not request
deinstallation of units or develop or purchase their own coin-counting system.

We generally have separate agreements with each of our retail partners
providing for our exclusive right to provide coin processing services in retail
locations. Coinstar units in service in three supermarket chains, The Kroger
Co., Albertson's, Inc. and Safeway accounted for approximately 28%, 11% and 11%,
respectively, of our revenue in 2000. For the nine months ended September 30,
2001, these three chains accounted for approximately 26%, 13% and 11%,
respectively, of our revenue. The termination of our contracts with any one or
more of our retail partners could seriously harm our business, financial
condition, results of operations and ability to achieve sufficient cash flow to
service our indebtedness.

Our quarterly operating results may fluctuate due to different usage rates
of individual Coinstar units, seasonality of use and other factors. Customer
utilization of our coin processing service varies substantially from unit to
unit, making our revenue difficult to forecast. Customer utilization is affected
by the timing and success of promotions by us and our retail

partners, age of the installed unit, adverse weather conditions and other
factors, many of which are not in our control. We believe that coin processing
volumes are affected by seasonality. This trend mirrors the seasonality patterns
of our supermarket partners. We cannot be certain, however, that such seasonal
trends will continue. Any projections of future trends are inherently uncertain
due to a variety of factors, including success in the timely deployment of a
substantial number of additional Coinstar units, consumer awareness and demand
for our coin processing services, and the lack of comparable companies engaged
in the coin processing business.

The timing and number of installations of new Coinstar units during the
quarter affect future quarterly operating results. The timing of Coinstar unit
installations during a particular quarter is largely dependent on installation
schedules determined by agreements with our retail partners, the variable length
of trial periods of our retail partners and the planned coordination of multiple
installations in a given geographic region.

As a result of these and other factors, revenue for any quarter is subject
to significant variation, and we believe that period-to-period comparisons of
our results of operations are not necessarily meaningful and should not be
relied upon as indications of future performance. Because our operating expenses
are based on anticipated revenue trends and because a large percentage of our
expenses are relatively fixed, revenue variability could cause significant and
disproportionate variations in operating results from quarter to quarter and
could result in significant losses. To the extent such expenses are not followed
by increased revenue, our operating results would be seriously harmed.

We have substantial indebtedness. As of September 30, 2001, we had
outstanding indebtedness of $62.6 million, which included $61.0 million of our
13.0% senior subordinated discount notes due 2006 and our capital lease
obligations. We will have debt service obligations of approximately $7.9 million
per year until October 2006, when the principal amount of $61.0 million will be
due. Our ability to continue to meet our debt service requirements will depend
upon continuing to achieve significant and sustained growth in our expected
operating cash flow, which will be affected by our success in implementing our
business strategy, prevailing economic conditions and financial, business and
other factors, some of which are beyond our control. Accordingly, we cannot be
certain as to whether we will continue to have sufficient resources to meet our
debt service obligations. If we are unable to generate sufficient cash flow to
service our indebtedness, we will have to reduce or delay planned capital
expenditures, sell assets, restructure or refinance our indebtedness or seek
additional equity capital. We cannot assure you that any of these strategies can
be effected on satisfactory terms, if at all, particularly in light of our high
levels of indebtedness. In addition, the extent to which we continue to have
substantial indebtedness could have significant consequences which may
materially limit or impair our ability to obtain additional financing in the
future for working capital, capital expenditures, product research and
development, acquisitions and other general corporate purposes. A substantial
portion of our cash flow from operations may need to be dedicated to the payment
of principal and interest on our indebtedness and therefore not available to
finance our business, and our high degree of indebtedness may make us more
vulnerable to economic downturns, limit our ability to withstand competitive
pressures or reduce our flexibility in responding to changing business and
economic conditions.

We face competition. We face competition from supermarket retailers and
banks that purchase and service their own coin-counting equipment. In addition,
we may face new competition as we seek to expand into international markets and
develop new products, services and enhancements. Our ability to expand
internationally may subject us to competition with banks that offer services
competitive with ours and with manufacturers and other companies that have
established or are seeking to establish coin-counting networks competitive to
ours. Moreover, new products that we are developing, such as those involving
pre-paid cards, will subject us to competition from companies with significantly
greater technological and capital resources and experience.

Many of our potential competitors with respect to the development of new
products, services and enhancements have longer operating histories, greater
name recognition, larger customer bases and significantly greater financial,
technical, marking and public relations resources than we have. These potential
competitors may succeed in developing technologies, products or services that
are more effective, less costly or more widely used than those that have been or
are being developed by us or that would render our technologies or products
obsolete or noncompetitive. Competitive pressures could seriously harm our
business, financial condition and results of operations and our ability to
achieve sufficient cash flow to service our indebtedness.

We depend upon third-party manufacturers and service providers, and
sole-source manufacturers. We do not conduct manufacturing operations and
depend, and will continue to depend, on outside parties for the manufacture of
the Coinstar unit and its key components. We intend to continue to expand our
installed base both domestically and internationally and such expansion may be
limited by the manufacturing capacity of our third-party manufacturers and
suppliers. Although we expect that our current contract manufacturers will be
able to produce sufficient units to meet projected demand, in reality they may
not

be able to meet our manufacturing needs in a satisfactory and timely manner. If
there is an unanticipated increase in demand for Coinstar unit installations, we
may be unable to meet such demand due to manufacturing constraints.

We obtain some key hardware components used in the Coinstar units from
sole-source suppliers. We cannot be certain that we will be able to continue to
obtain an adequate supply of these components in a timely manner or, if
necessary, from alternative sources. If we are unable to obtain sufficient
quantities of components or to locate alternative sources of supply on a timely
basis, we may experience delays in installing or maintaining Coinstar units,
either of which could seriously harm our business, financial condition and
results of operations and ability to achieve sufficient cash flow to service our
indebtedness.

In addition to some of our employees who provide limited transportation
services for our coin, we rely on third-party service providers for substantial
support and service efforts. In particular, we contract with armored carriers
and other third-party providers to arrange for pick-up, processing and deposit
of coins. We generally contract with one transportation provider and coin
processor to service a particular region. Many of these service providers do not
have long-standing relationships with us and either party generally can
terminate the contracts with advance notice ranging from 30 to 90 days. We do
not currently have nor do we expect to have in the foreseeable future the
internal capability to provide back up coin processing service in the event of
sudden disruption in service from a commercial coin processor. Any failure by us
to maintain our existing coin processing relationships or to establish new
relationships on a timely basis or on acceptable terms would harm our business,
financial condition and results of operations and our ability to achieve
sufficient cash flow to service our indebtedness.

We may be unable to adequately protect or enforce our patents and
proprietary rights. Our future success depends, in part, on our ability to
protect our intellectual property and maintain the proprietary nature of our
technology through a combination of patents, licenses and other intellectual
property arrangements, without infringing the proprietary rights of third
parties. We have 18 U.S. patents and 11 international patents relevant to
aspects of self-service coin processing. We also have additional patents pending
in the United States and several foreign jurisdictions.

We cannot assure you that any of our patents will be held valid if
challenged, that any pending patent applications will issue, or that other
parties will not claim rights in or ownership of our patents and other
proprietary rights. Moreover, patents issued to us may be circumvented or fail
to provide adequate protection. Our competitors might independently develop or
patent technologies that are substantially equivalent or superior to our
technologies.

Since patent applications in the United States are not publicly disclosed
until the patent is issued, others may have filed applications, which, if issued
as patents, could cover our products. We cannot be certain that others will not
assert patent infringement claims or claims of misappropriation against us based
on current or pending United States and/or foreign patents, copyrights or trade
secrets or that such claims will not be successful. In addition, defending our
company and our retail partners against these types of claims, regardless of
their merits, could require us to incur substantial costs and divert the
attention of key personnel. Parties making these types of claims may be able to
obtain injunctive or other equitable relief which could effectively block our
ability to provide our coin processing service and use our processing equipment
in the United States and abroad, and could result in an award of substantial
damages. In the event of a successful claim of infringement, we may need or be
required to obtain one or more licenses from, as well as grant one or more
licenses to, others. We cannot assure you that we could obtain necessary
licenses from others at a reasonable cost or at all. We are engaged in
discussions with a former supplier, ScanCoin, in an effort to clarify certain
contract rights and obligations as well as ownership of certain of our
intellectual property.

We also rely on trade secrets to develop and maintain our competitive
position. Although we protect our proprietary technology in part by
confidentiality agreements with our employees, consultants and corporate
partners, we cannot assure you that these agreements will not be breached, that
we will have adequate remedies for any breach or that our trade secrets will not
otherwise become known or be discovered independently by our competitors. The
failure to protect our intellectual property rights effectively or to avoid
infringing the intellectual property rights of others could seriously harm our
business, financial condition and results of operations and ability to achieve
sufficient cash flow to service our indebtedness.

Defects in or failures of our operating system could harm our business. We
collect financial and operating data, and monitor performance of Coinstar units,
through a wide-area communications network connecting each of the Coinstar units
with a central computing system at our headquarters. This information is used to
track the flow of coins, verify coin counts and schedule the dispatch unit
service and coin pick-up. The operation of Coinstar units depends on
sophisticated software, computing systems and communication services that may
contain undetected errors or may be subject to failures. These errors may arise
particularly when new services or service enhancements are added or when the
volume of services provided increases. Although each Coinstar unit is designed
to store all data collected, thereby helping to ensure that critical data is not
lost due to an operating systems failure, our inability to collect the data from
our Coinstar units could lead to a delay in processing coins

and crediting the accounts of our retail partners for vouchers already redeemed.
The design of the operating systems to prevent loss of data may not operate as
intended. Any loss or delay in collecting coin processing data would seriously
harm our operations.

We have in the past experienced limited delays and disruptions resulting
from upgrading or improving our operating systems. Although such disruptions
have not had a material effect on our operations, future upgrades or
improvements could result in delays or disruptions that would seriously harm our
operations.

We rely on the long distance telecommunication network that is not owned by
us and is subject to service disruptions. Further, while we have taken
significant steps to protect the security of our network, any breach of security
whether intentional or from a computer virus could seriously harm us. Any
service disruptions, either due to errors or delays in our software or computing
systems or interruptions or breaches in the communications network, or security
breaches of the system, could seriously harm our business, financial condition
and results of operations and ability to achieve sufficient cash flow to service
our indebtedness.

Some anti-takeover provisions may affect the price of our common stock and
make it harder for a third party to acquire us without the consent of our board
of directors. We have implemented anti-takeover provisions that may discourage
takeover attempts and depress the market price of our stock. Provisions of our
certificate of incorporation, bylaws and rights plan could make it more
difficult for a third party to acquire us, even if doing so would be beneficial
to our stockholders. Delaware law also imposes some restrictions on mergers and
other business combinations between us and any acquirer of 15% or more of our
outstanding common stock, and Washington law may impose additional restrictions
on mergers and other business combinations between us and any acquirer of 10% or
more of our outstanding common stock. These provisions may make it harder for a
third party to acquire us without the consent of our board of directors, even if
the offer from a third party may be considered beneficial by some stockholders.

PART II. OTHER INFORMATION

Item 2. Changes in Securities and Use of Proceeds

On June 21, 2001, we entered into a Securities Purchase Agreement with the
minority stockholders of Meals.com pursuant to which we agreed to purchase all
outstanding securities (including preferred stock and warrants) of Meals.com
held by the minority stockholders for a purchase price of $1.0 million. The
purchase price was paid in 52,656 shares of our common stock issued on July 18,
2001 and valued at $18.99 per share, the closing price of our common stock on
June 8, 2001. Each of the recipients of the shares in the transaction was an
accredited investor (as that term is defined in Regulation D adopted under the
Securities Act of 1933, as amended (the "Securities Act") and the issuance of
the shares was exempt from registration under Section 4(2) and Rule 506 of the
Securities Act. These shares were subsequently registered for resale on a
registration statement on Form S-3 that we filed on August 16, 2001 and the
Securities and Exchange Commission declared effective on August 23, 2001.

Item 4. Submission of Matters to a Vote of Security Holders

At our Annual Meeting of Stockholders held on August 10, 2001, the following
actions were taken:

1. Election of Directors

For Withheld
--- --------
Frances M. Conley 18,596,187 182,396
Keith D. Grinstein 18,596,187 182,396
Robert B. Woodard 18,596,187 182,396

2. To ratify the selection of Deloitte & Touche LLP as Independent
Auditors of Coinstar for the fiscal year ending December 31, 2001.

For Against Abstain
--- ------- -------
17,592,919 1,098,805 86,859

3. To approve the amendment to Coinstar's employee stock purchase plan to
increase the number of authorized shares under the plan from 400,000 to
600,000 shares.

For Against Abstain Not Voted
--- ------- ------- ---------
18,592,345 181,639 3,949 650

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits:

Exhibit
Number Description of Document
------ -----------------------
3.1 Amended and Restated Certificate of Incorporation of the Registrant.
/(1)/
3.2 Amended and Restated Bylaws of the Registrant. /(1)/
10.1 Employment Agreement between Dave Cole and the Registrant dated
October 3, 2001.

(b) Reports on Form 8-K:

None.

________

(1) Incorporated by reference to the Registrant's Registration Statement on
Form S-4 (No. 333-33233).

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

Coinstar, Inc.
(registrant)

By: /s/ Diane L. Renihan
--------------------------------------------
Diane L. Renihan
Chief Financial Officer
November 13, 2001

Exhibit Index

________________

(1) Incorporated by reference to the Registrant's Registration Statement on
Form S-4 (No. 333-33233).