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OUTERWALL INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
[October 30, 2014]

OUTERWALL INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


(Edgar Glimpses Via Acquire Media NewsEdge) 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 1A of Part II of this Quarterly Report on Form 10-Q and in Item 1A of Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 (our "2013 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. While we are focused on four consumer sectors, collectively our business segments and strategic investments currently operate within five consumer sectors: Entertainment, Money, Electronics, Beauty & Consumer Packaged Goods, and Health.


Our automated retail business model leverages technology advancements that allow delivery of new and innovative consumer products in a compact, automated format.

We believe this model positions us to address retailers' increasing need to provide more in less space driven by increased urbanization and consumers' increasing expectation of instant gratification. Our products and services can be found at approximately 66,550 kiosks in leading supermarkets, drug stores, mass merchants, financial institutions, convenience stores, malls and restaurants.

Core Offerings We have two core businesses: • Our Redbox business segment ("Redbox"), where consumers can rent or purchase movies and video games from self-service kiosks is focused on the entertainment consumer sector.

• Our Coinstar business segment ("Coinstar") is focused on the money consumer sector and provides self-service kiosks where consumers can convert their coins to cash and convert coins and paper bills to stored value products.

We also offer self-service kiosks that exchange gift cards for cash under our Coinstar™ Exchange brand.

New Ventures We identify, evaluate, build or acquire and develop innovative new self-service concepts in the automated retail space in our New Ventures business segment ("New Ventures"). Self-service kiosk concepts we are currently exploring in the marketplace are our ecoATM concept, in the Electronics sector, which provides an automated self-service kiosk where consumers can recycle mobile devices for cash and our consumer product sampling concept SAMPLEit, in the Beauty and Consumer Packaged Goods sector. New Ventures concepts are regularly assessed to determine whether continued funding or other alternatives are appropriate. Subsequent to our acquisition of ecoATM in the third quarter of 2013, results from ecoATM are included within our New Ventures segment results.

Strategic Investments and Joint Venture On occasion, we make strategic investments in external companies that provide automated self-service kiosk solutions. For example, in the Health sector we have invested in SoloHealth, Inc. See Note 8: Equity Method Investments and Related Party Transactions in our Notes to Consolidated Financial Statements for more information and information regarding our acquisition of ecoATM, one of our prior strategic investments.

On October 19, 2014, Redbox and Verizon entered into an agreement whereby Redbox would withdraw from the Joint Venture. See Note 20: Subsequent Events in our Notes to Consolidated Financial Statements for information regarding the terms of the withdrawal agreement.

41-------------------------------------------------------------------------------- Table of Contents 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 deploying, scaling and managing kiosk businesses. We build strong retailer relationships by providing retailers with turnkey solutions that complement their businesses without significant outlays of time and financial resources. We believe we have significant opportunities to continue to grow our revenues, profitability and cash flow by capitalizing on our strengths and favorable industry trends through the execution of the following strategies: • Continue growing our Redbox business profitably. We are focused on profitably growing Redbox through increased revenue generation and improved kiosk-operations efficiency.

We expect to continue to grow revenue through attracting new customers, improving the Blu-ray rental mix, and utilizing our customer management tools.

Blu-ray drives revenue growth by shifting rentals to its higher revenue price point, $1.50 per night, and higher margin dollars per rental. Not only does Blu-ray provide a strong financial benefit to our business, but it also offers consumers a better viewing experience due to superior picture and sound quality compared to other home video rental formats (including digital streaming).

Further, our customer management tools allow us to provide personalized recommendations and promotions to our customers, which helps us generate incremental revenue. In addition, if we were to increase pricing as a result of ongoing testing, we expect it would have a positive impact on revenue.

While we have substantially completed the build out of our Redbox network in the U.S., we believe we can improve financial performance by redeploying underperforming kiosks to lower kiosk density or higher-consumer-traffic areas.

We also have retrofitted a significant percentage of our existing kiosks to provide increased capacity, which enables Redbox to retain discs in the kiosks longer without a material increase in product cost thereby allowing us to provide greater title selection and copy depth to generate incremental rentals.

Our kiosk retrofit has yielded the equivalent of approximately 5,000 kiosks of new capacity at significantly lower cost as compared to equivalent new kiosk installation. We also continuously improve our proprietary algorithms allowing Redbox to more accurately predict daily title availability and demand at individual kiosk locations. From a financial perspective, we expect these strategies to help offset the expected secular decline in the physical rental market.

• Optimize and grow revenues from our Coinstar business. As with Redbox, we believe we can improve financial performance in our Coinstar business through kiosk optimization. We continue to focus on finding attractive locations for our kiosks, including through redeployment of underperforming kiosks to lower-kiosk-density or higher-consumer-traffic areas. Further, the Coinstar business continues to develop consumer-oriented products and services, such as Coinstar Exchange, and to expand into other channels, such as financial institutions, where we can leverage our Coinstar platform.

• Use our expertise to continue to develop our existing businesses and new innovative automated retail solutions. Through Redbox and Coinstar, we have demonstrated our ability to profitably scale automated retail solutions. We also leverage those core competencies to identify, evaluate, build or acquire, and develop new automated retail concepts through both organic and inorganic opportunities. For example, in the third quarter of 2013, we acquired ecoATM, one of our previous strategic investments. Further, we continue to make modest investments to test our product sampling kiosk concept, SAMPLEit. We are committed to addressing the changing needs and preferences of our consumers, including through strategic investments.

42 -------------------------------------------------------------------------------- Table of Contents Recent Events Q3 2014 Events • On September 26, 2014, Universal Studios Home Entertainment LLC exercised its option to extend the term of the revenue sharing license agreement between Redbox and Universal through December 31, 2015.

• On September 2, 2014, our remaining outstanding 4.0% Convertible Senior Notes ("Convertible Notes") matured. In the three months ended September 30, 2014, we retired or settled upon maturity $33.4 million in face value of Convertible Notes for $33.4 million in cash and the issuance of 248,944 shares of our common stock. See Note 9: Debt and Other Long-Term Liabilities in our Notes to Consolidated Financial Statements for more information.

• During the three months ended September 30, 2014, we repurchased 1,185,970 shares of our common stock at an average price of $59.52 per share for $70.6 million.(1) Q2 2014 Events • On June 27, 2014, Sony notified us of their intent to extend our existing content license agreement with them. This extension will extend the license period through September 30, 2015.

• On June 24, 2014, we entered into a new credit facility arrangement consisting of a senior secured $600.0 million revolving line of credit that, under certain conditions, may be increased up to an additional $200.0 million in aggregate, and a senior secured $150.0 million amortizing term loan. The maturity of the credit facility is extended until June 24, 2019.

• On June 9, 2014, we consummated a private offering to sell $300.0 million in aggregate principal amount of senior unsecured notes due 2021. We used the proceeds to repay indebtedness under our prior credit facility and for general corporate purposes.

• During the three months ended June, 30, 2014, we repurchased 711,556 shares of our common stock at an average price of $70.27 per share for $50.0 million.(1) Q1 2014 Events • During January 2014, we repurchased 736,000 shares of our common stock at an average price of $67.93 per share for $50.0 million.(1) • During the three months ended March 31, 2014, we executed a tender offer in which we accepted for payment an aggregate of 5,291,701 shares of our common stock at a final purchase price of $70.07 per share, for an aggregate cost of $370.8 million, excluding fees and expenses.(1) (1) Shares purchased as part of publicly announced repurchase plans or programs as approved by Board of Directors. See Note 10: Repurchases of Common Stock in our Notes to Consolidated Financial Statements for more information.

Subsequent Events • On October 27, 2014, we entered into an Amended and Restated Home Video Lease Output Agreement (the "Letter Agreement") with Lions Gate Films, Inc. ("Lionsgate"). The Letter Agreement extends the term of Redbox's arrangement to license theatrical and direct-to-video titles released by Lionsgate through September 30, 2016, which will be automatically extended for an additional year under certain conditions. See Note 20: Subsequent Events in our Notes to Consolidated Financial Statements for more information.

• On October 19, 2014, the Redbox and Verizon entered into an agreement whereby we would withdraw from the Joint Venture. See Note 20: Subsequent Events in our Notes to Consolidated Financial Statements for information regarding the terms of the withdrawal agreement.

43-------------------------------------------------------------------------------- Table of Contents Consolidated Results The discussion and analysis that follows covers our results from continuing operations: Three Months Ended Nine Months Ended September 30, Change September 30, Change Dollars in thousands, except per share amounts 2014 2013 $ % 2014 2013 $ % Revenue $ 552,864 $ 586,539 $ (33,675 ) (5.7)% $ 1,702,403 $ 1,712,896 $ (10,493 ) (0.6 )% Operating income $ 56,561 $ 55,194 $ 1,367 2.5 % $ 163,195 $ 187,977 $ (24,782 ) (13.2 )% Income from continuing operations $ 17,890 $ 86,795 $ (68,905 ) (79.4 )% $ 63,586 $ 165,215 $ (101,629 ) (61.5 )% Diluted earnings per share from continuing operations $ 0.93 $ 3.10 $ (2.17 ) (70.0 )% $ 2.98 $ 5.78 $ (2.80 ) (48.4 )% Comparing three months ended September 30, 2014 to three months ended September 30, 2013 Revenue decreased $33.7 million, or 5.7%, primarily due to: • $53.6 million decrease from our Redbox segment primarily due to a 11.8% decrease in same store sales, which we believe to be primarily due to the timing of releases and the continued impact of a considerably weaker second quarter 2014 content release schedule that was partially offset by the comparable strength of content in the third quarter, which resulted in 13.7% fewer rentals in the third quarter of 2014 compared to the third quarter of 2013; partially offset by • $14.5 million increase from our New Ventures segment primarily due to the inclusion of ecoATM results in the third quarter of 2014 subsequent to our acquisition of ecoATM on July 23, 2013 and an increase of 730 kiosks installed from 820 as of September 30, 2013 to 1,550 as of September 30, 2014; and • $5.5 million increase from our Coinstar segment, primarily due to growth of U.S. same store sales driven by a price increase implemented across all grocery locations in the U.S. which was effective October 1, 2013, higher volume in the U.K. due to an increased U.K. kiosk base, a price increase effective August 1, 2014 for all U.K. grocery retail locations for the coin voucher product taking the rate from 8.9% to 9.9% resulting in higher U.K.

same store sales, and growth in the number of Coinstar Exchange kiosks.

Operating income increased $1.4 million, or 2.5%, primarily due to: • $5.3 million increase in operating income within our Coinstar segment primarily due to revenue growth; partially offset by • $2.0 million decrease in operating income within our Redbox segment due to a revenue decline partially offset by expense reductions; • $1.0 million increase in operating loss within our New Ventures segment, primarily from investments being made to scale the ecoATM business; and • $0.9 million increase in share based expense not allocated to our segments primarily as a result of rights to receive cash we issued as replacement awards for unvested restricted stock as part of our acquisition of ecoATM in the third quarter of 2013.

Income from continuing operations decreased $68.9 million, or 79.4%, primarily due to: • $69.3 million increase in loss from equity method investments primarily due to the $68.4 million gain recorded in the third quarter of 2013 on the re-measurement of our previously held equity interest in ecoATM to its acquisition date fair value; and • $4.1 million increase in interest expense due to increased borrowings; partially offset by • $1.4 million increase in operating income discussed above; and • $3.7 million decrease in income tax expense.

44-------------------------------------------------------------------------------- Table of Contents Comparing nine months ended September 30, 2014 to nine months ended September 30, 2013 Revenue decreased $10.5 million, or 0.6%, primarily due to: • $78.9 million decrease from our Redbox segment primarily due to a 6.1% decrease in same store sales which we believe to be primarily due to the timing of releases and a considerably weaker release schedule in the second quarter of 2014 that resulted in 7.2% fewer rentals in the first nine months of 2014 compared to the first nine months of 2013; partially offset by • $54.3 million increase from our New Ventures segment primarily due to the inclusion of ecoATM results beginning on the July 23, 2013 acquisition date and an increase of 730 kiosks installed from 820 as of September 30, 2013 to 1,550 as of September 30, 2014; and • $14.2 million increase from our Coinstar segment, primarily due to growth of U.S. same store sales driven by a price increase implemented across all grocery locations in the U.S. which was effective October 1, 2013, higher volume in the U.K. due to an increased U.K. kiosk base and a price increase effective August 1, 2014 for all U.K. grocery retail locations for the coin voucher product taking the rate from 8.9% to 9.9% resulting in higher U.K.

same store sales, and growth in the number of Coinstar Exchange kiosks.

Operating income decreased $24.8 million, or 13.2%, primarily due to: • $14.9 million decrease in operating income within our Redbox segment primarily due to a $78.9 million decrease in revenue partially offset by a $37.6 million decrease in direct operating expenses and a $22.3 million decrease in general and administrative expenses. Product cost, included within direct operating expense, for the nine months ended September 30, 2013 would have been $23.8 million higher had the new methodology for amortizing product costs in our content library that we implemented on a prospective basis in the second quarter of 2013 had been in place for the duration of the respective license periods of the titles in the content library as costs would have shifted from prior periods; • $15.9 million increase in operating loss within our New Ventures segment, primarily from investments being made to scale the ecoATM business; and • $8.3 million increase in share based expense not allocated to our segments primarily as a result of rights to receive cash we issued as replacement awards for unvested restricted stock as part of our acquisition of ecoATM in the third quarter of 2013; partially offset by • $14.3 million increase in operating income within our Coinstar segment primarily due to $14.2 million increase in revenue, $1.4 million increase in general and administrative expenses primarily due to increased expenses associated with the growth of our Coinstar Exchange business, $1.1 million increase in direct operating expenses due to increased selling and customer service costs to support higher revenues, $1.0 million increase in marketing expenses primarily due to media buys for print, online and radio to support the growth of our Coinstar Exchange business, and $1.0 million increase in depreciation and amortization expense due to higher depreciation expense as a result of continued investment in our corporate technology infrastructure.

Income from continuing operations decreased $101.6 million, or 61.5%, primarily due to: • $72.5 million increase in losses from equity method investments primarily due to the $68.4 million gain recorded in the third quarter of 2013 on the re-measurement of our previously held equity interest in ecoATM to its acquisition date fair value; • $24.8 million decrease in operating income as described above; • $9.1 million increase in interest expense due to increased borrowings; partially offset by • $3.3 million decrease in income tax expense; and • $1.5 million decrease in other expenses.

45-------------------------------------------------------------------------------- Table of Contents Share-Based Payments and Rights to Receive Cash Our share-based payments consist of share-based compensation granted to executives, non-employee directors and employees and share-based payments granted to movie studios as part of content agreements. We grant stock options, restricted stock and performance-based restricted stock to executives and non-employee directors and restricted stock to our employees. In connection with our acquisition of ecoATM, we also granted certain rights to receive cash. We also granted restricted stock to certain movie studios as part of content agreements with our Redbox segment. The expense associated with the grants to movie studios is allocated to our Redbox segment and included within direct operating expenses. The expenses associated with share-based compensation to our executives, non-employee directors, employees and related to the rights to receive cash issued in connection with our acquisition of ecoATM are part of our shared services support function and are not allocated to our segments. The components of our unallocated share-based compensation expense are presented in the following table.

Unallocated Share-Based Compensation and Rights to Receive Cash Expense Three Months Ended Nine Months Ended September 30, Change September 30, Change Dollars in thousands 2014 2013 $ % 2014 2013 $ % Direct operating $ 1,903 $ 1,267 $ 636 50.2 % $ 5,214 $ 1,974 $ 3,240 164.1 % Marketing 678 739 (61 ) (8.3 )% 2,275 893 1,382 NM* Research and development 832 655 177 27.0 % 2,788 836 1,952 233.5 % General and administrative 3,139 2,973 166 5.6 % 9,847 8,135 1,712 21.0 % Total $ 6,552 $ 5,634 $ 918 16.3 % $ 20,124 $ 11,838 $ 8,286 70.0 % * Not meaningful Unallocated share-based compensation expense increased $0.9 million, or 16.3% and $8.3 million, or 70.0% during the three and nine months ended September 30, 2014, respectively, due to rights to receive cash we issued as replacement awards for unvested restricted stock as part of our acquisition of ecoATM in the third quarter of 2013 and changes in the fair value of restricted stock awards granted. See Note 11: Share-Based Payments in our Notes to Consolidated Financial Statements for more information.

Segment Results Our discussion and analysis that follows covers results of operations for our Redbox, Coinstar and New Ventures segments.

We manage our business by evaluating the financial results of our segments, focusing primarily on segment revenue and segment operating income before depreciation, amortization and other and share-based compensation granted to executives, non-employee directors and employees ("segment operating income").

Segment operating income contains internally allocated costs of our shared services support functions, including but not limited to, corporate executive management, business development, sales, customer service, finance, legal, human resources, information technology, and risk management. We also review depreciation and amortization allocated to each segment.

Management utilizes segment revenue and segment operating income to evaluate the health of our business segments and in consideration of allocating resources among our business segments. Specifically, our CEO evaluates segment revenue and segment operating income, 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 increases more than expected, our CEO may consider allocating more financial or other resources to that segment in the future. We periodically evaluate our shared services support function's allocation methods used for segment reporting purposes, which may result in changes to segment allocations in future periods.

We also review same store sales, which we calculate for our segments on a location basis. Most of our locations have a single kiosk, but in locations with a high-performing kiosk, we may add additional kiosks to drive incremental revenue and provide a broader product offering. Same store sales reflects the change in revenue from locations that have been operating for more than 13 months by the end of the reporting period compared with the same locations in the same period of the prior year. The same store sales metric is not applicable to our ecoATM business because transactions at the kiosk are for product acquisition, not sales.

Detailed financial information about our business segments, including significant customer relationships is provided in Note 15: Business Segments and Enterprise-Wide Information in our Notes to Consolidated Financial Statements.

46-------------------------------------------------------------------------------- Table of Contents Redbox Three Months Ended Nine Months Ended Dollars in thousands, except September 30, Change September 30, Change net revenue per rental amounts 2014 2013 $ % 2014 2013 $ % Revenue $ 438,048 $ 491,694 $ (53,646 ) (10.9 )% $ 1,399,185 $ 1,478,132 $ (78,947 ) (5.3 )% Expenses: Direct operating 312,792 350,759 (37,967 ) (10.8 )% 1,003,097 1,040,706 (37,609 ) (3.6 )% Marketing 6,038 5,883 155 2.6 % 17,282 18,057 (775 ) (4.3 )% Research and development 15 69 (54 ) (78.3 )% 41 73 (32 ) (43.8 )% General and administrative 33,527 44,017 (10,490 ) (23.8 )% 106,658 128,963 (22,305 ) (17.3 )% Segment operating income 85,676 90,966 (5,290 ) (5.8 )% 272,107 290,333 (18,226 ) (6.3 )% Less: depreciation and amortization (38,207 ) (41,478 ) 3,271 (7.9 )% (118,928 ) (122,219 ) 3,291 (2.7 )% Operating income $ 47,469 $ 49,488 $ (2,019 ) (4.1 )% $ 153,179 $ 168,114 $ (14,935 ) (8.9 )% Operating income as a percentage of revenue 10.8 % 10.1 % 10.9 % 11.4 % Same store sales growth (decline) (11.8 )% 2.1 % (6.1 )% (5.8 )% Effect on change in revenue from same store sales growth (decline) $ (57,302 ) $ 9,121 $ (66,423 ) (728.2 )% $ (89,572 ) $ (79,940 ) $ (9,632 ) 12.0 % Ending number of kiosks* 43,790 43,600 190 0.4 % 43,790 43,600 190 0.4 % Total rentals (in thousands)* 172,172 199,480 (27,308 ) (13.7 )% 541,466 583,707 (42,241 ) (7.2 )% Net revenue per rental $ 2.54 $ 2.46 $ 0.08 3.3 % $ 2.58 $ 2.53 $ 0.05 2.0 % * Excludes kiosks and the impact of kiosks acquired as part of the 2012 NCR Asset Acquisition which occurred on June 22, 2012. We acquired approximately 6,200 active kiosks. Approximately 1,900 of these kiosks remained in service at December 31, 2012. During the first quarter of 2013, we replaced 100 of these kiosks with Redbox kiosks and we removed but did not replace 1,500 more. As a result, there were approximately 300 of these kiosks still in service at March 31, 2013. During the three months ended September 30, 2013, kiosks acquired as part of the NCR acquisition made a negligible contribution to revenue. During the nine months ended September 30, 2013, kiosks acquired as part of the NCR acquisition generated revenue of approximately $2.8 million from 0.8 million rentals.

47-------------------------------------------------------------------------------- Table of Contents The comparable performance of our content library is continually affected by seasonality, the timing of the release slate and the relative attractiveness of titles available for rent in a particular quarter or year which may have lingering effects in subsequent periods. Compared with prior periods when kiosk installations were increasing and helping drive growth, Redbox revenue and other operating results may be more affected by these factors.

Comparing three months ended September 30, 2014 to three months ended September 30, 2013 Revenue decreased $53.6 million, or 10.9%, primarily due to the following: • $57.3 million decrease from an 11.8% decrease in same store sales primarily due to: • Timing of releases - total box office (calculated as the total box office of titles with total North American box office receipts of at least $5.0 million) during the quarter increased 7.9%, however, excluding releases on the last day of the quarter, total box office decreased 2.8%; and • Soft flow-through from the second quarter of 2014 - a 37.5% lower box office and timing of releases during the second quarter of 2014 as compared to the second quarter of 2013 lead to a lack of strong recent content at the end of the second quarter of 2014 which contributed to a 13.7% decrease in rentals in the third quarter of 2014 compared to the third quarter of 2013, partially offset by • $3.7 million in sales from newly installed or relocated kiosks.

Net revenue per rental increased $0.08 to $2.54 primarily due to: • A continued increase in Blu-ray rentals which represent 15.1% of total disc rentals and 17.6% of revenue during the quarter as compared to 13.0% and 15.3% during the prior quarter; • Further stabilization in single night rentals due to more effective promotional activity that leverages customer-specific offerings; and • Higher mix of video game rentals which increased from 1.9% to 2.1% of total disc rentals and have a higher daily rental fee than discs.

We consider Blu-ray a key focus for future revenue growth as it has a higher revenue and margin dollar per rental and offers consumers a better viewing experience due to superior picture and sound quality compared to other options such as digital streaming and video on demand.

Operating income decreased $2.0 million or 4.1% primarily due to the following offsetting impacts: • $53.6 million decrease in revenue as described above; partially offset by • $38.0 million decrease in direct operating expenses, which were 71.4% of revenue during the quarter and 71.3% during the prior quarter, primarily due to: • $21.9 million decrease in product costs to $189.1 million primarily from less amortization of second quarter and prior releases as a result of lower prior period purchases and efficientmanagement of content purchases during the third quarter. Our gross margin for the quarter was 56.8%, a decrease of 30 basis points from the prior quarter, and • Lower retailer revenue sharing expenses primarily due to lower revenue, lower payment card processing fees due to fewer rentals and decreases in supply chain and repair and maintenance expenses due to cost containment measures; and • $10.5 million decrease in general and administrative expenses primarily due to expense reductions attributable to corporate restructuring, lower variable expenses, lower legal fees and general cost containment initiatives.

48-------------------------------------------------------------------------------- Table of Contents Comparing nine months ended September 30, 2014 to nine months ended September 30, 2013 Revenue decreased $78.9 million, or 5.3%, primarily due to the following: • $89.6 million decrease from a 6.1% decrease in same store sales primarily due to: • Timing of releases - total box office (as defined above) during the first nine months of 2014 increased 2.2%, however, excluding releases on the last day of the period, total box office decreased 1.1%; • Soft flow-through from the second quarter of 2014 - 37.5% lower box office during the second quarter and 2.8% lower box office during the third quarter (when excluding content releases on the last day of the quarter) were partially offset by 28.1% higher box office during the first quarter. The significantly lower box office during the second quarter lead to a lack of strong recent content at quarter end which contributed to a 13.7% decrease in rentals in the third quarter and the 7.2% decrease in rentals for the nine month period; • $2.8 million decrease from revenue earned by kiosks acquired from NCR that were subsequently closed and removed from service; partially offset by • $13.4 million in revenue from newly installed or relocated kiosks including the replacement of the remaining NCR kiosks.

Net revenue per rental increased $0.05 to $2.58 primarily due to: • A continued increase in Blu-ray rentals which represent 14.8% of total disc rentals and 17.4% of revenue during the first nine months of 2014 as compared to 12.8% and 15.0% during the prior year; and • Further stabilization in single night rentals due to more effective promotional activity that leverages customer-specific offerings lead to a 23.7% reduction in promotional spend; partially offset by • Lower video game rentals, which declined 20.2% during the first nine months of 2014 as compared to the prior year due to a lighter release slate during the first and second quarters and the game industry's shift to next generation platforms.

Operating income decreased $14.9 million, or 8.9%, primarily due to the following: • $78.9 million decrease in revenue as described above; partially offset by • $37.6 million decrease in direct operating expenses, which were 71.7% of revenue during the first nine months of 2014 as compared to 70.4% during the prior year, not including the comparability impact arising from the change in how we amortize product costs discussed below, primarily as a result of: • Product costs decreasing $13.7 million to $611.0 million, with gross margin decreased by 140 basis points to 56.3% during the first nine months of 2014, primarily due to a change in how we amortize our product costs in our content library that was prospectivelyapplied as explained in Note 2: Summary of Significant AccountingPolicies in our Notes to Consolidated Financial Statements resulting in a $21.7 million benefit which was recorded in the second quarter of 2013 to reflect an increase in the ending value of the Redbox content library as of June 30, 2013. For comparability purposes, product cost for the first nine months of 2013 would have been $23.8 million higher had the new methodology been applied retrospectively as costs would have shifted from prior periods into the first nine months of 2013; • Further impacting gross margin was the performance of thecontent library as a result of the weak release schedule in the second quarter of 2014, partially offset by reduced promotionalactivity, a $1.9 million decrease in studio-related share-based expenses and closing underperforming NCR kiosks. The first nine months of 2013 benefited from an $11.4 million reduction in a loss contingency that had been previously expensed in 2012; • Direct operating expenses were also impacted by lowerretailer revenue sharing expenses primarily due to lower revenue, lower payment card processing fees due to fewer rentals and general cost containment initiatives; • $22.3 million decrease in general and administrative expenses primarily as a result of ongoing cost reduction initiatives, including payroll related savings arising from our December 2013 workforce reduction and lower variable expenses associated with IT infrastructure costs, temporary staffing, legal and professional fees; and • $0.8 million decrease in marketing costs due to cost containment initiatives and more efficient title and customer-specific marketing campaigns.

49-------------------------------------------------------------------------------- Table of Contents Coinstar Three Months Ended Nine Months Ended Dollars in thousands, September 30, Change September 30, Change except average transaction size 2014 2013 $ % 2014 2013 $ % Revenue $ 85,074 $ 79,611 $ 5,463 6.9 % $ 233,707 $ 219,520 $ 14,187 6.5 % Expenses: Direct operating 42,428 41,833 595 1.4 % 120,354 119,290 1,064 0.9 % Marketing 1,834 1,352 482 35.7 % 4,397 3,357 1,040 31.0 % Research and development 64 1,428 (1,364 ) (95.5 )% 486 5,107 (4,621 ) (90.5 )% General and administrative 7,313 7,349 (36 ) (0.5 )% 21,502 20,077 1,425 7.1 % Segment operating income 33,435 27,649 5,786 20.9 % 86,968 71,689 15,279 21.3 % Less: Depreciation and amortization (8,989 ) (8,539 ) (450 ) 5.3 % (26,473 ) (25,493 ) (980 ) 3.8 % Operating income $ 24,446 $ 19,110 $ 5,336 27.9 % $ 60,495 $ 46,196 $ 14,299 31.0 % Operating income as a percentage of revenue 28.7 % 24.0 % 25.9 % 21.0 % Same store sales growth (decline) 5.8 % 0.4 % 5.2 % (0.1 )% Ending number of kiosks 21,210 20,800 410 2.0 % 21,210 20,800 410 2.0 % Total transactions (in thousands) 19,601 20,597 (996 ) (4.8 )% 55,039 57,651 (2,612 ) (4.5 )% Average transaction size $ 41.92 $ 41.25 $ 0.67 1.6 % $ 41.36 $ 40.40 $ 0.96 2.4 % Comparing three months ended September 30, 2014 to three months ended September 30, 2013 Revenue increased $5.5 million, or 6.9%, primarily due to growth of U.S. same store sales, higher volume in the U.K. due to an increased U.K. kiosk base, higher U.K. same store sales and a growth in the number of Coinstar Exchange kiosks. The increase in same store sales in the U.S. was driven by the price increase implemented across all grocery locations in the U.S. effective October 1, 2013. Effective August 1, 2014, we increased the coin voucher product transaction fee from 8.9% to 9.9% at all U.K. grocery retail locations, resulting in higher U.K. same store sales during the third quarter of 2014.

The average transaction size continued to increase while the number of transactions have declined. The decline in transactions is the result of larger pours and less frequent visits, a slight decrease in the U.S. kiosk base year over year as a result of optimization efforts, and the impact of the Royal Canadian Mint's penny reclamation efforts in Canada.

Operating income increased $5.3 million, or 27.9%, primarily due to the following: • $5.5 million increase in revenue as described above; and • $1.4 million decrease in research and development expenses primarily due to a reduction in kiosk hardware and software engineering efforts for Coinstar and Coinstar Exchange; partially offset by • $0.6 million increase in direct operating expenses due to increased revenue sharing, selling and customer service costs to support higher revenues; • $0.5 million increase in marketing expenses primarily due to a shift in timing of marketing spend for Coinstar in the U.S. to the second half of 2014 compared to the prior year and other corporate marketing initiatives; and • $0.5 million increase in depreciation and amortization expense due to higher depreciation expense as a result of continued investment in our corporate technology infrastructure.

50-------------------------------------------------------------------------------- Table of Contents Comparing nine months ended September 30, 2014 to nine months ended September 30, 2013 Revenue increased $14.2 million, or 6.5%, primarily due to growth of U.S. same store sales, higher volume in the U.K. due to an increased U.K. kiosk base, higher U.K. same store sales and growth in the number of Coinstar Exchange kiosks. The increase in same store sales in the U.S. was driven by the price increase implemented across all grocery locations in the U.S. which was effective October 1, 2013. The price increase in the U.K. discussed above resulted in higher U.K. same store sales during the third quarter of 2014.

The average transaction size continued to increase while the number of transactions have declined. The decline in transactions is the result of larger pours and less frequent visits, a slight decrease in the U.S. kiosk base year over year as a result of optimization efforts, and the impact of the penny reclamation in Canada.

Operating income increased $14.3 million, or 31.0%, primarily due to the following: • $14.2 million increase in revenue as described above; and • $4.6 million decrease in research and development expenses primarily due to a reduction in kiosk hardware and software engineering efforts for Coinstar and Coinstar Exchange; partially offset by • $1.4 million increase in general and administrative expenses primarily due to increased expenses associated with the growth of our Coinstar Exchange business; • $1.1 million increase in direct operating expenses due to increased selling and customer service costs to support higher revenues; • $1.0 million increase in marketing expenses primarily due to media buys for print, online and radio to support the growth of our Coinstar Exchange business; and • $1.0 million increase in depreciation and amortization expense due to higher depreciation expense as a result of continued investment in our corporate technology infrastructure.

51-------------------------------------------------------------------------------- Table of Contents New Ventures Three Months Ended Nine Months Ended September 30, Change September 30, Change Dollars in thousands 2014 2013 $ 2014 2013 $ Revenue $ 29,742 $ 15,234 $ 14,508 $ 69,511 $ 15,244 $ 54,267 Expenses: Direct operating 26,988 12,114 14,874 66,150 12,848 53,302 Marketing 1,212 421 791 3,188 596 2,592 Research and development 2,088 1,358 730 6,570 2,155 4,415 General and administrative 3,885 6,692 (2,807 ) 11,822 11,611 211 Segment operating loss (4,431 ) (5,351 ) 920 (18,219 ) (11,966 ) (6,253 ) Less: depreciation and amortization (4,371 ) (2,419 ) (1,952 ) (12,136 ) (2,529 ) (9,607 ) Operating loss $ (8,802 ) $ (7,770 ) $ (1,032 ) $ (30,355 ) $ (14,495 ) $ (15,860 ) Ending number of kiosks 1,550 820 730 1,550 820 730 On July 23, 2013 we completed the acquisition of ecoATM. The primary reason for the business combination was to expand Outerwall's presence in automated retail and gain exposure to the growing demand for refurbished electronic products and mobile devices. Also during 2013, except for ecoATM and our product sampling kiosk venture, SAMPLEit, we discontinued all other concepts and reclassified their results of operations to discontinued operations for all periods presented. See Note 13: Discontinued Operations for more information. The New Ventures results of operations presented here represent the results of ecoATM from the July 23, 2013 acquisition date and the results of SAMPLEit.

Comparing three months ended September 30, 2014 to three months ended September 30, 2013 Revenue increased $14.5 million primarily due to the acquisition of ecoATM as previously described and an increase of 730 kiosks installed from 820 as of September 30, 2013 to 1,550 as of September 30, 2014. The key drivers of ecoATM revenue are devices collected per kiosk per day, the percentage of those devices that are non-scrap and the average selling price that ecoATM receives when reselling the devices. Compared to the second quarter of 2014, we continued to see improvement in devices collected per kiosk per day through more competitive pricing and kiosk enhancements, as well as an increase in the quantity of high value devices collected. These factors, along with our higher installed kiosk base, combined to increase our revenue $5.9 million from the second quarter. As we expand our installed kiosk base, we expect our revenue to grow from these new kiosks, as well as the continued ramping of kiosks installed during the nine months of 2014. Additionally, we expect our expenses to increase due to operating these additional kiosks.

Operating loss increased $1.0 million primarily due to the following; • $14.9 million increase in direct operating expenses mainly due to costs associated with the acquisition, transportation and processing of mobile devices in our ecoATM business, as well as costs for servicing of our kiosks and payments to our retailers. As we install additional ecoATM kiosks and our existing kiosks continue to ramp, we expect to leverage the fixed cost portions of our direct operating expenses; • $2.0 million increase in depreciation and amortization expense from depreciation on our increased installed kiosk base and amortization expense related to certain ecoATM intangible assets acquired as part of the business combination; • $0.7 million increase in research and development expense primarily at ecoATM due to continued development of our kiosk hardware and software platforms; and • $0.8 million increase in marketing costs mainly due to costs to promote the ecoATM and SAMPLEit kiosks, as well as additional headcount to support our installed kiosk base; partially offset by • $2.8 million decrease in general and administrative expense primarily due to $4.0 million in transaction expenses related to the acquisition of ecoATM in the third quarter of 2013 partially offset by higher costs in the third quarter of 2014 to support the continued growth in our installed kiosk base, as well as expenses related to facilities expansion, and human resource programs; and • $14.5 million increase in revenue described above.

52-------------------------------------------------------------------------------- Table of Contents Comparing nine months ended September 30, 2014 to nine months ended September 30, 2013 Revenue increased $54.3 million primarily due to the acquisition of ecoATM as previously described and an increase of 730 kiosks installed from 820 as of September 30, 2013 to 1,550 as of September 30, 2014. While there are several drivers that impact ecoATM revenue, the key revenue drivers are devices collected per kiosk per day, the percentage of those devices that are high value devices and the average selling price that ecoATM receives when reselling the devices. In 2014, we continue to see improvement in devices collected per kiosk per day through more competitive pricing and kiosk enhancements, including the software solution we deployed in the fourth quarter of 2013 to alleviate the locked iPhone issue. As we expand our installed kiosk base, we expect our revenue to grow from these new kiosks, as well as the continued ramping of kiosks installed during the first nine months of 2014. Additionally, we expect our expenses to increase due to operating these additional kiosks.

Operating loss increased $15.9 million primarily due to the following; • $53.3 million increase in direct operating expenses mainly due to costs associated with the acquisition, transportation and processing of mobile devices in our ecoATM business, as well as costs for servicing of our kiosks and payments to our retailers. As we install additional ecoATM kiosks and our existing kiosks continue to ramp, we expect to leverage the fixed cost portions of our direct operating expenses; • $9.6 million increase in depreciation and amortization expense from depreciation on our increased installed kiosk base and amortization expense related to certain ecoATM intangible assets acquired as part of the business combination; • $4.4 million increase in research and development expense mainly at ecoATM due to continued development of our kiosk hardware and software platforms; • $2.6 million increase in marketing costs primarily due to costs to promote the ecoATM and SAMPLEit kiosks, as well as additional headcount to support our installed kiosk base; and • $0.2 million increase in general and administrative expense primarily due to higher costs to support the continued growth in our installed kiosk base, as well as expenses related to facilities expansion and human resource programs, partially offset by $5.7 million in transaction expenses related to the acquisition of ecoATM in the nine months ended September 30, 2013; partially offset by • $54.3 million increase in revenue described above.

53-------------------------------------------------------------------------------- Table of Contents Loss from equity method investments Comparing three months ended September 30, 2014 to three months ended September 30, 2013 Loss from equity method investments was $11.4 million compared to income of $57.9 million primarily due to a gain of $68.4 million in the third quarter of 2013 resulting from the re-measurement of our previously held equity interest in ecoATM at its acquisition date fair value offset by an increased loss from our investment in the Joint Venture. On October 19, 2014, the Company and Verizon entered into an agreement whereby we would withdraw from the Joint Venture. See Note 20: Subsequent Events in our Notes to Consolidated Financial Statements for information regarding the terms of the withdrawal agreement.

Additional financial information about our equity method investments is provided in Note 8: Equity Method Investments and Related Party Transactions in our Notes to Consolidated Financial Statements.

Comparing nine months ended September 30, 2014 to nine months ended September 30, 2013 Loss and income from equity method investments was $31.3 million of loss compared to income of $41.3 million primarily due to a gain of $68.4 million in the first nine months of 2013 resulting from the re-measurement of our previously held equity interest in ecoATM at its acquisition date fair value offset by an increased loss from our investment in the Joint Venture.

Interest Expense, Net Three Months Ended Nine Months Ended September 30, Change September 30, Change Dollars in thousands 2014 2013 $ % 2014 2013 $ % Cash interest expense $ 11,517 $ 7,304 $ 4,213 57.7 % $ 29,646 $ 17,716 $ 11,930 67.3 % Non-cash interest expense: Amortization of debt discount 616 804 (188 ) (23.4 )% 2,171 3,876 (1,705 ) (44.0 )% Amortization of deferred financing fees 285 366 (81 ) (22.1 )% 1,252 1,341 (89 ) (6.6 )% Other - (54 ) 54 (100.0 )% - (548 ) 548 (100.0 )% Total non-cash interest expense 901 1,116 (215 ) (19.3 )% 3,423 4,669 (1,246 ) (26.7 )% Total cash and non-cash interest expense 12,418 8,420 3,998 47.5 % 33,069 22,385 10,684 47.7 % Loss from early extinguishment of debt 55 1 54 NM* 2,018 5,950 (3,932 ) (66.1 )% Total interest expense $ 12,473 $ 8,421 $ 4,052 48.1 % $ 35,087 $ 28,335 $ 6,752 23.8 % Interest income (10 ) (19 ) 9 (47.4 )% (50 ) (2,382 ) 2,332 (97.9 )% Interest expense, net 12,463 8,402 4,061 48.3 % 35,037 25,953 9,084 35.0 % * Not meaningful Comparing three months ended September 30, 2014 to three months ended September 30, 2013 Interest expense, net increased $4.1 million, or 48.3%, primarily due to interest expense from increased borrowing.

Comparing nine months ended September 30, 2014 to nine months ended September 30, 2013 Interest expense, net increased $9.1 million, or 35.0%, primarily due to interest expense from increased borrowing and a $2.3 million decrease in interest income primarily due to the prior period including income from a note receivable which settled in the second half of 2013. This was partially offset by a $3.9 million decrease in losses from the early extinguishment or conversion of debt. See Note 9: Debt and Other Long-Term Liabilities in our Notes to Consolidated Financial Statements for more information.

54-------------------------------------------------------------------------------- Table of Contents Income Tax Expense Comparing three months ended September 30, 2014 to three months ended September 30, 2013 Our effective tax rate from continuing operations was 39.8% and 15.2% for the three months ended September 30, 2014 and 2013, respectively.

Our effective tax rate for the three months ended September 30, 2014 was higher than the U.S. Federal statutory rate of 35.0% due primarily to state income taxes, offset partially by the Domestic Production Activities Deduction, which we are entitled to based on our domestic manufacturing activities. Our effective tax rate for the three months ended September 30, 2013 was lower than the U.S.

Federal statutory rate of 35.0% due primarily to a $68.4 million nontaxable gain related to the re-measurement of our previously held equity interest in ecoATM and the Domestic Production Activities Deduction. The nontaxable gain decreased our effective tax rate by 23.4 percentage points for the three months ended September 30, 2013.

Comparing nine months ended September 30, 2014 to nine months ended September 30, 2013 Our effective tax rate from continuing operations was 33.1% and 17.4% for the nine months ended September 30, 2014 and 2013, respectively.

Our effective tax rate for the nine months ended September 30, 2014 was lower than the U.S. Federal statutory rate of 35.0% due primarily to the Domestic Production Activities Deduction, which was recorded net of a contingency reserve, and discrete benefits, offset partially by state income taxes.

Our effective tax rate for the nine months ended September 30, 2013 was lower than the U.S. Federal statutory rate of 35.0% due primarily to the following items. A $68.4 million nontaxable gain related to the re-measurement of our previously held equity interest in ecoATM decreased our effective tax rate by 12.0 percentage points. A second quarter discrete one-time tax benefit of $17.8 million, net of a valuation allowance, realized from an arrangement to sell certain NCR kiosks and a series of transactions to reorganize Redbox related subsidiary structures through the sale of a wholly owned subsidiary decreased our effective tax rate by 8.9 percentage points. Additionally, our effective tax rate was lower than the U.S. Federal statutory rate of 35.0% due to the Domestic Production Activities Deduction. These tax benefits were partially offset by state income taxes.

55-------------------------------------------------------------------------------- Table of Contents Non-GAAP Financial Measures Non-GAAP measures may be provided as a complement to results provided in accordance with United States generally accepted accounting principles ("GAAP").

We use the following non-GAAP financial measures to evaluate our financial results: • Core adjusted EBITDA from continuing operations; • Core diluted earnings per share ("EPS") from continuing operations; • Free cash flow; and • Net debt and net leverage ratio.

These measures, the definitions of which are presented below, are non-GAAP because they exclude certain amounts which are included in the most directly comparable measure calculated and presented in accordance with GAAP. Our non-GAAP financial measures are not meant to be considered in isolation or as a substitute for our GAAP financial measures and may not be comparable with similarly titled measures of other companies.

Core and Non-Core Results We distinguish our core activities, those associated with our primary operations which we directly control, from non-core activities. Non-core activities are primarily nonrecurring events or events we do not directly control. Our non-core adjustments for the periods presented include i) restructuring costs associated with actions to reduce costs in our continuing operations primarily through workforce reductions across the Company, ii) acquisition costs primarily related to the acquisition of ecoATM, iii) compensation expense for rights to receive cash issued in conjunction with our acquisition of ecoATM and attributable to post-combination services as they are fixed amount acquisition related awards and not indicative of the directly controllable future business results, iv) income or loss from equity method investments, which represents our share of income or loss from entities we do not consolidate or control and includes the impacts of the gain on re-measurement of our previously held equity interest in ecoATM upon acquisition , and v) tax benefits related to a net operating loss adjustment and the recognition of a worthless stock deduction in a corporate subsidiary ("Non-Core Adjustments").

We believe investors should consider our core results because they are more indicative of our ongoing performance and trends, are more consistent with how management evaluates our operational results and trends, provide meaningful supplemental information to investors through the exclusion of certain expenses which are either nonrecurring or may not be indicative of our directly controllable business operating results, allow for greater transparency in assessing our performance, help investors better analyze the results of our business and assist in forecasting future periods.

56-------------------------------------------------------------------------------- Table of Contents Core Adjusted EBITDA from continuing operations Our non-GAAP financial measure core adjusted EBITDA from continuing operations is defined as earnings from continuing operations before depreciation, amortization and other; interest expense, net; income taxes; share-based payments expense; and Non-Core Adjustments.

A reconciliation of core adjusted EBITDA from continuing operations to net income from continuing operations, the most comparable GAAP financial measure, is presented in the following table: Three Months Ended Nine Months Ended September 30, Change September 30, Change Dollars in thousands 2014 2013 $ % 2014 2013 $ % Net income from continuing operations $ 17,890 $ 86,795 $ (68,905 ) (79.4 )% $ 63,586 $ 165,215 $ (101,629 ) (61.5 )% Depreciation, amortization and other 51,567 52,436 (869 ) (1.7 )% 157,537 150,241 7,296 4.9 % Interest expense, net 12,463 8,402 4,061 48.3 % 35,037 25,953 9,084 35.0 % Income taxes 11,841 15,529 (3,688 ) (23.7 )% 31,454 34,766 (3,312 ) (9.5 )% Share-based payments expense(1) 3,249 2,774 475 17.1 % 10,093 11,454 (1,361 ) (11.9 )% Adjusted EBITDA from continuing operations 97,010 165,936 (68,926 ) (41.5 )% 297,707 387,629 (89,922 ) (23.2 )% Non-Core Adjustments: Restructuring costs - - - NM* 469 - 469 NM* Acquisition costs - 4,003 (4,003 ) (100.0 )% - 5,669 (5,669 ) (100.0 )% Rights to receive cash issued in connection with the acquisition of ecoATM 3,274 2,300 974 42.3 % 10,033 2,300 7,733 NM* Loss from equity method investments 11,352 10,442 910 8.7 % 31,261 27,096 4,165 15.4 % Gain on previously held equity interest in ecoATM - (68,376 ) 68,376 (100.0 )% - (68,376 ) 68,376 (100.0 )% Core adjusted EBITDA from continuing operations $ 111,636 $ 114,305 $ (2,669 ) (2.3 )% $ 339,470 $ 354,318 $ (14,848 ) (4.2 )% * Not Meaningful (1) Includes both non-cash share-based compensation for executives, non-employee directors and employees as well as share-based payments for content arrangements.

Comparing three months ended September 30, 2014 to three months ended September 30, 2013 The decrease in our core adjusted EBITDA from continuing operations was primarily due to decreased segment operating income in our Redbox segment and increased operating loss in our New Ventures segment during the third quarter of 2013, after excluding the $4.0 million of non-core ecoATM acquisition costs, partially offset by increased segment operating income in our Coinstar segment.

The other significant components of core adjusted EBITDA from continuing operations have been discussed previously in the Results of Operations section above.

Comparing nine months ended September 30, 2014 to nine months ended September 30, 2013 The decrease in our core adjusted EBITDA from continuing operations was primarily due to decreased segment operating income in our Redbox segment and increased segment operating loss in our New Ventures segment, including the impact of $5.7 million in non-core ecoATM acquisition costs, partially offset by increased segment operating income in our Coinstar segment. The other significant components of core adjusted EBITDA from continuing operations have been discussed previously in the Results of Operations section above.

57-------------------------------------------------------------------------------- Table of Contents Core Diluted EPS from continuing operations Our non-GAAP financial measure core diluted EPS from continuing operations is defined as diluted earnings per share from continuing operations excluding Non-Core Adjustments, net of applicable taxes.

A reconciliation of core diluted EPS from continuing operations to diluted EPS from continuing operations, the most comparable GAAP financial measure, is presented in the following table: Three Months Ended Nine Months Ended September 30, Change September 30, Change 2014 2013 $ % 2014 2013 $ % Diluted EPS from continuing operations $ 0.93 $ 3.10 $ (2.17 ) (70.0 )% $ 2.98 $ 5.78 $ (2.80 ) (48.4 )% Non-Core Adjustments, net of tax:(1) Restructuring costs - - - NM* 0.01 - 0.01 NM* Acquisition costs - 0.09 (0.09 ) (100.0 )% - 0.14 (0.14 ) (100.0 )% Rights to receive cash issued in connection with the acquisition of ecoATM 0.14 0.06 0.08 133.3 % 0.37 0.06 0.31 NM* Loss from equity method investments 0.36 0.23 0.13 56.5 % 0.89 0.58 0.31 53.4 % Gain on previously held equity interest on ecoATM - (2.36 ) 2.36 (100.0 )% - (2.32 ) 2.32 (100.0 )% Tax benefit from net operating loss adjustment - - - NM* (0.04 ) - (0.04 ) NM* Tax (benefit) expense of worthless stock deduction 0.01 - 0.01 NM* (0.10 ) - (0.10 ) NM* Core diluted EPS from continuing operations $ 1.44 $ 1.12 $ 0.32 28.6 % $ 4.11 $ 4.24 $ (0.13 ) (3.1 )% * Not Meaningful (1) Non-Core Adjustments are presented after-tax using the applicable effective tax rate for the respective periods.

Free Cash Flow Our non-GAAP financial measure free cash flow is defined as net cash provided by operating activities after capital expenditures. We believe free cash flow is an important non-GAAP measure as it provides additional information to users of the financial statements regarding our ability to service, incur or pay down indebtedness and repurchase our securities. A reconciliation of free cash flow to net cash provided by operating activities, the most comparable GAAP financial measure, is presented in the following table: Three Months Ended Nine Months Ended September 30, Change September 30, Change Dollars in thousands 2014 2013 $ % 2014 2013 $ % Net cash provided by operating activities $ 49,627 $ 60,943 $ (11,316 ) (18.6 )% $ 207,047 $ 147,121 $ 59,926 40.7 % Purchase of property and equipment (19,295 ) (39,102 ) 19,807 (50.7 )% (72,311 ) (123,346 ) 51,035 (41.4 )% Free cash flow $ 30,332 $ 21,841 $ 8,491 38.9 % $ 134,736 $ 23,775 $ 110,961 466.7 % An analysis of our net cash from operating activities and used in investing and financing activities is provided below.

58-------------------------------------------------------------------------------- Table of Contents Net Debt and Net Leverage Ratio Our non-GAAP financial measure net debt is defined as the total face value of outstanding debt, including capital leases, less cash and cash equivalents held in financial institutions domestically. Our non-GAAP financial measure net leverage ratio is defined as net debt divided by core adjusted EBITDA from continuing operations for the last twelve months (LTM). We believe net debt and net leverage ratio are important non-GAAP measures because they: • are used to assess the degree of leverage by management; • provide additional information to users of the financial statements regarding our ability to service, incur or pay down indebtedness and repurchase our securities as well as additional information about our capital structure; and • are reported quarterly to support covenant compliance under our credit agreement.

A reconciliation of net debt to total outstanding debt including capital leases, the most comparable GAAP financial measure, is presented in the following table: September 30, December 31, Change Dollars in thousands 2014 2013 $ % Senior unsecured notes(1) $ 650,000 $ 350,000 $ 300,000 85.7 % Term loans(1) 148,125 344,375 (196,250 ) (57.0 )% Revolving line of credit 210,000 - 210,000 NM* Convertible debt(1) - 51,148 (51,148 ) (100.0 )% Capital leases 18,051 21,361 (3,310 ) (15.5 )% Total principal value of outstanding debt including capital leases 1,026,176 766,884 259,292 33.8 % Less domestic cash and cash equivalents held in financial institutions (26,003 ) (199,027 ) 173,024 (86.9 )% Net debt 1,000,173 567,857 432,316 76.1 % LTM Core adjusted EBITDA from continuing operations(2) $ 476,804 $ 491,652 $ (14,848 ) (3.0 )% Net leverage ratio 2.10 1.15 * Not Meaningful (1) See debt section of Liquidity and Capital Resources below and Note 9: Debt and Other Long-Term Liabilities in our Notes to Consolidated Financial Statements for detail of associated debt discount.

(2) LTM Core Adjusted EBITDA from continuing operations for the twelve months ended September 30, 2014 and December 31, 2013 was determined as follows: Dollars in thousands Core adjusted EBITDA from continuing operations for the nine months ended September 30, 2014 $ 339,470 Add: Core adjusted EBITDA from continuing operations for the twelve months ended December 31, 2013(A) 491,652 Less: Core adjusted EBITDA from continuing operations for the nine months ended September 30, 2013 (354,318 ) LTM Core adjusted EBITDA from continuing operations for the twelve months ended September 30, 2014 $ 476,804 (A) Core adjusted EBITDA from continuing operations for the twelve months ended December 31, 2013 is obtained from our Annual Report on Form 10-K for the period ended December 31, 2013, where it is reconciled to net income from continuing operations, the most comparable GAAP financial measure, and represents the LTM core adjusted EBITDA from continuing operations we use in our calculation of net leverage ratio as of December 31, 2013.

Liquidity and Capital Resources We believe our existing cash, cash equivalents and amounts available to us under our Credit Facility will be sufficient to fund our cash requirements and capital expenditure needs for at least the next 12 months. After that time, the extent of additional financing needed, if any, will depend on the success of our business. If we significantly increase kiosk installations beyond planned levels or if our Redbox, Coinstar or New Venture kiosks generate lower than anticipated revenue or operating results, then our cash needs may increase. Furthermore, our future capital requirements will depend on a number of factors, including consumer use of our services, the timing and number of machine installations, the number of available installable kiosks, the type and scope of service enhancements, the cost of developing potential new product service offerings, and enhancements, and cash required to fund potential future acquisitions, investment or capital returns to shareholders such as through share repurchases.

59-------------------------------------------------------------------------------- Table of Contents The following is an analysis of our year-to-date cash flows: Net Cash from Operating Activities Our net cash from operating activities increased by $59.9 million primarily due to the following: • $89.2 million increase in net cash inflows from changes in working capital primarily due to changes in prepaid expenses and other current assets, content library, accounts payable, other accrued liabilities, accrued payable to retailers, and accounts receivable; • $60.0 million change in net non-cash income and expense included in net income primarily due to a one-time gain of $68.4 million in the 2013 period resulting from the re-measurement of our previously held equity interest in ecoATM at its acquisition date fair value; partially offset by • $89.3 million decrease in net income to $62.8 million as discussed in the Consolidated Results section above.

Net Cash used in Investing Activities We used $95.0 million of net cash in our investing activities primarily due to: • $72.3 million used for purchases of property and equipment for kiosks and corporate infrastructure, including information technology primarily related to our Enterprise Resource Planning implementation; and • $24.5 million used for capital contributions to our Redbox Instant by Verizon Joint Venture.

Net Cash used in Financing Activities We used $299.6 million of net cash from financing activities as follows: • $545.1 million for repurchases of our common stock; • $51.1 million to repurchase and settle convertible debt; • $10.6 million to pay capital lease obligations and other debt; and • $2.0 million for other financing activities; partially offset by • $295.5 million from issuance of our senior unsecured notes due 2021; and • $13.8 million in net borrowings from our Credit Facility. The revolving line of credit had an average daily balance of $150.8 million over the first nine months of 2014 and was used to support the activities discussed above relative to the timing of cash flows from operations throughout the same period.

Cash and Cash Equivalents A portion of our business involves collecting and processing large volumes of cash, most of it in the form of coins. As of September 30, 2014, our cash and cash equivalent balance was $184.9 million, of which $71.7 million was identified for settling our payable to the retailer partners in relation to our Coinstar kiosks. The remaining balance of our cash and cash equivalents was available for use to support our liquidity needs.

Debt Debt comprises the following: Senior Notes Credit Facility Senior Unsecured Senior Unsecured Revolving Line Dollars in thousands Notes due 2019 Notes due 2021 Term Loans of Credit Total Debt As of September 30, 2014: Principal $ 350,000 $ 300,000 $ 148,125 $ 210,000 $ 1,008,125 Discount (4,551 ) (4,313 ) (354 ) - (9,218 ) Total 345,449 295,687 147,771 $ 210,000 998,907 Less: current portion - - (8,445 ) - (8,445 ) Total long-term portion $ 345,449 $ 295,687 $ 139,326 $ 210,000 $ 990,462 60-------------------------------------------------------------------------------- Table of Contents Senior Unsecured Notes Due 2019 On March 12, 2013, we and certain subsidiaries of ours, as subsidiary guarantors, entered into an indenture pursuant to which we issued $350.0 million principal amount of 6.000% Senior Notes due 2019 (the "Senior Notes due 2019") at par for proceeds, net of expenses, of $343.8 million. The expenses were allocated between debt discount and deferred financing fees based on their nature. As of September 30, 2014, we were in compliance with the covenants of the related indenture.

Senior Unsecured Notes Due 2021 On June 9, 2014, we and certain subsidiaries of ours, as subsidiary guarantors, entered into an indenture pursuant to which we issued $300.0 million principal amount of 5.875% Senior Notes due 2021 (the "Senior Notes due 2021") at par for proceeds, net of expenses, of $294.0 million. The expenses were allocated between debt discount and deferred financing fees based on their nature.

The Senior Notes due 2021 and related guarantees: • are general unsecured obligations and are effectively subordinated to all of our and our Subsidiary Guarantors' existing and future secured debt to the extent of the collateral securing that secured debt, and • will rank equally to all of our and our Subsidiary Guarantors' other unsecured and unsubordinated indebtedness.

In addition, the Senior Notes due 2021; • will be effectively subordinated to all of the liabilities of our existing and future subsidiaries that are not guaranteeing the Senior Notes due 2021, • require interest payable on June 15 and December 15 of each year, beginning on December 15, 2014, and • mature on June 15, 2021.

We may redeem any of the Senior Notes due 2021: • beginning on June 15, 2017 at a redemption price of 104.406% of their principal amount plus accrued and unpaid interest and additional interest, if any; then • the redemption price will be 102.938% of their principal amount plus accrued and unpaid interest and additional interest, if any, for the twelve-month period beginning June 15, 2018; then • the redemption price will be 101.469% of their principal amount plus accrued and unpaid interest and additional interest, if any, for the twelve-month period beginning June 15, 2019; and then • the redemption price will be 100.000% of their principal amount plus accrued interest and unpaid interest and additional interest, if any, beginning on June 15, 2020.

• We may also redeem some or all of the notes before June 15, 2017 at a redemption price of 100.000% of the principal amount, plus accrued and unpaid interest and additional interest, if any, to the redemption date, plus an applicable "make-whole" premium.

• In addition, before June 15, 2017, we may redeem up to 35% of the aggregate principal amount with the proceeds of certain equity offerings at 105.875% of their principal amount plus accrued and unpaid interest and additional interest, if any; we may make such redemption only if, after any such redemption, at least 65% of the aggregate principal amount originally issued remains outstanding.

Upon a change of control as defined in the indenture related to the Senior Notes due 2021, we will be required to make an offer to purchase the Senior Notes due 2021 or any portion thereof. That purchase price will equal 101% of the principal amount of the Senior Notes due 2021 on the date of purchase plus accrued and unpaid interest and additional interest, if any. If we make certain asset sales and do not reinvest the proceeds or use such proceeds to repay certain debt, we will be required to use the proceeds of such asset sales to make an offer to purchase the Senior Notes due 2021 at 100% of their principal amount, together with accrued and unpaid interest and additional interest, if any, to the date of purchase.

The terms of the Senior Notes due 2021 restrict our ability and the ability of certain of its subsidiaries to, among other things: incur additional indebtedness; create liens; pay dividends or make distributions in respect of capital stock; purchase or redeem capital stock; make investments or certain other restricted payments; sell assets; enter into transactions with stockholders or affiliates; or effect a consolidation or merger. However, these and other limitations set forth in the related indenture will be subject to a number of important qualifications and exceptions.

61-------------------------------------------------------------------------------- Table of Contents The indenture related to the Senior Notes due 2021 provides for customary events of default which include (subject in certain cases to grace and cure periods), among others: nonpayment of principal or interest or premium; breach of covenants or other agreements in the indenture; defaults in failure to pay certain other indebtedness; the failure to pay certain final judgments; the invalidity of certain of the Subsidiary Guarantors' guarantees; and certain events of bankruptcy, insolvency or reorganization. Generally, if an event of default occurs and is continuing under the indenture, either the trustee or the holders of at least 25% in aggregate principal amount then outstanding may declare the principal amount plus accrued and unpaid interest to be immediately due and payable. As of September 30, 2014, we were in compliance with the covenants of the related indenture.

In connection with the issuance of the Senior Notes due 2021 and related guarantees, we agreed to register the Senior Notes due 2021 and related guarantees under the Securities Act of 1933, as amended (the "Securities Act") so as to allow holders of the Senior Notes due 2021 and related guarantees to exchange the Senior Notes due 2021 and the related guarantees for the same principal amount of a new issue of Senior Notes due 2021 and related guarantees (collectively, the "Exchange Notes") with substantially identical terms, except that the Exchange Notes will generally be freely transferable under the Securities Act. If we fail to comply with these obligations on time (a "registration default"), we generally will be required to pay additional interest at a rate of 0.25% per annum for the first 90-day period following a registration default and an additional 0.25% per annum for each subsequent 90-day period that such additional interest continues to accrue (provided that such rate may not exceed 1.00% per annum).

Revolving Line of Credit and Term Loan On June 24, 2014, we entered into the Third Amended and Restated Credit Agreement (the "Amended and Restated Credit Agreement") providing for a senior secured credit facility (the "New Credit Facility"). The Amended and Restated Credit Agreement amended and restated in its entirety the Second Amended and Restated Credit Agreement dated as of November 20, 2007 and amended and restated as of April 29, 2009 and as of July 15, 2011 and all amendments and restatements thereto (the "Previous Credit Agreement"). The credit facility provided under the Previous Credit Agreement was replaced by the New Credit Facility. As a result of this refinancing activity, in the six months ended June 30, 2014, we recorded a loss on the extinguishment of the Previous Credit Facility of $1.7 million for certain previously capitalized and unamortized debt issuance costs.

The loss on extinguishment is recorded within interest expense, net in our Consolidated Statements of Comprehensive Income.

The New Credit Facility consists of (a) a $150.0 million amortizing term loan (the "Term Loan") and (b) a $600.0 million revolving line of credit (the "Revolving Line"), which includes (i) a $75.0 million sublimit for the issuance of letters of credit, (ii) a $50.0 million sublimit for swingline loans and (iii) a $75.0 million sublimit for loans in certain foreign currencies available to us and certain wholly owned Company foreign subsidiaries (the "Foreign Borrowers"). We may, subject to applicable conditions and subject to obtaining commitments from lenders, request an increase in the Revolving Line of up to $200.0 million in aggregate (the "Accordion").

We (or the Foreign Borrowers, if applicable), subject to applicable conditions, may generally elect interest rates on the Term Loan and Revolving Line calculated by reference to (a) LIBOR ("London Interbank Offered Rate") (or the Canadian Dealer Offered Rate, in the case of loans denominated in Canadian Dollars or, if LIBOR is not available for a foreign currency, such other interest rate customarily used by Bank of America for such foreign currency) for given interest periods (the "LIBOR/Eurocurrency Rate") or (b) on loans in U.S.

Dollars made to us, Bank of America's prime rate (or, if greater, (i) the average rate on overnight federal funds plus 0.50% or (ii) the daily floating one month LIBOR plus 1%) (the "Base Rate"), plus a margin determined by our consolidated net leverage ratio. For swingline borrowings, we will pay interest at the Base Rate, plus a margin determined by our consolidated net leverage ratio. For borrowings made with the LIBOR/Eurocurrency Rate, the margin ranges from 125 to 200 basis points, while for borrowings made with the Base Rate, the margin ranges from 25 to 100 basis points.

The Amended and Restated Credit Agreement requires principal amortization payments under the Term Loan as follows: Dollars in thousands Repayment Amount Remainder of 2014 $ 1,875 2015 9,376 2016 13,126 2017 15,000 2018 18,750 2019 89,998 Total $ 148,125 62-------------------------------------------------------------------------------- Table of Contents The Revolving Line matures on June 24, 2019, at which time all outstanding borrowings must be repaid and all outstanding letters of credit must have been terminated or cash collateralized. The maturity date of the borrowings under the New Credit Facility may be accelerated to December 18, 2018 if our senior unsecured notes due 2019 remain outstanding on or after such date. We may prepay amounts borrowed under the Term Loan without premium or penalty (other than breakage costs in the case of borrowings made with the LIBOR/Eurocurrency Rate), but amounts prepaid may not be re-borrowed.

The Amended and Restated Credit Agreement contains events of default that include, among others, non-payment of principal, interest or fees, violation of covenants, inaccuracy of representations and warranties, bankruptcy and insolvency events, material judgments, cross defaults to certain other indebtedness, and events constituting a change of control. The occurrence of an event of default will increase the applicable rate of interest and could result in the acceleration of our obligations under the New Credit Facilities and the obligations of any or all of the Guarantors to pay the full amount of our (or any Foreign Borrower's) obligations under the New Credit Facility.

The Amended and Restated Credit Agreement contains certain loan covenants, including, among others, financial covenants providing for a maximum consolidated net leverage ratio (i.e., consolidated total debt (net of certain cash and cash equivalents held by us and our domestic subsidiaries) to consolidated EBITDA) and a minimum consolidated interest coverage ratio, and limitations on our ability with regard to the incurrence of debt, the existence of liens, capital expenditures, stock repurchases and dividends, investments, and mergers, dispositions and acquisitions. Our obligations under the New Credit Facility are guaranteed by each of our direct and indirect U.S. subsidiaries (collectively, the "Guarantors"), and if any Foreign Borrower is added to the New Credit Facility, the Foreign Borrower's obligations will be guaranteed by us and each of the Guarantors. As of September 30, 2014, the interest rate on amounts outstanding under the Credit Facility was 2.02% and we were in compliance with the covenants of the Credit Facility.

Convertible Debt On September 2, 2014, our 4.0% Convertible Senior Notes (the "Convertible Notes") matured. The aggregate outstanding principal was $51.1 million at December 31, 2013.

The Convertible Notes were convertible as of December 31, 2013 and the debt conversion feature was classified as temporary equity on our Consolidated Balance Sheets. In the nine months ended September 30, 2014, we retired or settled upon maturity, a combined 51,148 Convertible Notes for total consideration of $51.1 million in cash and the issuance of 431,760 shares of common stock. The amount by which total consideration exceeded the fair value of the Convertible Notes has been recorded as a reduction of stockholders' equity.

The loss from early extinguishment of the Convertible Notes was approximately $0.3 million and is recorded in interest expense in our Consolidated Statements of Comprehensive Income.

Letters of Credit As of September 30, 2014, we had six irrevocable standby letters of credit that totaled $6.4 million. These standby letters of credit, which expire at various times through September 2015, are used to collateralize certain obligations to third parties. As of September 30, 2014, no amounts were outstanding under these standby letter of credit agreements.

Other Contingencies During the three months ended March 31, 2013, we resolved a previously disclosed loss contingency related to a supply agreement and recorded a benefit of $11.4 million in the direct operating line item in our Consolidated Statements of Comprehensive Income.

Contractual Payment Obligations As of September 30, 2014, other than the following, there have been no material changes during the period covered by this report to our contractual obligations specified in the table of contractual obligations included in our 2013 Form 10-K: On June 27, 2014 Sony notified us of their intent to extend our existing content license agreement with them. This will extend the license period through September 30, 2015 and require us to issue 25,000 shares of additional restricted stock to Sony during the fourth quarter of 2014 which will vest immediately. See Note 11: Share-Based Payments for more information about our share-based payments for content arrangements. As of September 30, 2014, after accounting for this extension, our commitment to purchase content from Sony was approximately $162.8 million.

On September 26, 2014, Universal Studios Home Entertainment LLC exercised its option to extend the term of the revenue sharing license agreement between Redbox and Universal through December 31, 2015. As of September 30, 2014, after accounting for this extension, our commitment to purchase content from Universal was approximately $140.6 million.

63-------------------------------------------------------------------------------- Table of Contents CRITICAL ACCOUNTING POLICIES Our consolidated financial statements have been prepared in accordance with US GAAP. Preparation of these statements requires management to make judgments and estimates. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the present circumstances. A summary of significant accounting policies and a description of accounting policies that are considered critical may be found in our 2013 Form 10-K at Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." In the second quarter of 2013, we updated our methodology for amortizing our Redbox content library. The amortization charges are still recorded on an accelerated basis and substantially all of the amortization expense is recognized within one year of purchase. Our updated methodology is more precise in the utilization of our rental curves, which incorporate thinning estimates in amortizing content costs. We update our rental curves on a quarterly basis to better reflect changes in these rental curves prospectively. See Note 2: Summary of Significant Accounting Policies in our Notes to Consolidated Financial Statements.

The preceding explanation of the updated amortization methodology for our Redbox content library is included here because it impacts the comparability of first and second quarter of 2014 and 2013 results of operations. There have been no material changes to the critical accounting policies previously disclosed in our 2013 Form 10-K.

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