UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

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

Commission File Number: 000-22555

 

COINSTAR, INC.

(Exact name of registrant as specified in its charter)

Delaware		94-3156448
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)
1800 114th Avenue SE, Bellevue, Washington (Address of principal executive offices)		98004 (Zip Code)

(425) 943-8000
(Registrant’s telephone number, including area code)

 

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

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

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

Large accelerated filer o

Accelerated filer þ

Non-accelerated filer o (Do not check if a smaller reporting company)

Smaller reporting company o

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

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

Class		Outstanding at October 23, 2009
Common Stock, $0.001 par value		31,065,788

 

 

COINSTAR, INC.

FORM 10-Q
Index

PART I. FINANCIAL INFORMATION
Item 1.		Financial Statements:
		Consolidated Balance Sheets as of September 30, 2009 and December 31, 2008 (unaudited)		Page 3
		Consolidated Statements of Operations for the nine and three month periods ended September 30, 2009 and September 30, 2008 (unaudited)		Page 4
		Consolidated Statement of Equity and Comprehensive Income for the nine month period ended September 30, 2009 (unaudited)		Page 5
		Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2009 and September 30, 2008 (unaudited)		Page 6
		Notes to Consolidated Financial Statements for the nine and three month periods ended September 30, 2009 and September 30, 2008 (unaudited)		Page 7
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		Page 20
Item 3.		Quantitative and Qualitative Disclosures about Market Risk		Page 33
Item 4.		Controls and Procedures		Page 33
PART II. OTHER INFORMATION
Item 1.		Legal Proceedings		Page 33
Item 1A.		Risk Factors		Page 34
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		Page 48
Item 6.		Exhibits		Page 48
SIGNATURE				Page 50
EX-4.1
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,
		2009				2008
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	68,411			$	66,408
Cash in machine or in transit			49,290				34,583
Cash being processed			65,679				91,044
Accounts receivable, net of allowance for doubtful accounts of $4,076 and $2,702 at September 30, 2009 and December 31, 2008, respectively			57,235				51,908
Inventory			88,041				92,247
Deferred income taxes			8,594				6,881
Prepaid expenses and other current assets			24,990				24,715
Total current assets			362,240				367,786
PROPERTY AND EQUIPMENT, NET			382,184				348,949
DEFERRED INCOME TAXES			103,567				4,338
OTHER ASSETS			16,511				11,865
INTANGIBLE ASSETS, NET			32,877				43,385
GOODWILL			292,361				290,391
TOTAL ASSETS		$	1,189,740			$	1,066,714
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable		$	100,919			$	132,194
Accrued payable to retailers and agents			115,303				132,490
Other accrued liabilities			82,027				87,500
Current portion of long-term debt			6,682				11,655
Current portion of capital lease obligations			27,428				20,264
Total current liabilities			332,359				384,103
LONG-TERM DEBT AND OTHER			418,667				295,942
CAPITAL LEASE OBLIGATIONS			31,950				23,509
DEFERRED TAX LIABILITY			60				12,072
TOTAL LIABILITIES			783,036				715,626
EQUITY:
Preferred stock, $0.001 par value—Authorized, 5,000,000 shares; no shares issued and outstanding at September 30, 2009 and December 31, 2008			—				—
Common stock, $0.001 par value—Authorized, 45,000,000 shares; 32,894,913 and 30,181,151 issued and 30,968,832 and 28,255,070 shares outstanding at September 30, 2009 and December 31, 2008, respectively			401,532				369,735
Retained earnings (accumulated deficit)			47,612				(2,672	)
Treasury stock			(40,831	)			(40,831	)
Accumulated other comprehensive loss			(1,609	)			(6,204	)
Total stockholders’ equity			406,704				320,028
Non-controlling interest			—				31,060
Total equity			406,704				351,088
TOTAL LIABILITIES AND EQUITY		$	1,189,740			$	1,066,714

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,
		2009				2008				2009				2008
REVENUE		$	816,786			$	533,817			$	295,970			$	203,452
EXPENSES:
Direct operating (1)			559,054				344,232				203,650				134,342
Marketing			16,605				13,946				5,833				7,372
Research and development			3,916				3,578				1,360				1,157
General and administrative			96,524				65,789				32,570				22,997
Depreciation and other (1)			66,864				41,997				23,432				15,384
Amortization of intangible assets			5,941				6,223				2,029				2,041
Proxy, write-off of acquisition costs, and litigation settlement			—				3,084				—				—
Income from operations			67,882				54,968				27,096				20,159
OTHER INCOME (EXPENSE):
Foreign currency loss and other, net			(339	)			(2,775	)			(270	)			(717	)
Interest income			184				1,063				30				180
Interest expense			(24,510	)			(16,073	)			(9,372	)			(5,394	)
Loss from equity investments			—				(338	)			—				(1	)
Early retirement of debt			(1,082	)			—				(1,082	)			—
Income from continuing operations before income taxes			42,135				36,845				16,402				14,227
Income tax expense			(16,231	)			(13,272	)			(6,761	)			(6,357	)
Income from continuing operations			25,904				23,573				9,641				7,870
Income (loss) from discontinued operations, net of tax (Note 6)			28,007				(2,892	)			31,722				(12	)
Net income			53,911				20,681				41,363				7,858
Less: Net income attributable to non-controlling interests			(3,627	)			(10,789	)			—				(3,347	)
NET INCOME ATTRIBUTABLE TO COINSTAR, INC.		$	50,284			$	9,892			$	41,363			$	4,511
BASIC EARNINGS PER SHARE:
Basic earnings per share from continuing operations attributable to Coinstar, Inc.		$	0.75			$	0.45			$	0.32			$	0.16
Basic earnings per share from discontinued operations attributable to Coinstar, Inc.			0.94				(0.10	)			1.04				—
Basic earnings per share attributable to Coinstar, Inc.		$	1.69			$	0.35			$	1.36			$	0.16
DILUTED EARNINGS PER SHARE:
Diluted earnings per share from continuing operations attributable to Coinstar, Inc.		$	0.74			$	0.45			$	0.31			$	0.16
Diluted earnings per share from discontinued operations attributable to Coinstar, Inc.			0.92				(0.10	)			1.03				—
Diluted earnings per share attributable to Coinstar, Inc.		$	1.66			$	0.35			$	1.34			$	0.16
WEIGHTED SHARES OUTSTANDING:
Basic			29,829				27,992				30,437				28,170
Diluted			30,209				28,507				30,840				28,685

See notes to consolidated financial statements

COINSTAR, INC.

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

																		Accumulated
										Retained Earnings								Other
		Common Stock								(Accumulated				Treasury				Comprehensive				Non-controlling								Comprehensive
		Shares				Amount				Deficit)				Stock				Loss				Interest				Total				Income
BALANCE, December 31, 2008			28,255,070			$	369,735			$	(2,672	)		$	(40,831	)		$	(6,204	)		$	31,060			$	351,088
Proceeds from exercise of stock options, net			630,804				13,275																				13,275
Stock-based compensation expense			141,708				5,883																349				6,232
Shares issued for DVD agreement			193,348				1,091																				1,091
Convertible debt-equity portion, net of tax							20,160																				20,160
Tax deficiency on stock-based compensation expense							(354	)																			(354	)
Purchase of non-controlling interest in Redbox, net of $55,778 deferred tax benefit							(56,751	)															(35,036	)			(91,787	)
Share issuance for purchase of Redbox non-controlling interest			1,747,902				48,493																				48,493
Net income											50,284												3,627				53,911			$	53,911
Gain on short-term investments net of tax expense of $10																			14								14				14
Foreign currency translation adjustments net of tax expense of $301																			3,873								3,873				3,873
Interest rate hedges on long-term debt net of tax expense of $452																			708								708				708
Comprehensive income																															58,506
Less: Comprehensive income attributable to non-controlling interests																															(3,627	)
Total comprehensive income																														$	54,879
BALANCE, September 30, 2009			30,968,832			$	401,532			$	47,612			$	(40,831	)		$	(1,609	)		$	—			$	406,704

See notes to consolidated financial statements

COINSTAR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

		Nine Month Periods
		Ended September 30,
		2009				2008
OPERATING ACTIVITIES:
Net income		$	53,911			$	20,681
Adjustments to reconcile net income to net cash provided by operating activities from continuing operations:
Depreciation and other			66,864				41,997
Amortization of intangible assets and deferred financing fees			6,907				6,608
Write-off of acquisition costs			1,262				1,004
Non-cash stock-based compensation for employees			6,232				6,288
Share-based payments for DVD agreement			1,091				—
Excess tax benefit on share-based awards			—				(615	)
Deferred income taxes			3,582				9,231
Income from equity investments			—				3,449
(Income) loss from discontinued operations, net of tax			(28,007	)			2,892
Loss on early retirement of debt			1,082				—
Other			632				835
Cash (used) provided by changes in operating assets and liabilities, net of effects of business acquisitions			(70,480	)			14,996
Net cash provided by operating activities from continuing operations			43,076				107,366
INVESTING ACTIVITIES:
Purchase of property and equipment			(105,141	)			(115,740	)
Acquisitions, net of cash acquired of $43,621 in 2008			(1,229	)			(24,829	)
Proceeds from sale of fixed assets			214				290
Net cash used by investing activities from continuing operations			(106,156	)			(140,279	)
FINANCING ACTIVITIES:
Principal payments on capital lease obligations and other			(18,642	)			(12,119	)
Proceeds from capital lease financing			22,020				—
Net (payments) borrowings on credit facility			(35,000	)			34,000
Convertible debt borrowings, net of underwriting discount and commissions of $6,000			194,000				—
Financing costs associated with revolving line of credit and convertible debt			(3,984	)			—
Cash used to purchase remaining non-controlling interests in Redbox			(113,867	)			—
Excess tax benefit on share-based awards			—				615
Proceeds from exercise of stock options			10,889				8,547
Net cash provided by financing activities from continuing operations			55,416				31,043
Effect of exchange rate changes on cash			2,996				(2,462	)
NET DECREASE IN CASH AND CASH EQUIVALENTS, CASH IN MACHINE OR IN TRANSIT, AND CASH BEING PROCESSED FROM CONTINUING OPERATIONS			(4,668	)			(4,332	)
CASH FLOWS FROM DISCONTINUED OPERATIONS:
Operating cash flows			14,872				2,761
Investing cash flows			(16,397	)			(8,130	)
Financing cash flows			(2,462	)			(4,140	)
			(3,987	)			(9,509	)
NET DECREASE IN CASH AND CASH EQUIVALENTS, CASH IN MACHINE OR IN TRANSIT, AND CASH BEING PROCESSED			(8,655	)			(13,841	)
CASH AND CASH EQUIVALENTS, CASH IN MACHINE OR IN TRANSIT, AND CASH BEING PROCESSED:
Beginning of period			192,035				196,592
End of period		$	183,380			$	182,751

See Note 10 for supplemental cash flow information.

See notes to consolidated financial statements

COINSTAR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Nine and Three Month Periods Ended September 30, 2009 and 2008
(unaudited)

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

     Description of company: Incorporated as a Delaware company in 1993, Coinstar, Inc. (the “Company”) is a leading provider of automated retail solutions offering convenient products and services that benefit consumers and drive incremental retail traffic and revenue for retailers. The Company’s core offerings in automated retail include its Coin and DVD businesses. The Coin services business consists of self-service coin counting kiosks where consumers can convert their coin to cash, a gift card or an e-certificate, among other options. The DVD services business consists of self-service DVD kiosks where consumers can rent or purchase movies. The Company’s products and services also include money transfer services; and electronic payment (“E-payment”) services such as stored value cards, prepaid debit cards and prepaid wireless products. The Company’s products and services can currently be found at more than 90,000 points of presence including supermarkets, drug stores, mass merchants, financial institutions, convenience stores, restaurants, and money transfer agent locations. As of September 30, 2009, the Company had an approximate total of:

Coin-counting kiosks			18,800	*
DVD kiosks			20,600
Money transfer services locations			45,000
E-payment point-of-sale terminals			24,500

     Sale of Entertainment Services Business: On September 8, 2009 we sold our Entertainment Services Business (“Entertainment Business”) to National Entertainment Network, Inc. See further discussion in Note 6.

     Basis of presentation: The unaudited consolidated financial statements of Coinstar included herein reflect all adjustments, consisting only of normal recurring adjustments that, in the opinion of management, are necessary to present fairly our consolidated financial position, results of operations and cash flows for the periods presented. Certain reclassifications have been made to the prior year amounts to conform to the current year presentation. Effective the third quarter of fiscal 2009 following the sale of our Entertainment Business, we reclassified the results of the Entertainment Business to discontinued operations for all 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, 2008, filed with the SEC. The results of operations for the nine and three month periods ended September 30, 2009 are not necessarily indicative of the results to be expected for any future quarter or for the entire fiscal year. Acquisitions are recorded and included in our results of operations as of the date acquired.

     Principles of consolidation: The accompanying unaudited consolidated financial statements include the accounts of Coinstar, Inc., our wholly-owned subsidiaries, companies in which we have a controlling interest, and other entities in accordance with Financial Accounting Standards Board Accounting Standard Codification (“FASB ASC”) 810-10. Investments in companies of which we may have significant influence, but not a controlling interest, are accounted for using the equity method of accounting. All significant intercompany balances and transactions have been eliminated in consolidation.

     Use of estimates: The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting

period. These judgments are difficult as matters that are inherently uncertain directly impact their valuation and accounting. Actual results may vary from management’s estimates and assumptions.

     Revenue recognition: We recognize revenue as follows:

	•		Coin-counting revenue, which is collected from either consumers or card issuers (in stored value card or e-certificate transactions), is recognized at the time the consumers’ coins are counted by our coin-counting kiosks. Cash deposited in kiosks that has not yet been collected is referred to as cash in machine and is reported in our consolidated balance sheet under the caption “Cash in machine or in transit”. Our revenue represents the fee charged for coin-counting;
	•		Net revenue from DVD movie rentals is recognized on a ratable basis during the term of a customer’s rental transaction. Revenue from the sale directly out of the kiosk of previously rented movies is recognized at the time of sale. On rental transactions for which the related DVDs have not yet been returned to the kiosk at month-end, revenue is recorded with a corresponding receivable recorded in the balance sheet, net of a reserve for uncollectibility. We record revenue net of refunds and applicable sales taxes collected from customers;
	•		Money transfer revenue represents the commissions earned on a money transfer transaction and is recognized at the time the customer completes the transaction;
	•		E-payment revenue is recognized at the point of sale based on our commissions earned, net of retailer fees.

     Interest rate swap: During the first quarter of 2008, we entered into an interest rate swap agreement with Wells Fargo bank for a notional amount of $150.0 million to hedge against the potential impact on earnings from an increase in market interest rates associated with the interest payments on our variable-rate revolving credit facility. In the fourth quarter of 2008, we entered into another interest rate swap agreement with JP Morgan Chase for a notional amount of $75.0 million to hedge against the potential impact on earnings from an increase in market interest rates associated with the interest payments on our variable-rate revolving credit facility. One of our risk management objectives and strategies is to lessen the exposure of variability in cash flow due to the fluctuation of market interest rates and lock in an interest rate for the interest cash outflows on our revolving debt. Under the interest rate swap agreements, we receive or make payments on a monthly basis, based on the differential between a specific interest rate and one-month LIBOR. The interest rate swaps are accounted for as cash flow hedges in accordance with FASB ASC 815-30 as of September 30, 2009. The cumulative change in the fair value of the swaps, which was $6.3 million, was recorded in other comprehensive income, net of tax of $2.5 million, with the corresponding adjustment to other accrued liabilities in our consolidated financial statements. We reclassify a corresponding amount from accumulated other comprehensive income to interest expense in the consolidated statement of operations as the interest payments are made. The estimated losses in accumulated other comprehensive income of approximately $4.6 million are expected to be reclassified into earnings as a component of interest expense over the next twelve months. The net gain or loss included in our consolidated statement of operations representing the amount of hedge ineffectiveness is inconsequential. The term of the $150.0 million swap is through March 20, 2011. The term of the $75.0 million swap is through October 28, 2010. The following table provides information about our interest rate swaps:

						Fair value
						September 30,				December 31,
		Balance sheet classification				2009				2008
						(in thousands)
Interest rate swap		Other accrued liabilities				$	6,306			$	7,466

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

     In 2008, we elected to defer the guidance of FAS 157, now incorporated within FASB ASC Subtopic 820-10, related to our non-financial assets and non-financial liabilities that are recognized and disclosed at fair value in the financial statements on a non-recurring basis until January 1, 2009. The adoption of FASB ASC Subtopic 820-10 for our non-financial assets and non-financial liabilities did not have a material impact to our consolidated financial statements.

     FASB ASC Subtopic 820-10 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 and liabilities that have been measured at fair value as of September 30, 2009 and indicates the fair value hierarchy of the valuation inputs utilized to determine such fair value.

		Balance as of September 30, 2009
		Level 1				Level 2				Level 3
Short-term investment		$	9,793				—				—
Interest rate swap liability			—			$	6,306				—

     Recent accounting pronouncements: In July 2009 the FASB issued Statement of Financial Accounting Standards No. 168, The Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (“SFAS 168”). SFAS 168 became the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of SFAS 168, the Codification superseded all then-existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting literature not included in the Codification became nonauthoritative. This Statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of SFAS 168 did not have a material impact on our consolidated financial position, results of operations, cash flows, or disclosures.

     In December 2007, the FASB issued FAS 141 (revised 2007), which is now incorporated within FASB ASC 805. FASB ASC 805 retains the fundamental requirements of FASB 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 guidance 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. The new guidance incorporated in FASB ASC 805 is effective for acquisitions made on or after the first day of annual periods beginning on or after December 15, 2008. The adoption of the new provisions incorporated in FASB ASC 805 resulted in the recognition of $1.3 million in acquisition related expenses in our results of operations for the nine months ended September 30, 2009.

     In December 2007, the FASB issued FASB Statement 160 which is now incorporated within FASB ASC 810-10. The new guidance in FASB ASC 810-10 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The new guidance is effective for interim and annual periods beginning on or after December 15, 2008. The adoption of the new guidance changed our reporting presentation for non-controlling interests and impacted our consolidated financial position, results of operations and cash flows related to the purchase of non-controlling interests in Redbox as described in Note 2.

     In March 2008, the FASB issued FAS 161 which is now incorporated within FASB ASC 815-10-50. The new accounting guidance in FASB ASC 815 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 new guidance is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The adoption of the new accounting provisions within FASB ASC 815 did not have a material impact on our consolidated financial position, results of operations, cash flows, or disclosures.

     In May 2009, the FASB issued FAS 165 which is now incorporated within FASB ASC 855. The new guidance addresses accounting and disclosure requirements related to subsequent events. The objective of the new guidance is to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued or available to be issued. FASB ASC 855 sets forth:

1.

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

	2.		The circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and
	3.		The disclosures that an entity should make about events or transactions that occurred after the balance sheet date.

     The new guidance within FASB ASC 855 is effective for interim or annual financial statements ending after June 15, 2009. As the new guidance is required to be applied prospectively, the impact on our financial statements will be dependent upon the timing of future transactions and application of FASB ASC 855 on those transactions. We have evaluated subsequent events in accordance with FASB ASC 855 through November 5, 2009.

     In May 2008, the FASB issued new accounting guidance pertaining to convertible debt. This accounting guidance which is now included in FASB ASC 470-20 specifies that issuers of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. The accounting guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. We adopted this new accounting guidance on January 1, 2009, and we have applied this accounting guidance to the convertible debt we issued in the third quarter of 2009.

     Contingency: In April 2007, we received a request for arbitration filed by ScanCoin before the Arbitration Institute of the Stockholm Chamber of Commerce regarding ownership of intellectual property related to an agreement between Coinstar and ScanCoin dated April 23, 1993. The parties have selected arbitrators, and we advanced partial payment for the arbitration. In August 2007, we received ScanCoin’s statement of claim and we responded with our statement of defense in November 2007. ScanCoin seeks a declaration of ownership of over 70 of our patents and patent applications related to our coin-counting kiosks, as well as monetary damages of approximately 56 million Swedish kronor (estimated to be approximately $8 million at September 30, 2009), plus interest. The arbitration has been delayed until after December 2009, but no new date has been set. We believe that ScanCoin’s claims against us are without merit and intend to defend ourselves vigorously in this arbitration. In October 2007, we filed a claim in United States District Court for the Northern District of Illinois against ScanCoin North America alleging that it is infringing on a patent we own relating to self-service coin kiosks. The case is stayed pending resolution of the arbitration.

NOTE 2: PURCHASE OF NON-CONTROLLING INTERESTS IN REDBOX

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

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

     On February 26, 2009, we purchased the Interests and the Note, paying initial consideration to GAM in the form of cash in the amount of $10.0 million and 1.5 million shares of Common Stock. Pursuant to the GAM Purchase Agreement, these shares were valued at $27.7433 each (based on the average of the volume weighted average price per share of Common Stock for each of the eight NASDAQ trading days prior to, but not including, the date of issuance).

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

any consideration paid in shares of Common Stock to GAM and such shares will either be newly issued, unregistered shares of Common Stock with similar registration rights to those of GAM or newly issued shares of Common Stock for which we already have an existing effective registration statement.

     We made a payment for deferred consideration of $92.3 million in the second quarter of 2009. The remaining payment for deferred consideration was made during the third quarter of 2009 and the obligation is paid in full as of September 30, 2009. The total consideration paid for the 2009 Redbox transaction was $162.4 million including cash of $113.9 million and Coinstar common stock of $48.5 million.

     The purchase of the non-controlling interest in Redbox was a change of our ownership interest in a previously consolidated subsidiary. Such change was accounted for as an equity transaction in accordance with FASB ASC 810-10. There was no gain or loss recorded in the consolidated net income or comprehensive income. The difference, approximately $112.5 million, between the fair value of the consideration paid and the amount of the non-controlling interest was recognized as a reduction to equity attributable to Coinstar. This difference will be amortized over fifteen years for tax purposes. As a result, we recognized a deferred tax benefit of $43.8 million in equity. In addition, we made an IRS code section 754 election resulting in an additional deferred tax benefit of $11.9 million recorded in equity. After taking these two tax benefits into consideration the difference is $56.8 million, which was recorded in the equity section of our balance sheet.

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

     The Amended and Restated Credit Agreement does not modify the amount of the $400.0 million revolving credit facility (the “Revolving Facility”) that was provided for in the Original Credit Agreement, provided that the provision of the Original Credit Agreement that allowed us to increase the size of the Revolving Facility by up to $50.0 million (subject to obtaining commitments from lenders for such increase) was deleted in the Amended and Restated Credit Agreement. The Amended and Restated Credit Agreement did not modify the interest rates or commitment fees that apply to the Revolving Facility. As a part of the amendment in February 2009, Redbox became a guarantor of our credit facility debt and Redbox financial results are included in our debt covenant calculation requirement.

     We paid off the Term Facility and a portion of the Revolving Facility with the proceeds from the convertible debt issuance during the third quarter of 2009 (See discussion at Note 9).

NOTE 3: PROPERTY AND EQUIPMENT

		September 30,				December 31,
		2009				2008
		(in thousands)
Machines		$	654,947			$	608,779
Computers			36,841				32,277
Office furniture and equipment			11,238				13,202
Vehicles			12,885				21,611
Leasehold improvements			3,888				3,715
			719,799				679,584
Accumulated depreciation and amortization			(337,615	)			(330,635	)
		$	382,184			$	348,949

     The amounts in the table above for 2008 include $37.3 million of net property and equipment for the Entertainment Business, which was sold during the third quarter of 2009.

     During the third quarter of 2009, we entered into $30.4 million in additional capital lease obligations. Approximately $22.0 million of the additions were equipment sale leaseback arrangements. As of September 30, 2009, our contractual capital lease obligations by fiscal year, including interest of approximately $5.7 million, totaled $10.0 million in 2009, $28.9 million in 2010, $18.9 million in 2011, $6.7 million in 2012 and $0.5 million in 2013.

NOTE 4: STOCK-BASED COMPENSATION

     Stock-based compensation: Stock-based compensation is accounted for in accordance with the provisions of FASB ASC 810-10. Under FASB ASC 718, 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,
		2009				2008				2009				2008
Expected term (in years)			3.7				3.7				3.7				3.7
Expected stock price volatility			40	%			35	%			40	%			35	%
Risk-free interest rate			1.5	%			2.5	%			1.9	%			2.6	%
Expected dividend yield			0	%			0	%			0	%			0	%
Estimated fair value per option granted		$	9.29			$	9.66			$	9.80			$	10.08

     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 employee stock-based compensation expense, and the related deferred tax benefit for stock option and award expense during the periods indicated:

		Nine Month Periods								Three Month Periods
		Ended September 30,								Ended September 30,
		2009				2008				2009				2008
		(in thousands)								(in thousands)
Stock-based compensation expense		$	6,232			$	4,809			$	1,497			$	1,618
Related deferred tax benefit			1,908				1,362				480				485

     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, 2009:

						Weighted
						average exercise
		Shares				price
		(in thousands)
OUTSTANDING, December 31, 2008			2,689			$	25.24
Granted			642				29.26
Exercised			(631	)			21.86
Cancelled, expired or forfeited			(245	)			30.06
OUTSTANDING, September 30, 2009			2,455				26.67
EXERCISABLE, September 30, 2009			1,469			$	24.56

     As of September 30, 2009, total unrecognized stock-based compensation expense related to unvested stock options was approximately $6.8 million. This expense is expected to be recognized over a weighted average period of approximately 1.9 years. During the nine month period ended September 30, 2009, the total intrinsic value of stock options exercised was approximately $7.1 million. At September 30, 2009, there were 4.6 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, 2009:

						Weighted
						average
						grant date
		Shares				fair value
		(in thousands)
NON-VESTED, December 31, 2008			135			$	30.36
Granted			207				29.20
Vested			(90	)			30.72
Forfeited			(45	)			30.09
NON-VESTED, September 30, 2009			207			$	29.70

     Compensation expense related to our restricted stock awards totaled approximately $3.1 million and $0.8 million for the nine and three month periods ended September 30, 2009. 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. As of September 30, 2009 total unrecognized stock-based compensation expense related to unvested restricted stock awards was approximately $4.5 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, 2009, the total fair value of restricted stock awards vested was approximately $2.1 million.

NOTE 5: INCOME PER SHARE

     Basic earnings per share is computed by dividing the net income available to common stockholders for the period by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing the net income available to common stockholders for the period by the weighted average number of common and potential common shares outstanding (if dilutive) during the period. Potential common shares, composed of incremental common shares issuable upon the exercise of stock options and vesting of certain non-vested restricted stock awards and the conversion features of our convertible debt we issued in the third quarter of 2009, are included in the calculation of diluted earnings per share to the extent such shares are dilutive.

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

		Nine Month Periods								Three Month Periods
		Ended September 30,								Ended September 30,
		2009				2008				2009				2008
		(in thousands)								(in thousands)
Numerator:
Income from continuing operations		$	25,904			$	23,573			$	9,641			$	7,870
Income (loss) from discontinued operations, net of tax			28,007				(2,892	)			31,722				(12	)
Net income			53,911				20,681				41,363				7,858
Less: Net income attributable to non-controlling interests			(3,627	)			(10,789	)			—				(3,347	)
Net income attributable to Coinstar, Inc		$	50,284			$	9,892			$	41,363			$	4,511
Denominator:
Weighted average shares for basic calculation			29,829				27,992				30,437				28,170
Incremental shares from employee stock options and awards			380				515				403				515
Weighted average shares for diluted calculation			30,209				28,507				30,840				28,685

     For the nine and three month periods ended September 30, 2009, options and certain restricted stock awards totaling approximately 1.3 million and 1.3 million shares of common stock, respectively, were excluded from the computation of earnings per common share because their impact would be antidilutive. 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 shares, respectively, of common stock were excluded from the computation of earnings per common share because their impact would be antidilutive. For the nine and three month periods ended September 30, 2009, no shares related to the conversion feature of our convertible debt were included in the calculation of earnings per share because the average price of our common stock remained below the initial conversion price of $40.29 during the period.

NOTE 6: SALE OF ENTERTAINMENT BUSINESS

     On September 8, 2009, we sold our subsidiaries comprising our Entertainment Business to National Entertainment Network, Inc (“National”) for nominal consideration. With the transaction, National assumed the operations of the Entertainment Business, including substantially all of the Entertainment Business’s related assets and liabilities. The disposed assets and liabilities primarily consist of current assets of $29.4 million, net property, plant and equipment of $35.2 million, intangible assets of $4.4 million, other assets of $3.1 million, and current liabilities of $24.3 million. As a result of the sale, we recorded a pre-tax loss on disposal of $49.8 million and a one-time tax benefit of $82.2 million during the third quarter of 2009. We have presented the disposition of our Entertainment Business as well as the operating loss from our Entertainment Business under discontinued operations in our Consolidated Statement of Operations, for all periods presented. The cash flows related to our Entertainment Business have been separately disclosed in our Consolidated Statement of Cash Flows under the operating, investing, and financing positions attributable to our discontinued operations.

     Revenue from discontinued operations was $90.6 million and $26.3 million for the nine month and three month periods ended September 30, 2009 and $117.1 million and $37.0 million for the nine month and three month periods ended September 30, 2008. The pretax loss from discontinued operations was $6.9 million and $1.0 million for the nine month and three month periods ended September 30, 2009, before the loss on disposal and related tax benefit, and the pretax loss from discontinued operations was $4.3 million for the nine month period ended September 30, 2008. During the three month period ended September 30, 2008 the pretax income from discontinued operations was $0.3 million.

     Our tax basis in the Entertainment Business was determined to be approximately $256.8 million which has been written off as worthless stock. However, the net tax benefit resulting from the worthless stock deduction was reduced by writing off the net deferred tax assets recorded on Entertainment Business’s books at the time of sale, resulting in a net one-time tax benefit of $82.2 million.

     The following table sets forth the computation of income (loss) from discontinued operations, net of tax for the periods indicated:

		Nine Month Periods								Three Month Periods
		Ended September 30,								Ended September 30,
		2009				2008				2009				2008
		(in thousands)								(in thousands)
(Loss) Income from discontinued operations (including loss on disposal of $49.8 million in the third quarter of 2009)		$	(56,784	)		$	(4,390	)		$	(50,887	)		$	307
Income tax benefit (expense) on discontinued operations			2,559				1,498				377				(319	)
One-time income tax benefit on loss on disposal in 2009			82,232				—				82,232				—
Income (loss) from discontinued operations, net of tax		$	28,007			$	(2,892	)		$	31,722			$	(12	)

NOTE 7: BUSINESS SEGMENT INFORMATION

     FASB ASC 280 requires that companies report, on an interim basis, separately in the financial statements certain financial and descriptive information about segment revenue, income and assets. The method for determining what information is reported is based on the way that management organizes the operating segments for making operational decisions and assessments of financial performance. Our chief operating decision maker is considered to be the Chief Executive Officer (“CEO”). In early 2008, we assessed our business segments due to changes in our business and product lines as well as our organizational structure. We redefined our business segments from North America and International to Coin and Entertainment services, DVD services, Money Transfer services, and E-payment services. With the sale of the Entertainment Business during the third quarter of 2009 we now report Coin services as its own segment. The amounts shown below for revenue and income exclude the Entertainment Business for all periods presented. The amounts shown for assets include both Coin and Entertainment assets for the periods prior to the sale of Entertainment. The following table presents revenue by product lines:

		Nine Month Periods								Three Month Periods
		Ended September 30,								Ended September 30,
		2009				2008				2009				2008
		(in thousands)								(in thousands)
Revenue:
Coin services		$	192,404			$	194,771			$	69,565			$	71,027
DVD services			541,707				254,661	*			198,085				104,192	*
Money transfer services			64,560				66,273				22,476				22,016
E-payment services			18,115				18,112				5,844				6,217
Consolidated revenue		$	816,786			$	533,817			$	295,970			$	203,452

     Our operating costs included in our shared service functions, which consist primarily of 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. In addition, our CEO manages our business by evaluating the financial results of the four operating segments, focusing primarily on segment revenue and segment operating income (loss) before depreciation and amortization, stock compensation expense and share-based payments (“segment operating income (loss)”). We utilize segment revenue and segment operating income (loss) because we believe they provide useful information for effectively allocating resources among business segments, evaluating the health of our business segments based on metrics that management can actively influence, and gauging our investments and our ability to service, incur or pay down debt. Specifically, our CEO evaluates segment revenue and segment operating income (loss) from continuing operations, and assesses the performance of each business segment based on these measures, as well as, among other things, the prospects of each of the segments and how they fit into the Company’s overall strategy. Our CEO then decides how resources should be allocated among our business segments. Stock-based compensation expense, share-based payments, and depreciation and amortization expenses are not allocated to our four operating segments.

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

		Nine Month Periods								Three Month Periods
		Ended September 30,								Ended September 30,
		2009				2008				2009				2008
		(in thousands)								(in thousands)
Operating income before depreciation/amortization and stock-based compensation/shared-based payments:
Coin services		$	66,731			$	68,741			$	23,399			$	25,432
DVD services			91,528				49,537				34,510				17,740
Money transfer services			(8,974	)			(9,425	)			(2,190	)			(2,725	)
E-payment services			(1,275	)			623				(576	)			(560	)
Subtotal			148,010				109,476				55,143				39,887
Depreciation/amortization and stock-based compensation/shared-based payments:
Depreciation, amortization and other			(72,805	)			(48,220	)			(25,461	)			(17,425	)
Stock-based compensation and share-based payments			(7,323	)			(6,288	)			(2,586	)			(2,303	)
Subtotal			(80,128	)			(54,508	)			(28,047	)			(19,728	)
Consolidated income from operations		$	67,882			$	54,968			$	27,096			$	20,159

		September 30,				December 31,
		2009				2008
		(in thousands)				(in thousands)
Total assets:
Coin services		$	513,469			$	473,256
DVD services			453,833				378,092
Money transfer services			112,268				105,645
E-payment services			42,093				35,963
Unallocated corporate assets			68,077				73,758
Consolidated assets		$	1,189,740			$	1,066,714

     The table above includes assets associated with the Entertainment Business within the Coin services line of $67.1 million as of December 31, 2008. Entertainment assets are not included as of September 30, 2009 as the Entertainment Business was sold in early September 2009.

     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,
		2009				2008				2009				2008
		(in thousands)								(in thousands)
Revenue:
North America		$	765,514			$	482,252			$	276,461			$	185,703
International			51,272				51,565				19,509				17,749
Total revenue		$	816,786			$	533,817			$	295,970			$	203,452

		September 30,				December 31,
		2009				2008
		(in thousands)
Total assets:
North America		$	1,163,723			$	1,025,362
International			135,178				138,868
Intercompany eliminations			(109,161	)			(97,516	)
Total assets		$	1,189,740			$	1,066,714

     The table above includes assets associated with the Entertainment Business within the North America line of $67.1 million as of December 31, 2008. Entertainment assets are not included as of September 30, 2009 as the Entertainment Business was sold in early September 2009.

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

		Nine Month Periods								Three Month Periods
		Ended September 30,								Ended September 30,
		2009				2008				2009				2008
Walmart Stores Inc.			20.3	%			13.3	%			20.2	%			14.4	%
Walgreen Co.			10.1	%			3.8	%			11.5	%			3.3	%
McDonalds			9.6	%			12.0	%			8.4	%			11.8	%
Supervalu Inc.			8.4	%			10.2	%			7.8	%			10.8	%

NOTE 8: DVD LICENSE AGREEMENT

Sony agreement

     On July 17, 2009, Redbox entered into a copy depth license agreement (the “Sony Agreement”) with SPHE Scan Based Trading Corporation (“Sony”), a subsidiary of Sony Pictures Home Entertainment Inc. Redbox estimates that it will pay Sony approximately $460.0 million during the term of the Sony Agreement, which is expected to last from July 1, 2009 until September 30, 2014. However, at Sony’s discretion, the Sony Agreement may expire earlier on September 30, 2011. Coinstar has guaranteed up to $25.0 million of Redbox’s liability under the Sony Agreement. In addition, Coinstar has granted Sony 193,348 shares of restricted stock that will vest over the term of the Sony Agreement. In the third quarter of 2009, we recorded share-based payment expense of $1.1 million related to the Sony Agreement to direct operating expenses in the consolidated statements of operations.

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

Lionsgate agreement

     On August 10, 2009, Redbox entered into a Home Video Lease Output Agreement (the “Lionsgate Agreement”) with Lions Gate Films, Inc. (“Lionsgate”). Redbox estimates that it will pay Lionsgate approximately $158 million during the term of the Lionsgate Agreement, which is expected to last from September 1, 2009 until August 31, 2014. However, at Lionsgate’s discretion, the Lionsgate Agreement may expire earlier on August 31, 2011.

     Under the Lionsgate Agreement, Redbox agrees to license minimum quantities of theatrical and direct-to-video DVDs for rental in each location that has a Redbox DVD kiosk in the United States. The DVDs licensed and purchased from Lionsgate are expected to represent approximately 7.4% percent of the total DVDs licensed and purchased by Redbox for 2009. Under the Lionsgate Agreement, Redbox should receive delivery of the DVDs by the “street date,” defined in the Lionsgate Agreement as the initial date on which the pictures are distributed on a rental basis to the general public for the purpose of non-commercial home entertainment viewing.

Paramount agreement

     On August 25, 2009, Redbox entered into a revenue sharing license agreement (the “Paramount Agreement”) with Paramount Home Entertainment Inc. (“Paramount”) that runs from August 25, 2009, through December 31, 2009 (the “Initial Term”). Prior to December 15, 2009, Paramount has the unilateral right to extend the term of the Paramount Agreement to December 31, 2014 (the “Extended Term”). However, if Paramount does agree to the Extended Term, at Paramount’s discretion, the Paramount Agreement may be terminated earlier on December 31, 2011. Redbox estimates that it would pay Paramount approximately $561.0 million during the Initial Term and the Extended Term. During the Initial Term, Coinstar will provide a $28.0 million letter of credit to Paramount. The letter of credit took effect October 1, 2009. During the Extended Term, the letter of credit would be replaced with a Coinstar guarantee to Paramount of up to $25 million.

     Under the Paramount Agreement, Redbox agrees to license minimum quantities of theatrical and direct-to-video DVDs for rental in each location that has a Redbox DVD kiosk in the United States. The DVDs licensed and purchased from Paramount are expected to represent approximately 18.5% percent of the total DVDs licensed and purchased by Redbox for 2009. Under the Paramount Agreement, Redbox should receive delivery of the DVDs by the “street date,” defined in the Paramount Agreement as the first date on which the titles are available to the general public for home entertainment purposes, whether on a rental or sell-through basis.

NOTE 9: 4% CONVERTIBLE SENIOR NOTES

     In September 2009, we issued $200 million aggregate principal amount of 4% Convertible Senior Notes (the “Notes”) for proceeds, net of expenses, of approximately $193.3 million. The Notes bear interest at a fixed rate of 4% per annum, payable semi-annually in arrears on each March 1 and September 1, beginning March 1 2010. The Notes mature on September 1, 2014. The effective interest rate on the Notes is 8.5%.

     The Notes are convertible, upon the occurrence of certain events or maturity, into cash up to the aggregate principal amount of the Notes and shares of our common stock, in respect of the remainder, if any, of the conversion obligation in excess of the aggregate principal amount. The initial conversion rate is 24.8181 shares of Common Stock per $1,000 principal amount of Notes, which is equivalent to an initial conversion price of approximately $40.29 per share of Common Stock. The events for conversion include: i) at any time during the period beginning on June 1, 2014 and ending on the close of business on the business day immediately preceding the stated maturity date; ii) during any quarter commencing after December 31, 2009 in which the closing price of our common stock exceeds 130% of the conversion price for at least 20 trading days during the period of 30 consecutive trading days ending on the last trading day of the preceding calendar quarter; (iii) during any five business day period after any 10 consecutive trading day period in which the trading price per $1,000 principal amount of the Notes for each day of that period is less than 98% of the product of the closing sale price of our common stock and the applicable conversion rate; (iv) we elect to distribute to substantially all holders of our common stock the right to purchase common stock at a price per share less than the average price of the closing price for the 10 consecutive trading day periods preceding the date of such announcement; or we elect to distribute to substantially all holders of our common stock the assets, debt securities, or rights to purchase securities of us, which distribution has a per value exceeding 10% of the closing price of the common stock preceding the declaration date for such distribution; (v) upon specified corporate transactions including a consolidation or merger.

     We have separately accounted for the liability and the equity component of the Notes in accordance with FASB ASC 470-20, Debt with Conversion and Other Options. The fair value of $165.2 million for our Notes and $34.8 million for the equity component was initially recorded and the transaction costs of $6.7 million directly related to the issuance were proportionally allocated to the liability and equity component. The total we recorded to equity was $20.1 million after a deferred tax asset of $13.5 million and $1.2 million of transaction costs. As our Notes are not actively traded in the market, fair value was estimated using a discounted cash flow analysis, based on the borrowing rate for similar types of borrowing arrangements. As of September 30, 2009, the fair value of our Notes was approximately $166.0 million and the carrying value of our Notes was $165.7 million. The unamortized debt discount as of September 30, 2009 was $34.3 million and the amortization of the debt discount will be recognized as non-cash interest expense. We recorded $0.3 million in interest expense in the third quarter related to the contractual interest coupon of the Notes. We recorded $0.5 million in non-cash interest expense in the third quarter of 2009 related to the amortization of the debt discount. The unamortized debt discount will be recognized as non-cash interest expense over the remaining periods in the amount of $1.4 million in 2009, $6.0 million in 2010, $6.6 million in 2011, $7.1 million in 2012, $7.7 million in 2013, and $5.5 million in 2014.

     The Notes are not redeemable at our election prior to maturity, but are subject to repurchase by us at the option of the holders following a fundamental change at a price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change purchase date. The fundamental change includes i) any person acquires the beneficial ownership of us and entitles to exercise 50% or more of the total voting power of our capital stocks; ii) certain merger and combination transactions; iii) substantial turnover of our Board Directors; iv) stockholders’ approval of the liquidation and dissolution of us; v) termination of Trading, defined as our common stock’s trading on the security exchange market.

     Net proceeds of the Notes were used to pay off our $87.5 million term loan under its senior secured credit facility and to pay down $105.8 million of the outstanding amount under our $400 million revolving line of credit under our senior secured credit facility. We recorded $1.1 million in early retirement of debt expense in the consolidated statements of operations for the nine and three month periods ended September 30, 2009 related to the write-off of deferred financing costs associated with the term loan.

     The Notes are the general senior unsecured obligations of Coinstar and rank equal in right of payment with all of our existing and future unsecured and unsubordinated indebtedness. The Notes will be structurally subordinated to all existing and future indebtedness incurred by Coinstar’s subsidiaries (including trade payables and guarantees under the Coinstar’s senior secured credit facility provided by certain of Coinstar’s subsidiaries), and will be effectively subordinated to any of Coinstar’s secured indebtedness (including capital leases) to the extent of the value of Coinstar’s assets that secure such indebtedness.

     As of September 30, 2009, our outstanding revolving line of credit and convertible debt balance together was $400.7 million. As of September 30, 2009 we were in compliance with all covenants.

NOTE 10: SUPPLEMENTAL CASH FLOW INFORMATION

     The following table provides supplemental cash flow information for the period indicated for our continuing operations:

		Nine Month Periods
		Ended September 30,
		2009				2008
		(in thousands)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest		$	22,705			$	9,545
Cash paid during the period for income taxes			1,215				5,552
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Non-cash consideration for purchase of Redbox non-controlling interest		$	48,493			$	—
Underwriting discount and commissions on convertible debt			6,000				—
Purchase of vehicles financed by capital lease obligations			4,750				580
Purchase of kiosks financed by capital lease obligations			8,439				—
Accrued acquisition costs			—				10,000

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, 2008 (the “Form 10-K”). 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 leading provider of automated retail solutions offering convenient products and services that benefit consumers and drive incremental retail traffic and revenue for retailers. Our core offerings in automated retail include our Coin and DVD businesses. Our Coin services consist of self-service coin counting kiosks where consumers can convert their coin to cash, a gift card or an e-certificate, among other options. Our DVD services consist of self-service DVD kiosks where consumers can rent or purchase movies. Our products and services also include money transfer services; and electronic payment (“E-payment”) services such as stored value cards, prepaid debit cards and prepaid wireless products. Our products and services can currently be found at more than 90,000 points of presence including supermarkets, drug stores, mass merchants, financial institutions, convenience stores, restaurants, and money transfer agent locations.

Recent events

Sale of Entertainment Business

     On September 8, 2009, we sold our subsidiaries comprising our entertainment services business (“Entertainment Business”) to National Entertainment Network, Inc (“National”) for nominal consideration. See discussion below in “Results of Operations.”

DVD license agreements

Sony agreement

     On July 17, 2009, Redbox entered into a copy depth license agreement (the “Sony Agreement”) with SPHE Scan Based Trading Corporation (“Sony”), a subsidiary of Sony Pictures Home Entertainment Inc. Redbox estimates that it will pay Sony approximately $460.0 million during the term of the Sony Agreement, which is expected to last from July 1, 2009 until September 30, 2014. However, at Sony’s discretion, the Sony Agreement may expire earlier on September 30, 2011. Coinstar has guaranteed up to $25.0 million of Redbox’s liability under the Sony Agreement. In addition, Coinstar has granted Sony 193,348 shares of restricted stock that will vest over the term of the Sony Agreement. In the third quarter of 2009, we recorded share-based payment expense of $1.1 million related to the Sony Agreement.

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

Lionsgate agreement

     On August 10, 2009, Redbox entered into a Home Video Lease Output Agreement (the “Lionsgate Agreement”) with Lions Gate Films, Inc. (“Lionsgate”). Redbox estimates that it will pay Lionsgate approximately $158 million during the term of the Lionsgate Agreement, which is expected to last from September 1, 2009 until August 31, 2014. However, at Lionsgate’s discretion, the Lionsgate Agreement may expire earlier on August 31, 2011.

     Under the Lionsgate Agreement, Redbox agrees to license minimum quantities of theatrical and direct-to-video DVDs for rental in each location that has a Redbox DVD kiosk in the United States. The DVDs licensed and purchased from Lionsgate are expected to represent approximately 7.4% percent of the total DVDs licensed and purchased by Redbox for 2009. Under the Lionsgate Agreement, Redbox should receive delivery of the DVDs by the “street date,” defined in the Lionsgate Agreement as the initial date on which the pictures are distributed on a rental basis to the general public for the purpose of non-commercial home entertainment viewing.

Paramount agreement

     On August 25, 2009, Redbox entered into a revenue sharing license agreement (the “Paramount Agreement”) with Paramount Home Entertainment Inc. (“Paramount”) that runs from August 25, 2009, through December 31, 2009 (the “Initial Term”). Prior to December 15, 2009, Paramount has the unilateral right to extend the term of the Paramount Agreement to December 31, 2014 (the “Extended Term”). However, if Paramount does agree to the Extended Term, at Paramount’s discretion, the Paramount Agreement may be terminated earlier on December 31, 2011. Redbox estimates that it would pay Paramount approximately $561.0 million during the Initial Term and the Extended Term. During the Initial Term, Coinstar will provide a $28.0 million letter of credit to Paramount. The letter of credit took effect October 1, 2009. During the Extended Term, the letter of credit would be replaced with a Coinstar guarantee to Paramount of up to $25 million.

     Under the Paramount Agreement, Redbox agrees to license minimum quantities of theatrical and direct-to-video DVDs for rental in each location that has a Redbox DVD kiosk in the United States. The DVDs licensed and purchased from Paramount are expected to represent approximately 18.5% percent of the total DVDs licensed and purchased by Redbox for 2009. Under the Paramount Agreement, Redbox should receive delivery of the DVDs by the “street date,” defined in the Paramount Agreement as the first date on which the titles are available to the general public for home entertainment purposes, whether on a rental or sell-through basis.

Convertible debt

     In September 2009, we issued $200 million aggregate principal amount of 4% Convertible Senior Notes (the “Notes”) for proceeds, net of expenses, of approximately $193.3 million. The Notes bear interest at a fixed rate of 4% per annum, payable semi-annually in arrears on each March 1 and September 1, beginning March 1, 2010. The Notes mature on September 1, 2014. See further discussion below in “Liquidity and Capital Resources.”

Management of Business Segments

     In early 2008, we assessed our business segments due to changes in our business and product lines as well as our organizational structure. We redefined our business segments from North America and International to Coin and Entertainment services, DVD services, Money Transfer services and E-payment services. With the sale of the Entertainment Business during the third quarter of 2009 we now report Coin services as its own segment. Our business segments now include:

	•		Coin services — We offer self-service coin-counting services. We own and service all of our coin-counting kiosks, providing a convenient and trouble-free service to retailers. We own and operate the only multi-national fully-automated network of self-service coin-counting kiosks across the United States, Canada, Puerto Rico, Ireland, and in the United Kingdom. We generate revenue from coin-counting transaction fees from our customers and business partners.
	•		DVD services — Through Redbox and DVDXpress, we offer DVDs through our self-service kiosks where consumers can rent or purchase movies. Our DVD kiosks supply the functionality of a traditional video rental store, yet usually 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. We generate revenue primarily through fees charged to rent or purchase a DVD.
	•		Money Transfer services — Through 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. We generate revenue primarily through commissions earned on money transfer transactions.

•

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, selling prepaid phones and providing payroll card services. 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.

     We manage our business by evaluating the financial results of these segments, focusing primarily on segment revenue and segment operating income (loss) before depreciation and amortization, stock compensation expense and share-based payments (“segment operating income (loss)”). Segment operating income (loss) contains the internally allocated costs including the shared service functions, which consist primarily of sales, finance, legal, human resources, and information technology.

     We utilize segment revenue and segment operating income/loss because we believe they provide useful information for effectively allocating resources among business segments, evaluating the health of our business segments based on metrics that management can actively influence, and gauging our investments and our ability to service, incur or pay down debt. Specifically, our CEO evaluates segment revenue and segment operating income/loss, and assesses the performance of each business segment based on these measures, as well as, among other things, the prospects of each of the segments and how they fit into our overall strategy. Our CEO then decides how resources should be allocated among our business segments. For example, if a segment’s revenue decreases more than expected, our CEO may consider allocating less financial or other resources to that segment in the future.

     See Note 7 of the Consolidated Financial Statements for additional information regarding business segments.

Strategy

     Our strategy is based upon leveraging our core competencies in the automated retail space to provide the consumer with convenience and value and to help retailers drive incremental traffic and revenue. Our competencies include success in building strong consumer and retailer relationships, and in scaling and managing kiosk businesses. We build strong consumer relationships by providing valuable self-service products and services in convenient locations. We build strong retailer relationships by providing retailers with turnkey solutions that complement their businesses without significant outlays of time and financial resources.

     We expect to continue devoting significant resources to our automated retail strategy, developing the information technology systems and technology infrastructure necessary to support our products and services, and adding administrative personnel to support our growing organization. We expect to continue evaluating new marketing and promotional programs to increase use of our products and services. As the Money Transfer services and E-payment services do not leverage our core competencies in automated retail, we are currently considering strategic alternatives for these businesses.

Purchase of the remaining non-controlling interests in Redbox

     Effective on January 18, 2008, when 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%, we began consolidating Redbox’s financial results into our Consolidated Financial Statements.

     On February 26, 2009, we purchased the remaining outstanding interests of Redbox from GetAMovie, Inc. (“GAM”) and other minority interest holders, and GAM’s right, title and interest in a Term Promissory Note dated May 3, 2007 made by Redbox in favor of GAM in the principal amount of $10.0 million, paid initial consideration in the form of cash in the amount of $10.1 million and 1.75 million shares of our common stock valued at $27.7433 per share and recognized deferred consideration of $101.1 million, which was paid off along with the interest during the second and third quarter of 2009. The interest totaled $2.7 million. Redbox is now a wholly-owned subsidiary of Coinstar. The total consideration paid for the 2009 Redbox transaction was $162.4 million including cash of $113.9 million and Coinstar common stock of $48.5 million.

Results of Operations

Sale of Entertainment Business

     On September 8, 2009, we sold our subsidiaries comprising our Entertainment Business to National for nominal consideration. With the transaction, National assumed the operations of the Entertainment Business, including substantially

all of the Entertainment Business’s related assets and liabilities. As a result of the sale, we recorded a pre-tax loss on disposal of $49.8 million and a one-time tax benefit of $82.2 million during the third quarter of 2009. We have presented the result of the disposition of our Entertainment Business as well as the operating loss from our Entertainment Business under the discontinued operations in our Consolidated Statement of Operations, for all periods presented. The cash flows related to our Entertainment Business discontinued operations have been separately disclosed in our Consolidated Statement of Cash Flows.

     Revenue from discontinued operations was $90.6 million and $26.3 million for the nine month and three month periods ended September 30, 2009 and $117.1 million and $37.0 million for the nine month and three month periods ended September 30, 2008. The pretax loss from discontinued operations was $6.9 million and $1.0 million for the nine month and three month periods ended September 30, 2009, before the loss on disposal and related tax benefit, and the pretax loss from discontinued operations was $4.3 million for the nine month period ended September 30, 2008. During the three month period ended September 30, 2008 the pretax income from discontinued operations was $0.3 million.

     Our tax basis in the Entertainment Business was determined to be approximately $256.8 million which has been written off as worthless stock. However, the net tax benefit resulting from the worthless stock deduction was reduced by writing off the net deferred tax assets recorded on Entertainment Business’s books at the time of sale, resulting in a net one-time tax benefit of $82.2 million.

     The following table sets forth the computation of income (loss) from discontinued operations, net of tax for the periods indicated:

		Nine Month Periods								Three Month Periods
		Ended September 30,								Ended September 30,
		2009				2008				2009				2008
		(in thousands)								(in thousands)
(Loss) Income from discontinued operations (including loss on disposal of $49.8 million in the third quarter of 2009)		$	(56,784	)		$	(4,390	)		$	(50,887	)		$	307
Income tax benefit (expense) on discontinued operations			2,559				1,498				377				(319	)
One-time income tax benefit on loss on disposal in 2009			82,232				—				82,232				—
Income (loss) from discontinued operations, net of tax		$	28,007			$	(2,892	)		$	31,722			$	(12	)

     We redefined our business segments from North America and International to Coin and Entertainment services, DVD services, Money Transfer services and E-payment services in early 2008. With the sale of the Entertainment Business during the third quarter of 2009 we now report Coin services as its own segment. The amounts shown below exclude the Entertainment Business for all periods presented.

Summary of operating results

Total revenue/Total operating income

		Nine Month Periods Ended September 30,																Three Month Periods Ended September 30,
(In millions, except percentages)		2009				2008				$ Chng				% Chng				2009				2008				$ Chng				% Chng
Total consolidated revenue		$	816.8			$	533.8			$	283.0				53.0	%		$	296.0			$	203.5			$	92.5				45.5	%
Total consolidated income from operations		$	67.9			$	55.0			$	12.9				23.5	%		$	27.1			$	20.2			$	6.9				34.2	%
Income from operations as a % of Total Revenue			8.3	%			10.3	%											9.2	%			9.9	%

     The increases in our consolidated revenue for the nine and three month periods ended September 30, 2009 compared to the nine and three months ended September 30, 2008 were driven primarily by our DVD services segment as a result of the increased number of DVD installed kiosks in our retailers’ locations as well as the revenue growth of our existing installed kiosks. The increase in our DVD services revenue was $287.1 million and $94.0 million for nine month and three month periods ended September 30, 2009 compared to the prior year. The increase was partially offset by the decrease in revenue from the foreign operations of Coin and Money Transfer services due to unfavorable changes in currency exchange rates.

     Our consolidated income from operations was $67.9 million and $55.0 million for the nine months ended September 30, 2009 and September 30, 2008, respectively. Our consolidated income from operations, before depreciation, amortization and other of $72.8 million, stock compensation expense and share-based payments of $7.3 million totaled $148.0 million for the nine month periods ended September 30, 2009, compared to $109.5 million for the prior-year period. The increase of $38.5 million from our consolidated segment operating income was offset by the increase in depreciation and amortization of $24.6 million primarily due to the increase in installations of DVD kiosks. The decrease in consolidated income from operations as a percentage of total revenue was mostly driven by higher product costs primarily resulting from the decrease in DVD salvage values.

     Our consolidated income from operations was $27.1 million and $20.2 million for the three months ended September 30, 2009 and September 30, 2008, respectively. Our consolidated operating income, before depreciation, amortization and other of $25.5 million, stock compensation expense and share-based payments of $2.6 million totaled $55.1 million for the third quarter of 2009, compared to $39.9 million from the prior-year third quarter. The increase of $15.2 million from our consolidated segment operating income was offset by higher depreciation and amortization expense of $8.0 million due to the increase in installations of DVD kiosks. The decrease in consolidated income from operations as a percentage of total revenue was primarily due to lower Coin services operating income as a percentage of revenue partially offset by increased DVD services operating income as a percentage of revenue.

Segment Revenue/Operating income (loss)

Coin services

		Nine Month Periods Ended September 30,																Three Month Periods Ended September 30,
(In millions, except percentages)		2009				2008				$ Chng				% Chng				2009				2008				$ Chng				% Chng
Coin services revenue		$	192.4			$	194.8			$	(2.4	)			-1.2	%		$	69.5			$	71.0			$	(1.5	)			-2.1	%
Coin services operating income		$	66.7			$	68.7			$	(2.0	)			-2.9	%		$	23.4			$	25.4			$	(2.0	)			-7.9	%
Operating income as a % of segment revenue			34.7	%			35.3	%											33.7	%			35.8	%

     The decreases in Coin services revenue for the nine and three month periods ended September 30, 2009 compared to the nine and three months ended September 30, 2008 were primarily driven by the unfavorable foreign exchange rates which have negatively impacted our Coin revenue by approximately $6.1 million and $1.4 million for the nine and three month periods ended September 30, 2009 compared to the prior year periods. Excluding the impact of foreign currency fluctuations, Coin revenue increased by $3.7 million (or 1.9%) for the nine month periods ended September 30, 2009 compared to the prior year periods and stayed consistent for the third quarter comparing to the prior year.

     The decrease in segment operating income for the nine month period ended September 30, 2009 compared to the nine months ended September 30, 2008 is primarily driven by the decline in segment revenue, partially offset by the decrease in the direct marketing expense resulting from the timing of marketing campaign activities. Coin service operating income as a percentage of revenue was fairly consistent period over period, 34.7% and 35.3% for the nine month periods ended September 30, 2009 and September 30, 2008. Coin services income from operations decreased as a percentage of revenue for the three months ended September 30, 2009 compared to the prior year period due to certain fixed costs remaining static while Coin services revenue decreased for the quarter.

DVD services

		Nine Month Periods Ended September 30,																Three Month Periods Ended September 30,
(In millions, except percentages)		2009				2008				$ Chng				% Chng				2009				2008				$ Chng				% Chng
DVD services revenue		$	541.7			$	254.6			$	287.1				112.8	%		$	198.1			$	104.2			$	93.9				90.1	%
DVD services operating income		$	91.5			$	49.5			$	42.0				84.8	%		$	34.5			$	17.7			$	16.8				94.9	%
Operating income as a % of segment revenue			16.9	%			19.4	%											17.4	%			17.0	%

     DVD services revenue for the nine months of 2008 above does not include $11.0 million for the period January 1, 2008 through January 17, 2008 when we did not consolidate Redbox. The remaining increases in DVD services revenue for the nine and three month periods ended September 30, 2009 compared to the nine and three months ended September 30, 2008 were driven by the increase in the number of rentals as a result of new kiosk placements compared to the prior year as well as revenue growth from existing kiosks. At September 30, 2009, we installed more than 8,800 additional DVD kiosks since September 30, 2008.

     The DVD services segment operating income increased year over year for both the nine and three month periods ended September 30, 2009 compared to prior year. The increases in segment operating income reflect the favorable revenue increase, offset in part by the DVD product costs to support the increased rental transactions, declines in DVD salvage values, and increased general and administration expenses to sustain the growth of the segment.

     The decline in DVD services segment operating income as a percentage of revenue for the nine month period ended September 30, 2009 compared to the prior year period was mostly driven by higher product costs, primarily resulting from the decrease in DVD salvage values. For the three month period ended September 30, 2009, the DVD services segment operating income as a percentage of revenue improved 40 basis points compared to the prior year period, as the impact of higher product costs, primarily resulting from the decrease in DVD salvage values, was more than offset by lower marketing expense as a percentage of revenue and the favorable impact of leveraging general and administrative expenses. Throughout the first nine months of 2009, one movie studio has restricted the distribution of DVDs to our DVD services segment. During October 2009, two additional movie studios began restricting the distribution of DVDs to our DVD services segment. The increased restriction of DVDs is expected to have a negative impact on the operating income margins in our DVD services business, because in these situations we must obtain DVD titles from alternative sources, often at a higher cost and often not in advantageous quantities.

Money Transfer services

		Nine Month Periods Ended September 30,																Three Month Periods Ended September 30,
(In millions, except percentages)		2009				2008				$ Chng				% Chng				2009				2008				$ Chng				% Chng
Money Transfer services revenue		$	64.6			$	66.3			$	(1.7	)			-2.6	%		$	22.5			$	22.0			$	0.5				2.3	%
Money Transfer services operating loss		$	(9.0	)		$	(9.4	)		$	0.4				-4.3	%		$	(2.2	)		$	(2.7	)		$	0.5				-18.5	%
Operating loss as a % of segment revenue			-13.9	%			-14.2	%											-9.8	%			-12.3	%

     The decline in revenue for the nine month period ended September 30, 2009 compared to the nine month period ended September 30, 2008 was largely due to a decrease in the average amount per transaction from approximately $571 to approximately $539. In addition, the unfavorable foreign currency exchange has negatively impacted the revenue. Our Money Transfer service revenue for the third quarter of 2009 increased compared to the prior year period. The increase was primarily driven by increased transaction volume from our foreign Money Transfer subsidiaries.

     Our Money Transfer service operating loss remained relatively flat for the nine month periods and three month periods ended September 30, 2009, compared to the nine month and three month periods ended September 30, 2008.

E-payment services

		Nine Month Periods Ended September 30,																Three Month Periods Ended September 30,
(In millions, except percentages)		2009				2008				$ Chng				% Chng				2009				2008				$ Chng				% Chng
E-payment revenue		$	18.1			$	18.1			$	—				0.0	%		$	5.9			$	6.3			$	(0.4	)			-6.3	%
E-payment operating (loss) income		$	(1.3	)		$	0.6			$	(1.9	)			-316.7	%		$	(0.6	)		$	(0.6	)		$	—				0.0	%
Operating loss or income as a % of segment revenue			-7.2	%			3.3	%											-10.2	%			-9.5	%

     The revenue from our E-payment services has remained relatively consistent for the nine and three month periods ended September 30, 2009 and September 30, 2008.

     The decline in our E-payment segment operating profit during the nine month periods ended September 30, 2009 compared to prior year was primarily due to income from the InComm settlement which generated $2.0 million of pre-tax income in the second quarter of 2008.

Expenses

Direct Operating Expenses

     Our direct operating expenses consist primarily of (1) amortization of our DVD library, (2) the percentage of transaction fees and commissions we pay to our retailers and agents, (3) credit card fees and coin pick-up, transportation and processing expenses, and (4) field operations support. Variations in the percentage of transaction fees and commissions we pay to our retailers and agents may result in increased expenses. Such variations are based on certain factors, such as total revenue, long-term non-cancelable contracts, installation of our machines in high traffic and/or urban or rural locations, E-payment capabilities, new product commitments, co-op marketing incentives, or other criteria.

		Nine Month Periods Ended September 30,																Three Month Periods Ended September 30,
(In millions, except percentages)		2009				2008				$ Chng				% Chng				2009				2008				$ Chng				% Chng
Direct operating expenses		$	559.1			$	344.2			$	214.9				62.4	%		$	203.7			$	134.3			$	69.4				51.6	%
as a % of Total Revenue			68.5	%			64.5	%											68.8	%			66.0	%

     Direct operating expenses increased in the nine and three month periods ended September 30, 2009 compared to the nine and three month periods ended September 30, 2008 primarily due to the increased revenue in the DVD service segment, and the resulting variable expenses associated with the increased revenue. In addition, the direct operating expenses as a percentage of revenue increased by 400 basis points and 280 basis points for the nine and three month periods ended September 30, 2009 compared with the prior year periods. These increases were driven mainly by higher DVD product costs primarily resulting from a decrease in DVD salvage values. The total increases in direct operating expenses for DVD services were $221.9 million and $71.8 million for the nine and three month periods ended September 30, 2009. The increases were partially offset by the cost reduction in our Money Transfer and E-payment services businesses.

Marketing

     Our marketing expenses represent our cost of advertising, traditional marketing, on-line marketing and public relations efforts in national and regional advertising and the major international markets in which we operate our Money Transfer services.

		Nine Month Periods Ended September 30,																Three Month Periods Ended September 30,
(In millions, except percentages)		2009				2008				$ Chng				% Chng				2009				2008				$ Chng				% Chng
Marketing		$	16.6			$	13.9			$	2.7				19.4	%		$	5.8			$	7.4			$	(1.6	)			-21.6	%
as a % of Total Revenue			2.0	%			2.6	%											2.0	%			3.6	%