Edgar Filing: COINSTAR INC

Form 10-Q

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 EXCHANGE ACT OF 1934

For the quarter ended September 30, 2007

¨	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 incorporation or organization)		(IRS Employer 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 by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ¨ No x

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 19, 2007
Common Stock, $0.001 par value		27,961,059

COINSTAR, INC.

FORM 10-Q

Index


PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements:

	Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006 (unaudited)	Page 3

	Consolidated Statements of Operations for the nine and three month periods ended September 30, 2007 and September 30, 2006 (unaudited)	Page 4

	Consolidated Statement of Stockholders’ Equity for the nine month period ended September 30, 2007 (unaudited)	Page 5

	Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2007 and September 30, 2006 (unaudited)	Page 6

	Notes to Consolidated Financial Statements for the nine and three month periods ended September 30, 2007 and September 30, 2006 (unaudited)	Page 7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	Page 13

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	Page 21

Item 4.	Controls and Procedures	Page 22

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	Page 22

Item 1A.	Risk Factors	Page 22

Item 6.	Exhibits	Page 22

SIGNATURE		Page 24

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

COINSTAR, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(unaudited)


	September 30, 2007			December 31, 2006
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	3,697		$	24,726
Cash in machine or in transit		65,611			63,740
Cash being processed		91,838			89,698
Accounts receivable, net of allowance for doubtful accounts of $1,536 and $1,050 at September 30, 2007 and December 31, 2006, respectively		46,777			21,339
Inventory		39,115			39,334
Deferred income taxes		11,261			17,775
Prepaid expenses and other current assets		16,270			13,371

Total current assets		274,569			269,983
PROPERTY AND EQUIPMENT, NET		191,534			160,962
DEFERRED INCOME TAXES		1,243			34
OTHER ASSETS		14,083			3,807
EQUITY INVESTMENTS		32,702			31,259
INTANGIBLE ASSETS, NET		40,473			43,121
GOODWILL		212,165			208,917

TOTAL ASSETS	$	766,769		$	718,083

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	48,888		$	57,536
Accrued liabilities payable to retailers		95,107			95,737
Other accrued liabilities		41,354			35,693
Current portion of long-term debt and capital lease obligations		31,252			7,883

Total current liabilities		216,601			196,849
LONG-TERM DEBT, CAPITAL LEASE OBLIGATIONS AND OTHER		193,120			192,381
DEFERRED TAX LIABILITY		11,331			7,488

TOTAL LIABILITIES		421,052			396,718
STOCKHOLDERS’ EQUITY:
Preferred stock, $0.001 par value—Authorized, 5,000,000 shares; no shares issued and outstanding at September 30, 2007 and December 31, 2006		—			—
Common stock, $0.001 par value—Authorized, 45,000,000 shares; 29,648,989 and 29,383,150 issued and 27,961,050 and 27,816,011 shares outstanding at September 30, 2007 and December 31, 2006, respectively		352,537			343,229
Retained earnings		20,438			5,469
Treasury stock		(34,301	)		(30,806	)
Accumulated other comprehensive income		7,043			3,473

Total stockholders’ equity		345,717			321,365

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	766,769		$	718,083

See notes to consolidated financial statements

COINSTAR, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)


	Nine Month Periods Ended September 30,						Three Month Periods Ended September 30,
	2007			2006			2007			2006
REVENUE	$	412,983		$	396,395		$	143,291		$	140,036
EXPENSES:
Direct operating		275,342			258,749			96,209			88,943
Operating taxes, net		(4,412	)		7,993			(9,488	)		2,446
Marketing		9,890			8,939			5,650			4,626
Research and development		4,083			4,091			1,397			1,457
General and administrative		41,336			37,944			15,685			13,984
Depreciation and other		44,117			39,564			15,100			13,410
Amortization of intangible assets		5,369			4,498			1,813			1,661

Income from operations		37,258			34,617			16,925			13,509
OTHER INCOME (EXPENSE):
Interest income and other, net		2,056			1,378			1,808			487
Interest expense		(12,464	)		(11,838	)		(4,365	)		(4,120	)
Income (loss) from equity investments and other		861			52			2,217			(443	)
Early retirement of debt		—			(238	)		—			—

Income before income taxes		27,711			23,971			16,585			9,433
Income taxes		(12,742	)		(10,384	)		(7,520	)		(4,144	)

NET INCOME	$	14,969		$	13,587		$	9,065		$	5,289

NET INCOME PER SHARE:
Basic	$	0.54		$	0.49		$	0.33		$	0.19
Diluted	$	0.53		$	0.49		$	0.32		$	0.19
WEIGHTED SHARES OUTSTANDING:
Basic		27,796			27,692			27,846			27,607
Diluted		28,336			27,977			28,405			27,910

See notes to consolidated financial statements

COINSTAR, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

Nine Month Period Ended September 30, 2007

(in thousands, except share data)

(unaudited)


	Common Stock									Accumulated Other
	Shares		Amount		Retained Earnings		Treasury Stock			Comprehensive Income		Total
BALANCE, December 31, 2006	27,816,011		$	343,229	$	5,469	$	(30,806	)	$	3,473	$	321,365
Proceeds from exercise of stock options, net	196,668			3,885									3,885
Stock-based compensation expense	69,171			4,886									4,886
Tax benefit on share-based compensation				537									537
Treasury stock purchase	(120,800	)						(3,495	)				(3,495	)
Net income						14,969							14,969
Other comprehensive income											3,570		3,570

BALANCE, September 30, 2007	27,961,050		$	352,537	$	20,438	$	(34,301	)	$	7,043	$	345,717

See notes to consolidated financial statements

COINSTAR, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)


	Nine Month Periods Ended September 30,
	2007			2006
OPERATING ACTIVITIES:
Net income	$	14,969		$	13,587
Adjustments to reconcile income from operations to net cash provided by operating activities:
Depreciation and other		44,117			39,564
Amortization of intangible assets		5,369			4,498
Amortization of deferred financing fees		562			570
Loss on early retirement of debt		—			238
Non-cash stock-based compensation		4,886			4,313
Excess tax benefit from exercise of stock options		(3,921	)		—
Deferred income taxes		10,737			8,827
Income from equity investments		(1,328	)		(52	)
Return on equity investments		—			720
Other		(388	)		(106	)
Cash provided (used) by changes in operating assets and liabilities, net of effects of business acquisitions:
Accounts receivable		(24,343	)		(3,318	)
Inventory		(1,212	)		(8,705	)
Prepaid expenses and other current assets		(5,428	)		(1,081	)
Other assets		(2,460	)		119
Accounts payable		(8,660	)		6,059
Accrued liabilities payable to retailers		(2,200	)		(2,650	)
Accrued liabilities		4,170			6,321

Net cash provided by operating activities		34,870			68,904
INVESTING ACTIVITIES:
Purchase of property and equipment		(64,374	)		(24,904	)
Acquisitions, net of cash acquired		(81	)		(31,386	)
Loan to equity investee		(10,000	)		—
Proceeds from sale of fixed assets		937			170

Net cash used by investing activities		(73,518	)		(56,120	)
FINANCING ACTIVITIES:
Principal payments on long-term debt, revolver loan and capital lease obligations		(30,667	)		(22,418	)
Additional borrowings on credit facility		46,500			—
Excess tax benefit from exercise of stock options		3,921			—
Repurchase of common stock		(3,495	)		(8,023	)
Proceeds from exercise of stock options		3,936			2,719

Net cash provided (used) by financing activities		20,195			(27,722	)
Effect of exchange rate changes on cash		1,435			1,780
NET DECREASE IN CASH AND CASH EQUIVALENTS, CASH IN MACHINE OR IN TRANSIT, AND CASH BEING PROCESSED		(17,018	)		(13,158	)
CASH AND CASH EQUIVALENTS, CASH IN MACHINE OR IN TRANSIT, AND CASH BEING PROCESSED:
Beginning of period		178,164			175,267

End of period	$	161,146		$	162,109

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest	$	11,848		$	11,075
Cash paid during the period for taxes		2,297			1,404
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Purchase of vehicles financed by capital lease obligations	$	6,515		$	13,149
Accrued acquisition costs	$	41		$	331

See notes to consolidated financial statements

COINSTAR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Nine and Three Month Periods Ended September 30, 2007 and 2006

(unaudited)

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of company: Incorporated as a Delaware company in 1993, Coinstar is a multi-national company offering a range of 4th Wall™ solutions for retailers’ storefronts consisting of self-service coin counting; electronic payment (“e-payment”) services such as money transfer services, stored value cards, payroll cards, prepaid debit cards and prepaid wireless products via point-of-sale terminals and financial services kiosks; and entertainment services such as skill-crane machines, bulk vending machines and kiddie rides. We have also made strategic investments in Redbox Automated Retail, LLC (“Redbox”) and Video Vending New York, Inc. (d.b.a. “DVDXpress”), to offer self-service DVD kiosks where consumers can rent or purchase movies. Our services, in one form or another, are currently offered in supermarkets, mass merchandisers, warehouse clubs, drugstores, universities, shopping malls and convenience stores in the United States, Canada, Mexico, Puerto Rico, the United Kingdom and other countries. As of September 30, 2007, we had a total of approximately 14,500 coin-counting machines installed, over 288,500 entertainment services machines installed, over 15,900 locations where our point-of-sale terminals were installed and over 400 financial services kiosks installed.

Basis of presentation: The unaudited consolidated financial statements of Coinstar, Inc. included herein reflect all adjustments, consisting only of normal recurring adjustments which, in the opinion of management, are necessary to present fairly our 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 United States generally accepted accounting principles (“GAAP”) for interim financial information. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such SEC rules and regulations. These financial statements should be read in conjunction with our audited financial statements and the accompanying notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006, filed with the SEC. The results of operations for the nine and three month periods ended September 30, 2007, is not necessarily indicative of the results to be expected for any future quarter or for the entire fiscal year. Acquisitions are recorded and included in our results of operations as of the date acquired.

Principles of consolidation: The accompanying consolidated financial statements include the accounts of Coinstar, Inc., our wholly-owned subsidiaries and other entities which are not wholly owned but are consolidated in accordance with Financial Accounting Standards Board (“FASB”) Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities (“FIN 46”). All significant intercompany balances and transactions have been eliminated in consolidation.

Use of estimates: The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These judgments are difficult as matters that are inherently uncertain directly impact their valuation and accounting. Actual results may vary from management’s estimates and assumptions.

Coin-in-machine represents the cash deposited into our entertainment services machines at period end which has not yet been collected. Based on our estimate of coin-in-machine, we have recognized the related revenue, the corresponding reduction to inventory and increase to accrued liabilities which represents the direct operating expenses associated with the coin-in-machine estimate. The estimated value of our entertainment services coin-in-machine was approximately $9.0 million and $7.1 million at September 30, 2007 and December 31, 2006, respectively.

Settlement of liabilities: In accordance with FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (“SFAS 140”), we consider liabilities to be extinguished when the debtor pays or is legally released from the obligation. During the first quarter of 2007, the company reversed liabilities totaling $870,000 in accordance with SFAS 140.

Patent costs: Costs to successfully defend a challenge to our patents are capitalized. Costs which relate to an unsuccessful outcome are charged to expense.

Operating taxes, net: Taxes related to operating our business are recorded in operating taxes, net on the consolidated statement of operations. Such taxes include property taxes, sales and use taxes, and franchise taxes and do not include income taxes. During the third quarter of 2007, operating taxes, net included $11.8 million due to the recognition of an excise tax refund (“telecommunication fee refund”) as a result of an Internal Revenue Service ruling that telecommunication fees paid during the period of March 1, 2003 through July 31, 2006 were improperly collected by the United States government. The $11.8 million represents the refund amount as filed on our fiscal year 2006 federal income tax return and is our best estimate of the amount that will be refunded and is recorded in accounts receivable.

Recent accounting pronouncements: In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”). FIN 48 is an interpretation of FASB Statement No. 109 which provides comprehensive guidance on the recognition and measurement of tax positions in previously filed tax returns or positions expected to be taken in future tax returns. The tax benefit from an uncertain tax position must meet a “more-likely-than-not” recognition threshold and is measured at the largest amount of benefit greater than 50% determined by cumulative probability of being realized upon ultimate settlement with the taxing authority. The interpretation provides guidance on derecognition, classification, interest and penalties, as well as disclosure requirements in the financial statements of uncertain tax positions.

Effective January 1, 2007, we adopted the provisions of FIN 48. As of the adoption date and September 30, 2007, we identified $1.2 million of unrecognized tax benefits (net of federal tax benefit on state issues) which would affect our effective tax rate if recognized. There was no material change in unrecognized income tax benefits, other than the $1.2 million described above, as a result of the adoption and we do not anticipate any significant change within the next twelve months.

In accordance with our accounting policy, we recognize interest and penalties associated with uncertain tax positions in income tax expense. As of the adoption date and September 30, 2007, it was not necessary to accrue interest and penalties associated with the uncertain tax positions identified.

We are generally not subject to examination in jurisdictions within the United States for years prior to 1995. For non United States jurisdictions, we are generally not subject to examination for years prior to 1998.

In September 2006, the FASB issued FASB Statement No. 157, Fair Value Measures (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measures required under other accounting pronouncements, but does not change existing guidance to whether or not an instrument is carried at fair value. SFAS 157 is effective for fiscal years beginning after November 15, 2007. We are currently reviewing the provisions of SFAS 157 to determine the impact to our consolidated financial statements.

In February 2007, the FASB issued FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – including an amendment to FASB Statement No. 115 (“SFAS 159”). Under SFAS 159, entities may elect to measure specified financial instruments and warranty and insurance contracts at fair value on a contract-by-contract basis, with changes in fair value recognized in earnings each reporting period. The election, called the fair value option, will enable entities to achieve an offset accounting effect for changes in fair value of certain related assets and liabilities without having to apply complex hedge accounting provisions. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We are currently reviewing the provisions of SFAS 159 to determine the impact to our consolidated financial statements.

Reclassifications: Certain reclassifications have been made to the prior period amounts to conform to the current period presentation.

NOTE 2: PROPERTY AND EQUIPMENT


	September 30, 2007			December 31, 2006
	(in thousands)
Coin, entertainment and e-payment machines	$	403,800		$	345,938
Computers		14,326			10,732
Office furniture and equipment		9,285			6,018
Vehicles		23,829			18,514
Leasehold improvements		1,611			2,353

		452,851			383,555
Accumulated depreciation and amortization		(261,317	)		(222,593	)

	$	191,534		$	160,962

NOTE 3: COMPREHENSIVE INCOME

Comprehensive income, net of related tax effects, is as follows:


	Nine Month Periods Ended September 30,					Three Month Periods Ended September 30,
	2007			2006		2007			2006
	(in thousands)
Net income	$	14,969		$	13,587	$	9,065		$	5,289
Other comprehensive income (loss)
Foreign currency translation adjustments, net of tax		3,630			814		2,415			395
Interest rate hedge on long-term debt, net of tax		(63	)		6		(33	)		(263	)
Short term investment, net of tax		3			7		2			13

Total comprehensive income	$	18,539		$	14,414	$	11,449		$	5,434

NOTE 4: STOCK-BASED COMPENSATION

Stock-based compensation: Stock-based compensation is accounted for in accordance with the provisions of FASB Statement No. 123 (revised 2004), Share-Based Payment (“SFAS 123R”). Under SFAS 123R, the fair value of stock awards is estimated at the date of grant using the Black-Scholes-Merton (“BSM”) option valuation model. Stock-based compensation expense is reduced for estimated forfeitures and is amortized over the vesting period.

The following summarizes the weighted average valuation assumptions and grant date fair value of options granted during the periods shown below:


	Nine Month Periods Ended September 30,						Three Month Periods Ended September 30,
	2007			2006			2007			2006
Expected term (in years)		3.7			3.6			3.7			3.6
Expected stock price volatility		41	%		47	%		35	%		45	%
Risk-free interest rate		4.5	%		4.6	%		4.1	%		4.8	%
Expected dividend yield		0.0	%		0.0	%		0.0	%		0.0	%
Estimated fair value per option granted	$	11.09		$	9.75		$	10.39		$	10.07

The expected term of the options represents the estimated period of time from grant until exercise and is based on historical experience of similar awards, giving consideration to the contractual terms, vesting schedules and expectations of future employee behavior. Expected stock price volatility is based on historical volatility of our stock for a period at least equal to the expected term. The risk-free interest rate is based on the implied yield available on United States Treasury zero-coupon issues with an equivalent remaining term. We have not paid dividends in the past and do not plan to pay any dividends in the foreseeable future.

The following table summarizes stock-based compensation expense and the related deferred tax benefit for stock option expense during the periods indicated:


	Nine Month Periods Ended September 30,				Three Month Periods Ended September 30,
	2007		2006		2007		2006
	(in thousands)
Stock-based compensation expense	$	4,886	$	4,313	$	1,607	$	1,401
Related deferred tax benefit		1,303		1,086		448		357

Stock options: Stock options are granted to employees under the 2000 Amended and Restated Equity Incentive Plan (the “2000 Plan”) and the 1997 Amended and Restated Equity Incentive Plan (the “1997 Plan”). Options awarded vest annually over 4 years and expire after 5 years. Shares of common stock are issued upon exercise of stock options.

The following table presents a summary of the stock option activity for the nine months ended September 30, 2007:


	Shares		Weighted average exercise price		Weighted average remaining contractual term	Aggregate intrinsic value (in thousands)
OUTSTANDING, December 31, 2006	2,514,435		$	21.52
Granted	464,224			30.25
Exercised	(200,492	)		20.22
Cancelled, expired or forfeited	(74,010	)		26.01

OUTSTANDING, September 30, 2007	2,704,157			23.00	4.68	$	24,808

EXERCISABLE, September 30, 2007	1,733,728			21.15	4.90	$	19,134

As of September 30, 2007, total unrecognized stock-based compensation expense related to unvested stock options was approximately $7.7 million. This expense is expected to be recognized over a weighted average period of approximately 18 months. During the nine month period ended September 30, 2007, the total intrinsic value of stock options exercised was approximately $2.2 million. At September 30, 2007, there were 5,306,973 shares of unissued common stock reserved for issuance under all the stock plans of which 2,602,816 shares were available for future grants.

The following table summarizes information about common stock options outstanding at September 30, 2007:


	Options Outstanding				Options Exercisable
Exercise price	Number of options outstanding	Weighted average remaining contractual life	Weighted average exercise price		Number of options exercisable	Weighted average exercise price
$ 7.38 - $18.59	549,935	5.05	$	16.69	504,250	$	16.56
18.60 - 22.60	600,151	4.73		20.82	542,199		20.95
22.61 - 23.90	610,466	3.67		23.39	368,080		23.26
23.91 - 30.00	510,954	5.65		25.68	308,231		26.06
30.01 - 32.68	432,651	4.39		30.31	10,968		31.69

	2,704,157	4.68		23.00	1,733,728		21.15

Restricted stock awards: Restricted stock awards are granted to certain employees and non-employee directors under the 1997 Plan and vest annually over 4 years and one year, respectively. The restricted shares require no payment from the grantee. The fair value of the awards is based on the market price on the grant date and is recorded on a straight-line basis over the vesting period.

The following table presents a summary of the restricted stock award activity for the nine months ended September 30, 2007:


	Shares		Weighted average grant date fair value
NON-VESTED, December 31, 2006	69,562		$	24.30
Granted	69,171			30.48
Vested	(19,550	)		24.08
Forfeited	(1,500	)		30.07

NON-VESTED, September 30, 2007	117,683			27.89

During 2006, we granted 7,500 restricted stock awards with a weighted average fair value of $22.77 per share, the respective market price of the stock at the grant date.

Compensation expense related to our restricted stock awards totaled approximately $917,000 and $400,000 for the nine and three month periods ended September 30, 2007, respectively. Compensation expense related to our restricted stock awards totaled approximately $348,000 and $130,000 for the nine and three month periods ended September 30, 2006, respectively. As of September 30, 2007, total unrecognized stock-based compensation expense related to unvested restricted stock awards was approximately $2.2 million. This expense is expected to be recognized over a weighted average period of approximately 23 months. During the nine month period ended September 30, 2007, the total fair value of restricted stock awards vested was approximately $471,000.

NOTE 5: INCOME PER SHARE

Basic net income per share is computed by dividing the net income available to common stockholders for the period by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing the net income 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 vesting of non-vested restricted stock awards, are included in the calculation of diluted net income per share to the extent such shares are dilutive.

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


	Nine Month Periods Ended September 30,				Three Month Periods Ended September 30,
	2007		2006		2007		2006
	(in thousands)
Numerator:
Net income	$	14,969	$	13,587	$	9,065	$	5,289

Denominator:
Weighted average shares for basic calculation		27,796		27,692		27,846		27,607
Incremental shares from employee stock options and awards		540		285		559		303

Weighted average shares for diluted calculation		28,336		27,977		28,405		27,910

For the nine and three month periods ended September 30, 2007, options and restricted stock awards totaling approximately 770,000 and 667,000 shares of common stock, respectively, were excluded from the computation of net income per common share because their impact would be antidilutive. For the nine and three month periods ended September 30, 2006, options and restricted stock awards totaling approximately 1.2 million and 1.0 million shares of common stock, respectively, were excluded from the computation of net income per common share because their impact would be antidilutive.

NOTE 6: BUSINESS SEGMENT INFORMATION

FASB Statement No. 131, Disclosure about Segments of an Enterprise and Related Information, requires that companies report separately in the financial statements certain financial and descriptive information about operating segments profit or loss, certain specific revenue and expense items and segment assets. The method for determining what information is reported is based on the way that management organizes the operating segments for making operational decisions and assessments of financial performance. Our chief operating decision maker is considered to be the Chief Executive Officer (“CEO”). We are organized into two reportable business segments: the North American business (which

includes the United States, Canada, Mexico and Puerto Rico), and our International business (which primarily includes the United Kingdom as well as other European operations of our Coinstar Money Transfer subsidiary (“CMT”)). Goodwill from the acquisition of CMT has been included in the International business segment. Goodwill arising in all other acquisitions has been allocated to our North American business segment.


	Nine Month Periods					Three Month Periods
	Ended September 30,					Ended September 30,
	2007			2006		2007			2006
	(in thousands)
Revenue:
North American business	$	372,624		$	374,126	$	128,140		$	129,675
International business		40,359			22,269		15,151			10,361

Total revenue	$	412,983		$	396,395	$	143,291		$	140,036

Net income (loss):
North American business	$	22,900		$	12,350	$	12,226		$	5,388
International business		(7,931	)		1,237		(3,161	)		(99	)

Total net income	$	14,969		$	13,587	$	9,065		$	5,289


	September 30,			December 31,
	2007			2006
	(in thousands)
Total assets:
North American business	$	739,205		$	694,650
International business		109,380			86,703
International eliminations		(81,816	)		(63,270	)

Total assets	$	766,769		$	718,083

Currently, management does not use product line financial performance as a basis for business operating decisions. However, our CEO does analyze our revenue based on revenue generated from our coin-counting and e-payment services separate from revenue generated from our entertainment service. Revenue for these two product lines was as follows:


	Nine Month Periods				Three Month Periods
	Ended September 30,				Ended September 30,
	2007		2006		2007		2006
	(in thousands)				(in thousands)
Revenue:
Coin-counting and e-payment services	$	224,489	$	188,370	$	80,859	$	70,408
Entertainment services		188,494		208,025		62,432		69,628

Total revenue	$	412,983	$	396,395	$	143,291	$	140,036

We have coin-counting, entertainment and e-payment services machines that are placed with retailers that accounted for the following percentages of our consolidated revenue:


	Nine Month Periods				Three Month Periods
	Ended September 30,				Ended September 30,
	2007		2006		2007		2006
Wal-Mart, Inc	25.5	%	27.1	%	24.2	%	26.4	%
The Kroger Company	11.4	%	11.2	%	11.0	%	11.9	%

NOTE 7: RELATED PARTY TRANSACTIONS

Randall J. Fagundo, former President of our entertainment services subsidiary, is a member of a limited liability company which has agreed to lease to Coinstar a 31,000 square foot building located in Louisville, Colorado. The terms of the agreement provide for a ten year lease term, commencing March 1, 2003, at monthly rental payments ranging from $25,353 for the first year to $33,076 for the tenth year, together with additional payments in respect of the tenant’s proportionate share of the maintenance and insurance costs and property tax assessments for the leased premises. We believe that the terms of this lease are comparable to those that would be entered into between unrelated parties on an arms’ length basis.

Approximately $319,000 of our accounts receivable balance is due from a related party of our e-payment subsidiary. This receivable arose in the ordinary course of business and relates to the purchase of prepaid air time. In addition, approximately $5.5 million of our other accrued liabilities balance is our best estimate of the amount due to a related party of our e-payment subsidiary relating to the amount expected to be refunded to us on their behalf relating to a telecommunication fee refund as a result of an Internal Revenue Service ruling that telecommunication fees paid during the period of March 1, 2003 through July 31, 2006 were improperly collected by the United States government. In the third quarter of 2007, we have recognized $2.7 million of income from equity investments, or 49% of the $5.5 million payable, related to our equity interest in the third party.

In the second quarter of 2007, we entered into a promissory note agreement with Redbox in the amount of $10.0 million. The principal amount is due on May 1, 2010 at which time any accrued and unpaid interest is due. The note accrues interest at 11% per annum. Interest payments are first due on May 1, 2009 and then on each three month period thereafter through May 1, 2010.

NOTE 8: SUBSEQUENT EVENTS

On September 27, 2007, we provided notice of exercise of the option agreement and amended certain provisions in the option agreement that allows us to purchase substantially all of DVDXpress’ assets and certain liabilities in exchange for any outstanding debt and accrued interest of approximately $8.4 million on the credit facility plus contingent consideration of up to approximately $3.7 million based on achievement of specific conditions. The transaction closed on October 30, 2007.

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, 2006. 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

We are a multi-national company offering a range of 4^th Wall solutions for retailers’ storefronts consisting of self-service coin counting; entertainment services such as skill-crane machines, bulk vending machines and kiddie rides; and e-payment services such as prepaid wireless products, stored value cards, payroll cards, prepaid debit cards and money transfer services. In addition, through our strategic investments in Redbox Automated Retail, LLC (“Redbox”) and Video Vending New York, Inc. (d.b.a. “DVDXpress”) we offer self-service DVD kiosks where consumers can rent or purchase movies. We also offer a range of point-of-sale terminals, stand-alone e-payment kiosks and e-payment enabled coin-counting machines in drugstores, universities, shopping malls, supermarkets and convenience stores in the United States, the United Kingdom and other countries.

Coin services

We are the leader in the self-service coin-counting services market. We own and operate the only multi-national fully automated network of self-service coin-counting machines across the United States, Canada, Puerto Rico, and in the United Kingdom. We estimate that at any one time, there is more than $10.5 billion worth of coin sitting idle in households in the United States. In 2006, consumers processed more than $2.6 billion worth of coin through our coin-counting machines.

We own and service all of our coin-counting machines. Consumers feed loose change into the machines, which count the change and then dispense vouchers or, in some cases, issue e-payment products, at the consumer’s election. Each voucher lists the dollar value of coins counted, less our transaction fee, which is typically 8.9% of the value of coins counted. In certain cases when our e-payment product is issued instead of a voucher, the consumer does not pay a fee. We generate revenue through transaction fees from our customers and business partners.

We launched our business in North America with the installation of our first coin-counting machine in the early 1990s and in 2001 we began offering our coin services in the United Kingdom. Since inception, our coin-counting machines have counted and processed more than 334 billion coins worth more than $17.9 billion in more than 490 million self-service coin-counting transactions. We own and operate more than 14,500 coin-counting machines in the United States, Canada, Puerto Rico and the United Kingdom (approximately 9,200 of which are e-payment enabled).

Entertainment services

We are the leading owner and operator of skill-crane and bulk vending machines in the United States. We estimate that the market for our entertainment services is approximately $1.1 billion annually in the United States.

Our entertainment services machines consist primarily of skill-crane machines, bulk vending and kiddie rides, which are installed in more than 28,000 retail locations, totaling more than 288,500 pieces of equipment. As with our coin services business, we own and service all of our entertainment services machines, providing a convenient and trouble free service to retailers. We generate revenue from money deposited in our machines that dispense plush toys, novelties and other items.

E-payment services

We offer e-payment services, including activating and reloading value on prepaid wireless accounts, selling stored value cards, loading and reloading prepaid debit cards and prepaid phone cards, prepaid phones, providing payroll card services and money transfer services. We believe these and other e-payment services represent a significant growth opportunity for us. We offer various e-payment services in the United States and the United Kingdom through 15,900 point-of-sale terminals, 400 stand-alone e-payment kiosks and 9,200 e-payment-enabled coin-counting machines in supermarkets, drugstores, universities, shopping malls and convenience stores.

We have relationships with national wireless carriers, such as Sprint, Verizon, T-Mobile, Virgin Mobile and AT&T. We generate revenue primarily through commissions or fees charged per e-payment transaction and pay our retailers a fee based on commissions earned on the sales of e-payment services.

Strategy

Our strategy, embodied in our 4^th Wall concept, is based on cross-selling our full range of products and services to our retailers. In addition, we believe that we will continue to increase operating efficiencies by combining and concentrating our products and services in our retailers’ storefront.

We expect to continue devoting significant resources to building our sales organization in connection with our 4^th Wall cross-selling strategy, adding administrative personnel to support our growing organization and developing the information technology systems and technology infrastructure necessary to support our products and services. We expect to continue evaluating new marketing and promotional programs to increase consumer utilization of our services as well as further expand our product research and development efforts.

Recent Events

On September 27, 2007, we provided notice of exercise of the Option Agreement and amended certain provisions in the Option Agreement that allows us to purchase substantially all of DVDXpress’ assets and certain liabilities in exchange for any outstanding debt and accrued interest of approximately $8.4 million on the credit facility plus contingent consideration of up to approximately $3.7 million based on achievement of specific conditions. The transaction closed on October 30, 2007.

On July 19, 2007, we entered into a stock purchase agreement to purchase all of the outstanding capital stock of GroupEx Financial Corporation, all of the outstanding capital stock of JRJ Express Inc. and all of the issued and outstanding membership interests in Kimeco, LLC, for an aggregate purchase price of up to $70 million. The purchase price includes a $60 million cash payment (subject to a customary working capital adjustment) upon the closing of the transactions contemplated by the agreement, $6 million of which will be held in escrow as partial security for the indemnification obligations of the sellers under the agreement until the earlier of (1) the date eighteen months following the closing and (2) the date thirty days after completion in calendar year 2009 of the 2008 calendar year audit. In addition, there is a contingent payment of up to $10 million should certain performance conditions be met in the fifteen months following the closing. Closing of the transaction is subject to certain customary closing conditions and is expected to occur as soon as all regulatory approvals are obtained.

Results of Operations - Nine and Three Month Periods Ended September 30, 2007 and 2006

Revenue


	Nine Months Periods									Three Months Periods
	Ended September 30,									Ended September 30,
(In millions, except percentages)	2007		2006		$ Chng			% Chng		2007		2006		$ Chng			% Chng
Coin and e-payment revenues	$	224.5	$	188.4	$	36.1		19.2	%	$	80.9	$	70.4	$	10.5		14.9	%
Entertainment revenues	$	188.5	$	208.0	$	(19.5	)	-9.4	%	$	62.4	$	69.6	$	(7.2	)	-10.3	%

Total Revenue	$	413.0	$	396.4	$	16.6		4.2	%	$	143.3	$	140.0	$	3.3		2.4	%

Our coin and e-payment revenues increased in the nine and three month periods ended September 30, 2007 compared to the nine and three month periods ended September 30, 2006 as a result of an increase in the number of transactions, an increase in the number of coin-counting machines, and the volume of coins processed by our coin-counting machines. In addition, our coin and e-payment revenues increased for the nine month periods ended September 30, 2007 compared to the nine month periods ended September 30, 2006 as a result of our acquisition of CMT in the second quarter of 2006.

The total dollar value of coins processed through our network for the nine and three month periods ended September 30, 2007 was approximately $2.1 billion and $767 million, respectively, compared to $1.9 billion and $695 million for the nine and three month periods ended September 30, 2006, respectively. The installed base of coin-counting machines increased to approximately 14,500 at September 30, 2007, from approximately 13,100 machines at September 30, 2006. Revenues for CMT were $16.7 million and for the nine month periods ended September 30, 2007 compared to $4.5 million for the nine month periods ended September 30, 2006. Our e-payment and money transfer revenues have increased year over year and we expect this trend to continue. We expect to continue installing additional coin-counting and e-payment machines and therefore, expect to continue to experience revenue growth in the foreseeable future.

We believe the decrease in revenue from our entertainment services is primarily due to the maturity of this industry, decreased foot traffic at our retailers’ locations, softness of the economy, increased fuel prices, consumer and retailer concerns surrounding the ongoing toy industry product recalls from China and a deflated housing market. While we are watching these trends closely, we believe macro-economic issues will continue to negatively affect retailer foot traffic for the foreseeable future.

Direct Operating Expenses

Our direct operating expenses consist primarily of the cost of (1) the percentage of transaction fees and commissions we pay to our retailers and agents, (2) coin pick-up, transportation and processing expenses, (3) the cost of plush toys and other products dispensed from the skill-crane and bulk-vending machines and (4) field operations support and related expenses. Variations in the percentage of transaction fees we pay to our retailers and agents may result in increased expenses. Such variations are based on our evaluation of certain factors, such as total revenue, e-payment capabilities, long-term non-cancelable contracts, installation of our machines in high traffic and/or urban or rural locations, new product commitments, co-op marketing incentive, or other criteria.


	Nine Months Periods										Three Months Periods
	Ended September 30,										Ended September 30,
(In millions, except percentages)	2007			2006			$ Chng		% Chng		2007			2006			$ Chng		% Chng
Direct operating expenses	$	275.3		$	258.7		$	16.6	6.4	%	$	96.2		$	88.9		$	7.3	8.2	%
as a % of Total Revenue		66.7	%		65.3	%						67.1	%		63.5	%

Direct operating expenses increased in the nine month period ended September 30, 2007 as compared to the nine month period ended September 30, 2006 primarily as a result of an increase in the number of revenue transactions, our acquisition of CMT in the second quarter of 2006, offset by operating synergies achieved in integration. Direct operating expenses for CMT were $15.9 million for the nine month periods ended September 30, 2007 compared to $4.1 million for the nine month periods ended September 30, 2006.

Direct operating expenses increased in the three month period ended September 30, 2007 as compared to the three month period ended September 30, 2006 primarily as a result of an increase in the number of revenue transactions offset by operating synergies achieved in integration. We are integrating our various business operations and have realized operating expense efficiencies as a percentage of revenue. For example, as a result of consolidating our field service routes in 2006, we have begun to realize efficiencies and cost savings in personnel, transportation and related costs which we expect to continue during 2007.

Operating taxes, net

Taxes related to operating our business are recorded in operating taxes, net on the consolidated statement of operations. Such taxes include property taxes, sales and use taxes, and franchise taxes and do not include income taxes.


	Nine Months Periods											Three Months Periods
	Ended September 30,											Ended September 30,
(In millions, except percentages)	2007			2006			$ Chng			% Chng		2007			2006			$ Chng			% Chng
Operating taxes, net	$	(4.4	)	$	8.0		$	(12.4	)	-155.0	%	$	(9.5	)	$	2.4		$	(11.9	)	-495.8	%
as a % of Total Revenue		-1.1	%		2.0	%							-6.6	%		1.7	%

Operating taxes, net decreased in the nine and three month periods ended September 30, 2007 as compared to the nine and three month periods ended September 30, 2006 primarily due to the recognition of an excise tax refund (“telecommunication fee refund”) of $11.8 million as a result of an Internal Revenue Service ruling that telecommunication fees paid during the period of March 1, 2003 through July 31, 2006 were improperly collected by the United States government. The $11.8 million represents the refund amount as filed on our fiscal year 2006 federal income tax return and is our best estimate of the amount that will be refunded. The telecommunication fee refund, together with income from an equity investment and interest income offset by related income tax and expenses, resulted in $6.5 million of net income.

Marketing

Our marketing expenses consist primarily of marketing, advertising and public relations efforts in existing market regions and startup marketing expenses incurred to launch our services in new regional markets.


	Nine Months Periods										Three Months Periods
	Ended September 30,										Ended September 30,
(In millions, except percentages)	2007			2006			$ Chng		% Chng		2007			2006			$ Chng		% Chng
Marketing	$	9.9		$	8.9		$	1.0	11.2	%	$	5.7		$	4.6		$	1.1	23.9	%
as a % of Total Revenue		2.4	%		2.2	%						4.0	%		3.3	%

Marketing expenses increased in the nine and three month periods ended September 30, 2007 as compared to the nine and three months periods ended September 30, 2006 primarily as a result of a shift in the timing of advertising. Marketing expenses represent our direction of advertising dollars toward national and regional advertising and the major international markets in which we operate for our money transfer services. We have been using advertising to introduce e-payment features on our coin-counting machines and other e-payment product channels such as our stored value card offerings. This directed marketing and advertising approach, which we expect to continue throughout the year, continues driving increased trial and repeat usage of both our coin services offering and e-payment products.

Research and Development

Our research and development expenses consist primarily of development costs of our coin-counting machine software, network applications, machine improvements and new product development.


	Nine Months Periods										Three Months Periods
	Ended September 30,										Ended September 30,
(In millions, except percentages)	2007			2006			$ Chng		% Chng		2007			2006			$ Chng			% Chng
Research and development	$	4.1		$	4.1		$	—	0.0	%	$	1.4		$	1.5		$	(0.1	)	-6.7	%
as a % of Total Revenue		1.0	%		1.0	%						1.0	%		1.1	%

Research and development expenses represent expenditures to support development and design of complementary new product ideas and to continue our ongoing efforts to enhance our existing products and services, primarily our coin-counting system. We intend to continue to invest in research and development in the coming years.

General and Administrative

Our general and administrative expenses consist primarily of administrative support for field operations, customer service, systems and engineering support, computer network operations, finance, human resources, occupancy expenses, legal expenses and insurance.


	Nine Months Periods											Three Months Periods
	Ended September 30,											Ended September 30,
(In millions, except percentages)	2007			2006			$ Chng			% Chng		2007			2006			$ Chng			% Chng
General and administrative	$	41.3		$	37.9		$	3.4		9.0	%	$	15.7		$	14.0		$	1.7		12.1	%
as a % of Total Revenue		10.0	%		9.6	%							11.0	%		10.0	%

General and administrative expenses increased in the nine and three month periods ended September 30, 2007 as compared to the nine and three month periods ended September 30, 2006 primarily due to an increase in stock-based compensation expense, an increase in professional fees, accrued severance costs related to the departure of the former President of our entertainment services subsidiary, expenses recognized related to our telecommunication fee refund and an increase in rent expense due to additional administrative office space offset by efficiencies gained related to the integration of our administrative processes. In addition, our general and administrative expenses increased for the nine month period ended September 30, 2007 compared to the nine month period ended September 30, 2006 as a result of our acquisition of CMT in the second quarter of 2006. General and administrative expenses for CMT were $4.8 million for the nine month periods ended September 30, 2007 compared to $2.7 million for the nine month periods ended September 30, 2006. Depreciation and Other Our depreciation and other expenses consist primarily of depreciation charges on our installed coin-counting and entertainment services machines as well as on computer equipment and leased automobiles.
	Nine Months Periods											Three Months Periods
	Ended September 30,											Ended September 30,
(In millions, except percentages)	2007			2006			$ Chng			% Chng		2007			2006			$ Chng			% Chng
Depreciation and other	$	44.1		$	39.6		$	4.5		11.4	%	$	15.1		$	13.4		$	1.7		12.7	%
as a % of Total Revenue		10.7	%		10.0	%							10.5	%		9.6	%

Depreciation and other expense increased in the nine and three month periods ended September 30, 2007 as compared to the nine and three month periods ended September 30, 2006 primarily due the increase in our capital expenditures. Amortization of Intangible Assets Our amortization expense consists of amortization of intangible assets, which are mainly comprised of the value assigned to our acquired retailer relationships and, to a lesser extent, internally developed software.
	Nine Months Periods											Three Months Periods
	Ended September 30,											Ended September 30,
(In millions, except percentages)	2007			2006			$ Chng			% Chng		2007			2006			$ Chng			% Chng
Amortization of intangible assets	$	5.4		$	4.5		$	0.9		20.0	%	$	1.8		$	1.7		$	0.1		5.9	%
as a % of Total Revenue		1.3	%		1.1	%							1.3	%		1.2	%

Amortization expense increased in the nine month period ended September 30, 2007 as compared to the nine month period ended September 30, 2006 primarily as a result of intangible assets derived from our acquisition of CMT in the second quarter of 2006. Other Income and Expense
	Nine Months Periods											Three Months Periods
	Ended September 30,											Ended September 30,
(In millions, except percentages)	2007			2006			$ Chng			% Chng		2007			2006			$ Chng			% Chng
Interest income and other, net	$	2.1		$	1.4		$	0.7		50.0	%	$	1.8		$	0.5		$	1.3		260.0	%
Interest expense	$	(12.5	)	$	(11.8	)	$	(0.7	)	5.9	%	$	(4.4	)	$	(4.1	)	$	(0.3	)	7.3	%
Income (loss) from equity investments and other	$	0.9		$	0.1		$	0.8		—		$	2.2		$	(0.4	)	$	2.6		—
Early retirement of debt	$	—		$	(0.2	)	$	0.2		—		$	—		$	—		$	—		—

Interest income and other, net increased in the nine and three month periods ended September 30, 2007 as compared to the nine and three month periods ended September 30, 2006 primarily due to the recognition of interest income on our telecommunication fee refund offset by lower than average investment balances.

Interest expense increased in the nine and three month periods ended September 30, 2007 as compared to the nine and three month periods ended September 30, 2006 primarily due to an increase in capital lease arrangements and additional interest expense related to borrowing on our revolving line of credit.

Income (loss) from equity investments and other increased in the nine and three months ended September 30, 2007 as compared to the nine and three months ended September 30, 2006 primarily as a result of recording our portion of the telecommunication fee refund expected to be collected by us on behalf our equity investee.

Income Tax Expense

The income tax provision for the nine month periods ended September 30, 2007 and 2006 reflects an effective tax rate of 46.0% and 43.3%, respectively, compared to a United States statutory rate of 35%. For each of the nine month periods ended September 30, 2007 and 2006, the tax rate reflects United States statutory rate and state income tax implications as well as tax implications from the application of SFAS 123R with respect to incentive stock options. The increase in the tax rate is primarily due to adjustments in state deferred tax assets. For the remainder of the year, we expect a tax rate of approximately 44% - 46%.

Liquidity and Capital Resources

Cash and Liquidity

Our business involves collecting and processing large volumes of cash, most of it in the form of coins. We present three categories of cash on our balance sheet: cash and cash equivalents, cash in machine or in transit, and cash being processed.

As of September 30, 2007, we had cash and cash equivalents, cash in machine or in transit, and cash being processed totaling $161.1 million, which consisted of cash and cash equivalents immediately available to fund our operations of $3.7 million, cash in machine or in transit of $65.6 million and cash being processed of $91.8 million. Cash in machine or in transit represents coin residing in our coin-counting or entertainment services machines or being processed by carriers which is not immediately available to us until it has been collected and deposited. Cash being processed represents coin residing in our coin-counting or entertainment services machines or being processed by carriers which we are mainly obligated to use to settle our accrued liabilities payable to our retailers. Working capital was $58.0 million at September 30, 2007, compared with $73.1 million at December 31, 2006. The decrease in working capital was primarily the result of borrowings on our revolving credit facility offset by the timing of payments to our vendors and retailers and the recognition of the receivable related to our telecommunication fee refund.

Net cash provided by operating activities was $34.9 million for the nine months ended September 30, 2007, compared to net cash provided by operating activities of $68.9 million for the nine months ended September 30, 2006. Cash provided by operating activities decreased primarily as a result of an increase in cash used for operating assets and liabilities of $36.9 million, primarily due to the timing of payments to our vendors and retailers.

Net cash used by investing activities for the nine months ended September 30, 2007, was $73.5 million compared to $56.1 million for the nine months ended September 30, 2006. Net cash used by investing activities consisted primarily of capital expenditures, the acquisition of CMT in 2006, and a promissory note with Redbox in 2007. The increase in capital expenditures is primarily related to our increase in coin and entertainment machines.

Net cash provided by financing activities for the nine months ended September 30, 2007, was $20.2 million. This amount represented cash used to make a scheduled principal payment of $1.5 million on our term loan, payments on our revolver loan of $23.5 million, our capital lease payments of $5.7 million and repurchase of our common stock of $3.5 million, offset by net proceeds from the exercise of stock options of $3.9 million, additional borrowings on our credit facility of $46.5 million, and the excess tax benefit from exercise of stock options of $3.9 million. Net cash used by financing activities for the nine months ended September 30, 2006, was $27.7 million. This amount represented cash used to make a scheduled principal payment of $1.4 million and an additional principal payment of $16.9 million on our term loan, $4.1 million on capital leases and repurchase of our common stock of $8.0 million, offset by proceeds from the exercise of stock options of $2.7 million.

Equity Investments

In 2005, we invested $20.0 million to obtain a 47.3% interest in Redbox, which included a conditional consideration agreement requiring us to contribute an additional $12.0 million if Redbox achieved certain targets within a one year period. In 2006, those targets were met and we paid the conditional consideration of $12.0 million; however, the percentage of our interest in Redbox did not change. We have a one-time option to purchase membership interests exercisable from December 2007 to November 2008, which could increase our ownership interest in Redbox to 51%. We are accounting for our ownership under the equity method in our consolidated financial statements.

In 2005, we entered into a credit agreement, which was subsequently amended, to provide DVDXpress with a credit facility to provide up to $9.9 million. As of September 30, 2007, DVDXpress has drawn down $8.0 million on this credit facility. In addition, in 2005 we signed an asset purchase option agreement (“Option Agreement”) with DVDXpress. On September 27, 2007, we provided notice of exercise of the Option Agreement and amended certain provisions in the Option Agreement that allows us to purchase substantially all of DVDXpress’ assets and certain liabilities in exchange for any outstanding debt and accrued interest of approximately $8.4 million on the credit facility plus contingent consideration of up to approximately $3.7 million based on achievement of specific conditions. The transaction closed on October 30, 2007. We are consolidating DVDXpress into our consolidated financial statements in accordance with FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities (“FIN 46R”).

Credit Facility

On July 7, 2004, we entered into a senior secured credit facility maturing on July 7, 2011. This facility provided for advances totaling up to $310.0 million, consisting of a $60.0 million revolving credit facility and a $250.0 million term loan facility. Fees for this facility of approximately $5.7 million are being amortized over the life of the revolving line of credit and the term loan which are 5 years and 7 years, respectively. Loans under this facility are secured by a first security interest in substantially all of our assets and the assets of our subsidiaries, as well as a pledge of our subsidiaries’ capital stock. Our quarterly payments of $479,000 will continue until March 31, 2011 at which time the remaining principal balance of $178.8 million will be due on July 7, 2011, the maturity date of the facility. As of September 30, 2007, our original term loan balance of $250.0 million had been reduced to $185.5 million. As of September 30, 2007, we have borrowed $23.0 million against our revolving credit facility of $60.0 million.

Advances under this credit facility may be made as either base rate loans (the higher of the Prime Rate or Federal Funds Effective Rate) or LIBOR rate loans at our election. Applicable interest rates are based upon either the LIBOR or base rate plus an applicable margin dependent upon a consolidated leverage ratio of outstanding indebtedness to EBITDA (to be calculated in accordance with the terms specified in the credit agreement). Our consolidated leverage ratios are based upon LIBOR plus 200 basis points or the base rate plus 100 basis points. At September 30, 2007, our interest rate on the term loan was 7.36% and was approximately 7.21% for the revolving credit facility.

The credit facility contains standard negative covenants and restrictions on actions including, without limitation, restrictions on indebtedness, liens, fundamental changes or dispositions of our assets, payments of dividends or common stock repurchases, capital expenditures, foreign investments, acquisitions, sale and leaseback transactions and swap agreements, among other restrictions. In addition, the credit agreement requires that we meet certain financial covenants, ratios and tests, including maintaining a maximum consolidated leverage ratio and a minimum interest coverage ratio, as defined in the agreement. As of September 30, 2007, we were in compliance with all covenants. In the first quarter of 2006, we had a mandatory debt paydown of $16.9 million. There is not a mandatory payment in 2007 per our 2006 covenant calculations.

As of September 30, 2007, we had six irrevocable letters of credit that totaled $11.7 million. These standby letters of credit, which expire at various times through August 31, 2008, are available to collateralize certain obligations to third parties. Prior to and as of September 30, 2007, no amounts were outstanding under these letters of credit.

We believe our existing cash, cash equivalents and amounts available to us under our credit facility 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, if any, will depend on the success of our business. If we significantly increase installations beyond planned levels, or if coin–counting machine volumes generated or entertainment services machine plays are lower than historical levels, or if we increase our capital investment in CMT significantly, our cash needs may increase. Furthermore, our future capital requirements will depend on a number of factors, including cash required by future acquisitions, consumer usage of our services, the timing and number of machine installations, the number of available installable machines, the type and scope of service enhancements and the cost of developing potential new product and service offerings and enhancements.

Off-Balance Sheet Arrangements

As September 30, 2007, off-balance sheet arrangements are comprised of our obligations under our interest rate hedge as disclosed in Note 6 to our Consolidated Financial Statements included in our Fiscal 2006 Annual Report on Form 10-K and our operating leases and letters of credit as disclosed in Note 7 to our Consolidated Financial Statements included in our Fiscal 2006 Annual Report on Form 10-K. We have no other off-balance sheet arrangements that have had or are reasonably likely to have a material current or future effect on our financial condition or consolidated financial statements.

Contractual Obligations

There have been no material changes during the period covered by this report, outside of the ordinary course of our business, to the contractual obligations specified in the table of contractual obligations included in the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the our Fiscal 2006 Annual Report on Form 10-K.

Quarterly Financial Results

The following table sets forth selected unaudited quarterly financial information for the last eight quarters. This information has been prepared on the same basis as our audited consolidated financial statements and includes, in the opinion of management, all normal and recurring adjustments that management considers necessary for a fair presentation of the quarterly results for the periods. The operating results for any quarter are not necessarily indicative of the results for future periods. Certain reclassifications have been made to the prior year balances to conform to the current year presentation.


	Three Month Periods Ended
	Sept. 30, 2007 (1)			June 30, 2007			March 31, 2007			Dec. 31, 2006			Sept. 30, 2006			June 30, 2006 (2)			March 31, 2006 (3)			Dec. 31, 2005 (4)
	(in thousands, except per share data)
	(unaudited)
Consolidated Statement of Operations:
Revenue	$	143,291		$	137,356		$	132,336		$	138,047		$	140,036		$	130,327		$	126,032		$	125,607
Expenses:
Direct operating		96,209			89,941			89,192			90,856			88,943			84,932			84,874			82,964
Operating taxes, net		(9,488	)		2,629			2,447			1,936			2,446			2,722			2,825			2,235
Marketing		5,650			2,614			1,626			5,481			4,626			3,389			924			5,031
Research and development		1,397			1,345			1,341			1,155			1,457			1,393			1,241			1,446
General and administrative		15,685			13,404			12,247			13,033			13,984			12,594			11,366			8,472
Depreciation and other		15,100			14,549			14,468			13,272			13,410			13,295			12,859			11,887
Amortization of intangible assets		1,813			1,817			1,739			1,722			1,661			1,510			1,327			1,281

Income from operations		16,925			11,057			9,276			10,592			13,509			10,492			10,616			12,291
Interest income and other, net		1,808			173			75			165			487			420			471			426
Interest expense		(4,365	)		(4,125	)		(3,974	)		(3,910	)		(4,120	)		(3,986	)		(3,732	)		(3,613	)
Income (loss) from equity investments and other		2,217			(1,101	)		(255	)		(118	)		(443	)		304			191			(88	)
Early retirement of debt		—			—			—			—			—			—			(238	)		—

Income before income taxes		16,585			6,004			5,122			6,729			9,433			7,230			7,308			9,016
Income taxes		(7,520	)		(2,656	)		(2,566	)		(1,689	)		(4,144	)		(3,111	)		(3,129	)		(3,497	)

Net income	$	9,065		$	3,348		$	2,556		$	5,040		$	5,289		$	4,119		$	4,179		$	5,519

Net income per share:
Basic	$	0.33		$	0.12		$	0.09		$	0.18		$	0.19		$	0.15		$	0.15		$	0.20
Diluted	$	0.32		$	0.12		$	0.09		$	0.18		$	0.19		$	0.15		$	0.15		$	0.20

(1)	In the third quarter of 2007, we recognized a telecommunication fee refund as described in footnote one of this report.

(2)	In the second quarter of 2006, we acquired CMT.

(3)	Effective January 2006, we adopted the guidance under FASB Statement No. 123 (revised 2004), Share-Based Payment which requires the expensing of stock compensation.

(4)	In the fourth quarter of 2005, we acquired The Amusement Factory L.L.C.

Seasonality

We have historically experienced seasonality in our revenues with higher revenues in the second half of the year than in the first half of the year. Our coin services revenue generally experiences its highest revenues in the third calendar quarter, followed by the fourth calendar quarter, and relatively lower revenues in the first half of the year. Our e-payment services revenue generally provides its highest revenue in the fourth quarter. We expect our results of operations will continue to fluctuate as a result of seasonal fluctuations and our revenue mix between relatively higher margin coin and e-payment services and relatively lower margin entertainment services.

Critical Accounting Policies

Our consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles. Preparation of these statements requires management to make judgments and estimates. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the present circumstances. A summary of significant accounting policies and a description of accounting policies that are considered critical may be found in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006 at Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. Except as noted below, there have been no material changes to the critical accounting policies previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006.

Income taxes: Effective January 1, 2007, we adopted the provisions FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”). FIN 48 is an interpretation of FASB Statement No. 109 which provides comprehensive guidance on the recognition and measurement of tax positions in previously filed tax returns or positions expected to be taken in future tax returns. The tax benefit from an uncertain tax position must meet a “more-likely-than-not” recognition threshold and is measured at the largest amount of benefit greater than 50% determined by cumulative probability of being realized upon ultimate settlement with the taxing authority. The interpretation provides guidance on derecognition, classification, interest and penalties, as well as disclosure requirements in the financial statements of uncertain tax positions. As of the adoption date and September 30, 2007, we identified $1.2 million of unrecognized tax benefits (net of federal tax benefit on state issues) which would affect our effective tax rate if recognized. There was no material change in unrecognized income tax benefits, other than the $1.2 million described above, as a result of the adoption and we do not anticipate any significant change within the next twelve months.

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.

We are subject to the risk of fluctuating interest rates in the normal course of business, primarily as a result of our credit agreement with JPMorgan Chase Bank and investment activities that generally bear interest at variable rates. Because our investments have maturities of three months or less, and our credit facility interest rates are based upon either the LIBOR or base rate plus an applicable margin, we believe that the risk of material loss is low and that the carrying amount of these balances approximates fair value.

For our debt obligation which has a variable interest rate, the rate presented reflects our projected credit facility interest rate of LIBOR plus a margin of 2.0% and the impact of our interest rate hedge on $125.0 million of the outstanding debt balance. As of September 30, 2007, we have variable-rate debt that consists of our term loan balance of $185.5 million and the balance on our revolving credit facility of $23.0 million. Based on our outstanding debt obligations and our interest rate hedge as of September 30, 2007, an increase of 1.0% in interest rates over the next year would increase our annualized interest expense and related cash payments by approximately $2.1 million; a decrease of 1.0% in interest rates over the next year would decrease our annualized interest expense and related cash payments by approximately $2.1 million. Such potential increases or decreases are based on certain simplified assumptions, including minimum quarterly principal repayments made on variable-rate debt for all maturities and an immediate, across-the-board increase or decrease in the level of interest rates with no other subsequent changes for the remainder of the periods.

We are subject to the risk of foreign exchange rate fluctuation in the normal course of business as a result of our operations in the United Kingdom, Europe, Canada and Mexico. As of September 30, 2007, our accumulated gain of $8.5 million included in accumulated other comprehensive income primarily relates to the favorable currency translation of the British Pound Sterling and the Euro. To date, we have not entered into any significant forward contracts or other derivative financial instruments to hedge the effects of adverse fluctuations in foreign currency exchange rates, but will continue to evaluate and consider use of these instruments in the future.

Item 4.

Controls and Procedures

We maintain a set of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Management, with the participation of our chief executive officer and chief financial officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report and has determined that such disclosure controls and procedures are effective.

We also maintain a system of internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act). No changes in our internal control over financial reporting occurred during the quarter ended September 30, 2007, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

In April 2007, we received a request for arbitration filed by ScanCoin AB (“ScanCoin”) before the Arbitration Institute of the Stockholm Chamber of Commerce regarding ownership of intellectual property related to an agreement between Coinstar and ScanCoin dated April 23, 1993. The parties have selected arbitrators, and we advanced partial payment for the arbitration. In August 2007, we received ScanCoin’s statement of claim. ScanCoin seeks a declaration of ownership of over 70 of our patents and patent applications related to our coin-counting machines, as well as monetary damages of approximately $8 million, plus interest. We believe that ScanCoin’s claims against us are without merit and intend to defend ourselves vigorously in this arbitration. In October 2007, we filed a claim in United States District Court for the Northern District of Illinois against ScanCoin North America alleging that it is infringing on a patent we own relating to self-service coin machines.

Item 1A.

Risk Factors

There have been no material changes from risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006, which was filed with the SEC on March 9, 2007.

Item 6.

Exhibits


Exhibit Number		Description of Document

2.5 *		Stock Purchase Agreement dated July 19, 2007 by and among Coinstar E-Payment Services Inc., Jose Francisco Leon, Benjamin Knoll, Martin Barrett, Frank Joseph Lawrence, David Mard and Robert Duran. (1)

3.2		Amended and Restated Bylaws. (2)

31.1		Certification of Chief Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*	Certain exhibits and schedules in connection with the Stock Purchase Agreement have been omitted pursuant to Item 601(b)(2) of Regulation S-K. Coinstar, Inc. agrees to provide the Commission a copy of any such exhibit or schedule upon request.

⁽¹⁾	Incorporated by reference to the Registrant’s Form 8-K filed on July 25, 2007 (File Number 000-22555).

⁽²⁾	Incorporated by reference to the Registrant’s Form 8-K filed on October 19, 2007 (File Number 000-22555).

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.

By:		/s/ BRIAN V. TURNER
		Brian V. Turner
		Chief Financial Officer
		November 8, 2007

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