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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For The Quarter Ended March 31, 2005

OR

Commission File Number: 000-22555

COINSTAR, INC.

(Exact name of registrant as specified in its charter)

(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.

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COINSTAR, INC.

FORM 10-Q

Index

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PART I. FINANCIAL INFORMATION

COINSTAR, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(unaudited)

See notes to consolidated financial statements.

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COINSTAR, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

See notes to consolidated financial statements.

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COINSTAR, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

Three Month Period Ended March 31, 2005

(in thousands, except share data)

(unaudited)

See notes to consolidated financial statements.

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COINSTAR, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

See notes to consolidated financial statements.

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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.

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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.

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

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NOTE 3: COMPREHENSIVE INCOME

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

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:

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.

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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:

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:

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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.

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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

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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.

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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 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

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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.

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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

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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:

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.

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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.