UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

      (Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 000-22555

 

COINSTAR, INC.

(Exact name of registrant as specified in its charter)

Delaware		94-3156448
(State or other jurisdiction of		(IRS 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 þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

      Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

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

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 July 24, 2009
Common Stock, $0.001 par value		30,498,958

 

 

COINSTAR, INC.

FORM 10-Q
Index

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of June 30, 2009 (unaudited) and December 31, 2008		Page 3
Consolidated Statements of Operations for the six and three month periods ended June 30, 2009 and June 30, 2008 (unaudited)		Page 4
Consolidated Statement of Equity and Comprehensive Income for the six month period ended June 30, 2009 (unaudited)		Page 5
Consolidated Statements of Cash Flows for the six month periods ended June 30, 2009 and June 30, 2008 (unaudited)		Page 6
Notes to Consolidated Financial Statements for the six and three month periods ended June 30, 2009 and June 30, 2008 (unaudited)		Page 7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		Page 18
Item 3. Quantitative and Qualitative Disclosures about Market Risk		Page 28
Item 4. Controls and Procedures		Page 28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings		Page 28
Item 1A. Risk Factors		Page 29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		Page 29
Item 4. Submission of Matters to a Vote of Security Holders		Page 29
Item 6. Exhibits		Page 29
SIGNATURE		Page 31
EX-10.9
EX-10.10
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I. FINANCIAL INFORMATION

Item 1.		Financial Statements

COINSTAR, INC.

CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)

		June 30,				December 31,
		2009				2008
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	58,407			$	66,408
Cash in machine or in transit			48,712				34,583
Cash being processed			81,133				91,044
Accounts receivable, net of allowance for doubtful accounts of $4,029 and $2,702 at June 30, 2009 and December 31, 2008, respectively			60,468				51,908
Inventory			97,438				92,247
Deferred income taxes			7,191				6,881
Prepaid expenses and other current assets			27,407				24,715
Total current assets			380,756				367,786
PROPERTY AND EQUIPMENT, NET			384,912				348,949
DEFERRED INCOME TAXES			41,713				4,338
OTHER ASSETS			12,494				11,865
INTANGIBLE ASSETS, NET			39,038				43,385
GOODWILL			290,300				290,391
TOTAL ASSETS		$	1,149,213			$	1,066,714
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable		$	109,697			$	132,194
Accrued payable to retailers and agents			129,687				132,490
Other accrued liabilities			78,186				87,500
Current portion of long-term debt			6,545				11,655
Current portion of capital lease obligations			19,374				20,264
Total current liabilities			343,489				384,103
LONG-TERM DEBT AND OTHER			459,144				295,942
CAPITAL LEASE OBLIGATIONS			15,641				23,509
DEFERRED TAX LIABILITY			1,750				12,072
TOTAL LIABILITIES			820,024				715,626
EQUITY:
Preferred stock, $0.001 par value—Authorized, 5,000,000 shares; no shares issued and outstanding at June 30, 2009 and December 31, 2008			—				—
Common stock, $0.001 par value—Authorized, 45,000,000 shares; 32,184,942 and 30,181,151 issued and 30,258,861 and 28,255,070 shares outstanding at June 30, 2009 and December 31, 2008, respectively			367,653				369,735
Retained earnings (accumulated deficit)			6,249				(2,672	)
Treasury stock			(40,831	)			(40,831	)
Accumulated other comprehensive loss			(3,882	)			(6,204	)
Total stockholders’ equity			329,189				320,028
Non-controlling interest			—				31,060
Total equity			329,189				351,088
TOTAL LIABILITIES AND EQUITY		$	1,149,213			$	1,066,714

See notes to consolidated financial statements

COINSTAR, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)

		Six Month Periods								Three Month Periods
		Ended June 30,								Ended June 30,
		2009				2008				2009				2008
REVENUE		$	585,123			$	410,422			$	313,968			$	219,903
EXPENSES:
Direct operating (1)			416,179				281,819				224,153				150,509
Marketing			10,849				6,618				5,714				3,815
Research and development			2,556				2,421				1,299				1,175
General and administrative			67,385				45,802				34,087				24,706
Depreciation and other (1)			48,858				35,826				25,713				18,855
Amortization of intangible assets			4,372				4,640				2,191				2,298
Proxy, write-off of acquisition costs, and litigation settlement			—				3,084				—				3,084
Income from operations			34,924				30,212				20,811				15,461
OTHER INCOME (EXPENSE):
Foreign currency (loss) gain and other, net			(63	)			(2,018	)			96				(890	)
Interest income			161				885				47				626
Interest expense			(15,186	)			(10,822	)			(8,647	)			(5,906	)
(Loss) income from equity investments			—				(337	)			—				243
Income before income taxes			19,836				17,920				12,307				9,534
Income tax expense			(7,288	)			(5,097	)			(5,349	)			(2,585	)
NET INCOME			12,548				12,823				6,958				6,949
Less: Net income attributable to non-controlling interests			(3,627	)			(7,442	)			—				(4,269	)
NET INCOME ATTRIBUTABLE TO COINSTAR, INC.		$	8,921			$	5,381			$	6,958			$	2,680
(1) “Direct operating” above excludes depreciation and other of $40.1 million and $21.2 million for the six and three month periods ended June 30, 2009 and $30.2 million and $15.0 million for the six and three month periods ended June 30, 2008, respectively.
EARNINGS PER SHARE:
Basic earnings per share attributable to Coinstar, Inc.		$	0.30			$	0.19			$	0.23			$	0.10
Diluted earnings per share attributable to Coinstar, Inc.		$	0.30			$	0.19			$	0.23			$	0.09
WEIGHTED SHARES OUTSTANDING:
Basic			29,525				27,903				30,117				28,022
Diluted			29,893				28,418				30,575				28,600

See notes to consolidated financial statements

COINSTAR, INC.

CONSOLIDATED STATEMENT OF EQUITY AND COMPREHENSIVE INCOME
Six Month Period Ended June 30, 2009
(in thousands, except share data)
(unaudited)

																		Accumulated
										Retained Earnings								Other
		Common Stock								(Accumulated				Treasury				Comprehensive				Non-controlling								Comprehensive
		Shares				Amount				Deficit)				Stock				Loss				Interest				Total				Income (Loss)
BALANCE, December 31, 2008			28,255,070			$	369,735			$	(2,672	)		$	(40,831	)		$	(6,204	)		$	31,060			$	351,088
Proceeds from exercise of stock options, net			109,265				1,748																				1,748
Stock-based compensation expense			146,624				4,388																349				4,737
Tax benefit on stock-based compensation expense							40																				40
Purchase of non-controlling interest in Redbox, net of $55,778 deferred tax benefit							(56,751	)															(35,036	)			(91,787	)
Share issuance for purchase of Redbox non-controlling interest			1,747,902				48,493																				48,493
Net income											8,921												3,627				12,548			$	12,548
Loss on short-term investments net of tax benefit of $2																			(3	)							(3	)			(3	)
Foreign currency translation adjustments net of tax expense of $153																			1,605								1,605				1,605
Interest rate hedges on long-term debt net of tax expense of $461																			720								720				720
Comprehensive income																															14,870
Less: Comprehensive income attributable to non-controlling interests																															(3,627	)
Total comprehensive income																														$	11,243
BALANCE, June 30, 2009			30,258,861			$	367,653			$	6,249			$	(40,831	)		$	(3,882	)		$	—			$	329,189

See notes to consolidated financial statements

COINSTAR, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

		Six Month Periods
		Ended June 30,
		2009				2008
OPERATING ACTIVITIES:
Net income		$	12,548			$	12,823
Adjustments to reconcile income from operations to net cash provided by operating activities:
Depreciation and other			48,858				35,826
Amortization of intangible assets and deferred financing fees			4,878				4,923
Write-off of acquisition costs			1,262				1,004
Non-cash stock-based compensation			4,737				3,984
Excess tax benefit on share-based awards			(125	)			(531	)
Deferred income taxes			7,871				5,276
Income from equity investments			—				3,449
Other			126				575
Cash (used) provided by changes in operating assets and liabilities, net of effects of business acquisitions:
Accounts receivable			(7,329	)			5,418
Inventory			(5,249	)			(16,308	)
Prepaid expenses and other current assets			(3,196	)			(4,031	)
Other assets			245				(311	)
Accounts payable			(23,825	)			24,494
Accrued payable to retailers and agents			9,816				16,179
Other accrued liabilities			(22,217	)			(31,008	)
Net cash provided by operating activities			28,400				61,762
INVESTING ACTIVITIES:
Purchase of property and equipment			(78,044	)			(72,793	)
Acquisitions, net of cash acquired of $43,621			—				(24,834	)
Proceeds from sale of fixed assets			435				1,898
Net cash used by investing activities			(77,609	)			(95,729	)
FINANCING ACTIVITIES:
Principal payments on capital lease obligations			(13,515	)			(7,948	)
Net borrowings on credit facility			73,000				57,000
Borrowings on term loan			87,500				—
Financing costs associated with revolving line of credit			(3,234	)			—
Cash used to purchase remaining non-controlling interests in Redbox			(102,353	)			—
Excess tax benefit on share-based awards			125				531
Proceeds from exercise of stock options			2,260				8,149
Net cash provided by financing activities			43,783				57,732
Effect of exchange rate changes on cash			1,643				1,953
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS, CASH IN MACHINE OR IN TRANSIT, AND CASH BEING PROCESSED			(3,783	)			25,718
CASH AND CASH EQUIVALENTS, CASH IN MACHINE OR IN TRANSIT, AND CASH BEING PROCESSED:
Beginning of period			192,035				196,592
End of period		$	188,252			$	222,310
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest		$	11,390			$	6,297
Cash paid during the period for income taxes			918				4,963
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Non-cash consideration for purchase of Redbox non-controlling interest		$	59,301			$	—
Purchase of vehicles financed by capital lease obligations			2,029				727
Accrued acquisition costs			—				10,039

See notes to consolidated financial statements

COINSTAR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Six and Three Month Periods Ended June 30, 2009 and 2008
(unaudited)

NOTE 1: ORGANIZATION, BUSINESS, AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Description of company: Incorporated as a Delaware company in 1993, Coinstar, Inc. (the “Company”) is a leading provider of automated retail solutions offering convenient products and services that benefit consumers and drive incremental retail traffic and revenue for its retail partners. The Company’s core offerings in automated retail include its Coin and DVD businesses. The Coin services business consists of self-service coin counting kiosks where consumers can convert their coin to cash, a gift card or an e-certificate, among other options. The DVD services business consists of self-service DVD kiosks where consumers can rent or purchase movies. The Company’s products and services also include money transfer services; and electronic payment (“E-payment”) services such as stored value cards, payroll cards, prepaid debit cards and prepaid wireless products; and entertainment services such as skill-crane machines, bulk vending machines and kiddie rides. The Company’s products and services can currently be found at more than 95,000 points of presence including supermarkets, drug stores, mass merchants, financial institutions, convenience stores, restaurants and money transfer agent locations. As of June 30, 2009, the Company had an approximate total of:

Coin-counting kiosks			18,400	*
Entertainment services machines			142,000
DVD kiosks			17,900
Money transfer services locations			44,000
E-payment point-of-sale terminals			24,000

     Basis of presentation: The unaudited consolidated financial statements of the Company 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. Certain reclassifications have been made to the prior year amounts to conform to the current year presentation.

     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, 2008, filed with the SEC. The results of operations for the six and three month periods ended June 30, 2009, are 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, companies which we have a controlling interest, and other entities in accordance with Financial Accounting Standards Board (“FASB”) Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities (“FIN 46R”). Investments in companies of which we may have significant influence, but not a controlling interest, are accounted for using the equity method of accounting. 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 revenue 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.

Revenue recognition: We recognize revenue as follows:

•

Coin-counting revenue, which is collected from either consumers or card issuers (in stored value card or e-certificate transactions), is recognized at the time the consumers’ coins are counted by our coin-counting kiosks. Cash deposited in kiosks that has not yet been collected is referred to as cash in machine and is reported in our consolidated balance sheet under the caption “Cash in machine or in transit”. Our revenue represents the fee charged for coin-counting;

•

Net revenue from DVD movie rentals is recognized on a ratable basis during the term of a customer’s rental transaction. Revenue from the sale directly out of the kiosk of previously rented movies is recognized at the time of sale. On rental transactions for which the related DVDs have not yet been returned to the kiosk at month-end, revenue is recorded with a corresponding receivable recorded in the balance sheet, net of a reserve for uncollectibility. We record revenue net of refunds and applicable sales taxes collected from customers.

•

Money transfer revenue represents the commissions earned on a money transfer transaction and is recognized at the time the customer completes the transaction;

•

Entertainment revenue is recognized at the time cash is deposited in our machines. Cash deposited in the machines that has not yet been collected is referred to as cash in machine and is estimated at period end and reported on the balance sheet under the caption “Cash in machine or in transit”. This estimate is based on the average daily revenue per machine, multiplied by the number of days since the coin in the machine has been collected. The estimated value of our entertainment services coin-in-machine was approximately $3.6 million and $3.0 million at June 30, 2009 and December 31, 2008, respectively;

•

E-payment revenue is recognized at the point of sale based on our commissions earned, net of retailer fees.

     Interest rate swap: During the first quarter of 2008, we entered into an interest rate swap agreement with Wells Fargo bank for a notional amount of $150.0 million to hedge against the potential impact on earnings from an increase in market interest rates associated with the interest payments on our variable-rate revolving credit facility. In the fourth quarter of 2008 we entered into another interest rate swap agreement with JP Morgan Chase for a notional amount of $75.0 million to hedge against the potential impact on earnings from an increase in market interest rates associated with the interest payments on our variable-rate revolving credit facility. One of our risk management objectives and strategies is to lessen the exposure of variability in cash flow due to the fluctuation of market interest rates and lock in an interest rate for the interest cash outflows on our revolving debt. Under the interest rate swap agreements, we receive or make payments on a monthly basis, based on the differential between a specific interest rate and one-month LIBOR. The interest rate swaps are accounted for as cash flow hedges in accordance with FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”). As of June 30, 2009, the cumulative change in the fair value of the swaps, which was $6.3 million, was recorded in other comprehensive income, net of tax of $2.5 million, with the corresponding adjustment to other accrued liabilities in our consolidated financial statements. We reclassify a corresponding amount from accumulated other comprehensive income to the consolidated statement of operations as the interest payments are made. The estimated losses in accumulated other comprehenive income of approximately $3.9 million are expected to be reclassified into earnings as a component of interest expense over the next twelve months. The net gain or loss included in our consolidated statement of operations representing the amount of hedge ineffectiveness is inconsequential. The term of the $150.0 million swap is through March 20, 2011. The term of the $75.0 million swap is through October 28, 2010. The following table provides information about our interest rate swaps:

						Fair value
						June 30,				December 31,
		Balance sheet location				2009				2008
						(in thousands)
Interest rate swap		Other accrued liabilities				$	6,286			$	7,466

     Fair value: The carrying amounts for cash and cash equivalents, our receivables and our payables approximate fair value, which is the amount for which the instrument could be exchanged in a current transaction between willing parties. The fair values of our revolving line of credit and term loan approximate their carrying amount.

     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. Effective January 1, 2008, we implemented SFAS 157 for our financial assets and liabilities.

     In 2008, we elected to defer implementation of SFAS 157 related to our non-financial assets and non-financial liabilities that are recognized and disclosed at fair value in the financial statements on a non-recurring basis until January 1, 2009. The adoption of SFAS 157 for our non-financial assets and non-financial liabilities did not have a material impact to our consolidated financial statements.

     SFAS No. 157 establishes a hierarchy that prioritizes fair value measurements based on the types of inputs used for the various valuation techniques. The levels of the hierarchy are described below:

•

Level 1: Observable inputs such as quoted prices in active markets for identical assets or liabilities

•

Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; these include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active

•

Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions

     The following table presents our financial assets that have been measured at fair value as of June 30, 2009 and indicates the fair value hierarchy of the valuation inputs utilized to determine such fair value.

		Balance as of June 30, 2009
		Level 1				Level 2				Level 3
Short-term investment		$	1,943				—				—
Interest rate swap liability			—			$	6,286				—

     Recent accounting pronouncements: In December 2007, the FASB issued FASB Statement No. 141 (revised 2007), Business Combinations (“SFAS 141R”). SFAS 141R retains the fundamental requirements of Statement No. 141 to account for all business combinations using the acquisition method (formerly the purchase method) and for an acquiring entity to be identified in all business combinations. However, the new standard requires the acquiring entity in a business combination to recognize all the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose the information needed to evaluate and understand the nature and financial effect of the business combination. SFAS 141R is effective for acquisitions made on or after the first day of annual periods beginning on or after December 15, 2008. The adoption of SFAS 141R resulted in the recognition of $1.3 million in acquisition related expenses in our results of operations for the six months ended June 30, 2009.

     In December 2007, the FASB issued FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements—An Amendment of ARB No. 51 (“SFAS 160”). SFAS 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 is effective for interim and annual periods beginning on or after December 15, 2008. The adoption of SFAS 160 changed our reporting presentation for non-controlling interests and impacted our consolidated financial position, results of operations and cash flows related to the purchase of non-controlling interests in Redbox as described in Note 2.

     In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS 161”). SFAS 161 requires enhanced disclosures about how and why companies use derivatives, how derivative instruments and related hedged items are accounted for and how derivative instruments and related hedged items affect a company’s financial position, financial performance and cash flows. The provisions of SFAS 161 are effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The adoption of SFAS 161 did not have a material impact on our consolidated financial position, results of operations, cash flows or disclosures.

     In May 2009 the FASB issued Statement of Financial Accounting Standards No. 165, Subsequent Events (“SFAS 165”). SFAS 165 addresses accounting and disclosure requirements related to subsequent events. The objective of SFAS 165 is to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued or available to be issued. SFAS 165 sets forth:

1.

The period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements;

2.

The circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and

3.

The disclosures that an entity should make about events or transactions that occurred after the balance sheet date.

     SFAS 165 is effective for interim or annual financial statements ending after June 15, 2009. As SFAS 165 is required to be applied prospectively, the impact of SFAS 165 on our financial statements will be dependent upon the timing of future transactions and application of SFAS 165 on those transactions. Our subsequent event disclosure in Note 7 is in accordance with SFAS 165. We have evaluated subsequent events in accordance with SFAS 165 through August 6, 2009.

     In July 2009 the FASB issued Statement of Financial Accounting Standards No. 168, The Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (“SFAS 168”). SFAS 168 will become the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of SFAS 168, the Codification supersedes all then-existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting literature not included in the Codification will become nonauthoritative. This Statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009.

     Contingency: In April 2007, we received a request for arbitration filed by 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 and we responded with our statement of defense in November 2007. ScanCoin seeks a declaration of ownership of over 70 of our patents and patent applications related to our coin-counting kiosks, as well as monetary damages of approximately 56 million Swedish kronor (estimated to be approximately $7 million at June 30, 2009), plus interest. The arbitration is scheduled for December 2009. 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 kiosks. The case is stayed pending resolution of the arbitration.

NOTE 2: PURCHASE OF NON-CONTROLLING INTERESTS IN REDBOX

     In January 2008, we exercised our option to acquire a majority ownership interest in the voting equity of Redbox and our ownership interest increased from 47.3% to 51.0%. Since our initial investment in Redbox, we have accounted for our 47.3% ownership interest under the equity method in our Consolidated Financial Statements. Effective with the close of the transaction on January 18, 2008, we began consolidating Redbox’s financial results into our Consolidated Financial Statements.

     On February 26, 2009, we closed the transaction announced on February 12, 2009 (the “GAM Transaction”), whereby we agreed under a Purchase and Sale Agreement (the “GAM Purchase Agreement”) with GetAMovie, Inc. (“GAM”) to acquire (i) GAM’s 44.4% voting interests (the “Interests”) in Redbox and (ii) GAM’s right, title and interest in a Term Promissory Note dated May 3, 2007 made by Redbox in favor of GAM in the principal amount of $10.0 million (the “Note”), in exchange for a combination of cash and our common stock, par value $0.001 per share (the “Common Stock”).

     On February 26, 2009, we purchased the Interests and the Note, paying initial consideration to GAM in the form of cash in the amount of $10.0 million and 1.5 million shares of Common Stock. Pursuant to the GAM Purchase Agreement, these shares were valued at $27.7433 each (based on the average of the volume weighted average price per share of Common Stock for each of the eight NASDAQ trading days prior to, but not including, the date of issuance (the “VWAP Price”)). We also will pay deferred consideration to GAM in cash and/or shares of Common Stock at our election and subject to the satisfaction of certain conditions at one or more later dates, with at least 50% of such deferred consideration payable by July 31, 2009 and the remaining 50% payable by October 30, 2009, subject to mandatory prepayment on the occurrence of certain events.

     In addition, on February 26, 2009, the Company purchased the remaining outstanding interests of Redbox from non-controlling interest and non-voting interest holders in Redbox under similar terms to those of the GAM Purchase Agreement, issuing 146,039 unregistered shares of Common Stock and an aggregate of 101,863 shares of Common Stock pursuant to already existing effective registration statements and paying $83,000, as initial consideration. Such parties also are entitled to

receive deferred consideration in cash and/or shares of Common Stock at such date(s) as GAM is paid deferred consideration. Any consideration paid or to be paid in shares of Common Stock to these parties has or will be valued in the same manner as any consideration paid or to be paid in shares of Common Stock to GAM and such shares will either be newly issued, unregistered shares of Common Stock with similar registration rights to those of GAM or newly issued shares of Common Stock for which we already have an existing effective registration statement.

     As of June 30, 2009, the total consideration paid for the Redbox transaction was $150.8 million including cash of $102.3 million and Coinstar common stock of $48.5 million, and the remaining deferred consideration payable balance was $10.8 million. The company has the option to pay off the deferred consideration payable balance before its due date of October 31, 2009. The expected payment will be between $11.2 million and $12.2 million according to the terms of the agreement.

     The purchase of the non-controlling interest in Redbox was a change of our ownership interest in a previously consolidated subsidiary. Such change was accounted for as an equity transaction in accordance with FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements. There was no gain or loss recorded in the consolidated net income or comprehensive income. The difference, approximately $112.5 million, between the fair value of the consideration paid and the amount of the non-controlling interest was recognized as a reduction to equity attributable to us. This difference will be amortized over fifteen years for tax purposes. As a result, we recognized a deferred tax benefit of $43.8 million in equity. In addition, we made an IRS code section 754 election resulting in an additional deferred tax benefit of $11.9 million in equity. After taking these two tax benefits into consideration the difference is $56.8 million, which was recorded in the equity section of our balance sheet.

     Secured credit facility: On April 29, 2009, we modified our credit agreement, dated as of November 20, 2007 and amended as of February 12, 2009 (the “Original Credit Agreement”), by amending and restating the Original Credit Agreement in its entirety (the “Amended and Restated Credit Agreement”). Among other changes, the Amended and Restated Credit Agreement provides for a new two-year $62.5 million term loan (the “Term Facility”), proceeds of which, net of fees and closing costs, have been used to pay a portion of the deferred consideration payable by us in connection with our purchase of the outstanding interests in Redbox on February 26, 2009 (the “Redbox Obligation”). The Amended and Restated Credit Agreement allowed us to, subject to meeting certain conditions, make a single request on or before May 28, 2009 to increase the commitment under the Term Facility by a minimum amount of $10.0 million and up to a maximum amount that would not cause the total commitment under the Term Facility to exceed $100.0 million after giving effect to such increase. Pursuant to this provision, on April 30, 2009 an additional lender increased the commitment under the Term Facility by $25.0 million. A portion of the proceeds of this increase has also been used to pay a portion of the Redbox Obligation. After the increase on April 30, 2009, we are not entitled under the terms of the Amended and Restated Credit Agreement to additional increases under the Term Facility.

     The interest rate applicable to the Term Facility is based upon, at our election, the Eurodollar Rate or the Base Rate, in each case plus an applicable margin that is determined by our consolidated leverage ratio. The applicable margins for the Term Facility are set forth below.

Pricing Level		Consolidated Leverage Ratio		Eurodollar Rate +		Base Rate +
1		£1.50 to 1.00		3.75		2.75
2		>1.50 to 1.00 but £2.00 to 1.00		4.00		3.00
3		>2.00 to 1.00 but £2.50 to 1.00		4.25		3.25
4		>2.50 to 1.00 but £3.00 to 1.00		4.50		3.50
5		>3.00 to 1.00		4.75		3.75

     Interest on the Term Facility is payable quarterly in arrears for amounts bearing interest determined by the Base Rate or the Eurodollar Rate where the interest period exceeds three months. Otherwise, interest on the Term Facility is payable in arrears on the last day of the interest period applicable to the amounts borrowed under the Term Facility. Principal of and accrued interest on the Term Facility is payable on April 29, 2011. We may prepay amounts borrowed under the Term Facility without premium or penalty (other than Eurodollar breakage costs), but amounts prepaid may not be reborrowed.

     The Amended and Restated Credit Agreement does not modify the amount of the $400.0 million revolving credit facility (the “Revolving Facility”) that was provided for in the Original Credit Agreement, provided that the provision of the Original Credit Agreement that allowed us to increase the size of the Revolving Facility by up to $50.0 million (subject to

obtaining commitments from lenders for such increase) was deleted in the Amended and Restated Credit Agreement. The Amended and Restated Credit Agreement did not modify the interest rates or commitment fees that apply to the Revolving Facility. The Term Facility is subject to the same affirmative and negative covenants and events of default that govern the Revolving Facility.

NOTE 3: PROPERTY AND EQUIPMENT

		June 30,				December 31,
		2009				2008
		(in thousands)
Machines		$	679,909			$	608,779
Computers			33,972				32,277
Office furniture and equipment			14,956				13,202
Vehicles			21,783				21,611
Leasehold improvements			3,827				3,715
			754,447				679,584
Accumulated depreciation and amortization			(369,535	)			(330,635	)
		$	384,912			$	348,949

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:

		Six Month Periods								Three Month Periods
		Ended June 30,								Ended June 30,
		2009				2008				2009				2008
Expected term (in years)			3.7				3.7				3.7				3.7
Expected stock price volatility			40	%			35	%			41	%			35	%
Risk-free interest rate			1.5	%			2.5	%			2.1	%			3.1	%
Expected dividend yield			0	%			0	%			0	%			0	%
Estimated fair value per option granted		$	9.27			$	9.54			$	10.29			$	9.80

     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.

		Six Month Periods								Three Month Periods
		Ended June 30,								Ended June 30,
		2009				2008				2009				2008
		(in thousands)								(in thousands)
Stock-based compensation expense		$	4,737			$	3,191			$	1,942			$	1,572
Related deferred tax benefit			1,592				877				748				443

     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 six months ended June 30, 2009:

						Weighted
						average exercise
		Shares				price
		(in thousands)
OUTSTANDING, December 31, 2008			2,689				$25.24
Granted			618				29.22
Exercised			(109	)			20.68
Cancelled, expired or forfeited			(179	)			29.94
OUTSTANDING, June 30, 2009			3,019				25.94
EXERCISABLE, June 30, 2009			1,963				$23.80

     As of June 30, 2009, total unrecognized stock-based compensation expense related to unvested stock options was approximately $7.5 million. This expense is expected to be recognized over a weighted average period of approximately 2.0 years. During the six month period ended June 30, 2009, the total intrinsic value of stock options exercised was approximately $1.1 million. At June 30, 2009, there were 5.1 million shares of unissued common stock reserved for issuance under all the stock plans of which 2.1 million shares were available for future grants.

     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 six months ended June 30, 2009:

						Weighted
						average
						grant date
		Shares				fair value
		(in thousands)
NON-VESTED, December 31, 2008			135			$	30.36
Granted			207				29.20
Vested			(89	)			30.72
Forfeited			(41	)			30.12
NON-VESTED, June 30, 2009			212			$	29.71

     Compensation expense related to our restricted stock awards totaled approximately $2.3 million and $1.1 million for the six and three month periods ended June 30, 2009. Compensation expense related to our restricted stock awards totaled approximately $0.5 million and $0.3 million for the six and three month periods ended June 30, 2008. As of June 30, 2009 total unrecognized stock-based compensation expense related to unvested restricted stock awards was approximately $5.0 million. This expense is expected to be recognized over a weighted average period of approximately 1.8 years. During the six month period ended June 30, 2009, the total fair value of restricted stock awards vested was approximately $2.1 million.

NOTE 5: INCOME PER SHARE

     Basic earnings 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 earnings per share is computed by dividing the net income available to common stockholders 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 certain non-vested restricted stock awards, are included in the calculation of diluted earnings per share to the extent such shares are dilutive.

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

		Six Month Periods								Three Month Periods
		Ended June 30,								Ended June 30,
		2009				2008				2009				2008
		(in thousands)								(in thousands)
Numerator:
Net income attributable to Coinstar, Inc.		$	8,921			$	5,381			$	6,958			$	2,680
Denominator:
Weighted average shares for basic calculation			29,525				27,903				30,117				28,022
Incremental shares from employee stock options and awards			368				515				458				578
Weighted average shares for diluted calculation			29,893				28,418				30,575				28,600

     For the six and three month periods ended June 30, 2009, options and certain restricted stock awards totaling approximately 1.3 million and 1.4 million shares of common stock, respectively, were excluded from the computation of earnings per common share because their impact would be antidilutive. For the six and three month periods ended June 30, 2008, options and restricted stock awards totaling approximately 0.8 million and 0.8 million shares, respectively, of common stock were excluded from the computation of earnings 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, on an interim basis, separately in the financial statements certain financial and descriptive information about segment revenue, income and 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”). In early 2008, we assessed our business segments due to changes in our business and product lines as well as our organizational structure. We redefined our

business segments from North America and International to Coin and Entertainment services, DVD services, Money Transfer services and E-payment services. The following table presents revenue by product lines:

		Six Month Periods								Three Month Periods
		Ended June 30,								Ended June 30,
		2009				2008				2009				2008
		(in thousands)								(in thousands)
Revenue:
Coin and entertainment services:
Coin revenue		$	122,838			$	123,744			$	64,851			$	64,502
Entertainment revenue			64,307				80,057				31,920				35,831
Subtotal			187,145				203,801				96,771				100,333
DVD services			343,622				150,469	*			188,925				89,956	*
Money transfer services			42,085				44,256				22,154				23,786
E-payment services			12,271				11,896				6,118				5,828
Consolidated revenue		$	585,123			$	410,422			$	313,968			$	219,903

     Our operating costs included in our shared service functions, which consist primarily of field operations, sales, finance, legal, human resources, and information technology, are allocated to our four segments. We will continually evaluate the shared service allocations for segment reporting purposes, which may result in changes to segment allocations in future periods. Because our field operations are fully integrated with our Coin and Entertainment services, our CEO allocates resources and evaluates Coin and Entertainment services results, as well as makes decisions, on a combined basis. Therefore, our Coin and Entertainment services are considered one segment for reporting purposes. In addition, our CEO manages our business by evaluating the financial results of the four operating segments, focusing primarily on segment revenue and segment operating income (loss) before depreciation and amortization and stock compensation expense (“segment operating income (loss)”). We utilize segment revenue and segment operating income (loss) because we believe they provide useful information for effectively allocating resources among business segments, evaluating the health of our business segments based on metrics that management can actively influence, and gauging our investments and our ability to service, incur or pay down debt. Specifically, our CEO evaluates segment revenue and segment operating income (loss), and assesses the performance of each business segment based on these measures, as well as, among other things, the prospects of each of the segments and how they fit into the Company’s overall strategy. Our CEO then decides how resources should be allocated among our business segments. Stock-based compensation expense and depreciation and amortization expenses are not allocated to our four operating segments.

     The following table summarizes our income from operations, by segment for the period indicated:

		Six Month Periods								Three Month Periods
		Ended June 30,								Ended June 30,
		2009				2008				2009				2008
		(in thousands)								(in thousands)
Operating income before depreciation/amortization and stock-based compensation:
Coin and entertainment services		$	41,642			$	46,814			$	22,092			$	21,983
DVD services			57,571				32,074				30,954				19,205
Money transfer services			(6,117	)			(5,944	)			(2,309	)			(4,121	)
E-payment services			(205	)			1,798				(80	)			1,469
Subtotal			92,891				74,742				50,657				38,536
Depreciation/amortization and stock-based compensation:
Depreciation, amortization and other			(53,230	)			(40,546	)			(27,904	)			(21,205	)
Stock-based compensation			(4,737	)			(3,984	)			(1,942	)			(1,870	)
Subtotal			(57,967	)			(44,530	)			(29,846	)			(23,075	)
Consolidated income from operations		$	34,924			$	30,212			$	20,811			$	15,461

		June 30,				December 31,
		2009				2008
		(in thousands)				(in thousands)
Total assets:
Coin and entertainment services		$	512,304			$	473,256
DVD services			409,167				378,092
Money transfer services			114,244				105,645
E-payment services			39,253				35,963
Unallocated corporate assets			74,245				73,758
Consolidated assets		$	1,149,213			$	1,066,714

     The following tables represent information by geographic area. North America includes the United States, Canada, Mexico and Puerto Rico and International primarily includes the United Kingdom, Ireland and other European countries in which our money transfer subsidiary, Coinstar Money Transfer, operates.

		Six Month Periods								Three Month Periods
		Ended June 30,								Ended June 30,
		2009				2008				2009				2008
		(in thousands)								(in thousands)
Revenue:
North America		$	553,360			$	376,655			$	296,704			$	202,281
International			31,763				33,767				17,264				17,622
Total revenue		$	585,123			$	410,422			$	313,968			$	219,903
Net income (loss) attributable to Coinstar, Inc.:
North America		$	13,632			$	13,869			$	8,920			$	7,301
International			(4,711	)			(8,488	)			(1,962	)			(4,621	)
Total net income		$	8,921			$	5,381			$	6,958			$	2,680

		June 30,				December 31,
		2009				2008
		(in thousands)
Total assets:
North America		$	1,166,383			$	1,025,362
International			139,419				138,868
Intercompany eliminations			(156,589	)			(97,516	)
Total assets		$	1,149,213			$	1,066,714

     Our Coin and Entertainment, DVD, Money Transfer and E-payment services are primarily located within retailers. The following retailers accounted for 10% or more of our consolidated revenue:

		Six Month Periods								Three Month Periods
		Ended June 30,								Ended June 30,
		2009				2008				2009				2008
Walmart Stores Inc.			22.6	%			16.9	%			22.8	%			16.3	%
McDonalds			9.1	%			10.1	%			8.7	%			11.2	%

NOTE 7: SUBSEQUENT EVENT

Sony license agreement

     On July 17, 2009, Redbox entered into a copy depth license agreement (the “License Agreement”) with SPHE Scan Based Trading Corporation (“Sony”), a subsidiary of Sony Pictures Home Entertainment Inc. Redbox estimates that it will pay Sony approximately $460.0 million during the term of the License Agreement, which is expected to last from July 1, 2009 until September 30, 2014. However, at Sony’s discretion, the License Agreement may expire earlier on September 30,

2011. Coinstar has guaranteed up to $25.0 million of Redbox’s liability under the License Agreement. In addition, Coinstar has granted Sony 193,348 shares of restricted stock that will vest over the term of the License Agreement.

     Under the License Agreement, Redbox agrees to license minimum quantities of theatrical and direct-to-video DVDs for rental in its more than 17,000 DVD-rental kiosks in the United States. The DVDs licensed and purchased from Sony are expected to represent approximately 19.9% percent of the total DVDs licensed and purchased by Redbox for 2009. Under the License Agreement, Redbox should receive delivery of the DVDs by the “street date,” the initial date on which the pictures are distributed on a rental basis to the general public for home entertainment viewing.