Edgar Filing: COINSTAR INC

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For The Quarter Ended March 31, 2005

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

Commission File Number: 000-22555

COINSTAR, INC.

(Exact name of registrant as specified in its charter)


Delaware		94-3156448
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

1800 114th Avenue SE, Bellevue, Washington		98004
(Address of principal executive offices)		(Zip Code)

(425) 943-8000

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨

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


Class		Outstanding at April 15, 2005
Common Stock, $0.001 par value		25,400,369

COINSTAR, INC.

FORM 10-Q

Index


PART I. FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements:

	Consolidated Balance Sheets as of March 31, 2005 and December 31, 2004 (unaudited)	Page 3

	Consolidated Statements of Operations for the three month periods ended March 31, 2005 and March 31, 2004 (unaudited)	Page 4

	Consolidated Statement of Stockholders’ Equity for the three month period ended March 31, 2005 (unaudited)	Page 5

	Consolidated Statements of Cash Flows for the three month periods ended March 31, 2005 and March 31, 2004 (unaudited)	Page 6

	Notes to Consolidated Financial Statements for the three month periods ended March 31, 2005 and March 31, 2004 (unaudited)	Page 7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	Page 12

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	Page 25

Item 4.	Controls and Procedures	Page 26

PART II. OTHER INFORMATION

Item 2.	Unregistered Sales of Equity Securities	Page 26

Item 6.	Exhibits	Page 26

SIGNATURE		Page 28

PART I. FINANCIAL INFORMATION

Item 1.

Consolidated Financial Statements

COINSTAR, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(unaudited)


	March 31, 2005			December 31, 2004
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	98,318		$	94,640
Cash being processed		55,664			62,147
Trade accounts receivable, net of allowance for doubtful accounts of $548 and $481 at March 31, 2005 and December 31, 2004, respectively		5,295			5,283
Inventory		28,792			25,877
Deferred income taxes		18,674			18,833
Prepaid expenses and other current assets		9,472			11,626

Total current assets		216,215			218,406
PROPERTY AND EQUIPMENT, NET		135,348			131,267
DEFERRED INCOME TAXES		12,128			15,880
OTHER ASSETS		6,180			6,200
INTANGIBLE ASSETS, net of accumulated amortization of $3,183 and $2,152 at March 31, 2005 and December 31, 2004, respectively		35,903			35,033
GOODWILL		142,303			140,348

TOTAL ASSETS	$	548,077		$	547,134

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	27,855		$	23,661
Accrued liabilities payable to retailers		57,246			63,504
Other accrued liabilities		19,572			22,904
Current portion of long-term debt and capital lease obligations		3,460			3,350

Total current liabilities		108,133			113,419
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS		207,215			207,569

Total liabilities		315,348			320,988
STOCKHOLDERS’ EQUITY:
Preferred stock, $0.001 par value—Authorized, 5,000,000 shares; no shares issued and outstanding in 2005 or 2004		—			—
Common stock, $0.001 par value—Authorized, 45,000,000 shares; 26,618,065 and 26,460,701 shares issued and 25,384,851 and 25,227,487 shares outstanding at March 31, 2005 and December 31, 2004, respectively		284,100			282,046
Accumulated deficit		(30,762	)		(35,430	)
Treasury stock		(22,783	)		(22,783	)
Accumulated other comprehensive income		2,174			2,313

Total stockholders’ equity		232,729			226,146

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	548,077		$	547,134

See notes to consolidated financial statements.

COINSTAR, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)


	Three Month Periods Ended March 31,
	2005			2004
REVENUE	$	105,585		$	43,052
EXPENSES:
Direct operating		72,843			20,218
Sales and marketing		994			1,050
Research and development		1,309			1,441
General and administrative		8,592			5,064
Depreciation and other		10,806			7,915
Amortization of intangible assets		1,031			53

Income from operations		10,010			7,311
OTHER INCOME (EXPENSE):
Interest income and other, net		488			69
Interest expense		(2,850	)		(246	)

Income before income taxes		7,648			7,134
Income taxes		(2,980	)		(2,517	)

NET INCOME	$	4,668		$	4,617

NET INCOME PER SHARE:
Basic	$	0.18		$	0.22
Diluted	$	0.18		$	0.21

WEIGHTED SHARES OUTSTANDING:
Basic		25,272			21,290
Diluted		25,665			21,533

See notes to consolidated financial statements.

COINSTAR, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

Three Month Period Ended March 31, 2005

(in thousands, except share data)

(unaudited)


	Common Stock			Accumulated Deficit			Treasury Stock			Accumulated Other Comprehensive Income			Total			Comprehensive Income
	Shares	Amount		Accumulated Deficit			Treasury Stock			Accumulated Other Comprehensive Income			Total			Comprehensive Income
BALANCE, January 1, 2005	25,227,487	$	282,046	$	(35,430	)	$	(22,783	)	$	2,313		$	226,146
Proceeds from issuance of shares under employee stock purchase plan	37,470		448											448
Proceeds from exercise of stock options, net	16,364		236											236
Stock-based compensation expense net of unearned compensation of $1,192	50,889		73											73
Tax benefit on options and employee stock purchase plan			89											89
Common stock issued in conjunction with acquisition, net of issue costs of $26	52,641		1,208											1,208
Comprehensive income:
Net income					4,668									4,668		$	4,668
Other comprehensive income :
Short term investments net of tax benefit of $5											(9	)		(9	)		(9	)
Foreign currency translation adjustments, net of tax benefit of $174											(312	)		(312	)		(312	)
Interest rate hedge on long-term debt, net of tax expense of $117											182			182			182

Total comprehensive income																$	4,529


BALANCE, March 31, 2005	25,384,851	$	284,100	$	(30,762	)	$	(22,783	)	$	2,174		$	232,729

See notes to consolidated financial statements.

COINSTAR, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)


	Three Month Periods Ended March 31,
	2005			2004
OPERATING ACTIVITIES:
Net income	$	4,668		$	4,617
Adjustments to reconcile income to net cash provided by operating activities:
Depreciation and other		10,806			7,915
Amortization of intangible assets		1,031			53
Amortization of deferred financing fees		175			—
Non-cash stock-based compensation		73			9
Deferred income taxes		2,896			2,281
Other		45			—
Cash provided (used) by changes in operating assets and liabilities, net of effects of business acquisitions:
Accounts receivable		658			(392	)
Inventory		(2,598	)		(362	)
Prepaid expenses and other current assets		1,333			(1,616	)
Other assets		87			2
Accounts payable		3,581			1,933
Accrued liabilities payable to retailers		(6,121	)		(7,718	)
Accrued liabilities		(3,562	)		(785	)

Net cash provided by operating activities		13,072			5,937
INVESTING ACTIVITIES:
Purchase of available-for-sale securities		—			(11	)
Purchase of property and equipment		(13,809	)		(5,819	)
Acquisitions, net of cash acquired of $0 and $1,087 in 2005 and 2004, respectively		(1,469	)		(4,751	)
Proceeds from sale of fixed assets		29			4

Net cash used by investing activities		(15,249	)		(10,577	)
FINANCING ACTIVITIES:
Principal payments on long-term debt and capital lease obligations		(898	)		(4,030	)
Proceeds from exercise of stock options and issuance of shares under employee stock purchase plan		684			969

Net cash used by financing activities		(214	)		(3,061	)
Effect of exchange rate changes on cash		(414	)		272

NET DECREASE IN CASH, CASH EQUIVALENTS AND CASH BEING PROCESSED:		(2,805	)		(7,429	)
CASH, CASH EQUIVALENTS AND CASH BEING PROCESSED:
Beginning of period		156,787			99,664

End of period	$	153,982		$	92,235

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest	$	2,841		$	274
Cash paid during the period for taxes		84			236
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Purchase of vehicles financed by capital lease obligations	$	790		$	1,035
Common stock issued in conjunction with acquisition, net of issue costs of $26		1,208			—
Issuance of warrants for acquisition		—			595
Accrued acquisition costs		123			1,291

See notes to consolidated financial statements.

COINSTAR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Three Month Periods Ended March 31, 2005 and 2004

(unaudited)

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of company: Coinstar, Inc. is a multi-national company offering a range of services consisting of coin counting, entertainment and electronic payment (“e-payment”) services. Our network of automated, self-service coin-counting machines provides consumers with a convenient and innovative means to convert loose coins into cash. As a result of our July 2004 acquisition of ACMI Holdings, Inc. and its subsidiary, American Coin Merchandising, Inc., (collectively referred to as “ACMI”), we offer various entertainment services to consumers in mass merchandisers, supermarkets, warehouse clubs, restaurants, entertainment centers, truck stops and other distribution channels. These entertainment services include skill-crane machines, bulk vending, kiddie rides and video games. In addition, we offer various e-payment services through point-of-sale and non-coin-counting kiosks in drugstores, universities, shopping malls and convenience stores. As of March 31, 2005, we had a total of approximately 12,200 coin-counting machines installed, approximately 171,000 entertainment services machines installed and over 17,000 locations where our point-of-sale and non-coin-counting kiosks were installed. Coinstar was incorporated as a Delaware company in 1993.

Basis of presentation: The unaudited consolidated financial statements of Coinstar, Inc. included herein reflect all adjustments, consisting only of normal recurring adjustments which, in the opinion of management, are necessary to present fairly our consolidated financial position, results of operations and cash flows for the periods presented.

These financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such SEC rules and regulations. These financial statements should be read in conjunction with our audited financial statements and the accompanying notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2004, filed with the SEC. The results of operations for the three month period ended March 31, 2005 is not necessarily indicative of the results to be expected for any future quarter or for the entire fiscal year. Acquisitions are recorded and included in our results of operations as of the date acquired.

Principles of consolidation: The accompanying consolidated financial statements include the accounts of Coinstar, Inc. and our wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

Use of estimates: The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These judgments are difficult as matters that are inherently uncertain directly impact their valuation and accounting. Actual results may vary from management’s estimates and assumptions.

In connection with our acquisitions, we have allocated the respective purchase prices plus transaction costs to the estimated fair values of assets acquired and liabilities assumed. These purchase price allocation estimates were based on our estimates of fair values and estimates from third-party consultants.

We have estimated the value of our entertainment services coin-in-machine which was approximately $4.2 million and $4.4 million at March 31, 2005 and December 31, 2004, respectively. Coin-in-machine represents the cash deposited into our entertainment services machines at period end which has not yet been collected. Based on our estimate of coin-in-machine, we have recognized the related revenue, the corresponding reduction to inventory and increase to accrued liabilities which represents the direct operating expenses associated with the coin-in-machine estimate.

Stock-based compensation: We account for stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees. All options granted under the stock-based compensation plans had an exercise price equal to the fair market value of the stock at the date of grant. Accordingly, no compensation expense has been recognized for our stock option grants. Certain directors and members of management receive compensation in the form of stock or restricted stock. Unrestricted stock awards are expensed when issued. Restricted stock grants are recorded as unearned compensation measured at the date of grant and recognized as compensation expense over the vesting period.

The following illustrates the effect on net income and net income per share had we applied the fair value recognition provision of SFAS No. 123, Accounting for Stock-Based Compensation, to the stock option awards.


	Three Month Periods Ended March 31,
	2005			2004
	(in thousands except per share data)
Net income as reported:	$	4,668		$	4,617
Add:
Total stock-based employee compensation expense included in the determination of net income as reported, net of taxes of $28 and $8 in 2005 and 2004, respectively		45			12
Deduct:
Total stock-based employee compensation determined under fair value based method for all awards, net of taxes of $551 and $609 in 2005 and 2004, respectively		(1,285	)		(1,262	)

Pro forma net income:	$	3,428		$	3,367

Net income per share:
Basic:
As reported	$	0.18		$	0.22
Pro forma		0.14			0.16
Diluted:
As reported		0.18			0.21
Pro forma		0.14			0.16

The assumptions used to calculate fair value are evaluated and revised, as necessary, to reflect market conditions and our experience.

Recent accounting pronouncements: In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (“SFAS 123R”). SFAS 123R will require that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. SFAS 123R covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans. SFAS 123R replaces SFAS 123, Accounting for Stock Issued to Employees. SFAS 123R will be effective for us January 1, 2006. We are in process of evaluating the impact of adopting SFAS 123R and determining the impact on our results of operations, financial position and cash flows.

NOTE 2: PROPERTY AND EQUIPMENT


	March 31, 2005			December 31, 2004
	(in thousands)
Coin, entertainment and e-payment machines	$	272,056		$	261,908
Computers		5,993			9,931
Office furniture and equipment		4,529			4,415
Leased vehicles		5,956			5,569
Leasehold improvements		566			737

		289,100			282,560
Accumulated depreciation and amortization		(153,752	)		(151,293	)

	$	135,348		$	131,267

NOTE 3: COMPREHENSIVE INCOME

Comprehensive income, net of related tax effects, is as follows:


	Three Month Periods Ended March 31,
	2005			2004
	(in thousands)
Net income	$	4,668		$	4,617
Other comprehensive income (loss)		(139	)		176

Total comprehensive income	$	4,529		$	4,793

NOTE 4: INCOME PER SHARE

Basic net income per share is computed by dividing the net income available to common stockholders for the period by the weighted average number of common shares outstanding during the period excluding unvested restricted stock awards that have been issued. Diluted net income per share is computed by dividing the net income for the period by the weighted average number of common and potential common shares outstanding (if dilutive) during the period. Potential common shares, composed of incremental common shares issuable upon the exercise of stock options and unvested restricted stock awards, are included in the calculation of diluted net income per share to the extent such shares are dilutive.

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


	Three Month Periods Ended March 31,
	2005		2004
	(in thousands)
Numerator:
Net income	$	4,668	$	4,617

Denominator:
Weighted average shares for basic calculation		25,272		21,290
Warrants		—		1
Incremental shares from employee stock options		393		242

Weighted average shares for diluted calculation		25,665		21,533

For the three month periods ended March 31, 2005 and 2004, options and unvested restricted stock awards to acquire 0.5 million and 1.9 million shares of common stock, respectively, were excluded from the computation of net income per common share because their impact would be antidilutive.

NOTE 5: BUSINESS SEGMENT INFORMATION

SFAS No. 131, Disclosure about Segments of an Enterprise and Related Information, requires that companies report separately in the financial statements certain financial and descriptive information about operating segments profit or loss, certain specific revenue and expense items and segment assets. The method for determining what information is reported is based on the way that management organizes the operating segments for making operational decisions and assessments of financial performance. Our Chief Executive Officer (“CEO”) is considered our chief operating decision maker. We are organized into two reportable business segments: the North American business (which includes the United States, Canada and Mexico), and our International business (which includes the United Kingdom). The total revenue of the North American segment mainly relates to operations located within the United States, and the total revenue of the International segment mainly relates to the operations located within the United Kingdom. Goodwill arising from our acquisitions has been allocated to the North American segment.


	Three Month Periods Ended March 31,
	2005		2004
	(in thousands)
Revenue:
North American business	$	100,835	$	39,419
International business		4,750		3,633

Total revenue	$	105,585	$	43,052

Net income:
North American business	$	3,733	$	4,043
International business		935		574

Total net income	$	4,668	$	4,617


	March 31, 2005			December 31, 2004
	(in thousands)
Total assets:
North American business	$	536,471		$	535,864
International business		24,355			25,886
Intercompany eliminations		(12,749	)		(14,616	)

Total assets	$	548,077		$	547,134

Currently, management does not use product line financial performance as a basis for business operating decisions. However, our CEO does analyze our revenue based on revenue generated from our coin-counting and e-payment services business separate from revenue generated from our entertainment service business. Revenue for these two product lines is as follows:


	Three Month Periods Ended March 31,
	2005		2004
Revenue:
Coin-counting and e-payment services	$	48,327	$	43,052
Entertainment services		57,258		—

Total revenue	$	105,585	$	43,052

We have coin-counting, entertainment and e-payment services machines that are placed with retailers that accounted for the following percentages of our consolidated revenue:


	Three Month Periods Ended March 31,
	2005		2004
Wal-Mart, Inc.	28.5	%	4.7	%
The Kroger Company	10.0	%	23.8	%
Albertson’s, Inc.	7.2	%	12.1	%

NOTE 6: RELATED PARTY TRANSACTIONS

Randall J. Fagundo, President of our entertainment services subsidiary, is a member of a limited liability company which has agreed to lease to Coinstar a 31,000 square foot building located in Louisville, Colorado. The terms of the agreement provide for a ten year lease term, commencing March 1, 2003, at monthly rental payments ranging from $25,353 for the first year to $33,076 for the tenth year, together with additional payments in respect of the tenant’s proportionate share of the maintenance and insurance costs and property tax assessments for the leased premises. We believe that the terms of this lease are comparable to those that would be entered into between unrelated parties on an arms’ length basis.

Approximately $1.1 million of our accounts receivable balance is due from a related party of our e-payment subsidiary. This receivable arose in the ordinary course of business and relates to the purchase of prepaid air time.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the Financial Statements and related Notes thereto included elsewhere in this Quarterly Report on Form 10-Q. Except for the 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, those discussed under the caption “Factors That May Affect Our Business, Future Operating Results and Financial Condition,” and those discussed elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2004. 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 Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect our business, prospects and results of operations.

Overview

We are the leader in the self-service coin-counting services market. We own and operate the only multi-national fully automated network of self-service coin-counting machines across the United States, in Canada and in the United Kingdom. We believe we are the leading owner and operator of skill-crane machines and bulk vending machines in the United States. We refer to these services collectively as entertainment services. We also offer a range of electronic payment (“e-payment”) services such as stored value cards, payroll cards, prepaid MasterCard^{^®} cards and prepaid wireless products at point-of-sale terminals, stand-alone e-payment kiosks and e-payment enabled coin-counting machines in drugstores, universities, shopping malls, supermarkets and convenience stores in the United States and the United Kingdom.

We launched our business in North America with the installation of the first Coinstar coin-counting machine in the early 1990s, and in 2001 we began our commercial rollout of coin-counting services in the United Kingdom. Since inception, our coin-counting machines have counted and processed more than 220 billion coins worth more than $11.0 billion in more than 320 million self-service coin-counting transactions. We now own and operate more than 12,200 coin-counting machines in the United States, Canada and United Kingdom and approximately 171,000 entertainment services machines in the United States and Mexico. We also utilize point-of-sale terminals in more than 17,000 locations and own and operate approximately 250 stand-alone e-payment kiosks for e-payment services in the United States and the United Kingdom. In addition, approximately 3,000 of our 12,200 coin-counting machines are e-payment enabled.

Revenue

Coin services

We estimate that at any one time, there is approximately $10.5 billion worth of coin sitting idle in households in the United States. In 2004, consumers processed more than $2.1 billion worth of coin through our coin-counting machines.

We own and service all of our coin-counting machines, providing a “turn-key, headache-free” service to retailers. Our machines are easy to use, highly accurate, durable, easy to service and capable of processing up to 600 coins per minute. Consumers feed loose change into the machines, which count the change and then dispense vouchers or, in some cases, issue e-payment products, at the consumer’s election. Each voucher lists the dollar value of coins counted, less our transaction fee. Our patented, proprietary technology helps us to maintain high up-time, remotely monitor performance and minimize the potential for losses associated with voucher fraud.

Since we pay a percentage of our transaction fees to our retail partners, our coin services benefit our retail partners by providing an additional source of revenue. In addition, our studies show that our coin services increase foot traffic in our retail partners’ stores and that approximately 45% of our customers spend all or a part of the proceeds of their vouchers in the store. Our leading coin services retail partners include The Kroger Co. and Albertson’s, Inc. supermarket chains.

Entertainment services

We estimate that the market for our entertainment services is approximately $1.1 billion in the United States. We believe we are the leading owner and operator of skill-crane and bulk vending machines in the United States.

Our entertainment services machines consist primarily of skill-crane machines, bulk vending, kiddie rides and video games, which are installed in more than 18,000 retail locations, totaling approximately 171,000 pieces of equipment. The majority of our

entertainment services revenue is derived from skill-crane machines that dispense plush toys, novelties and other items. For each play, customers maneuver the skill-crane into position and attempt to retrieve the desired item in the machine’s enclosed display area before play is ended. We utilize appealing displays of quality merchandise, new product introductions and other merchandising techniques to attract new and repeat customers. Our leading entertainment services partners include Wal-Mart, Inc. and Denny’s Corporation.

Since we pay our retail partners a portion of the fee per play, our entertainment services machines, like our coin-counting machines, provide an additional revenue stream for our retail partners. In addition, our entertainment services machines add an element of entertainment for consumers. As with our coin services business, we own and service all of our entertainment machines, providing a convenient service to retailers.

E-payment services

We estimate that the e-payment services market is over $5.0 billion in the United States. We offer e-payment services, including loading prepaid wireless accounts, reloading prepaid MasterCard^{^®} cards and prepaid phone cards and providing payroll card services. We believe these and other e-payment services represent a significant growth opportunity for us. We offer various e-payment services through point-of-sale terminals, stand-alone e-payment kiosks and e-payment enabled coin-counting machines in supermarkets, drugstores, universities, shopping malls and convenience stores. These services provide an easy way for consumers to perform a variety of useful transactions without having to obtain a bank account or credit card. Our leading e-payment services partners include the Albertson’s, Inc. supermarket chain and the Walgreens Co. and CVS Corporation drug stores.

We generate revenue for ourselves and pay our retail partners a fee through our commissions earned on the sales of e-payment services. We have relationships with national wireless carriers, such as Sprint, Verizon, T-Mobile, Virgin Mobile and Cingular Wireless. As part of our strategy to increase and augment our e-payment services business, we have acquired three regional e-payment businesses.

Expenses

Our direct operating expenses consist of expenses associated with our coin-counting, e-payment and entertainment services operations and support, as follows:

For coin services and e-payment services, these expenses consist primarily of the cost of (1) coin pick-up, transportation and processing expenses, (2) field operations support and related expenses, (3) retail operations support and (4) the percentage of transaction fees we pay to our retail partners. Variations in the percentage of transaction fees we pay to our retail partners may result in increased expenses. Such variations are based on our evaluation of certain factors with the retailer, such as total revenue, e-payment capabilities, long-term non-cancelable contracts, installation of our machines in high traffic and/or urban or rural locations, new product commitments, or other criteria.

For entertainment services, these expenses consist primarily of the cost of plush toys and other products dispensed from the skill-crane and bulk-vending machines. Our plush toys are produced abroad, primarily in China. We purchase other products, including products provided in our bulk vending machines, from other third party suppliers. Similar to our coin services, these expenses also consist of (1) the cost of coin pick-up, transportation and processing expenses, (2) field operations support and related expenses and (3) the fees we pay our retail partners for the placement of machines.

Our sales and marketing expenses consist primarily of marketing, advertising and public relations efforts in existing market regions and startup marketing expenses incurred to launch our services in new regional markets.

Our research and development expenses consist primarily of maintenance and development costs of our coin-counting machine software, network applications, machine improvements and new product development.

Our general and administrative expenses consist primarily of administrative support for field operations, customer service, systems and engineering support, computer network operations, finance, human resources, occupancy expenses, legal expenses and insurance.

Our depreciation and other expenses consist primarily of depreciation charges on our installed coin-counting, entertainment and e-payment services machines and, to a lesser extent, depreciation on computer equipment and leased automobiles.

Our amortization expense consists of amortization of intangible assets including retailer relationships that were valued when we acquired our various subsidiaries.

We expect to continue devoting significant resources to building our sales and marketing organization, adding administrative personnel and developing the systems and infrastructure necessary to support our machines. We expect to continue evaluating new marketing and promotional programs to increase consumer utilization of our services. We also intend to continue to engage in systems and product research and development.

We believe that our future coin-counting and e-payment product revenue growth, operating margin gains and profitability will depend on the success of our efforts to increase customer usage, retain our current retail partners, respond to competitive pressures, expand our installed base with retail partners in existing markets, expand into new geographies and distribution formats and undertake ongoing marketing and promotional activities that will sustain the growth in unit coin volume over time. Given the unpredictability of the timing of installations with retail partners and the resulting revenues, the growth in coin processing volumes of our installed base and the continued market acceptance of our services by consumers and retail partners, our operating results for any future periods may be subject to significant variation, and we believe that period-to-period comparisons of our results of operations are not necessarily predictive and should not be relied on as indications of future performance.

Results of Operations

We acquired ACMI on July 7, 2004 and consequently, ACMI’s first quarter 2004 financial results are not included in our consolidated financial results for the three months ended March 31, 2004.

The following table shows revenue and expense as a percent of revenue for the periods indicated:


	Three Month Periods Ended March 31,
	2005		2004
Revenue	100.0	%	100.0	%
Expenses:
Direct operating	69.0		47.0
Sales and marketing	1.0		2.4
Research and development	1.2		3.3
General and administrative	8.1		11.8
Depreciation and other	10.2		18.4
Amortization of intangibles	1.0		0.1

Income from operations	9.5	%	17.0	%

Three Month Periods Ended March 31, 2005 and 2004

Revenue

Revenue increased to $105.6 million in the three months ended March 31, 2005 from $43.1 million for the comparable 2004 period. Our revenue grew as a result of two primary factors: (1) the acquisition of our subsidiary, ACMI, and (2) an increase in coin-counting activity.

Revenue for our coin and e-payment services increased from $43.1 million to $48.3 million, or 12.3% as a result of an increase in the number of transactions, an increase in the number of coin-counting machines and e-payment point of sale locations in service and the volume of coins processed by the machines in service during this period. The total dollar value of coins processed through our network increased to approximately $530 million during the three months ended March 31, 2005 from approximately $485 million for the comparable 2004 period. The installed base of coin-counting machines increased to approximately 12,200 in 2005 from approximately 10,900 machines in 2004.

Entertainment services revenue during the three months ended March 31, 2005 was $57.3 million. In the comparable prior year period, ACMI as a standalone company, reported revenue of $56.3 million. Our entertainment services revenue is derived primarily from skill-crane machines, which comprised approximately 74% of our entertainment revenue, and bulk vending equipment installed in retail locations. Total entertainment services machines installed at March 31, 2005 was approximately 171,000 machines, an increase of over 10,000 machines since July 7, 2004, the date of our acquisition.

Direct Operating Expenses

Direct operating expenses increased to $72.8 million in the three months ended March 31, 2005 from $20.2 million in the comparable prior year period. Direct operating expenses increased primarily due to (1) our acquisition of ACMI, (2) changes in the transaction fee arrangements we pay certain of our coin services retail partners and (3) increased expenses to develop and provide ongoing support to our retail partners as we make additional services available through our coin-counting machines. Direct operating expenses as a percentage of revenue increased to 69.0% in the three months ended March 31, 2005 from 47.0% in the same period of 2004 mainly due to the addition of our entertainment subsidiary which historically has higher direct operating expenses, mainly due to

the plush toys and other items dispensed from our entertainment machines. We expect transportation expenses to increase if the current trend of rising fuel costs continues, combined with increased labor costs as we expand into less densely populated regions.

Sales and Marketing

Sales and marketing expenses remained consistent at $1.0 million in the three months ended March 31, 2005 and 2004. Although our sales and marketing expenses did not change significantly, we did change our allocation and focus of advertising dollars increasing expenditures to regionally promote new products as they are introduced. Since revenues increased significantly and our marketing expenditures decreased, sales and marketing as a percentage of revenue decreased to 1.0% in the three months ended March 31, 2005 from 2.4% in the comparable prior year period.

Research and Development

Research and development expenses decreased slightly to $1.3 million in the three months ended March 31, 2005 from $1.4 million in the comparable prior year period due to ongoing cost containment measures. Research and development expenses represent expenditures to support research and development to design complementary new product ideas and continue our ongoing efforts to enhance our existing products and services, primarily our coin-counting system. Since revenues increased significantly and our research and development expenditures remained relatively consistent, research and development expenses as a percentage of revenue decreased to 1.2% for the three months ended March 31, 2005 from 3.3% in the comparable prior year period.

General and Administrative

General and administrative expenses increased to $8.6 million for the three months ended March 31, 2005 from $5.1 million in the comparable prior year period. General and administrative expenses increased primarily due to the acquisition of ACMI, which resulted in additional expenses of $2.9 million. Excluding the impact from ACMI, our general and administrative expenses remained relatively constant. General and administrative expenses as a percentage of revenue decreased to 8.1% in the three months ended March 31, 2005 from 11.8% in the comparable prior year period.

Depreciation and Other

Depreciation and other expense increased to $10.8 million in the three months ended March 31, 2005 from $7.9 million in the comparable prior year period. Depreciation expense increased primarily due to our acquisition of ACMI which recognized depreciation expense of $4.2 million in the three months ended March 31, 2005. During the three months ended March 31, 2004, in addition to depreciation expense, there was other expense of $1.0 million related to the disposal of fixed assets which is not recurring in 2005. Depreciation and other expense as a percentage of revenue decreased to 10.2% in the three months ended March 31, 2005 from 18.4% in the comparable prior year period.

Amortization of Intangible Assets

Amortization of intangible assets increased to $1.0 million in the three months ended March 31, 2005, from $0.1 million in the comparable 2004 period. Amortization expense of intangible assets increased due to our acquisitions, mainly ACMI; specifically the amortization of the value assigned to retailer relationships. Amortization expense as a percentage of revenue increased to 1.0% in the three months ended March 31, 2005, from 0.1% in the same period during 2004.

Other Income and Expense

Interest income and other, net, increased to $488,000 in the three months ended March 31, 2005 from $69,000 in the comparable prior year period. The increase in other income was due to a combination of miscellaneous income earned and recognized under equity method accounting by our e-payment subsidiary, as well as an increase in interest income from interest earned on the proceeds received in connection with our secondary offering in December 2004.

Interest expense increased to $2.9 million in the three months ended March 31, 2005 from $0.2 million in the comparable prior year period. With our acquisition of ACMI on July 7, 2004, we entered into a $310.0 million credit facility of which $207.3 million was outstanding at March 31, 2005. As a result, the increase in interest expense was attributed to a significantly larger amount of outstanding debt at the quarter ended March 31, 2005 compared to 2004.

Liquidity and Capital Resources

As of March 31, 2005, we had cash, cash equivalents and cash being processed totaling $154.0 million, which consisted of cash and cash equivalents available to fund our operations of $98.3 million and cash being processed of $55.7 million. Cash being processed represents cash residing in our machines, cash in transit or cash which is payable to our retail partners as service fees. Working capital was $108.1 million at March 31, 2005 compared with $105.0 million at December 31, 2004.

Net cash provided by operating activities was $13.1 million for the three months ended March 31, 2005, compared to net cash provided by operating activities of $5.9 million for the three months ended March 31, 2004. Cash provided by operating activities increased primarily as the result of an increase of non-cash expenses included in net income and a decreased use of cash from changes in operating assets and liabilities for the quarter ended March 31, 2005. The decreased use of cash during the period was mainly due to the timing of payments to our suppliers compared to the prior year’s quarter.

Net cash used by investing activities for the three month period ended March 31, 2005 was $15.2 million compared to $10.6 million in the comparable prior year quarter. Net cash used by investing activities consisted primarily of capital expenditures made in each of the three month periods ended March 31, 2005 and 2004, mainly for the purchase of coin and entertainment machines. As of March 31, 2005, we had entered into certain purchase agreements with suppliers of our machines, which require aggregate future purchases for coin and entertainment machines and components in the amount of $6.1 million.

Net cash used by financing activities for the three month period ended March 31, 2005 was $0.2 million. This amount represented cash used to make scheduled principal payments of $0.5 million on our term loan and $0.4 million on capital lease payments offset by proceeds from the exercise of stock options and employee stock purchases of $0.7 million. Net cash used by financing activities for the three months ended March 31, 2004 was $3.1 million.

On July 7, 2004, we entered into a senior secured credit facility funded by a syndicate of lenders led by JPMorgan Chase Bank and Lehman Brothers Inc. to provide for the financing of our acquisition of ACMI. The credit agreement provided for advances totaling up to $310.0 million, consisting of a $60.0 million revolving credit facility and a $250.0 million term loan facility. Fees for this facility of approximately $5.7 million are being amortized over the life of the revolving line of credit and the term loan which are 5 years and 7 years, respectively. Loans made pursuant to the credit agreement are secured by a first security interest in substantially all of our assets and the assets of our subsidiaries, as well as a pledge of our subsidiaries’ capital stock. The credit facility matures on July 7, 2011. As of March 31, 2005, our original term loan balance of $250.0 million had been reduced to $207.3 million.

Advances under this credit facility may be made as either base rate loans (the higher of the Prime Rate or Federal Funds Effective Rate) or LIBOR rate loans at our election. Applicable interest rates are based upon either the LIBOR or base rate plus an applicable margin dependent upon a consolidated leverage ratio of outstanding indebtedness to EBITDA (to be calculated in accordance with the terms specified in the credit agreement). Initially, interest rates payable upon advances were based upon either an initial rate of LIBOR plus 225 basis points or the base rate plus 125 basis points. Due to improved consolidated leverage ratios, as of February 28, 2005, the basis points added to either LIBOR or the base rate have been respectively reduced to 200 basis points and 100 basis points. At March 31, 2005, our interest rate on this facility was 4.84%. On April 7, 2005, due to changes in the LIBOR rate, our interest rate was adjusted to 5.13%.

The credit facility contains standard negative covenants and restrictions on actions by us including, without limitation, restrictions on indebtedness, liens, fundamental changes or dispositions of our assets, payments of dividends or common stock repurchases, capital expenditures, foreign investments, acquisitions, sale and leaseback transactions and swap agreements, among other restrictions. In addition, the credit agreement requires that we meet certain financial covenants, ratios and tests, including maintaining a maximum consolidated leverage ratio and a minimum interest coverage ratio, as defined in the agreement. As of March 31, 2005, we were in compliance with all covenants.

Quarterly principal payments on the term loan of $0.5 million terminate on March 31, 2011. The remaining principal balance of $194.8 million is due July 7, 2011, the maturity date of the facility. Commitment fees on the unused portion of the facility, currently 50 basis points, may vary and are based on our consolidated leverage ratio.

On September 23, 2004 we purchased an interest rate cap and sold an interest rate floor at zero net cost, which protects us against certain interest rate fluctuations of the LIBOR rate, on $125.0 million of our variable rate debt under our credit facility. The effective date of the interest rate cap and floor is October 7, 2004 and expires in three years on October 9, 2007. The interest rate cap and floor consists of a LIBOR ceiling of 5.18% and a LIBOR floor that step up in each of the three years beginning October 7, 2004, 2005 and 2006. The LIBOR floor rates are 1.85%, 2.25% and 2.75% for each of the respective three-year periods. Under this hedge, we will continue to pay interest at prevailing rates plus any spread, as defined by our credit facility, but will be reimbursed for any amounts paid on LIBOR in excess of the ceiling. Conversely, we will be required to pay the financial institution that originated the instrument if LIBOR is less than the respective floor rates. We have recognized the fair value of the interest rate cap and floor as an asset of $0.4 million at March 31, 2005.

As of March 31, 2005, we had eight irrevocable letters of credit that totaled $15.4 million. These letters of credit, which expire at various times through December 2005, are available to collateralize certain obligations to third parties. As of March 31, 2005, no amounts were outstanding under these letters of credit.

Under the terms of our new credit agreement entered into on July 7, 2004, we are permitted and our Board has authorized us to repurchase up to $3.0 million of our common stock plus proceeds from the issuance of new shares of capital stock under our employee

equity compensation plans. (This authorization is in addition to the 1,233,214 shares repurchased previous to July 7, 2004 for an aggregate of $22.8 million.) As of March 31, 2005, the cumulative proceeds received from option exercises or other equity purchases under our equity compensation plans subsequent to July 7, 2004, totaled approximately $5.7 million bringing the total authorized for purchase under our credit agreement to $8.7 million. We have not made further share repurchases since entering into our new credit facility on July 7, 2004.

As of March 31, 2005, our net deferred income tax assets totaled $30.8 million. In the quarter ended March 31, 2005, we recorded $3.0 million in income tax expense, which, as a result of our federal and state NOL carryforwards, will not result in cash payments for income taxes other than those required by some foreign jurisdictions and states, and federal alternative minimum taxes.

Off-Balance Sheet Arrangements

As of March 31, 2005, we have no off-balance sheet arrangements.

Contractual Obligations

The tables below summarize our contractual obligations and other commercial commitments as of March 31, 2005:


	Payments Due by Period
Contractual Obligations As of March 31, 2005	Total		Less than 1 year		1 - 3 years		4 - 5 years		After 5 years
	(in thousands)
Long-term debt	$	207,331	$	2,089	$	4,178	$	4,178	$	196,886
Capital lease obligations		3,659		1,524		1,834		301		—
Operating leases		22,048		7,589		10,130		3,184		1,145
Purchase obligations*		15,071		15,071		—		—		—

Total contractual cash obligations	$	248,109	$	26,273	$	16,142	$	7,663	$	198,031

*	Purchase obligations consist of outstanding purchase orders issued in the ordinary course of our business.


	Amount of Commitment Expiration Per Period
Other Commercial Commitments As of March 31, 2005	Total		Less than 1 year		1 - 3 years		4 - 5 years		After 5 years
	(in thousands)
Letters of credit	$	15,355	$	15,355	$	—	$	—	$	—

Total commercial commitments	$	15,355	$	15,355	$	—	$	—	$	—

We believe our existing cash, cash equivalents and amounts available to us under our credit facility will be sufficient to fund our cash requirements and capital expenditure needs for at least the next 12 months. After that time, the extent of additional financing needed, if any, will depend on the success of our business. If we significantly increase installations beyond planned levels, or if coin –counting machine volumes generated or entertainment services machine plays are lower than historical levels, our cash needs may increase. Furthermore, our future capital requirements will depend on a number of factors, including cash required by future acquisitions, our consumer usage, the timing and number of installations, the number of available installable machines held, the type and scope of service enhancements, the cost of developing potential new product and service offerings and enhancements.

Quarterly Financial Results

The following table sets forth selected unaudited quarterly financial information for the last eight quarters. This information has been prepared on the same basis as our audited consolidated financial statements and includes, in the opinion of management, all normal and recurring adjustments that management considers necessary for a fair presentation of the quarterly results for the periods. The operating results for any quarter are not necessarily indicative of the results for future periods. Certain reclassifications have been made to the prior year balances to conform with the current year presentation.


	Three Month Periods Ended
	March 31, 2005			Dec. 31, 2004			Sept. 30, 2004			June 30, 2004			March 31, 2004			Dec. 31, 2003			Sept. 30, 2003			June 30, 2003
	(in thousands, except per share data)
	(unaudited)
Consolidated Statements of Operations:
Revenue	$	105,585		$	109,793		$	106,430		$	47,825		$	43,052		$	46,366		$	48,671		$	43,102
Expenses:
Direct operating		72,843			73,678			69,937			23,093			20,218			20,904			20,870			19,077
Sales and marketing		994			4,567			3,642			3,666			1,050			5,262			3,440			3,384
Research and development		1,309			1,058			1,410			1,556			1,441			1,389			1,566			1,524
General and administrative		8,592			9,423			8,098			4,890			5,064			4,376			4,783			5,228
Depreciation and other		10,806			10,116			9,821			7,450			7,915			7,245			6,764			6,642
Amortization of intangible assets		1,031			993			884			84			53			37			38			38

Income from operations		10,010			9,958			12,638			7,086			7,311			7,153			11,210			7,209
Interest income and other, net		488			201			190			61			69			41			38			52
Interest expense and early retirement of debt		(2,850	)		(3,812	)		(2,793	)		(126	)		(246	)		(216	)		(300	)		(336	)

Income before income taxes		7,648			6,347			10,035			7,021			7,134			6,978			10,948			6,925
Income taxes		(2,980	)		(1,796	)		(3,386	)		(2,470	)		(2,517	)		(2,548	)		(4,014	)		(2,676	)

Net income	$	4,668		$	4,551		$	6,649		$	4,551		$	4,617		$	4,430		$	6,934		$	4,249

Net income per share:
Basic	$	0.18		$	0.20		$	0.31		$	0.21		$	0.22		$	0.21		$	0.32		$	0.20
Diluted		0.18			0.20			0.30			0.21			0.21			0.21			0.32			0.19

Seasonality

We have historically experienced seasonality in our coin services business, with highest revenues experienced in the third calendar quarter, followed by the fourth calendar quarter, and relatively lower revenues in the first half of the year. ACMI has also experienced seasonality, with peak revenues in the fourth quarter and periods surrounding the Easter holiday season. While our acquisition of ACMI may impact the historical seasonality of our business to some degree, we expect our results of operations will continue to fluctuate both as a result of seasonal fluctuations and our revenue mix between relatively higher margin coin and e-payment services and relatively lower margin entertainment services.

Factors That May Affect Our Business, Future Operating Results and Financial Condition

You should carefully consider the risks described below before making an investment decision. The risks and uncertainties described below are not the only ones facing our company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. If any of the following risks actually occur, our business could be harmed, the trading price of our common stock could decline and you could lose all or part of your investment.

Certain statements in the risks described below are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include any statement that may predict, forecast, indicate, or imply future results performance, or achievements. Forward-looking statements can be identified by the use of terminology such as “believe,” “anticipate,” “expect,” “estimate,” “may,” “will,” “should,” “project,” “continue,” “plans,” “aims,” “intends,” “likely,” or other similar words or phrases. Except for historical matters, the matters discussed in this Quarterly Report on Form 10-Q and other statements or filings made by Coinstar from time-to-time may be forward-looking statements. We caution you that forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from the forward-looking statements. We are including this Cautionary Statement to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for any such forward-looking statements.

We have substantial indebtedness as a result of our acquisition of ACMI.

On July 7, 2004, we acquired ACMI for $235.0 million in cash. To finance the acquisition, we entered into a senior secured credit facility funded by a syndicate of lenders led by JPMorgan Chase Bank and Lehman Brothers Inc. The credit agreement provides for advances totaling up to $310.0 million, consisting of a $60.0 million revolving credit facility and a $250.0 million term loan facility. Since this acquisition, we have repaid $42.7 million of the debt outstanding. The credit facility bears interest at variable rates pegged to prevailing interest rates. As a result, our operating results are exposed to risks of fluctuations in interest rates. Loans made pursuant to the credit agreement are secured by a first security interest in substantially all of our assets and the assets of our subsidiaries, as well as a pledge of our subsidiaries’ capital stock. The credit facility matures on July 7, 2011. This debt financing may limit our ability to effect future financings or may negatively impact our business, financial condition, results of operations and growth. Substantial financial leverage poses the risk that we may not be able to generate sufficient cash flow to service the indebtedness, or to adequately fund our operations. We may be unable to increase our revenue and leverage the acquisition of ACMI to achieve sufficient cash flow to meet our debt service obligations. Moreover, the credit agreement governing our indebtedness contains financial and other covenants that could impair our flexibility and restrict our ability to pursue growth opportunities. The credit agreement contains negative covenants and restrictions on actions by us including, without limitation, restrictions on certain common stock repurchases, liens, investments, capital expenditures, indebtedness, restricted payments including cash payments of dividends, and fundamental changes or dispositions of our assets. In addition, the credit agreement requires that we meet certain financial covenants, ratios and tests, including maintaining a maximum consolidated leverage ratio and a minimum interest coverage ratio, all as defined in the credit agreement. If the covenants are not met, our lenders would be entitled, under certain circumstances, to declare such indebtedness immediately due and payable.

We only recently acquired ACMI, and have limited experience in operating this business. If ACMI’s entertainment services business does not meet our performance expectations, our business and financial condition could be materially and adversely affected.

We completed our acquisition of ACMI on July 7, 2004, and have included its operations in our financial results since that date. As a result of ACMI’s higher operating expenses, as well as the impact from acquisition-related charges, including the amortization of intangibles and financing fees, our blended operating margin was 9.5% in the three months ended March 31, 2005, compared to 17.0% in the first quarter of 2004, which was prior to the ACMI acquisition. We expect our future operating margins to fluctuate on a quarterly and annual basis as a function of our coin-counting, e-payment and entertainment services revenues. In addition, as a result of the ACMI acquisition, we are now required to maintain inventory of consumer products to support our skill-crane and bulk vending machine businesses. As of March 31, 2005, we carried $28.8 million of inventory on our balance sheet, approximately 84% of which is attributable to the entertainment business. While we will regularly evaluate the carrying value of this inventory and establish reserves for obsolete inventory, our experience in evaluating this inventory is limited. If we determine that the value of our inventory has become impaired, we may be required to take substantial write-downs, which would be charged to direct operating expenses. Because we have limited experience in operating our entertainment services business, there may be other expenses or liabilities associated with this business that we are not aware of, or we may not be able to achieve the operating results for the entertainment services business in line with ACMI’s historical results or our expectations. For any of the foregoing reasons, we may not achieve the strategic and financial objectives of the ACMI acquisition, and our failure to do so could materially and adversely affect our businesses, operating results and financial condition.

The termination, non-renewal or renegotiation on materially adverse terms of our contracts with any one or more of our significant retail partners could seriously harm our business, financial condition and results of operations.

We derive substantially all of our revenue from two sources: coin-counting machines installed in high traffic supermarkets and entertainment services machines installed in supermarkets, mass merchandisers, restaurants, bowling centers, truckstops, warehouse clubs and similar locations. The success of our business depends in large part on our ability to maintain relationships with our existing retail partners in locations where we can operate profitably. For example, since our acquisition of our entertainment services subsidiary, Wal-Mart, Inc. and the Kroger Company accounted for approximately 28.5% and 10.0% of our consolidated revenue, respectively. If we are unable to persuade existing retail partners that our coin and entertainment services provide direct and indirect benefits that are superior to or competitive with other systems (including coin-counting systems which the retail partners could operate themselves or through a third party) or alternative potential uses of the floor space that our machines occupy, we may encounter difficulties maintaining existing retailer relationships. We typically operate pursuant to separate agreements with each of our retail partners. Our typical contract is for a set term, which typically ranges from one to three years and automatically renews until we or our partner gives notice of termination before a certain time prior to the end of the initial term or renewal period. However, there are variations on certain contract provisions with some of our retail partners, including product offerings, the service fee we pay each retail partner, frequency of service, and the ability to cancel the contract upon notice after a certain period of time. Our entertainment services relationship with Wal-Mart, Inc. is governed by a contract that Wal-Mart, Inc. may terminate at any time, for any reason. Cancellation of this contract would seriously harm our entertainment services business and reputation. More generally, if we are

unable to maintain or renew such contracts with our other existing retail partners, our business, financial condition and results of operations could be significantly impaired. For example, a contract with one of our brokers recently expired. We are currently still providing machines in accordance with the contract and have not yet agreed upon a deinstallation schedule. Although the contract expiration is expected to result in the loss of certain relationships, we do not believe that any such loss will have a material adverse effect on our financial results.

We may be unable to continue to pay our retail partners a service fee that allows us to operate our coin-counting and entertainment services machines at historical levels of profitability.

We have faced and continue to face ongoing pricing pressure from our current retail partners to increase the service fee we pay on coin and entertainment services or to make other financial concessions to win or retain business. If we are unable to respond effectively to ongoing pricing pressures, we may fail to retain certain of our retail partners. We have, in some cases, implemented new fee arrangements for our coin services. These fee arrangements are based on our evaluation of certain unique factors with the retailer, such as total revenue, e-payment capabilities, long-term non-cancelable contracts, installation of our machines in high traffic and/or urban or rural locations, new product commitments, or other criteria. Together with other factors, these arrangements could increase our expenses relative to coin services significantly in future periods.

We may be unable to attract new retail partners and penetrate new markets and distribution channels.

In order to continue our coin-counting and entertainment services machine installation growth, we will need to attract new retail partners and develop operational or unit production cost efficiencies that make it feasible for us to penetrate lower density markets and/or new distribution channels. We cannot assure you that we will be able to attract new retail partners or that we will be able to drive down costs relating to the manufacture, installation or servicing of coin-counting or entertainment services machines to levels that would enable us to operate profitably in lower density markets. If we are unable to do so, our future operating results could be adversely affected.

We may be unable to identify and define product trends, as well as to anticipate, gauge and react to changing consumer demands in a timely manner.

To be competitive, we need to develop new services that are accepted by the market and establish third-party relationships necessary to develop and commercialize such services. For example, toy and other products dispensed in our entertainment services machines must appeal to a broad range of consumers whose preferences cannot be predicted with certainty and are subject to change. If we misjudge the market for our toy products, we may be faced with significant excess inventories for some products and missed opportunities for other products. In addition, because we place orders for toy products well in advance of purchases by consumers, we could experience excess inventory if our consumers purchase fewer products than anticipated. In order to develop and commercialize new non-entertainment vending products or services, we will need to enhance the capabilities of our coin-counting and entertainment services machines and our network and establish market acceptance of such products or services. We cannot assure you that new or additional products or services that we may attempt to commercialize will be successful.

Competitive pressures could seriously harm our business, financial condition and results of operations.

Our coin-counting business faces competition from supermarket retailers, banks and other companies that purchase and operate coin-counting equipment from companies such as ScanCoin AB, Cummins-Allison Corporation and others, and who service such equipment themselves or through third parties. For example, in 2003, one of our largest coin-counting retail partners decided to purchase and operate its own coin-counting machines. Other retail partners may choose to replace our coin-counting machines with self-installed machines. In addition, retailers, some of which have significantly more resources than us, may decide to enter the coin-counting business and some banks and other competitors already provide coin-counting free of charge or for an amount that yields very low margins or that may not generate a profit at all. An expansion of the coin-counting services provided by any of such competitors could materially and adversely affect our business and results of operations.

As a result of our acquisition of ACMI, we now compete with a number of regional and local operators of entertainment services equipment. Many of these competitors are engaged in expansion programs, and ACMI has experienced and we expect to continue to experience intense competition for new locations and acquisition candidates. We may be unable to compete effectively with these companies in the future. Our entertainment services equipment also competes with other vending machines, coin-operated entertainment devices, and seasonal and bulk merchandise for sites within retail locations. We cannot assure you that we will be able to maintain current sites in the retail locations or that we will be able to obtain sites in the future on attractive terms or at all. It is possible that a well-financed vending machine manufacturer or other vending machine operator with existing relationships with retail accounts could compete with us in certain markets or capture additional market share at our expense.

Defects or failures in our coin-counting machines’ operating system could harm our business.

The operation of our coin-counting machines depends on sophisticated software, computing systems and communication services that may contain undetected errors or may be subject to failures. These errors may arise particularly when new services or service enhancements are added. We have in the past experienced limited delays and disruptions resulting from upgrading or improving our operating systems. Future upgrades or improvements that may be necessary to expand and maintain our business could result in delays or disruptions that could have the effect of seriously harming our operations. We also rely on a long distance telecommunication network that is not owned by us and is subject to service disruptions. Further, while we have taken significant steps to protect the security of our network, security breaches may result from intentional acts of third parties or from computer viruses. Any service disruptions, whether due to errors or delays in our software or computing systems, interruptions or breaches in the communications network, or security breaches of the system, could seriously harm our business, financial condition and results of operations.

Lack of consumer confidence, whether real or perceived, in our coin-counting machines could harm our business.

The accuracy of the coin-counting functionality of our machines is important to consumers and our retail partners. The failure to maintain consumer confidence in our technology and systems could harm our business. Our inability to collect the data from our coin-counting machines could lead to a delay in processing coins and crediting the accounts of our retail partners for vouchers that have already been redeemed. Any loss or delay in collecting coin data could seriously harm our operations.

We may be unable to adequately protect or enforce our patents and other proprietary rights.

Our success depends, in part, on our ability to protect our intellectual property and maintain the proprietary nature of our technology through a combination of patents, licenses and other intellectual property arrangements, without infringing the proprietary rights of third parties. We have 58 United States and international patents relevant to aspects of self-service coin-counting, including: machine networking, fraud avoidance and voucher authentication, among others. We also have additional patent applications pending in the United States and several foreign jurisdictions directed to this technology.

Our patents may not be held valid if challenged, pending patent applications may not be issued, and other parties may claim rights in or ownership of our patents and other proprietary rights. Since many patent applications in the United States are not publicly disclosed until the patent is issued, others may have filed applications, which, if issued as patents, could cover our products or technology. Patents issued to us may be circumvented or fail to provide adequate protection of our technologies. Our competitors might independently develop or patent technologies that are substantially equivalent or superior to our technologies.

We also rely on trademarks, copyrights, trade secrets and other proprietary intellectual property to develop and maintain our competitive position. Although we protect our intellectual property in part by confidentiality agreements with our employees, consultants, vendors and corporate partners, these parties may breach these agreements. We may have inadequate remedies for any such breach and our trade secrets may otherwise become known or be discovered independently by our competitors. The failure to protect our intellectual property rights effectively or to avoid infringing the intellectual property rights of others could seriously harm our business, financial condition and results of operations.

Certain parties may assert claims of patent infringement or misappropriation against us based on current or pending United States and/or foreign patents, copyrights or trade secrets, or contracts. If such claims were successful, our business could be harmed. Defending our company and our retail partners against these types of claims, regardless of their merits, could require us to incur substantial costs and divert the attention of key personnel. Parties making these types of claims may be able to obtain injunctive or other equitable relief, which could effectively block our ability to provide our coin-counting service and operate our coin-counting equipment in the United States and abroad. Such types of claims could also result in an award of substantial damages. If third parties have or obtain proprietary rights that our products infringe, we may be unable to obtain necessary licenses from others at a reasonable cost or at all. For example, we have from time to time engaged in discussions with a former supplier, ScanCoin AB, in an effort to clarify certain contract rights and obligations as well as ownership of certain of our intellectual property. In addition, if we instigate litigation to enforce our patents or protect our other proprietary rights, or to determine the validity and scope of other parties’ proprietary rights, such litigation could cause us to spend significant financial and management resources.

Acquisitions involve risks that could harm our business and impair our ability to realize potential benefits from such acquisitions.

As part of our business strategy, we have in the past sought and may in the future seek to acquire or invest in businesses, products or technologies that we feel could complement or expand our business. We may be unable to adequately address the financial, legal and operational risks raised by acquisitions, which could harm our business and prevent us from realizing the projected benefits of the acquisitions. Further, the evaluation and negotiation of potential acquisitions, as well as the integration of an acquired business, will divert management time and other resources. In addition, we cannot assure you that any particular transaction, even if

successfully completed, will ultimately benefit our business. Certain financial and operational risks related to acquisitions that may have a material impact on our business are:

•

use of cash resources and incurrence of debt and contingent liabilities in funding acquisitions,

•

stockholder dilution if an acquisition is consummated through an issuance of our securities,

•

amortization expenses related to acquired intangible assets and other adverse accounting consequences,

•

costs incurred in identifying and performing due diligence on potential acquisition targets that may or may not be successful,

•

difficulties and expenses in assimilating the operations, products, technology, information systems or personnel of the acquired company,

•

impairment of relationships with employees, retailers and affiliates of our business and the acquired business,

•

the assumption of known and unknown liabilities of the acquired company, including intellectual property claims, and

•

entrance into markets in which we have no direct prior experience.

In addition, acquisitions we make may have adverse accounting consequences or may result in highly restrictive debt covenants. For example, in connection with our acquisition of our entertainment business, we recorded approximately $34.4 million of identifiable intangible assets, which will result in annual amortization expense of approximately $3.4 million over the next 10 years. In addition, we also recorded approximately $135.3 million of goodwill in connection with the acquisition that will not be amortized, but instead must be tested periodically for impairment. Any impairment of this goodwill in the future could result in substantial charges to our operating results. Finally, to finance our acquisition of the entertainment business, we entered into a senior secured credit facility that places substantial restrictions on our business operations. Any further acquisitions we may make may involve additional accounting charges or operational restrictions that may impact our future operating results.

Our future operating results may fluctuate.

Our future operating results will depend significantly on our ability to continue to drive new and repeat consumer utilization of our coin-counting services and entertainment services equipment, our ability to develop and commercialize new products and services and the costs incurred to do so, and our ability to successfully integrate our entertainment business into our operations. Our operating results have a history of fluctuating and may fluctuate in the future. Our future operating results also may fluctuate based upon many other factors, including:

•

the transaction fee we charge consumers to use our service,

•

the amount of service fees that we pay to our retail partners,

•

our ability to establish or maintain relationships with significant retail partners,

•

the commercial success of our retail partners, which could be affected by such factors as severe weather, strikes or general economic conditions,

•

fluctuations in revenue generated by our coin-counting and entertainment services equipment,

•

our ability to effectively manage the product mix of our entertainment services equipment to maximize consumer preferences,

•

fluctuations in interest rates, which affects our debt service obligations,

•

the timing of, and our ability to develop and successfully commercialize, product enhancements and new products,

•

the level of product and price competition,

•

our success in maintaining and expanding our network and managing our growth,

•

the successful operation of our coin-counting network,

•

activities of and acquisitions or announcements by competitors,

•

the impact from any impairment of goodwill related to our acquisitions,

•

fluctuations in consumer spending patterns, and

•

relationships with manufacturers and suppliers.

In addition, we have historically experienced seasonality in our coin services business, with highest revenues experienced in the third calendar quarter, followed by the fourth calendar quarter, and relatively lower revenues in the first half of the year. Our entertainment business has also experienced seasonality, with peak revenues in the fourth quarter and periods surrounding the Easter holiday season. While our acquisition of the entertainment business may impact the historical seasonality of the coin-counting business to some degree, we expect our results of operations will continue to fluctuate both as a result of seasonal fluctuations and our revenue mix between relatively higher margin coin and e-payment services and relatively lower margin entertainment services.

We depend upon third-party manufacturers, suppliers and service providers.

We currently conduct limited manufacturing operations and depend, and will continue to depend, on outside parties to manufacture our coin-counting machines and key components of our coin-counting and entertainment services machines. We intend to continue to expand our installed base for coin-counting machines in North America and in the United Kingdom and for entertainment services machines in the United States and Mexico. Such expansion may be limited by the manufacturing capacity of our third-party manufacturers and suppliers. Third-party manufacturers may not be able to meet our manufacturing needs in a satisfactory and timely manner. If there is an unanticipated increase in demand for coin-counting machine or entertainment services equipment installations, we may be unable to meet such demand due to manufacturing constraints.

We obtain some key hardware components used in the coin-counting machines and entertainment services equipment from a limited number of suppliers. We may be unable to continue to obtain an adequate supply of these components in a timely manner or, if necessary, from alternative sources. If we are unable to obtain sufficient quantities of components or to locate alternative sources of supply on a timely basis, we may experience delays in installing or maintaining coin-counting machines or entertainment services equipment, either of which could seriously harm our business, financial condition and results of operations.

We rely on third-party service providers for substantial support and service efforts that we currently do not provide directly. In particular, we contract with third-party providers to arrange for pick-up, processing and deposit of coins as well as limited servicing of our machines. We generally contract with a single transportation provider and coin processor to service a particular region and either party generally can terminate the contracts with advance notice ranging from 30 to 90 days. We do not currently have, nor do we expect to have in the foreseeable future, the internal capability to provide back-up coin processing service in the event of a sudden disruption in service from a commercial coin processor. Any failure by us to maintain our existing coin processing relationships or to establish new relationships on a timely basis or on acceptable terms would harm our business, financial condition and results of operations.

There are risks associated with conducting our businesses and sourcing goods internationally.

We currently have coin operations in Canada and the United Kingdom. We also now have entertainment services equipment operating in Mexico. We expect to continue increasing our deployment of both coin-counting machines and entertainment services equipment internationally. Exposure to exchange rate fluctuations, restrictions on the repatriation of funds, adverse changes in tax, tariff and trade regulations, difficulties with foreign distributors and difficulties in managing an organization outside the United States are risks that could seriously harm the development of our business and ability to operate our machines profitably.

In addition, substantially all of the plush toys and other products dispensed from our entertainment services machines are produced by foreign manufacturers, including a majority purchased directly from manufacturers in China. We purchase our other vending products indirectly from vendors who obtain a significant percentage of such products from foreign manufacturers. In 2003, our entertainment business transitioned its product fulfillment operations to a third-party distribution center in Shanghai, China. As a result, we are subject to changes in governmental policies, the imposition of tariffs, import and export controls, transportation delays and interruptions, political and economic disruptions and labor strikes that could disrupt the supply of products from such manufacturers. A reduction or interruption in supplies or a significant increase in the price of one or more supplies necessary for our toy manufacture could have a material adverse effect on our business. We also could be affected by labor strikes in the sea shipping, trucking and railroad industries. Such disruptions could interrupt supplies or increase our transportation costs and thereby reduce profit margins in a particular period.

Our business is subject to federal, state, local and foreign laws and government regulation.

Our current businesses are subject to federal, state, local and foreign laws and government regulation, including government regulation relating to coins, toy safety, child protection, vehicle safety, access to machines in public places, charitable fundraising, the transfer of money or things of value, weights and measures, gaming, sweepstakes, contests and consumer protection. The application of existing laws and regulations, changes in or enactment of new laws and regulations that apply or may in the future apply to our current or future products or services, changes in governmental authorities’ interpretation of the application of various government

regulations to our business, or the failure or inability to gain and retain required permits and approvals could materially and adversely affect our business in the future.

In addition, certain jurisdictions may also require us to hold certain licenses, permits and approvals in connection with the operation of our coin-counting and entertainment services machines. For example, in Washington state, skill-crane machines are subject to the licensing requirements of the Washington State Gambling Commission. There can be no assurance that we will be granted all necessary permits or approvals in the future or that current permits and approvals will be renewed. Given the unique nature of our businesses and new products and services we may develop in the future, the application of various laws and regulations to our business is or in the future may be uncertain.

Recall of any of the products dispensed by our entertainment services machines or by the entertainment services industry generally could adversely affect our entertainment services business.

Our entertainment services machines, and the entertainment services industry generally, are subject to regulation by the Consumer Product Safety Commission and similar state and international regulatory authorities. The toys and other products dispensed from our entertainment services machines could be subject to involuntary recalls and other actions by such authorities. Concerns about product safety may lead us to voluntarily recall or discontinue offering selected products and may generally reduce consumers’ willingness to purchase the products distributed through our entertainment services business. For example, a 2004 recall of certain toy jewelry resulted in consumer avoidance of bulk vending generally. We believe that this development has adversely affected the bulk vending portion of our entertainment services business since the third quarter of 2004. We cannot assure you that our toy or other entertainment services products may not experience defects or errors after their production and sale to consumers. Such defects or errors could result in the rejection of our entertainment services products by consumers, damage to our reputation, lost sales, potential inventory valuation write-downs, excess inventory, diverted development resources and increased customer service and support costs, any of which could harm our business. Any such errors, defects or recalls may not be covered by insurance or cause our insurance costs to increase in future periods.

We may be subject to product liability claims if people or property are harmed by our products and services.

Some of the products we sell, especially through our entertainment services machines, may expose us to product liability claims arising from personal injury, death or property damage. Any such product liability claim may result in adverse publicity regarding us, our entertainment service machines and the products we sell. Even if we successfully defend ourselves against this type of claim, we could be forced to spend a substantial amount of money in litigation expenses and our management could be required to spend valuable time in defending against these claims. Our vendors may not indemnify us against product liability. There is a risk that such claims or liabilities may exceed, or fall outside the scope of, our insurance coverage and we cannot be certain that insurance will continue to be available to us on economically reasonable terms, or at all. Any imposition of product liability could harm our business, financial condition and operating results.

Our stock price has been and may continue to be volatile.

Our stock price has fluctuated substantially since our initial public offering in July 1997. For example, during the last twelve months, the sale price of our common stock has ranged from $15.60 to $27.85 per share. The market price of our stock could decline from current levels or continue to fluctuate. The market price of our stock may be significantly affected by the following factors:

•

the termination, modification or non-renewal of one or more retail partner relationships,

•

operating results below market expectations and changes in, or our failure to meet, financial estimates of securities analysts or our own guidance,

•

trends and fluctuations in the use of our coin-counting and entertainment services machines,

•

period-to-period fluctuations in our financial results,

•

release of analyst reports,

•

announcements regarding the establishment, modification or termination of relationships regarding the development of new products and services,

•

announcements of technological innovations or new products or services by us or our competitors,

•

industry developments, and

•

economic or other external factors.

In addition, the securities markets have experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations may also seriously harm the market price of our common stock.

If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud.

Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. Any inability to provide reliable financial reports or prevent fraud could harm our business. We have completed the process of evaluating our internal control procedures to satisfy the requirements of the Sarbanes-Oxley Act of 2002, which require management and our auditors to evaluate and assess the effectiveness of our internal controls. We continue to evaluate and, where appropriate, enhance our policies, procedures and internal controls. If we fail to maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we could be subject to regulatory scrutiny, civil or criminal penalties or shareholder litigation. In addition, failure to maintain adequate internal controls could result in financial statements that do not accurately reflect our financial condition. We cannot assure you that we will be able to complete the work necessary to fully comply with the requirements of the Sarbanes-Oxley Act, that our auditors will complete their review and assessment of our internal controls in a timely manner or that management or our auditors will conclude that our internal controls are effective.

Our anti-takeover mechanisms may affect the price of our common stock and make it harder for a third party to acquire us without the consent of our board of directors.

We have implemented anti-takeover provisions that may discourage takeover attempts and depress the market price of our stock. Provisions of our certificate of incorporation, bylaws and rights plan could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. Delaware law also imposes some restrictions on mergers and other business combinations between us and any acquirer of 15% or more of our outstanding common stock. Furthermore, Washington law may impose additional restrictions on mergers and other business combinations between us and any acquirer of 10% or more of our outstanding common stock. These provisions may make it harder for a third party to acquire us without the consent of our board of directors, even if the offer from a third party may be considered beneficial by some stockholders.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

The following discussion about our market risk involves forward-looking statements. Actual results could differ from those projected in our forward-looking statements.

We are subject to the risk of fluctuating interest rates in the normal course of business, primarily as a result of our credit agreement with JPMorgan Chase Bank and investment activities that generally bear interest at variable rates. Because our investments have maturities of three months or less, and our credit facility interest rates are based upon either the LIBOR or base rate plus an applicable margin, we believe that the risk of material loss is low and that the carrying amount of these balances approximates fair value. For our debt obligation which has a variable interest rate, the rate presented reflects the current rate in effect at April 7, 2005, which is 5.13%. This rate is based on LIBOR plus a margin of 2.0%.

The table below presents principal amounts, at book value, by year of maturity and our current interest rate.


Liabilities	Expected Maturity Date												March 31, 2005				Average interest rate*
(in thousands)	2005		2006		2007		2008		2009		Thereafter		Total		Fair Value		Average interest rate*
Long-term debt:
Variable rate	$	1,567	$	2,089	$	2,089	$	2,089	$	2,089	$	197,408	$	207,331	$	207,331	5.13	%

*	Our current interest rate approximates our average interest rate. In an environment of rising interest rates, we believe our current interest rate indicates our expected future interest rates better than our historical average interest rates.

We have variable-rate debt that, at March 31, 2005, had an outstanding balance of $207.3 million. Under the terms of our credit agreement, we have entered into a zero net cost interest rate hedge on $125.0 million of this outstanding debt balance which will decrease our sensitivity to changes in the LIBOR rate. Based on our outstanding debt obligations as of March 31, 2005, an increase of 1.0% in interest rates over the next four years would increase our annualized interest expense and related cash payments by approximately $1.7 million; a decrease of 1.0% in interest rates over the next four years would decrease our annualized interest

expense and related cash payments by approximately $1.9 million. Such potential increases or decreases are based on certain simplified assumptions, including minimum quarterly principal repayments made on variable-rate debt for all maturities and an immediate, across-the-board increase or decrease in the level of interest rates with no other subsequent changes for the remainder of the periods.

As discussed above, on September 23, 2004 we purchased an interest rate cap and sold an interest rate floor at zero net cost, which protects us against certain interest rate fluctuations of the LIBOR rate on $125.0 million of our variable rate debt under our credit facility. The effective date of the interest rate cap and floor is October 7, 2004 and expires in three years on October 9, 2007. The interest rate cap and floor consists of a LIBOR ceiling of 5.18% and LIBOR floors that will step up in each of the three years beginning October 7, 2004, 2005 and 2006. The LIBOR floor rates are 1.85%, 2.25% and 2.75% for each of the respective three-year periods. Under this hedge, we will continue to pay interest at prevailing rates plus any spread, as defined by our credit facility, but will be reimbursed for any amounts paid on LIBOR in excess of the ceiling. Conversely, we will be required to pay the financial institution that originated the instrument if LIBOR is less than the respective floor rates.

Item 4.

Controls and Procedures

We maintain a set of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), designed to ensure that information required to be disclosed in our filings under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Management, with the participation of our chief executive officer and chief financial officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report and has determined that such disclosure controls and procedures are effective.

We also maintain a system of internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act). No changes in our internal control over financial reporting occurred during the fiscal quarter ended March 31, 2005 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 2.

Unregistered Sales of Equity Securities

During the three months ended March 31, 2005, we issued 52,641 shares of common stock in connection with the merger of Mundo Communications, Inc. into a wholly-owned subsidiary of Coinstar. These shares were issued pursuant to an exemption under Section 506 of the Securities Act of 1933, as amended. Pursuant to the merger agreement, we registered the resale of these shares and any contingent shares that may be delivered if certain financial targets are achieved, on a Registration Statement on Form S-3 that was declared effective on March 23, 2005.

Item 6.

Exhibits

(a) Exhibits:


Exhibit Number		Description of Document

10.1		Form of 1997 Amended and Restated Equity Incentive Plan Stock Option Grant Notice.

10.2		Form of 2000 Amended and Restated Equity Incentive Plan Stock Option Grant Notice.

10.3		First Amendment to Employment Agreement between Randall J. Fagundo and American Coin Merchandising Inc., a wholly-owned subsidiary of the Registrant dated May 2, 2005.

10.4		Employment Agreement between Alex Camara and the Registrant dated June 15, 2001.

31.1		Certification of Chief Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Where You Can Get Information We File with the SEC

We file annual, quarterly and current reports, as well as registration and proxy statements and other information, with the SEC. These documents are available on our website at www.coinstar.com under: About Us—Investor Relations—SEC Filings. In addition, copies of these reports and other information may be obtained at prescribed rates from the Public Reference Section of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549. You can get further information about the SEC’s Public Reference Room by calling 1-800-SEC-0330. The SEC also maintains a website at http://www.sec.gov that contains reports, registration statements and other information regarding registrants like us that file electronically with the SEC.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


COINSTAR, INC.

By:		/s/ BRIAN V. TURNER
		Brian V. Turner
		Chief Financial Officer
		May 5, 2005

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents