Coinstar Responds to Concerns Raised by Research Report.

Business Editors & High-Tech/Retail Writers

BELLEVUE, Wash.--(BUSINESS WIRE)--Aug. 28, 2002

Coinstar Inc. (Nasdaq:CSTR) today responded to a report issued on August 26, 2002, by Off Wall Street. The company also confirmed previous guidance for its North American core business and its United Kingdom operations.

"We question the Off Wall Street report's analysis of our historical results and the conclusions based on that analysis," stated Diane Renihan, chief financial officer of Coinstar. "Normally, we do not respond to third party analyses or projections relating to our business. However, given the impact this report appears to be having, we've decided to address, in a question and answer format, the key conclusions of this report."

Is it true that average new unit revenues declined 26 percent in the first quarter of 2002 and 12 percent in the second quarter of 2002, compared with the year-ago period? Does this mean that you have tapped most of the markets in North America?

Average annualized revenue from new machines has not declined. While the basic formula Off Wall Street uses to calculate average annualized revenues for new units appears to be correct, some of the numbers they use in that formula are based on incorrect assumptions. Based on Coinstar's analysis, average annualized revenues from new machines (that have been installed one year or less) increased 22 percent in the second quarter of 2002, compared with the second quarter of 2001.

We continue to believe that we have solid installation opportunities, not only in high-traffic supermarkets, but also through our strategy to expand into new geographies and new channels of distribution.

Are you still planning to install 800 units in 2002 and 2003 as you have projected?

Since new installations are performing well, we have no reason to cut back on planned installations. We still believe that we can install 800 units in 2002 and another 800 units in 2003, absent a deinstallation surprise like we experienced in the second quarter of 2002.

Isn't it true that comparable revenue growth rates have slowed over the past three quarters?

Comparable revenue growth declined from 18.8 percent in the fourth quarter of 2001 to 13.2 percent in the second quarter of 2002. Nonetheless, we remain pleased with our double-digit comparable revenue growth figures. And during several quarters in which comparable revenue growth hit the high-teens level, we repeatedly stated that "as we compare against an ever larger per machine revenue base, it's not likely that we will continue to see such high comp growth on a percentage basis."

Won't future diversification efforts result in lower margins than the core business?

Our core business produces exceptional margins. The fact that some new businesses may not match those margins doesn't mean they are not worth pursuing, as long as they meet our high hurdle rates.

We have recently announced a pilot with Tap Services Inc., to provide field service and coin transportation at 17 new locations in the third quarter. We believe this outsourcing of field service could sufficiently lower our cost structure enough to make smaller and more rural markets economically viable.

We also announced an 18-location pilot with Charter One Bank to test bank installations using a new revenue model. Under this model, we receive a flat monthly fee up to a specified volume level. Above that, we receive 8.9 percent of the transaction value. Because of this guaranteed minimum return, we believe that bank installations can prove sufficiently profitable, even with lighter bank traffic levels. Furthermore, we are currently using fully depreciated machines for these installations.

Isn't it true that cash transactions, as a fraction of total consumer transactions, continue to shrink as debit cards rapidly gain acceptance?

Based on data from The Nilson Report, the leading publication covering consumer payment systems worldwide, debit card usage has cannibalized the use of checks far more than the use of cash. The number of cash transactions has reportedly increased significantly over the past 10 years.

Our research indicates there is an estimated $10.5 billion of idle coins sitting in American's coin jars and drawers. And consumers continue to generate change and accumulate coins.

Furthermore, we are exploring new products that would enable us to process all types of transactions, including cash, credit, and debit cards.

Isn't it true that the new backlit design costs about $14,000, compared with $12,500 for older models, and $4,000 for retrofitting an older model?

Over time, we have been able to reduce the capital cost of a Coinstar machine. Due to continued success at improving the efficiency of the manufacturing process, we have again reduced machine costs. The fully landed capital cost of a new backlit design is now $12,000. And the cost to retrofit an older machine to the backlit design is $3,000.

Aren't you concerned about new competition?

We take any competitive challenge very seriously. There are several companies who make coin processing equipment, but are selling hardware, not a service. In contrast, Coinstar offers a full service solution to our retail partners, and continually works to provide value-added services--including new products and promotions--that continue to differentiate us from potential competitors, who provide just hardware.

Based on Off Wall Street research, Coinstar users indicate they would use the service every two to three years. Is this true?

Our most recent study showed that customers visit the Coinstar machine 2.15 times per year, on average. This is an independent study we commission every year, with the most recent completed in September 2001. This study, conducted by NFO Research, is a representative sample of Coinstar users with statistical accuracy of + or - 1.8 percent, at the 95% confidence level.

Could you comment on Off Wall Street's research that suggests unit revenues plateau 12 to 24 months after installation?

We have 10 years of data that indicates this is untrue. Individual machine revenues increase over time, albeit at a decreasing rate. The fact is that each age category--even those five years and older--is posting positive comparable revenue growth.

One of the difficulties in valuing Coinstar is that the company has net operating loss and credit carry forwards of about $128.9 million. Can you comment?

We leave it up to the market to determine the proper valuation for our stock. However, the net operating loss carry forward is currently $153 million.

Confirms Guidance

Confirming its previously issued guidance for the North American core business, the company expects 2002 revenues of $147.0 to $150.0 million, direct contribution of $83.5 to $85.5 million, EBITDA of $49.0 to $51.0 million, and net income from continuing operations of $20.5 to $22.5 million, or approximately $0.90 to $0.98 per share.

For its U.K. operation, the company expects revenues of $5.0 to $6.0 million and EBITDA between a loss of $500,000 and breakeven for 2002.

The company plans to update 2003 guidance and provide 2004 guidance in mid to late November.

About Coinstar Inc.

Coinstar Inc. owns and operates the only nationwide network of supermarket-based machines that offer coin counting and other electronic services. The company has more than 10,000 machines linked by a sophisticated interactive network throughout the United States, as well as in Canada and the United Kingdom.

This press release contains forward-looking statements relating to Coinstar's anticipated growth and future operating results that involve a number of risks and uncertainties. These are forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. The words "believe," "expect," "intend," "anticipate," variations of such words, and similar expressions identify forward-looking statements, but their absence does not mean that the statement is not forward-looking. Forward-looking statements in this press release include statements relating to Coinstar's expectations for new unit installations; future comparable revenue growth rates; Coinstar's plans to diversify into new geographic areas, pursue bank installations and develop new products; Coinstar's expectations for lower per unit capital costs; and future individual machine revenue growth. Actual results may vary significantly from the results expressed or implied in such statements and any other forward looking statements contained in this press release. Factors that could cause or contribute to such varying results include, but are not limited to, unanticipated deinstallations by existing retail partners or terminations of existing retail partner agreements, particularly those of our largest retail partners; uncertainties relating to the ultimate success of our efforts to increase new and repeat customer usage of Coinstar machines; uncertainties relating to our ability to obtain new agreements with potential retail partners for the installation of Coinstar units in North America and the United Kingdom; the possibility of disruptions in or other problems with the deployment, operation and management of our coin processing network; competitive pressures from existing and potential competitors; and uncertainties relating to the ultimate success of new business initiatives. These and other risks are more fully described under the caption "Risk Factors" included in the most recent reports filed with the Securities and Exchange Commission by Coinstar Inc. Coinstar undertakes no duty or obligation to update the information provided herein.