Edgar Filing: COINSTAR INC

e10vq

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarter ended September 30, 2008


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 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	Smaller reporting company o
		(Do not check if a smaller reporting company)

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 October 24, 2008
Common Stock, $0.001 par value		28,248,413

COINSTAR, INC.

FORM 10-Q
Index


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements:

Consolidated Balance Sheets as of September 30, 2008 (unaudited) and December 31, 2007		Page 3

Consolidated Statements of Operations for the nine and three month periods ended September 30, 2008 and September 30, 2007 (unaudited)		Page 4

Consolidated Statement of Stockholders’ Equity and Comprehensive Income for the nine month period ended September 30, 2008 (unaudited)		Page 5

Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2008 and September 30, 2007 (unaudited)		Page 6

Notes to Consolidated Financial Statements for the nine and three month periods ended September 30, 2008 and September 30, 2007 (unaudited)		Page 7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		Page 17

Item 3. Quantitative and Qualitative Disclosures about Market Risk		Page 26

Item 4. Controls and Procedures		Page 26

PART II. OTHER INFORMATION

Item 1. Legal Proceedings		Page 26

Item 1A. Risk Factors		Page 26

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		Page 27

Item 6. Exhibits		Page 28

SIGNATURE		Page 29
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)


	September 30,			December 31,
	2008			2007
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	64,362		$	18,497
Cash in machine or in transit		45,506			78,097
Cash being processed		72,883			99,998
Accounts receivable, net of allowance for doubtful accounts of $1,831 and $1,489 at September 30, 2008 and December 31, 2007, respectively		57,435			49,809
Inventory		82,169			33,360
Deferred income taxes		6,724			3,459
Prepaid expenses and other current assets		28,479			18,747

Total current assets		357,558			301,967
PROPERTY AND EQUIPMENT, NET		331,214			146,041
DEFERRED INCOME TAXES		790			16,447
OTHER ASSETS		10,195			15,150
EQUITY INVESTMENTS		—			33,052
INTANGIBLE ASSETS, NET		45,714			34,457
GOODWILL		289,185			221,459

TOTAL ASSETS	$	1,034,656		$	768,573


LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	120,322		$	49,829
Accrued payable to retailers and agents		108,914			99,998
Other accrued liabilities		76,280			40,911
Current portion of long-term debt and capital lease obligations		30,011			6,505

Total current liabilities		335,527			197,243
LONG-TERM DEBT, CAPITAL LEASE OBLIGATIONS AND OTHER		337,103			266,146
DEFERRED TAX LIABILITY		57			54
MINORITY INTEREST		34,915			—

TOTAL LIABILITIES		707,602			463,443

STOCKHOLDERS’ EQUITY:
Preferred stock, $0.001 par value—Authorized, 5,000,000 shares; no shares issued and outstanding at September 30, 2008 and December 31, 2007		—			—
Common stock, $0.001 par value—Authorized, 45,000,000 shares; 30,174,494 and 29,665,125 issued and 28,248,413 and 27,739,044 shares outstanding at September 30, 2008 and December 31, 2007, respectively		369,280			354,509
Accumulated deficit		(6,892	)		(16,784	)
Treasury stock		(40,831	)		(40,831	)
Accumulated other comprehensive income		5,497			8,236

Total stockholders’ equity		327,054			305,130

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,034,656		$	768,573

See notes to consolidated financial statements

COINSTAR, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)


	Nine Month Periods						Three Month Periods
	Ended September 30,						Ended September 30,
	2008			2007			2008			2007
REVENUE	$	650,919		$	412,983		$	240,497		$	143,291
EXPENSES:
Direct operating (1)		453,340			270,930			168,721			86,721
Marketing		13,992			9,890			7,374			5,650
Research and development		3,578			4,083			1,157			1,397
General and administrative		65,762			41,336			22,760			15,685
Depreciation and other (1)		53,572			44,117			17,746			15,100
Amortization of intangible assets		6,911			5,369			2,271			1,813
Proxy, write-off of acquisition costs, and litigation settlement		3,084			—			—			—

Income from operations		50,680			37,258			20,468			16,925
OTHER INCOME (EXPENSE):
Foreign currency (loss) gain and other		(2,727	)		559			(709	)		699
Interest income		1,065			1,497			180			1,109
Interest expense		(16,226	)		(12,464	)		(5,404	)		(4,365	)
(Loss) Income from equity investments		(338	)		861			(1	)		2,217
Minority interest		(10,789	)		—			(3,347	)		—

Income before income taxes		21,665			27,711			11,187			16,585
Income tax expense		(11,773	)		(12,742	)		(6,676	)		(7,520	)

NET INCOME	$	9,892		$	14,969		$	4,511		$	9,065


(1)		“Direct operating” above excludes depreciation and other of $48.3 million and $15.9 million for the nine and three month periods ended September 30, 2008 and $40.8 million and $13.9 million for the nine and three months ended September 30, 2007.


NET INCOME PER SHARE:
Basic	$	0.35	$	0.54	$	0.16	$	0.33
Diluted	$	0.35	$	0.53	$	0.16	$	0.32

WEIGHTED SHARES OUTSTANDING:
Basic		27,992		27,796		28,170		27,846
Diluted		28,507		28,336		28,685		28,405

See notes to consolidated financial statements

COINSTAR, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

Nine Month Period Ended September 30, 2008

(in thousands, except share data)

(unaudited)


												Accumulated
											Other
	Common Stock											Comprehensive						Comprehensive
	Shares		Amount		Accumulated Deficit			Treasury Stock				Income (Loss)			Total			Income (Loss)
BALANCE, December 31, 2007		27,739,044	$	354,509	$	(16,784	)	$	(40,831	)		$	8,236		$	305,130
Proceeds from exercise of stock options, net		418,753		8,547												8,547
Stock-based compensation expense		90,616		4,809												4,809
Tax benefit on share-based compensation				1,415												1,415
Net income						9,892										9,892		$	9,892
Loss on short-term investments net of tax benefit of $16													(25	)		(25	)		(25	)
Foreign currency translation adjustments net of tax benefit of $92													(3,541	)		(3,541	)		(3,541	)
Interest rate hedges on long-term debt net of tax expense of $794													827			827			827

Total comprehensive income																		$	7,153


BALANCE, September 30, 2008		28,248,413	$	369,280	$	(6,892	)	$	(40,831	)		$	5,497		$	327,054

See notes to consolidated financial statements

COINSTAR, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)


	Nine Month Periods
	Ended September 30,
	2008			2007
OPERATING ACTIVITIES:
Net income	$	9,892		$	14,969
Adjustments to reconcile income from operations to net cash provided by operating activities:
Depreciation and other		53,572			44,117
Amortization of intangible assets and deferred financing fees		7,297			5,931
Write-off of acquisition costs		1,004			—
Non-cash stock-based compensation		6,288			4,886
Excess tax benefit on share-based awards		(615	)		(3,921	)
Deferred income taxes		9,231			10,737
Loss (Income) from equity investments		3,449			(1,328	)
Minority interest		10,789			—
Other		834			(388	)
Cash (used) provided by changes in operating assets and liabilities, net of effects of business acquisitions:
Accounts receivable		21,613			(24,343	)
Inventory		(22,505	)		(1,212	)
Prepaid expenses and other current assets		(11,772	)		(5,428	)
Other assets		(593	)		(2,460	)
Accounts payable		41,762			(8,660	)
Accrued payable to retailers and agents		(17,485	)		(2,200	)
Other accrued liabilities		(2,635	)		4,170

Net cash provided by operating activities		110,126			34,870
INVESTING ACTIVITIES:
Purchase of property and equipment		(126,814	)		(64,374	)
Acquisitions, net of cash acquired of $40,277 in 2008		(24,829	)		(81	)
Loan to equity investee		—			(10,000	)
Proceeds from sale of fixed assets		3,235			937

Net cash used by investing activities		(148,408	)		(73,518	)
FINANCING ACTIVITIES:
Principal payments on revolving line of credit and capital lease obligations		(299,759	)		(30,667	)
Additional borrowings on credit facility		317,500			46,500
Excess tax benefit on share-based awards		615			3,921
Repurchase of common stock		—			(3,495	)
Proceeds from exercise of stock options		8,547			3,936

Net cash provided by financing activities		26,903			20,195
Effect of exchange rate changes on cash		(2,462	)		1,435

NET DECREASE IN CASH AND CASH EQUIVALENTS, CASH IN MACHINE OR IN TRANSIT, AND CASH BEING PROCESSED		(13,841	)		(17,018	)
CASH AND CASH EQUIVALENTS, CASH IN MACHINE OR IN TRANSIT, AND CASH BEING PROCESSED:
Beginning of period		196,592			178,164

End of period	$	182,751		$	161,146


SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest	$	9,728		$	11,848
Cash paid during the period for income taxes		5,552			2,297

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Purchase of vehicles financed by capital lease obligations	$	961		$	6,515
Accrued acquisition costs		10,000			41

See notes to consolidated financial statements

COINSTAR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Nine and Three Month Periods Ended September 30, 2008 and 2007
(unaudited)

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

Description of company: Incorporated as a Delaware company in 1993, Coinstar, Inc. (the “Company”) is a multi-national company offering a range of 4th Wall™ solutions for retailers’ storefronts. Our services consist of self-service coin counting, entertainment services such as skill-crane machines, bulk vending machines and kiddie rides, self-service DVD kiosks where consumers can rent or purchase movies, money transfer services, and electronic payment (“E-payment”) services such as stored value cards, payroll cards, prepaid debit cards and prepaid wireless products via point-of-sale terminals and stored value kiosks. Our services, in one form or another, are offered in supermarkets, mass merchandisers, warehouse clubs, drugstores, universities, shopping malls and convenience stores in the United States, Canada, Mexico, Puerto Rico, Ireland, the United Kingdom and other countries. As of September 30, 2008, we had an approximate total of:


Coin-counting machines	17,500	*
Entertainment services machines	150,000
DVD kiosks	11,800
Money transfer services locations	35,000
E-payment point-of-sale terminals	20,800
E-payment enabled coin-counting kiosks	10,900


*		Amount includes 10,900 E-payment coin-counting kiosks.

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.

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, 2007, filed with the SEC. The results of operations for the nine and three month periods ended September 30, 2008, 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 and companies in which we have a controlling interest. Investments in companies of which we have significant influence, but not a controlling interest, are accounted for under equity method accounting. All significant intercompany balances and transactions have been eliminated in consolidation.

In January 2008, we exercised our option to acquire a majority ownership interest in the voting equity of Redbox Automated Retail, LLC (“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 this transaction on January 18, 2008, we began consolidating Redbox’s financial results into our Consolidated Financial Statements.

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.

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 machines. Our revenue represents the fee charged for coin-counting;

	•		DVD revenue is recognized during the term of a customer’s rental transaction;

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

	•		Entertainment revenue is recognized at the time cash is deposited in our machines. Cash deposited in the machines that has not yet been collected is referred to as cash in machine and is estimated at period end and reported on the balance sheet under the caption “Cash in machine or in transit”. This estimate is based on the average daily revenue per machine, multiplied by the number of days since the coin in the machine has been collected. The estimated value of our entertainment services coin-in-machine was approximately $3.8 million and $8.4 million at September 30, 2008 and December 31, 2007, respectively;

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

Interest rate swap: During the first quarter of 2008, we entered into an interest rate swap agreement with Wells Fargo bank for a notional amount of $150 million to hedge against the potential impact on earnings from the 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 agreement, we receive or make payments on a monthly basis, based on the differential between a specific interest rate and one-month LIBOR. This interest rate swap is accounted for as a cash flow hedge in accordance with FAS No. 133, Accounting for Derivative Instruments and Hedging Activities. As of September 30, 2008, the change in the fair value of the swap, which was $1.6 million, was recorded in other comprehensive income, net of tax of $0.8 million, with the corresponding adjustment to other assets 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 net gain or loss included in our consolidated statement of operations representing the amount of hedge ineffectiveness is zero. The term of the swap is through March 20, 2011.

Recent accounting pronouncements: 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 accordance with the provisions of FSP No. FAS 157-2, Effective Date of FASB Statement No. 157, 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 nonrecurring basis until January 1, 2009. We are currently reviewing the provisions of SFAS 157 to determine the impact on our non-financial assets and liabilities that are recognized or disclosed at fair value on a nonrecurring basis.

The adoption of SFAS 157 with respect to financial assets and liabilities did not have a material impact on our financial results for the nine month periods ended September 30, 2008. 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 September 30, 2008 and indicates the fair value hierarchy of the valuation inputs utilized to determine such fair value.


	Balance as of September 30, 2008
	Level 1		Level 2		Level 3
Short-term investment	$	1,742		—		—
Interest rate swap asset		—	$	1,627		—

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. We are currently reviewing the provisions of SFAS 141R to determine the impact to our Consolidated Financial Statements.

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 annual periods beginning on or after December 15, 2008. We are currently reviewing the provisions of SFAS 160 to determine the impact to our Consolidated Financial Statements.

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. We are in the process of determining the impact the adoption of SFAS 161 will have on our financial statement disclosures.

Contingency: 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 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 machines, as well as monetary damages of approximately $8 million, plus interest. The arbitration is scheduled for 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 machines. ScanCoin North America has moved to stay the case pending resolution of the arbitration.

NOTE 2: ACQUISITIONS

Groupex

On January 1, 2008, we acquired GroupEx Financial Corporation, JRJ Express Inc. and Kimeco, LLC (collectively, “GroupEx”), for an aggregate purchase price of $70.0 million. The purchase price included a $60.0 million cash payment (subject to a customary working capital adjustment) at closing. In addition, there is an additional payment of up to $10.0 million should certain performance conditions be met in the fifteen months following the closing. As of September 30, 2008, we believe this payout is probable as the performance conditions have been met. Further, we incurred an estimated $2.1 million in transaction costs, including legal, accounting, and other directly related charges. The total purchase price, net of cash acquired, was $45.3 million. The results of operations of GroupEx from January 1, 2008 are included in Coinstar’s Consolidated Statement of Operations.

The acquisition was recorded under the purchase method of accounting and the purchase price was allocated based on the fair value of the assets acquired and the liabilities assumed.

The total purchase price consideration consists of the following:


	(in thousands)
Cash paid for acquisition of GroupEx	$	60,000
Estimated additional payout		10,000
Estimated acquisition related costs		2,100

	$	72,100

The total purchase consideration has been allocated to the assets acquired and liabilities assumed, including identifiable intangible assets, based on their respective fair values at the acquisition date. The accounting for the purchase price allocation is preliminary and is subject to possible adjustments in the future, based on our final analysis of certain liabilities. The following unaudited condensed balance sheet data presents the preliminary determination of the fair value of the assets acquired and liabilities assumed.


	(in thousands)
Assets acquired:
Cash and cash equivalents	$	26,807
Trade accounts receivable		13,531
Prepaid expenses and other assets		2,053
Property and equipment		4,015
Intangible assets		15,300
Goodwill		55,730

		117,436

Liabilities assumed:
Accounts payable and accrued liabilities		45,336

	$	72,100

Goodwill of $55.7 million, representing the excess of the purchase price paid over the fair value of the tangible and identifiable intangible assets acquired, will not be amortized, consistent with the guidance in FASB Statement No. 142, Goodwill and Other Intangible Assets. An election pursuant to Internal Revenue Code Section 338(h)(10) is being made for tax purposes so the entire amount of intangibles and goodwill will be amortized and deducted over 15 years. Included in the liabilities assumed, is an estimated additional payment of $10.0 million which represents our best estimate that certain performance conditions as defined in the agreement, would be met in the fifteen months following the closing. As of September 30, 2008, we believe the estimated payout is probable as the performance conditions have been met and the payment will be made in 2009.

We used forecasted future cash flows to estimate the fair value of the acquired intangible assets and a portion of the purchase price was allocated to the following identifiable intangible assets:


			Estimated
	Fair value		Useful Lives
	(in thousands)		(in years)
Intangible assets:
Internal use software	$	1,600		5
Agent relationships		12,300		10
Trademark		1,400		3

Total	$	15,300

Amortization expense for the nine months ended September 30, 2008, relating to this acquisition was approximately $1.5 million. Based on identified intangible assets recorded as of September 30, 2008, and assuming no subsequent impairment of the underlying assets, the estimated aggregate amortization expense will be as follows:


	(in thousands)
2008	$	2,017
2009		2,017
2010		2,017
2011		1,550
2012		1,550
Thereafter		6,149

	$	15,300

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 this transaction on January 18, 2008, we began consolidating Redbox’s financial results into our Consolidated Financial Statements.

The total purchase price consideration consists of the following:


	(in thousands)
Cash paid for the initial Redbox investment of 47.3% ownership in December 2005	$	32,000
Cash paid for the additional investment of 3.7% ownership in January 2008		5,106
Estimated acquisition related costs		392
Equity investment (loss) from December 2005 to January 2008		(3,689	)

Total investment in Redbox at the acquisition date	$	33,809

The acquisition was recorded under the purchase method of accounting and the purchase price was allocated based on the fair value of the assets acquired and the liabilities assumed to the extent of the 51% ownership interest acquired as of the various dates the payments were made under step acquisition accounting. The remaining 49% portion of net assets represents the minority interest ownership in Redbox. The following unaudited condensed balance sheet presents assets and liabilities of Redbox, consolidated on January 18, 2008, resulting from our step acquisitions of Redbox.


	(in thousands)
Assets acquired:
Cash and cash equivalents	$	13,470
Trade accounts receivable		10,175
Inventory		27,072
Prepaid expenses and other assets		7,142
Property and equipment		100,691
Intangible assets		1,905
Goodwill		11,898

		172,353

Liabilities assumed:
Accounts payable and accrued liabilities		112,521
Deferred tax liability		2,101
Minority interest		23,922

Total investment in Redbox	$	33,809

The calculation and recognition of goodwill is consistent with the step acquisition guidance in FASB Statement No. 141, Business Combination and ARB No. 51, Consolidated Financial Statements. Goodwill of $11.9 million represents primarily the excess of purchase paid over the fair of value of the tangible and identifiable intangible assets acquired, and is not amortized. The goodwill of $2.5 million recognized as a result of the additional ownership of 3.7% is expected to be deductible for tax purposes.

We used forecasted future cash flows to estimate the fair value of Redbox intangible assets. Intangible assets of $1.9 million represent the internal-use software and customer relations acquired when payments were made under step acquisition accounting and are amortized over 5 years. The amortization expense for the nine months ended September 30, 2008 was approximately $0.3 million. Based on intangible assets recorded as of September 30, 2008, and assuming no subsequent impairment of the underlying assets, the annual estimated amortization expense will be as follows:


	(in thousands)
2008	$	489
2009		496
2010		415
2011		192
2012		192
Thereafter		121

	$	1,905

The following unaudited pro forma information represents the results of operations for Coinstar, Inc. inclusive of Redbox for the nine and three month periods ended September 30, 2008 and 2007, as if the acquisition had been consummated as of January 1, 2008 and January 1, 2007. Such pro forma information is not provided for our Groupex acquisition as the impact to our consolidated financial statements is not material. This pro forma information does not purport to be indicative of what may occur in the future:


	Nine Month Periods				Three Month Periods
	Ended September 30,				Ended September 30,
	2008		2007		2008		2007
	(in thousands)				(in thousands)
Revenue	$	661,929	$	497,166	$	240,497	$	180,944
Net income	$	9,903	$	14,906	$	4,511	$	9,032
Net income per share
Basic	$	0.35	$	0.54	$	0.16	$	0.32
Diluted	$	0.35	$	0.53	$	0.16	$	0.32

Shares:
Basic		27,992		27,796		28,170		27,846
Diluted		28,507		28,336		28,685		28,405

NOTE 3: PROPERTY AND EQUIPMENT


	September 30,			December 31,
	2008			2007
	(in thousands)
Machines	$	603,588		$	364,564
Computers		29,242			15,238
Office furniture and equipment		12,849			10,119
Vehicles		22,011			24,655
Leasehold improvements		3,054			2,548

		670,744			417,124
Accumulated depreciation and amortization		(339,530	)		(271,083	)

	$	331,214		$	146,041

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						Three Month Periods
	Ended September 30,						Ended September 30,
	2008			2007			2008			2007
Expected term (in years)		3.7			3.7			3.7			3.7
Expected stock price volatility		35	%		41	%		35	%		35	%
Risk-free interest rate		2.5	%		4.5	%		2.6	%		4.1	%
Expected dividend yield		0	%		0	%		0	%		0	%
Estimated fair value per option granted	$	9.66		$	11.09		$	10.08		$	10.39

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 and award expense, which excludes stock-based compensation for Redbox in the amount of $1.5 million and $0.7 million for the nine and three months ended September 30, 2008, respectively, during the periods indicated:


	Nine Month Periods				Three Month Periods
	Ended September 30,				Ended September 30,
	2008		2007		2008		2007
	(in thousands)				(in thousands)
Stock-based compensation expense	$	4,809	$	4,886	$	1,618	$	1,607
Related deferred tax benefit		1,362		1,303		485		448

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, 2008 (shares in thousands):


				Weighted
				average exercise
	Shares			price

OUTSTANDING, December 31, 2007		2,668		$	23.07
Granted		525			32.34
Exercised		(433	)		20.31
Cancelled, expired or forfeited		(56	)		27.31

OUTSTANDING, September 30, 2008		2,704			25.22


EXERCISABLE, September 30, 2008		1,648			22.31

As of September 30, 2008, total unrecognized stock-based compensation expense related to unvested stock options was approximately $7.3 million. This expense is expected to be recognized over a weighted average period of approximately 1.8 years. During the nine month period ended September 30, 2008, the total intrinsic value of stock options exercised was approximately $5.8 million. At September 30, 2008, there were 4.8 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 nine months ended September 30, 2008 (shares in thousands):


				Weighted
				average
				grant date
	Shares			fair value

NON-VESTED, December 31, 2007		105		$	28.25
Granted		91			33.67
Vested		(46	)		29.73
Forfeited		(6	)		32.37

NON-VESTED, September 30, 2008		144			31.01

Compensation expense related to our restricted stock awards totaled approximately $1.6 million and $0.6 million for the nine and three month periods ended September 30, 2008, respectively. Compensation expense related to our restricted stock awards totaled approximately $0.9 million and $0.4 million for the nine and three month periods ended September 30, 2007, respectively. As of September 30, 2008 total unrecognized stock-based compensation expense related to unvested restricted stock awards was approximately $3.1 million. This expense is expected to be recognized over a weighted average period of approximately 1.6 years. During the nine month period ended September 30, 2008, the total fair value of restricted stock awards vested was approximately $1.3 million.

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				Three Month Periods
	Ended September 30,				Ended September 30,
	2008		2007		2008		2007
	(in thousands)				(in thousands)
Numerator:
Net income	$	9,892	$	14,969	$	4,511	$	9,065

Denominator:
Weighted average shares for basic calculation		27,992		27,796		28,170		27,846
Incremental shares from employee stock options and awards		515		540		515		559

Weighted average shares for diluted calculation		28,507		28,336		28,685		28,405

For the nine and three month periods ended September 30, 2008, options and restricted stock awards totaling approximately 0.9 million and 0.9 million, respectively, shares of common stock 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, 2007, options and restricted stock awards totaling approximately 0.8 million and 0.7 million, respectively, shares of common stock 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, on an interim basis, separately in the financial statements certain financial and descriptive information about segment revenues, 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”). We are currently organized into four reportable business segments: Coin and Entertainment services, E-payment services, Money transfer services and DVD services. Prior to January 1, 2008 we were organized into two reportable business segments: the North American business (which included the United States, Canada, Mexico and Puerto Rico) and the International business (which primarily included the United Kingdom as well as other European operations of our Constar Money Transfer subsidiary).

The following table summarizes our revenue by segment for the periods indicated:


	Nine Month Periods				Three Month Periods
	Ended September 30,				Ended September 30,
	2008		2007		2008		2007
	(in thousands)				(in thousands)
Revenue:
Coin and entertainment services:
Coin revenue	$	194,771	$	184,607	$	71,027	$	67,400
Entertainment revenue		117,102		188,494		37,046		62,432

Subtotal		311,873		373,101		108,073		129,832

DVD services		254,661		7,315		104,192		1,649
Money transfer services		66,273		16,729		22,016		6,239
E-payment services		18,112		15,838		6,216		5,571

Consolidated revenue	$	650,919	$	412,983	$	240,497	$	143,291

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 strategic decisions, on a combined basis. Therefore, our Coin and Entertainment services are one segment for reporting purposes. In addition, our CEO focuses on the segment profitability before depreciation and amortization when evaluating our segment performance. Stock-based compensation expense and depreciation and amortization expenses are not allocated to our four segments. As we changed our internal organization structure during the first quarter of 2008, resulting in the change of reportable segments, we did not restate the prior period under the new basis because it was not practical to do so.

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


	Nine Month Period			Three Month Period
	Ended September 30,			Ended September 30,
	2008			2008
	(in thousands)
Operating income before depreciation/amortization and unallocated expenses:
Coin and entertainment services	$	74,017		$	27,203
DVD services		50,070			17,996
Money transfer services		(8,141	)		(2,197	)
E-payment services		1,584			(214	)

Subtotal		117,530			42,788

Depreciation/amortization and unallocated corporate expenses:
Depreciation, amortization and other		(60,562	)		(20,017	)
Unallocated expense — stock-based compensation		(6,288	)		(2,303	)

Subtotal		(66,850	)		(22,320	)

Consolidated income from operations	$	50,680		$	20,468


	September 30,
	2008
	(in thousands)
Total assets:
Coin and entertainment services	$	480,646
DVD services		252,879
Money transfer services		186,563
E-payment services		40,728
Unallocated corporate assets		73,840

Consolidated assets	$	1,034,656

The unallocated corporate assets are primarily cash and cash equivalents.

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.


	Nine Month Periods						Three Month Periods
	Ended September 30,						Ended September 30,
	2008			2007			2008			2007
	(in thousands)						(in thousands)
Revenue:
North America	$	599,354		$	372,624		$	222,749		$	128,140
International		51,565			40,359			17,748			15,151

Total revenue	$	650,919		$	412,983		$	240,497		$	143,291


Net income (loss):
North America	$	21,181		$	22,900		$	9,970		$	12,226
International		(11,289	)		(7,931	)		(5,459	)		(3,161	)

Total net income	$	9,892		$	14,969		$	4,511		$	9,065


	September 30,			December 31,
	2008			2007
	(in thousands)
Total assets:
North America	$	998,356		$	726,098
International		133,344			129,092
Intercompany eliminations		(97,044	)		(86,617	)

Total assets	$	1,034,656		$	768,573

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 revenues:


	Nine Month Periods						Three Month Periods
	Ended September 30,						Ended September 30,
	2008			2007			2008			2007
Wal-Mart Stores Inc.		17.6	%		25.5	%		18.7	%		24.2	%
McDonalds		10.0	%		—			10.0	%		—
The Kroger Company		7.9	%		11.4	%		7.5	%		11.0	%

NOTE 7: RELATED PARTY AND OTHER TRANSACTIONS

During the second quarter of 2008, we entered into a settlement agreement with Incomm Holding, Inc. and certain of its affiliates (“Incomm”). As a result, we and Incomm have agreed to dissolve a related party of our E-payment subsidiary of which we own 49%. A previous liability owed to the related party was relieved. The net settlement, after attorney fees, was approximately $2.0 million of income.

In the second quarter of 2008 we settled the proxy contest which resulted in one additional member to our Board of Directors, and one additional independent director to be added by March 1, 2009. Expenses related to this proxy contest, including the solicitation of stockholders, were approximately $4.1 million. We also incurred expenses associated with the write-off of in-process acquisition expenses of $1.0 million for due diligence and professional service costs in connection with acquisitions that were being considered in the past and for which discussions have now been terminated.

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

The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and related Notes included elsewhere in this Quarterly Report on Form 10-Q. Except for the consolidated historical information, the following discussion contains forward-looking statements that involve risks and uncertainties, such as our objectives, expectations and intentions. Our actual results could differ materially from results that may be anticipated by such forward-looking statements and discussed elsewhere herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and those discussed under “Risk Factors” in Item IA of Part II of this Quarterly Report on Form 10-Q and in Item IA of Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2007. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We undertake no obligation to revise any forward-looking statements in order to reflect events or circumstances that may subsequently arise. Readers are urged to carefully review and consider the various disclosures made in this report and in our other reports filed with the SEC that attempt to advise interested parties of the risks and factors that may affect our business, prospects and results of operations.

Overview

We are a multi-national company offering a range of 4^th Wall solutions for retailers’ storefronts. Our services consists of self-service coin counting, entertainment services such as skill-crane machines, bulk vending machines and kiddie rides, self-service DVD kiosks where consumers can rent or purchase movies, money transfer services, and electronic payment (“E-payment”) services such as stored value cards, payroll cards, prepaid debit cards and prepaid wireless products via point-of-sale terminals and stored value kiosks. Our services, in one form or another, are offered in supermarkets, mass merchandisers, warehouse clubs, drugstores, universities, shopping malls and convenience stores in the United States, Canada, Mexico, Puerto Rico, Ireland, the United Kingdom and other countries.

Coin and entertainment services

We are the leader in the self-service coin-counting services market and are the leading owner and operator of skill-crane and bulk vending machines in the United States. We own and operate the only multi-national fully automated network of self-service coin-counting machines across the United States, Canada, Puerto Rico, Ireland 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 2007, consumers processed more than $2.9 billion worth of coin through our coin-counting machines.

We own and service all of our coin-counting and entertainment services machines, providing a convenient and trouble free service to retailers. Coin-counting revenues are generated through transaction fees from our customers and business partners. 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. When consumers elect to have a stored value card or e-certificate issued, the transaction fee normally charged to the consumer is charged instead to the card issuers for the coin-counting services.

Since inception, our coin-counting machines have counted and processed more than 381 billion coins worth more than $20.8 billion in more than 563 million self-service coin-counting transactions. We own and operate more than 17,500 coin-counting machines in the United States, Canada, Puerto Rico, Ireland and the United Kingdom (approximately 10,900 of which are E-payment enabled).

Our entertainment services machines consist primarily of skill-crane machines, bulk vending and kiddie rides, which are installed in more than 17,000 retail locations, totaling more than 150,000 pieces of equipment. We generate revenue from money deposited in our machines that dispense plush toys, novelties and other items.

DVD services

Through our acquisition of DVDXpress and our majority ownership interest in Redbox, we offer self-service DVD rentals through 11,800 kiosks where consumers can rent or purchase movies. Our DVD kiosks supply all the functionality of a traditional video rental store, yet occupy an area of less than ten square feet. Consumers use a touch screen to select their DVD, swipe a valid credit or debit card, and go. The process is designed to be fast, efficient and fully automated with no upfront or membership fees. Typically, the DVD rental price is a flat fee plus tax for one night and if the consumer chooses to keep the DVD for additional nights, they are automatically charged for the fee. Our DVD kiosks are available in all states in the continental United States, Puerto Rico and the United Kingdom and offer our consumers with a more convenient home entertainment solution. We generate revenue primarily through fees charged to rent or purchase a DVD, and pay our retail partners a percentage of our revenues.

Money transfer services

Through our acquisitions of Coinstar Money Transfer (“CMT”) and GroupEx Financial Corporation, JRJ Express Inc. and Kimeco, LLC (collectively, “GroupEx”) we offer money transfer services primarily in the United Kingdom, European countries, North America, and Central America. Our money transfer services provide an easy to use, reliable and cost effective way to send money around the world; it has become one of the leading independent providers of electronic money transfer services, with over 35,000 locations and operations in over 140 countries worldwide. Our services are specially suited for individuals away from home who need to send money to their family and friends or to manage their personal finances.

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 and providing payroll card 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 20,800 point-of-sale terminals, 400 stand-alone E-payment kiosks and 10,900 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.

In addition, we expect to continue devoting significant resources to building our sales organization in connection with our 4^th Wall cross-selling strategy, adding administrative and compliance 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.

Results of Operations — Nine and Three Month Periods Ended September 30, 2008 and 2007

Revenue


	Nine Month Periods Ended September 30,										Three Month Periods Ended September 30,
(In millions, except percentages)	2008		2007		$ Chng			% Chng			2008		2007		$ Chng			% Chng

Coin revenues	$	194.8	$	184.6	$	10.2			5.5	%	$	71.0	$	67.4	$	3.6			5.3	%
Entertainment revenues		117.1		188.5		(71.4	)		-37.9	%		37.1		62.4		(25.3	)		-40.5	%
DVD revenues		254.6		7.3		247.3			3387.7	%		104.2		1.6		102.6			6412.5	%
Money transfer revenues		66.3		16.7		49.6			297.0	%		22.0		6.2		15.8			254.8	%
E-payment revenues		18.1		15.9		2.2			13.8	%		6.2		5.7		0.5			8.8	%

Total Revenue	$	650.9	$	413.0	$	237.9			57.6	%	$	240.5	$	143.3	$	97.2			67.8	%

Our coin revenues increased in the nine and three month periods ended September 30, 2008 compared to the nine and three month periods ended September 30, 2007 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. New installations were strong for the third quarter of 2008 with over 1,000 placements. Same store sales were 1.8% negative for the third quarter of 2008, partly due to the large number of installations over the past 12 months, resulting in a slight cannibalization effect on same store sales. The remainder of negative comparative sales was due to macro-factors which has resulted in less coin generated under current economic conditions.

The total dollar value of coins processed through our network for the nine and three month periods ended September 30, 2008 was approximately $2.2 billion and $806 million, compared to $2.1 billion and $767 million, respectively, for the nine and three month period ended September 30, 2007. The installed base of coin-counting machines increased to approximately 17,500 at September 30, 2008, from approximately 14,500 at September 30, 2007.

Our entertainment revenues decreased for the nine and three month period ended September 30, 2008 compared to the nine and three month period ended September 30, 2007 primarily as a result of a reduced number of machines installed in Walmart locations, our decision to resign certain lower performing accounts during 2008, decreased foot traffic at our retailers’ locations, softness of the economy, increased fuel prices, 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. The installed base of entertainment machines decreased to approximately 150,000 at September 30, 2008, from approximately 289,000 at September 30, 2007 primarily due to our agreement with Wal-Mart to significantly expand our installed coin-counting and DVD machines while reducing our installed entertainment machines. In addition, we are also reducing our installed base as a result of strategic decisions to resign from certain lower performing accounts.

Our DVD revenues increased in the nine and three month period ended September 30, 2008 compared to the nine and three month period ended September 30, 2007 primarily as a result of our increased ownership percentage of Redbox, which, as a result required the consolidation of Redbox’s results from the effective date of January 18, 2008. Revenue for Redbox for the period from January 18 to September 30, 2008 was $245.6 million and $100.9 million for the third quarter of 2008. In the first nine months and the third quarter of 2008, we had approximately 4,800 and 2,200 net installs, respectively. We significantly increased our Walmart installs during the third quarter of 2008. In addition, solid unit economics and the counter-cyclical nature of DVD rentals to the economy contributed a better than expected performance. These factors were partially offset by a subpar movie slate during the summer months.

Our Money transfer revenues increased in the nine and three month periods ended September 30, 2008 compared to the nine and three month periods ended September 30, 2007 primarily as a result of the acquisition of GroupEx effective January 1, 2008, an increase in the number of money transfer transactions, and an increase in the average amount per transaction. Revenues for GroupEx for the nine and three month period ended September 30, 2008 was $41.3 million and $13.7 million, respectively.

Our E-payment revenues increased in the nine and three month periods ended September 30, 2008 compared to the nine and three month periods ended September 30, 2007 as a result of an increase in the amount of transactions and the number of locations offering our E-payment services from the prior year periods.

Direct Operating Expenses

Our direct operating expenses consist primarily 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, (4) field operations support and (5) amortization of our DVD inventory. 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 Month Periods Ended September 30,											Three Month Periods Ended September 30,
(In millions, except percentages)	2008			2007			$ Chng		% Chng			2008			2007			$ Chng		% Chng

Direct operating expenses	$	453.3		$	270.9		$	182.4		67.3	%	$	168.7		$	86.7		$	82.0		94.6	%
as a % of Total Revenue		69.6	%		65.6	%							70.1	%		60.5	%

Direct operating expenses increased in the nine and three month periods ended September 30, 2008 compared to the nine and three month periods ended September 30, 2007 primarily as a result of the consolidation of Redbox’s results, which runs at a higher direct operating costs percentage than our historical business, our acquisition of GroupEx in January, increased freight and handling costs and increased transportation costs due to rising fuel prices. The increase in direct operating expenses for DVD and Money Transfer were $171.9 million and $42.7 million, respectively, for the nine month period ended September 30, 2008, and $73.8 million and $13.8 million for the three month period ended September 30, 2008. Additionally, in the third quarter of 2007 we recorded an excise tax 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. These increases were offset by the decrease from our Coin and Entertainment direct operating expenses in the amount of $46.2 million and $18.2 million for the nine and three month periods ended September 30, 2008. This decrease was primarily related to our agreement with Wal-Mart to significantly expand our installed coin-counting and DVD machines while reducing our installed entertainment machines. The remaining increase was from our E-payment services due to the increase in revenues as the majority of E-payment expenses are variable in nature.

Marketing

Our marketing expenses represent our cost of advertising, marketing and public relation efforts in national and regional advertising and the major international markets in which we operate our Money transfer services. For example, 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 through 2008, continues driving increased trial and repeat use of both our coin services offerings and e-payment products.


	Nine Month Periods Ended September 30,											Three Month Periods Ended September 30,
(In millions, except percentages)	2008			2007			$ Chng		% Chng			2008			2007			$ Chng		% Chng

Marketing	$	14.0		$	9.9		$	4.1		41.4	%	$	7.4		$	5.7		$	1.7		29.8	%
as a % of Total Revenue		2.2	%		2.4	%							3.1	%		4.0	%

Marketing expenses increased in the nine and three month period ended September 30, 2008 compared to the nine and three month periods ended September 30, 2007 primarily as a result of the consolidation of Redbox’s results, and our acquisition of GroupEx in January 2008. The increase in marketing expenses for DVD and Money Transfer were $4.2 million and $0.8 million, respectively, for the nine month period ended September 30, 2008, and $2.3 million and $0.3 million for the three month period ended September 30, 2008. The increases were slightly offset primarily due to a reduction in television ad spending in our Coin and entertainment services.

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. Research and development expenses represent expenditures to support development and design of our complementary new product ideas and to continue our ongoing efforts to enhance our existing products and services, primarily our coin-counting system.


	Nine Month Periods Ended September 30,												Three Month Periods Ended September 30,
(In millions, except percentages)	2008			2007			$ Chng			% Chng			2008			2007			$ Chng			% Chng

Research and development	$	3.6		$	4.1		$	(0.5	)		-12.2	%	$	1.2		$	1.4		$	(0.2	)		-14.3	%
as a % of Total Revenue		0.6	%		1.0	%								0.5	%		1.0	%

Research and development expenses have remained relatively consistent for the nine and three month periods ended September 30, 2008 and September 30, 2007. We intend to continue to invest at these levels 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 Month Periods Ended September 30,											Three Month Periods Ended September 30,
(In millions, except percentages)	2008			2007			$ Chng		% Chng			2008			2007			$ Chng		% Chng

General and administrative	$	65.8		$	41.3		$	24.5		59.3	%	$	22.8		$	15.7		$	7.1		45.2	%
as a % of Total Revenue		10.1	%		10.0	%							9.5	%		11.0	%

General and administrative expenses increased in the nine and three month periods ended September 30, 2008 compared to the nine and three month periods ended September 30, 2007 as a result of the consolidation of Redbox’s results and our acquisition of GroupEx in January 2008. General and administrative expenses increased for DVD and Money Transfer by $22.5 million and $2.4 million, respectively, for the nine month period ended September 30, 2008, and $8.9 million and $0.1 million for the three month period ended September 30, 2008. As a percentage of revenue, general and administrative expenses decreased during the third quarter of 2008. This decrease is attributable to the leverage in the DVD business and cost containment measures across other business lines. The decrease was partially offset by higher general and administrative expenses in the money transfer business due to anti-money laundering and regulatory compliance costs as the money transfer business has grown.

Proxy, write-off of acquisition costs, and litigation settlement

During the second quarter of 2008 there were unique events resulting in expenses for a proxy contest and the write-off of acquisition costs as well as income from the litigation settlement agreement with InComm Holding Inc.


	Nine Month Periods Ended September 30,											Three Month Periods Ended September 30,
(In millions, except percentages)	2008			2007			$ Chng		% Chng			2008			2007			$ Chng		% Chng

Proxy, write-off of acquisition costs, and litigation settlement	$	3.1		$	—		$	3.1		100.0	%	$	—		$	—		$	—		0.0	%
as a % of Total Revenue		0.5	%		0.0	%							0.0	%		0.0	%

Proxy, write-off acquisition costs, and litigation settlement expenses totaled $3.1 million combined for the first nine months of 2008:

	•		We settled the proxy contest which resulted in one additional member to our Board of Directors and one additional independent director to be added by March 1, 2009. Expenses related to this proxy contest, including the solicitation of stockholders, were approximately $4.1 million.

	•		We incurred expenses associated with the write-off of in-process acquisition expenses of $1.0 million for due diligence and professional service costs in connection with acquisitions that were being considered in the past and discussions have now been terminated.

	•		We entered into a settlement agreement with Incomm Holding, Inc. and certain of its affiliates (“Incomm”). As a result, we and Incomm have agreed to dissolve a related party of our E-payment subsidiary of which we own 49%. A previous liability owed to the related party was relieved. The net settlement, after attorney fees, was approximately $2.0 million of income.

Depreciation and Other

Our depreciation and other expenses consist primarily of depreciation charges on our installed service machines as well as on computer equipment and leased automobiles.


	Nine Month Periods Ended September 30,											Three Month Periods Ended September 30,
(In millions, except percentages)	2008			2007			$ Chng		% Chng			2008			2007			$ Chng		% Chng

Depreciation and other	$	53.6		$	44.1		$	9.5		21.5	%	$	17.7		$	15.1		$	2.6		17.2	%
as a % of Total Revenue		8.2	%		10.7	%							7.4	%		10.5	%

Depreciation and other expenses increased in the nine and three month periods ended September 30, 2008 compared to the nine and three month periods ended September 30, 2007 primarily as a result of the consolidation of Redbox’s results and our acquisition of GroupEx in January 2008. Depreciation and other expenses for Redbox were $18.3 million and $7.4 million for the nine and three month periods ended September 30, 2008, respectively. Depreciation and other expenses for GroupEx were $0.6 million and $0.2 million, respectively, for the nine and three month periods ended September 30, 2008, respectively. The increase of depreciation and other expenses from the acquisitions were offset by the decrease in our Coin and Entertainment services in the amount of $11.1 million and $5.5 million for the nine and three month periods, primarily due to the write-off of fixed assets in connection with our asset impairment charge in the fourth quarter of 2007. The remaining increases were from our E-payment services and Money Transfer service due to the increase in installed base of the machines.

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 Month Periods Ended September 30,											Three Month Periods Ended September 30,
(In millions, except percentages)	2008			2007			$ Chng		% Chng			2008			2007			$ Chng		% Chng

Amortization of intangible assets	$	6.9		$	5.4		$	1.5		27.8	%	$	2.3		$	1.8		$	0.5		27.8	%
as a % of Total Revenue		1.1	%		1.3	%							1.0	%		1.3	%

Amortization expense increased in the nine and three month periods ended September 30, 2008 compared to the nine and three month periods ended September 30, 2007 primarily as a result of intangible assets derived from our acquisitions.

Other Income and Expense


	Nine Month Periods Ended September 30,												Three Month Periods Ended September 30,
(In millions, except percentages)	2008			2007			$ Chng			% Chng			2008			2007			$ Chng			% Chng

Foreign currency (loss) gain and other	$	(2.7	)	$	0.6		$	(3.3	)		-550.0	%	$	(0.7	)	$	0.7		$	(1.4	)		-200.0	%
Interest income	$	1.1		$	1.5		$	(0.4	)		-26.7	%	$	0.2		$	1.1		$	(0.9	)		-81.8	%
Interest expense	$	(16.2	)	$	(12.5	)	$	(3.7	)		29.6	%	$	(5.4	)	$	(4.4	)	$	(1.0	)		22.7	%
Loss (Income) from equity investments	$	(0.3	)	$	0.9		$	(1.2	)		-133.3	%	$	—		$	2.2		$	(2.2	)		-100.0	%
Minority interest	$	(10.8	)	$	—		$	(10.8	)		100.0	%	$	(3.3	)	$	—		$	(3.3	)		100.0	%

Foreign currency (loss) gain and other decreased in the nine and three month periods ended September 30, 2008 as compared to the nine and three month periods ended September 30, 2007 primarily due to the impact from the unfavorable movement of foreign exchange rates in our foreign subsidiaries during 2008.

Interest income decreased for the nine and three month periods ended September 30, 2008 due to lower invested balances and a decrease in interest rates.

Interest expense increased in the nine and three month periods ended September 30, 2008 as compared to the nine and three month periods ended September 30, 2007 primarily due to higher outstanding debt balances.

Loss from equity investments decreased in the nine and three month periods ended September 30, 2008 as compared to the nine and three month periods ended September 30, 2007 primarily as a result of the consolidation of Redbox’s results beginning in the first quarter of 2008.

Minority interest for the nine and three month periods ended September 30, 2008 represents the operating results for the 49% stake in Redbox that we do not own.

Income Tax Expense

The income tax provision for the nine month periods ended September 30, 2008 and 2007 reflects an effective tax rate of 54.3% and 46.0%, respectively. These rates differ from the federal statutory rate primarily due to the effect of U.S. state taxes and losses in the United Kingdom that do not provide tax benefits currently. The increase also was based in part on the timing of reinstating the Research and Development tax credit in Congress during October 2008. As a result of the timing of the reinstatement, we are not able to recognize the benefit of the tax credit until the fourth quarter of 2008. The effective rate also includes implications from the application of SFAS 123R with respect to incentive stock options.

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, 2008, we had cash and cash equivalents, cash in machine or in transit, and cash being processed totaling $182.8 million. This consisted of cash and cash equivalents immediately available to fund our operations of $64.4 million, cash in machine or in transit of $45.5 million and cash being processed of $72.9 million (which relates to our partner payable liability and payable to our money transfer agents as recorded in “accrued payable to retailers and agents” in the Consolidated Balance Sheet). Working capital was $22.0 million as of September 30, 2008, compared with $104.7 million as of December 31, 2007. The decrease in working capital was primarily the result of our acquisition of GroupEx and our increased ownership percentage of Redbox, which, as a result required the consolidation of Redbox’s results from the effective date of January 18, 2008. In addition, the decrease is due to the timing of payments to our vendors and retailers.

Net cash provided by operating activities was $110.1 million for the nine months ended September 30, 2008, compared to net cash provided by operating activities of $34.9 million for the nine months ended September 30, 2007. Cash provided by operating activities increased primarily as a result of an increase in income net of non-cash transactions on our Consolidated Statement of Operations of $26.7 million. The increase of $26.7 million resulted mostly from our increased ownership percentage of Redbox, which, as a result required the consolidation of Redbox's results from the effective date of January 18, 2008. In addition, we had cash provided by our operating assets and liabilities of $8.4 million for the nine months ended September 30, 2008 compared to cash used by operating assets and liabilities of $40.1 million for the nine months ended September 30, 2007. Cash used by our operating assets and liabilities decreased mainly due to the timing of payments to our retailers.

Net cash used by investing activities for the nine months ended September 30, 2008 was $148.4 million compared to $73.5 million in the comparable prior year period. Net cash used by investing activities consisted primarily of capital expenditures and the acquisitions of GroupEx and Redbox in January 2008. The increase in capital expenditures year-over-year is primarily a result of the installation of coin and DVD machines, upgrades to our machines, and other corporate infrastructure costs.

Net cash provided by financing activities for the nine months ended September 30, 2008 was $26.9 million compared to cash provided of $20.2 million in the comparable prior year period. In 2008, net cash provided by financing activities represented the borrowings on our credit facility of $317.5 million, proceeds of employee stock option exercises of $8.5 million, and the excess tax benefit from exercise of stock options of $0.6 million, offset by cash used to make principal payments on debt of $299.8 million. Net cash provided by financing activities for the nine months ended September 30, 2007, was $20.2 million. This amount primarily represented cash used to make payments on our revolver loan and capital leases of $30.7 million and repurchase of our common stock of $3.5 million, offset by additional borrowings on our credit facility of $46.5 million, net proceeds from the exercise of stock options of $3.9 million, and the excess tax benefit from exercise of stock options of $3.9 million.

Credit Facility

On November 20, 2007, we entered into a senior secured revolving line of credit facility, which replaced a prior credit facility, providing advances up to $400.0 million for (i) revolving loans, (ii) swingline advances subject to a sublimit of $25.0 million, and (iii) the issuance of letters of credit in our behalf subject to a sublimit of $50.0 million. We may, subject to applicable conditions, request an increase in the revolving line of credit facility up to an aggregate of an additional $50.0 million. Fees for this facility of approximately $1.7 million are being amortized over the 5-year life of the revolving line of credit facility. We amortize deferred financing fees on a straight-line basis which approximates the effective interest method. The credit facility matures on November 20, 2012, at which time all outstanding borrowings must be repaid and all outstanding letters of credit must have been cash collateralized. Our obligations under the revolving line of credit facility are secured by a first priority security interest in substantially all of our assets and the assets of our domestic subsidiaries, as well as a pledge of a substantial portion of our subsidiaries’ capital stock. As of September 30, 2008, our outstanding revolving line of credit balance was $291.0 million.

During the first quarter of 2008, we entered into an interest rate swap agreement with Wells Fargo bank for a notional amount of $150 million to hedge against the potential impact on earnings from the 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 agreement, we receive or make payments on a monthly basis, based on the differential between a specific interest rate and one-month LIBOR. This interest rate swap is accounted for as a cash flow hedge in accordance with FAS No. 133, Accounting for Derivative Instruments and Hedging Activities. As of September 30, 2008, the change in the fair value of the swap, which was $1.6 million, was recorded in other comprehensive income, net of tax of $0.8 million, with the corresponding adjustment to other assets 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 net gain or loss included in our consolidated statement of operations representing the amount of hedge ineffectiveness is zero. The term of the swap is through March 20, 2011.

Subject to applicable conditions, we may elect interest rates on our revolving borrowings calculated by reference to (i) the British Bankers Association LIBOR rate (the “BBA LIBOR Rate”) fixed for given interest periods or (ii) Bank of America’s prime rate (or, if greater, the average rate on overnight federal funds plus one half of one percent) (the “Base Rate”), plus a margin determined by our consolidated leverage ratio. For swing line borrowings, we will pay interest at the Base Rate, plus a margin determined by our consolidated leverage ratio. For borrowings made with the BBA LIBOR Rate, the margin ranges from 75 to 175 basis points, while for borrowings made with the Base Rate, the margin ranges from 0 to 50 basis points. As of September 30, 2008, our weighted average interest rate on the revolving line of credit facility was 4.5%.

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, investments, and mergers, dispositions and acquisitions, 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 credit agreement. As of September 30, 2008, we were in compliance with all covenants.

As of September 30, 2008, we had five irrevocable standby letters of credit that totaled $11.8 million. These standby letters of credit, which expire at various times through December 2008, are used to collateralize certain obligations to third parties. Prior to and as of September 30, 2008, no amounts have been, or are outstanding under these standby 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, our cash needs may increase. Furthermore, our future capital requirements will depend on a number of factors, including cash required by future acquisitions, consumer use 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.

Redbox Debt

As of September 30, 2008, included in our consolidated financial statements was debt associated with Redbox totaling $35.9 million, of which $11.6 million was a promissory note owed to GetAMovie, Inc. (“GAM”), a third party vendor, and $24.3 million related to a Rollout Purchase, License and Service Agreement (“the Rollout Agreement”) with McDonald’s USA. This debt is not contractually guaranteed by Coinstar, Inc.

In May 2007, Redbox entered into the individual promissory note agreement with GAM. The promissory note provided Redbox with $10.0 million and carried an effective interest rate of 11.0% per year. Accrued interest of $1.6 million at September 30, 2008 becomes payable to GAM on May 1, 2009, and thereafter, will be paid quarterly, in arrears, with a final payment consisting of the principal and any accrued interest on May 1, 2010.

In November 2006, Redbox and McDonald’s USA entered into the Rollout agreement for which Redbox subsequently received proceeds. The proceeds under the Rollout agreement are classified as debt and the interest rate is based on similar rates that Redbox has with its kiosk sale-leaseback transactions. Future payments made to McDonald’s USA over the contractual term of the agreement, which is 5 years, will reduce the accrued interest liability and principal.

Off-Balance Sheet Arrangements

As of September 30, 2008, off-balance sheet arrangements are comprised of our operating leases and letters of credit as disclosed in Note 8 to our Consolidated Financial Statements included in our Fiscal 2007 Annual Report on Form 10-K. We also have $7.2 million in additional operating leases for Redbox as of September 30, 2008 comprised mostly of leases for office space and operations vehicles. 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 our Fiscal 2007 Annual Report on Form 10-K with the exception of $27.9 million in total capital lease obligations, $7.2 million in operating leases and $35.9 million in total debt obligations for Redbox.

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,			June 30,			March 31,			Dec. 31,			Sept. 30,			June 30,			March 31,			Dec. 31,
	2008			2008 (4)			2008 (1)			2007 (2)			2007 (3)			2007			2007			2006
	(in thousands, except per share data)
	(unaudited)
Consolidated Statement of Operations:
Revenue	$	240,497		$	219,903		$	190,519		$	133,314		$	143,291		$	137,356		$	132,336		$	138,047
Expenses:
Direct operating		168,721			152,009			132,610			85,112			86,721			92,570			91,639			92,792
Marketing		7,374			3,815			2,803			2,009			5,650			2,614			1,626			5,481
Research and development		1,157			1,175			1,246			1,070			1,397			1,345			1,341			1,155
General and administrative		22,760			23,206			19,796			13,857			15,685			13,404			12,247			13,033
Depreciation and other		17,746			18,855			16,971			14,724			15,100			14,549			14,468			13,272
Amortization of intangible assets		2,271			2,298			2,342			1,962			1,813			1,817			1,739			1,722
Impairment and excess inventory charges		—			—			—			65,220			—			—			—			—
Proxy, write-off of acquisition costs, and litigation settlement		—			3,084			—			—			—			—			—			—
Income (loss) from operations		20,468			15,461			14,751			(50,640	)		16,925			11,057			9,276			10,592
Foreign currency (loss) gain and other		(709	)		(890	)		(1,128	)		91			699			(20	)		(120	)		(35	)
Interest income		180			626			259			201			1,109			193			195			200
Interest expense		(5,404	)		(5,906	)		(4,916	)		(4,605	)		(4,365	)		(4,125	)		(3,974	)		(3,910	)
(Loss) income from equity investments and other		(1	)		243			(580	)		472			2,217			(1,101	)		(255	)		(118	)
Minority interest		(3,347	)		(4,269	)		(3,173	)		—			—			—			—			—
Early retirement of debt		—			—			—			(1,794	)		—			—			—			—

Income (loss) before income taxes		11,187			5,265			5,213			(56,275	)		16,585			6,004			5,122			6,729
Income taxes		(6,676	)		(2,585	)		(2,512	)		19,053			(7,520	)		(2,656	)		(2,566	)		(1,689	)

Net income (loss)	$	4,511		$	2,680		$	2,701		$	(37,222	)	$	9,065		$	3,348		$	2,556		$	5,040

Net income (loss) per share:
Basic	$	0.16		$	0.10		$	0.10		$	(1.34	)	$	0.33		$	0.12		$	0.09		$	0.18
Diluted	$	0.16		$	0.09		$	0.10		$	(1.34	)	$	0.32		$	0.12		$	0.09		$	0.18


(1)		In the first quarter of 2008, we acquired GroupEx and the majority ownership interest of Redbox.

(2)		In the fourth quarter of 2007, we recorded an impairment and excess inventory charge.

(3)		In the third quarter of 2007, we recognized a telecommunication fee refund. The net income effect of the refund, net of taxes, monies owed to a joint venture and other effects was approximately $6.5 million in the third quarter of 2007.

(4)		In the second quarter of 2008, we recognized $3.1 million in expense related to a proxy contest, the write-off of in-process acquisition costs and a litigation settlement.

Seasonality

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 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 Money Transfer and E-payment services generally provide its highest revenue in the fourth quarter. Our DVD services generate lower revenues in the second quarter due in part to improved weather and daylight saving time. We have not experienced significant seasonality in our entertainment services. 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 Entertainment and DVD services, and relatively lower margin E-payment and Money Transfer services.

Critical Accounting Policies

Our consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”). 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, 2007 at Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. 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, 2007.

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 a syndicate of lenders led by Bank of America, N.A. 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, prime rate 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.

Based on our outstanding revolving line of credit obligations of $291.0 million as of September 30, 2008, an increase of 1.0% in interest rates over the next year would increase our annualized interest expense by approximately $1.4 million, net of a $1.5 million offset resulting from our interest rate swap agreement; a decrease of 1.0% in interest rates over the next year would decrease our annualized interest expense by approximately $1.4 million, net of a $1.5 million offset resulting from our interest rate swap agreement. Such potential increases or decreases are based on certain simplified assumptions, including 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. In 2008, we have hedged a portion of our interest rate risk by entering into an interest rate swap with a notional amount of $150 million. This interest rate swap converts a portion of our variable one-month LIBOR rate financing into a fixed interest rate financing. This fixed interest rate swap reduces the effect of fluctuations in the market interest rates. The term of the swap is through March 20, 2011.

We are further 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, Ireland, Europe, Canada and Mexico.

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, 2008, 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 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 machines, as well as monetary damages of approximately $8 million, plus interest. The arbitration is scheduled for 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 machines. ScanCoin North America has moved to stay the case pending resolution of the arbitration.

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, 2007 and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2008.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Under the terms of our credit facility, we are permitted to repurchase up to (i) $25.0 million of our common stock plus (ii) proceeds received after November 20, 2007, from the issuance of new shares of capital stock under our employee equity compensation plans. Subsequent to November 20, 2007 and as of September 30, 2008, the authorized cumulative proceeds received from option exercises or other equity purchases under our equity compensation plans totaled $9.1 million bringing the total authorized for purchase under our credit facility to $34.1 million. After taking into consideration our share repurchases of $6.5 million subsequent to November 20, 2007, the remaining amount authorized for repurchase under our credit facility is $27.6 million as of September 30, 2008, however we will not exceed our repurchase limit authorized by the board of directors as outlined below.

Apart from our credit facility limitations, our board of directors authorized the repurchase of up to $22.5 million of our common stock plus additional shares equal to the aggregate amount of net proceeds received after January 1, 2003, from our employee equity compensation plans. As of September 30, 2008, this authorization allows us to repurchase up to $23.8 million of our common stock.

The following table summarizes information regarding shares repurchased during the quarter ended September 30, 2008:


					Total Number of		Maximum Approximate
					Shares Purchased as		Dollar Value of Shares
	Total Number of				part of the Publicly		that May Yet be
	Shares Repurchased		Average Price Paid		Announced		Purchased Under the
	(1)		per Share		Repurchase Plans		Programs

7/1/08 - 7/31/08		265	$	34.49		—	$	23,363,850
8/1/08 - 8/31/08		—		—		—		23,438,313
9/1/08 - 9/30/08		265		32.00		—		23,764,092

		530	$	33.25		—	$	23,764,092


(1)		Represents shares tendered for tax withholding on vesting of restricted stock awards. Prior to January 1, 2008, 12,083 shares had been tendered for tax withholding on vesting of restricted stock awards. However, none of these transactions are included against the dollar value of shares that may yet be purchased under the programs.

Item 6. Exhibits


Exhibit
Number		Description

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.

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 10, 2008

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