COINSTAR INC, 10-K405, 2000-03-30

COINSTAR INC
10-K405, 2000-03-30
PERSONAL SERVICES

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES ACT OF 1934

(Mark One)

[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 1999

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

From the transition period from to

Commission File Number: 000-22555

COINSTAR, INC.
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C>
Delaware 91-3156448
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)

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

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

Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.001 par value

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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

The aggregate market value of the voting stock held by non affiliates of the
registrant, based upon the closing price of Common Stock on February 29, 2000
as reported on the NASDAQ National Market, was approximately $283,074,442.
Shares of Common Stock held by each executive officer and director and by each
shareholder whose beneficial ownership exceeds 5% of the outstanding Common
Stock at February 29, 2000 have been excluded in that such persons may be
deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.

As of February 29, 2000, there were 20,219,603 shares of the registrant's
Common Stock outstanding.

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DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement for Registrant's 2000 Annual
Meeting of Stockholders to be held June 15, 2000 are incorporated by reference
in Part III of this Annual Report on Form 10-K. The definitive proxy statement
will be filed with the Securities and Exchange Commission within 120 days
after the end of the fiscal year to which the report relates.

FORM 10-K
Index

PART I
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<C> <S> <C>
Item 1. Business................................................. Page 3
Item 2. Properties............................................... Page 19
Item 3. Legal Proceedings........................................ Page 19
Item 4. Submission of Matters to a Vote of Security Holders...... Page 19

PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters...................................... Page 20
Item 6. Selected Financial and Other Data........................ Page 21
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... Page 23
Item 7a. Quantitative and Qualitative Disclosures About Market
Risk..................................................... Page 31
Item 8. Financial Statements and Supplementary Data.............. Page 32
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...................... Page 32

ITEM III
Item 10. Directors and Executive Officers of the Registrant....... Page 32
Item 11. Executive Compensation................................... Page 32
Item 12. Security Ownership of Certain Beneficial Owners and
Management............................................... Page 32
Item 13. Certain Relationships and Related Transactions........... Page 32

PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K................................................. Page 33
SIGNATURES ......................................................... Page 35
</TABLE>

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PART I

Item 1. Business.

Our disclosure and analysis in this Annual Report on Form 10-K contains
forward-looking statements regarding our business, prospects and results of
operations that involve risks and uncertainties. Our actual results could
differ materially from the results that may be anticipated by such forward-
looking statements and discussed elsewhere in this report. Factors that could
cause or contribute to such differences include, but are not limited to, those
discussed under the captions "Risk Factors" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" as well as those
discussed elsewhere throughout this report. 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 by us 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.

Summary

We are the first and only company to own and operate a national network of
self-service coin-counting machines in the United States, the United Kingdom
and Canada. Our Coinstar(R) coin-counting units provide consumers with a fun,
accurate and convenient means of converting accumulated change into cash. With
approximately 195 retail partners, primarily supermarket chains, we currently
operate more than 7,000 Coinstar units in approximately 85 regional markets
across the United States. We are also conducting trials of eight Coinstar
units in the United Kingdom and 26 units in Canada. We launched the Coinstar
network with the installation of our first Coinstar unit in 1994, and have
installed an average of 1,673 Coinstar units in each year since January 1,
1996. Since our inception, the Coinstar network has counted and processed
almost 52 billion coins with a value of approximately $2 billion in more than
69 million customer transactions.

The Coinstar unit, which is about the size of an ATM, is highly accurate,
durable, easy to use, easy to service and capable of processing up to 600
coins per minute. It accepts consumers' loose change and then prints out a
voucher listing the total number by denomination and dollar value of the
processed coins, less our processing fee. Consumers may then apply the
vouchers to their retail purchases or redeem the vouchers for cash. Our
services provide consumers with a convenient and reliable means of converting
loose coins into spendable cash. Our services also benefit our retail partners
by enhancing customer service, increasing store traffic, and promoting sales,
reducing internal store coin handling expenses and providing an additional
source of revenue.

Our key competitive advantages include our technology and expertise
developed over the past six years, the nationwide network of installed
Coinstar machines, our dedicated field service organization, our strong
relationships with a majority of the leading supermarket chains in the United
States and our proven ability to execute our rollout strategy. Our Coinstar
units have been designed to operate as part of a scalable, two-way, wide-area
communications network. Our intelligent on-line network enables us to track
each machine 24 hours a day and provides key financial data and operating
statistics to our headquarters and field service representatives. Our
dedicated field service organization provides highly responsive service to our
retail partners by ensuring the efficient collection and handling of coins and
by performing preventive maintenance and repair on each Coinstar unit.
Combined, these elements are critical in providing a great customer experience
and the high level of service demanded by our retail partners. Our intelligent
network and highly trained field service organization have enabled us to
maintain a system-wide Coinstar unit availability of 98%. Our prime retail
locations, along with these other competitive advantages, form a strategic
platform from which we are able to deliver additional value-added services to
consumers and our retail partners.

$145 Billion Annual Coin Recycling Opportunity in the United States

We believe the market for coin recycling is very large and still virtually
untapped. We believe that an estimated 290 billion cash transactions occur on
an annual basis in the United States. Assuming the change

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generated by each such cash transaction averages fifty cents, the annual coin
flow resulting from such transactions would be approximately $145 billion.
Based on the current population in the United States, the average person
handles approximately $600 in coins each year. To support this flow of coins
in the economy, the U.S. Mint has produced $15 billion in new coins over the
past 25 years. According to the U.S. Mint, the circulating stock of coins used
in cash transactions is approximately $8 billion, which we estimate would have
to turn over approximately 18 times a year to support a coin flow of $145
billion.

The prevalence of coins in cash transactions and the lack of a convenient
alternative for converting coins into cash have resulted in the accumulation
of coins. Based on the U.S. Mint data, only $8 billion of the $15 billion in
coins produced over the last 25 years, the useful life of a coin, are regarded
as circulating, and we believe there is an estimated $7 billion of non-
circulating coins. New coins are made to replace those that fall out of
circulation and to support the increasing size of the economy. In 1999 alone,
the U.S. Mint produced over 21 billion new coins worth approximately $1.74
million. We also believe a significant market opportunity exists for providing
a convenient method of recycling the recurring coin flow and redeeming non-
circulating coins in the United Kingdom, Canada, and other selected
international markets.

The Coinstar Solution--Our Core Coin Recycling Business

Traditionally, banks and other depository institutions have been the primary
means by which consumers could convert coins into cash, but they typically
have provided the service only to their customers and generally only after the
customer has pre-sorted, counted and wrapped in paper roll the coins, an
inefficient and labor-intensive process.

We have designed, developed and commercially deployed the first, largest and
only nationwide network of self-service coin counting and processing machines.
Our Coinstar units have been designed to operate as part of a scalable, two-
way, wide-area communications network that allows us to keep track of key
financial and operational statistics. In addition, our Coinstar unit offers an
efficient, hassle-free alternative for consumers to convert coins into cash
allowing us to capitalize on a $145 billion annual consumer coin recycling
market opportunity.

Growth Strategy

Our objective is to enhance our position as the leading provider of self-
service coin processing services and to develop new value-added services that
can be delivered through the Coinstar network. Key elements of our strategy
include:

Aggressively grow our core coin recycling business. We plan to aggressively
grow our domestic core coin recycling business by rapidly expanding the
Coinstar network, increasing customer use of our service, leveraging our
relationships and prime retail locations to provide value-added services to
consumers and our retail partners and improving profit margins through
increased efficiencies.

Rapidly expanding the Coinstar network. We plan to continue to rapidly
expand our presence in supermarkets as our primary retail location because of
the prevalence of large regional chains, geographic concentration of stores
and recurring consumer traffic. We are initially targeting supermarkets in the
100 largest metropolitan areas in the country, which include approximately
22,000 of the approximately 30,000 supermarkets in the United States. Our
current installation base of more than 7,000 Coinstar units represent a
penetration of our target supermarkets of approximately 32%. We believe a
significant opportunity exists to increase the number of Coinstar units
installed through increased penetration of existing retail partner stores as
well as by entering into contracts with new partners. Supermarkets offer a
large market of potential consumers, a convenient location for multiple
consumer visits and opportunities for large-scale deployments. In addition, we
believe our coin-processing unit provides banks and other depository
institutions with an economical way to handle their in-branch coin processing
needs.

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The following table sets forth-key data that highlights our growth in
installed units:

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<CAPTION>
Year Ended December 31,
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1995 1996 1997 1998 1999
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Installed base of Coinstar units.. 263 1,501 3,204 4,813 6,952
Number of regional markets........ 11 23 40 58 85
Value of coins processed (in
thousands)....................... $17,701 $115,476 $332,526 $623,291 $873,395
</TABLE>

As of December 31, 1999, we had eight Coinstar units installed in the United
Kingdom and 21 units installed in Canada on a trial basis.

Increasing consumer use of our service. We promote consumer trials of the
Coinstar unit through commercial media, such as television and radio, and in-
store promotions. We believe that building greater awareness of our service
will significantly enhance the growth of our core coin recycling business. Our
1999 market study indicates that approximately 12% of the people living in
markets where Coinstar machines are installed have tried our service, and 78%
of people who have tried our service tend to use it again. In addition, we are
developing other value-added services to broaden consumer appeal of the
Coinstar units and promote greater trial and use.

Improve profit margins through increased efficiencies. Over the past six
years, we have continued to improve and/or maintain our profit margins through
increased efficiencies resulting from our expansion, including increased
regional densities and more effective utilization of the Coinstar network and
our field service organization. In addition, we have built an effective
management, marketing, sales and administrative team. We believe this
infrastructure can support substantial growth in Coinstar unit installations
and the introduction of new products and services.

Expand our presence in the United Kingdom. As of December 31, 1999, we have
installed eight Coinstar units on a trial basis in Sainsbury's and Tesco, the
two largest grocery retailers in the United Kingdom. These two retailers
operate over 1,000 stores throughout the United Kingdom and account for more
than 40% of all United Kingdom grocery sales. We believe the United Kingdom
offers an attractive market opportunity given the higher coin content of
British currencies and similar customer profiles to the United States. In
addition, British supermarkets are leaders in providing financial services to
their customers and in using technology in their stores to add value to the
shopping experience.

Enter other selected international markets. We believe there could be an
opportunity for us to expand our business beyond North America and the United
Kingdom because our Coinstar unit can be adapted to the currency sets of most
countries without significant time or cost. In addition, our experience in the
United Kingdom should position us to participate in the upcoming conversion to
the new Euro currency. New Euro coins will begin circulating in January 2002
and by June 30, 2002 existing national coins must be converted to Euros. In
addition, Japan, Australia and a number of other countries may offer
attractive opportunities to expand our operations internationally.

Leverage our existing network of over 7,000 Coinstar machines. We continue
to explore new ways to use our prime retail locations and intelligent network
to better serve our customers and retail partners. We plan to leverage our
intelligent network to deliver additional products through the convenient
supermarket venue. With our expanding base of Coinstar units, we are able to
conduct national promotions that increase usage and awareness while delivering
additional value and products to consumers via secure printers in a retail
environment.

Leverage our relationships, prime retail locations and the Internet, to
provide value-added services to consumers and our retail partners. Our
relationships with leading supermarket chains, our prime retail locations and
the Coinstar network form a strategic platform from which we are able to
deliver additional value-added services to consumers and our retail partners.
Two examples of this are our Extra Spending Power

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Program and our e-services initiatives. The Extra Spending Power program
provides added incentives to use the Coinstar service by giving consumers who
process their coins valuable coupon offers printed by the machine. Our retail
partners have the opportunity to create their own in-store events by
advertising on the Coinstar coin-counting machine's display screen and
delivering coupons to consumers. In addition, Coinstar may partner with
companies providing nationally branded products and services for added
incentive opportunities.

As another example, we announced our e-services initiatives in February
1999. The e-services part of our business is comprised of two major
components, our Meals.com Internet site and our in-store Coinstar Shopper(TM)
kiosk. The benefits of Meals.com are three-fold: (i) for consumers, Meals.com
offers a user-friendly site with powerful tools that make getting great meals
on the dinner table faster, easier and less expensive; (ii) for packaged goods
manufacturers, Meals.com offers targeted advertising and promotion
opportunities and (iii) for supermarket retailers, Meals.com enables retailers
to build customer loyalty by making grocery shopping easier and more
convenient. As such, Meals.com is Coinstar's latest effort to provide value to
consumers and to the supermarket industry.

A second component of our e-services business is the Coinstar Shopper kiosk
that allows us to deliver meal solutions, customized grocery discounts,
merchandise offers and enhanced frequent shopper services to consumers at our
retail partners.

Coinstar Network

Coinstar Unit

Our coin processing unit is comprised of a coin input and patented cleaning
process, a coin counter that is designed to be jam-resistant, coin collection
bins, a computer, a thermal printer, an input keypad, an internal phone and a
color monitor. Our Coinstar unit is highly accurate, durable, easy to use,
easy to service and capable of processing up to 600 coins per minute. The
counter system in our Coinstar unit detects and removes foreign coins, slugs,
debris and damaged coins and directs the coins processed to collection
trolleys located inside the Coinstar unit. Since our first commercial
introduction of our Coinstar unit in 1994, we have improved the unit to
decrease problems from clogging or malfunctioning including from moisture,
dirt, lint, and other debris. These improvements in Coinstar units have
reduced downtime and as a result, reduced maintenance costs. Since October
1996, Coinstar has received eight United States patents and one International
patent relating to aspects of self-service coin processing. Our proprietary
technology has enabled our coin processing units to be available to customers
on a more consistent basis. In the event of any malfunction, our units have a
telephone handset so our retail partners can connect directly to our customer
service center via a toll free number. The reliability of our Coinstar unit
and the utilization of our communications network have resulted in a unit
availability rate that exceeds 98%.

An internal computer that runs a multi-tasking operating system controls our
Coinstar unit. In addition to controlling and coordinating coin sorting and
other functions, the computer electronically records nearly all unit
operations. For each coin counting and processing transaction, the unit
produces a unique transaction number, records the dollar amount, time and
duration of the transaction, and identifies the number of each type of coin
processed and the number of rejected coins. This information is sent daily
over our wide-area communications network to our headquarters for analysis and
backup.

Intelligent Communications and Information Systems

Our Coinstar units have been designed to operate as part of a scalable, two-
way, wide-area communications network. The network is designed to allow
Coinstar units to transmit key financial data and operating statistics to our
headquarters on a daily basis. We use this information to accurately track
unit coin flow and operating performance, enabling us to schedule just-in-time
coin pick-ups, provide unit service and perform essential accounting and
reporting functions. In addition, this network enables us to configure the
units remotely with a

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variety of operational and marketing data and future enhancements to our
Coinstar unit. These network and associated features provide the following key
benefits:

. Downloadable Information, Software Programs and Systems
Enhancements. With a scalable, two-way network, we can send information
to each Coinstar unit, customized to each unit's location and store
specific advertising, on-screen promotions and coupons. In addition, we
can download new versions of application and operating system software
using the network. This ability to perform multiple functions remotely,
eliminates costly on-site visits and lowers our per unit operating costs.

. Enhancement of Field Service Productivity. Each Coinstar unit generates
daily performance and operating reports that are transmitted over the
network to our headquarters for consolidation. We can then electronically
distribute this information, via the network to our field service
employees, which enables us to better utilize field service and
transportation personnel. Information on individual unit usage and
operations help us manage the efficiency of coin collection and
transportation activities and reduce downtime resulting from units that
are full of coins.

. Financial Reporting and Reconciliation. We receive financial data and
operating statistics through the network on a daily basis. The financial
and accounting information is reconciled with bank records and coin
collection and transportation processing data logged into the network to
ensure the accuracy, speed and control of each deposit. In addition, our
retail partners receive weekly automated facsimile or email reports
generated by the network detailing information such as transaction
volumes and deposits made for each store.

. Automated Tracking of Coin Collection, Processing and Deposits. Our wide-
area and local-area networks are coupled securely using sophisticated
networking equipment that enable us to accurately track all coin flow
activity from the Coinstar unit to the depository institution. The
Coinstar network is linked with our transportation and coin processing
partners, which enables us to generate key coin tracking data.

. Coinstar Network Scalability. The Coinstar network is scalable to support
the increasing demands resulting from our rapid installation of Coinstar
units. The components of the Coinstar network that reside at headquarters
operate on widely available personal computers with advanced reliability
features. In addition, we have built an extensive and secure Intranet on
top of our infrastructure using standard client/server tools provided by
leading industry vendors.

. Coinstar Network Scalability. The Coinstar network is scalable to support
the increasing demands resulting from our rapid installation of Coinstar
units. The components of the Coinstar network that reside at Coinstar's
headquarters operate on widely available personal computers with advanced
reliability features. In addition, we have built an extensive and secure
Intranet on top of our infrastructure using standard client/server tools
provided by leading industry vendors.

Regional Field Service and Organization

We have recruited and retained a dedicated field service organization of
over 240 field service personnel and supporting employees. Our field service
organization provides highly responsive service to our retail partners by
ensuring the efficient collection and handling of coins and by performing
preventive maintenance and repairs.

. Field Service Personnel. In all our markets, our field service employee
has the primary direct contact with our consumers and retail partners.
Each field service team member is connected to our wide-area

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communications network by laptop computer, mobile phone and pager. Each
Coinstar unit provides specific service information to the responsible field
service employee by directly paging the employee with current operating
information based on a series of predetermined performance criteria.

. Transportation and Processing Services. Generally, we contract with third
party providers to transport and process coins deposited in Coinstar
units. We believe the use of these contracted resources allows growth
with minimal investment in facilities and equipment. The transportation
service typically includes removing the coin trolleys, tagging them for
deposit, cleaning of the Coinstar unit, transporting the coins for
processing at the coin processing facilities and depositing the coins to
our local depository. We have an automated tracking system for tracking
each deposit to each retail partner's account, as well as our bank
account.

. Installation Personnel. An individual account manager manages each
installation. For a typical installation, an operations representative
visits the store prior to the delivery of the Coinstar unit to coordinate
with the store manager on the location of the Coinstar unit within the
store and review site requirements. On the day of delivery, our field
service representative unpacks the unit and conducts a training and
orientation session for store personnel.

Key Benefits of the Coinstar Network

Benefits to Our Retail Partners

Our retail partner marketing strategy is to significantly increase our
penetration with existing leading retail partners as well as to establish
relationships with new leading retail partners in the 100 largest metropolitan
areas in the United States. Our Coinstar units are located in a majority of the
leading supermarket chains, such as Kroger's, Safeway, Albertson's, and Ahold.

When marketing to supermarkets, we highlight the benefits of our service,
including increasing store traffic, promoting sales, reducing internal store
coin handling expenses and providing an additional source of revenue. We
believe our Coinstar unit enables supermarkets to provide a convenient service
to their customers using minimal store space, while incurring virtually no
additional cost.

. Increases Store Traffic. We believe the Coinstar unit helps to increase
store traffic by providing consumers with a fun, accurate and convenient
means of converting accumulated change into cash. A 1999 Benchmark survey
conducted by Gilmore Research, an independent market research firm hired
by us, indicated that 32% of the Coinstar unit users surveyed were not in
their primary grocery store. And 51% of the Coinstar users surveyed were
"very likely" or "somewhat likely" to visit another store to use a
Coinstar unit if it was not installed in the store they regularly visit.

. Promotes Sales. We believe the Coinstar unit promotes sales for our
retail partners by putting new disposable income in shoppers' hands while
they are in the store. Customers are more likely to make a purchase in
the store because they generally must redeem their vouchers at a checkout
counter. The 1999 Gilmore Research study indicated that 58% of customers
surveyed spent some or all of their voucher in the store. This first
opportunity at new "found" money provides supermarkets with an increased
opportunity of generating incremental sales.

. Reduce Internal Coin Handling Expenses. We offer our retail partners the
ability to process and count coins without any processing fee subject to
certain restrictions, such as day of the week. We believe that this
service reduces our retail partners' internal coin handling expenses and
losses.

. Increase Revenues. We provide our retail partners an additional source of
revenue through the sharing of our processing fee.

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Key Benefits to Consumers

Since we offer a new consumer service through our convenient, self-service
coin processing units, an important element of our marketing strategy is to
increase consumer trials of our service. We promote the Coinstar unit to
consumers in general through public relations and various media, including
freestanding newspaper advertisements, billboards, radio and television
commercials and targeted mailings. On a local basis, we market to our retail
partners' existing customer base by communicating through advertising media
already used by our partners. These joint marketing efforts include
cooperative newspaper advertisements and direct mail circulars, window signs,
bag stuffers or printed bags, shelf talkers, in-store demonstrations and other
merchandising aids. We plan to continue to use effective promotional
opportunities in new markets and in expansion of existing markets with new or
existing retail partners. We have generally found local, regional and national
press interested in our coin processing service and willing to devote space
and airtime to communicate our message.

Our Coinstar unit has been designed to be prominently branded, highly
identifiable, easily recognized and capable of self-promotion to consumers.
The Coinstar unit is generally located near the primary entrance areas of our
retail partners and in clear view of the checkout counters or service centers.
We are continually developing additional techniques including point of sale
material and the use of sound and animation that, when added to the Coinstar
unit, are intended to attract consumers and stimulate trials and repeat use.

We are also developing other programs designed to increase the breadth and
volume of consumer usage. For example, in May 1997, we began the Coins That
Count philanthropic service program that we believe provides non-profit
organizations with a cost- effective means of raising money. This
philanthropic service provides consumers with a simple means for making tax-
deductible donations. Instead of receiving vouchers to be redeemed at the
retail partner's checkout counter, consumers receive printed receipts
evidencing the value of their donations. In 1998, we began a national
relationship with the US Fund for Unicef as the designated coin processor for
their annual Trick or Treat for Unicef program. In addition, in February 1999,
we announced our e-services initiatives. These initiatives first included the
Coinstar Shopper kiosk, which allows us to deliver meal solutions, customized
grocery discounts, merchandise offers and enhanced frequent shopper services
to consumers at our retail partners, and now also includes our Meals.com
Internet site.

Product Research and Development

We believe that strong product research and development capabilities are
essential to maintaining the competitiveness of our product and service
offerings. Since inception, we have focused our research and development
efforts on developing and enhancing our operating system and support network
for continued expansion of our network and addition of value-added services.
As of December 31, 1999, we employed 47 software engineers, information
technology specialists and other professional staff in these efforts. We also
contract with a number of specialized outside consultants for additional
services.

Manufacturing and Supply

Coinstar units are assembled by SeaMed, a division of Plexus Corporation.
SeaMed is a contract manufacturer in Redmond, Washington that utilizes several
subsuppliers to provide components and subassemblies. Each Coinstar unit is
manufactured to our proprietary designs and specifications. We own all
designs, documentation, tooling, specialized fixtures and test equipment.
SeaMed inspects and tests each unit for quality assurance prior to shipment.
We believe that using contract manufacturers has several advantages including
decreasing capital investment in plant and equipment and working capital, the
ability to leverage contract manufacturers' purchasing relationships for lower
material costs, minimal fixed costs of maintaining unused manufacturing
capacity, greater capacity flexibility and the ability to utilize suppliers'
broad technical and process expertise.

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Proprietary Rights

We regard the protection of our patents, copyrights, service marks,
trademarks, trade dress and trade secrets as important to our success. We rely
on a combination of patent, copyright, trademark, service mark and trade
secret laws and contractual restrictions to protect our proprietary rights in
products and services. We have entered into confidentiality and invention
assignment agreements with our employees and contractors.

We have made several technological advances relating to self-service coin
processing that we believe are important to the successful operation of the
Coinstar unit in a self-service environment. These advancements are
implemented both mechanically and through our wide-area network software.
These technologies enable the Coinstar unit to handle moisture, dust, lint,
dirt, paper, paper clips, and other debris with infrequent clogging or
malfunctioning. Since October 1996, Coinstar has received eight United States
patents and one International patent relating to aspects of self-service coin
processing. Sufficient debris removal is important to reducing clogging and
malfunctioning. Reducing these problems and the associated downtime improves
unit availability for customer use and reduces the amount of time our field
service personnel or retail partner must spend attending to the unit.

Competition

We are the first and only company to own and operate a national network of
self-service coin processing machines. We believe that our key competitive
advantages include our technology and expertise developed over the past six
years, the nationwide Coinstar network, our dedicated field service
organization, our strong relationships with a majority of the leading
supermarket chains in the United States and our proven ability to execute our
rollout strategy. We compete on a regional basis with several direct
competitors that operate self-service coin processing machines. We compete
indirectly with manufacturers of machines and devices that enable consumers to
count or sort coins themselves, and we also compete directly or indirectly
with banks and similar depository institutions for coin conversion customers.
We may also compete with supermarket retailers that decide to purchase and
service their own coin counting equipment. Banks are the primary alternative
available to consumers for converting coins into cash, and they generally do
not charge a fee for accepting rolled coins. As the market for coin processing
develops, banks and other businesses may decide to offer additional coin
processing services, either as a customer service or on a self-service basis,
and compete directly with us.

Employees

As of December 31, 1999, we employed approximately 374 full-time employees
and approximately 60 part-time employees. None of our employees is represented
by a union and management believes our employee relations are good.

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<PAGE>

Executive Officers

The following table sets forth the name, age and position of our executive
officers as of February 29, 2000:

<TABLE>
<CAPTION>
Name Age Position
- ---- --- ----------------------------------------------------------

<S> <C> <C>
Jens H. Molbak.......... 37 Chairman of the Board of Directors

Daniel A. Gerrity....... 38 President and Chief Executive Officer

Kirk A. Collamer........ 47 Vice President and Chief Financial Officer

Michael W. Parks........ 52 Vice President of Operations

Carol Lewis............. 49 Vice President of Corporate and Organizational Development

Michael L. Doran........ 49 Vice President of Software Technology

William W. Booth........ 44 Vice President of Retail Development

Ian G. Melanson......... 35 Vice President and General Manager of E-services

Rich Stillman........... 44 Vice President of Sales and Marketing

Diane L. Renihan........ 34 Controller and Chief Accounting Officer
</TABLE>

Jens H. Molbak has served as chairman of the board of directors since
founding Coinstar in 1990. He served as our chief executive officer from 1990
to February 2000. In February 2000, he became chief executive officer of
Meals.com, Inc., a majority-owned subsidiary of Coinstar. Prior to founding
Coinstar, he served two years as an analyst at Morgan Stanley & Co., Inc., an
investment bank.

Daniel A. Gerrity has served as our president and chief executive officer
and as a director since February 2000. He served as our president and chief
operating officer from April 1998 to February 2000 and as our vice president
and chief technology officer from November 1993 to April 1998. Prior to
November 1993, he served on our advisory board and in various capacities for a
Silicon Valley software company.

Kirk A. Collamer has served as our vice president and chief financial
officer since joining Coinstar in February 1997. From March 1995 until
February 1997, Mr. Collamer served as the chief financial officer of Muzak
Limited Partnership, a business music services provider. From April 1988 to
March 1995, he served in various capacities at Ameritech Corporation, a
telecommunications company, serving as vice president, finance and controller
and vice president and chief financial officer of two subsidiaries. Mr.
Collamer resigned as Coinstar's vice president and chief financial officer on
February 29, 2000.

Michael W. Parks has served as our vice president of operations since July
1998 and as our director of field operations from April 1994 through June
1998. From September 1993 to April 1994, Mr. Parks served as president of
Seriphus Group, a consulting company he founded.

Carol Lewis has served as our vice president of corporate and organizational
development since September 1998 and as our national director of philanthropic
services from September 1996 through September 1998. From February 1994 until
July 1995, she served as executive director of Pacific Northwest Ballet, a
professional ballet company. Prior to that she served as senior vice president
of administration for Egghead Software. Ms. Lewis' prior experience includes
service as deputy mayor of the City of Seattle.

Michael L. Doran has served as our vice president of software technology
since September 1998 and as our director of information systems from August
1996 through September 1998. From June 1989 to August 1996, Mr. Doran served
as senior manager, application services for Snohomish Public Utility District
where he directed automation planning and application development. Prior to
that, he opened and managed the Oregon office of Fiserv, Inc., a national
service bureau providing computer services to financial institutions and,
while at US Bancorp, Inc., he managed the bank's automated teller machines and
debit card automation projects.

William W. Booth has served as our vice president of retail development
since December 1998 and as our director of retail development from April 1995
through December 1998. From April 1992 until March 1995 he

11
<PAGE>

served as the senior director, retail marketing services for Catalina
Marketing Corporation, a consumer marketing company. From July 1989 until
March 1992 he served as senior account executive at Citicorp POS Information
Services. Prior to that he held account management and analyst positions at
Datachecker Systems Inc. and Sweda International, Inc.

Ian G. Melanson has served as our vice president and general manager of e-
services since December 1998. Prior to that, Mr. Melanson served Coinstar as a
marketing consultant from July 1998 to December 1998. From November 1996 until
May 1998, Mr. Melanson was vice president of marketing at Digital Media
Networks Corporation, a development stage company in Toronto, Canada. From
June 1993 to November 1996, Mr. Melanson was a consultant at McKinsey &
Company and active in both the marketing and retailing practices. From July
1988 to February 1993, Mr. Melanson worked in brand management for Procter &
Gamble, Inc.

Rich Stillman has served as our vice president of marketing since joining
Coinstar in September 1999. From April to August 1999, Mr. Stillman served as
head of marketing at Onvia.com, a business to business e-services company.
From August 1996 to January 1999, he co-founded and served as vice president
of sales and marketing for Originet Inc., a start-up technology company
providing digital multi-media interactive systems to large retailers. From
February 1995 to July 1996, he served as senior vice president and group
account director for Cole & Weber, an advertising communications firm. Prior
to that, he served as senior vice president and group account director at the
Lord Group Advertising agency in New York.

Diane L. Renihan has served as our chief accounting officer since February
2000 and as our controller since joining Coinstar in December 1999. From May
1995 to December 1999, Ms. Renihan served in various capacities at Seattle
Lighting Fixture Co., a retail distributor of lighting and related products,
including controller, director of finance and chief financial officer. From
October 1993 to May 1995, she served as the accounting manager at Amylin
Pharmaceuticals, Inc., a biotechnology research company. Ms. Renihan is a
certified public accountant.

Risk Factors

We have a history of sustained operating losses and we expect such losses to
continue. We have incurred substantial losses since inception in 1991. Our net
loss was $29.6 million for 1997, $24.0 million for 1998, and $21.4 million for
1999. As of December 31, 1999 we had an accumulated deficit of $103.8 million.
Our operating losses to date have resulted primarily from expenses incurred in
the development, marketing and operation of the Coinstar units, expansion and
maintenance of the network, administrative and occupancy expenses at our
headquarters and depreciation and amortization. We expect to continue to incur
operating losses as we continue to increase our installed base of Coinstar
units and seek to develop and market new products, services and enhancements,
including the development and deployment of our electronic commerce
technology, including Meals.com and the Coinstar Shopper Internet kiosk.

We have a limited operating history and face uncertainty in our ability to
become a profitable company. After several years of development, we commenced
commercial deployment of Coinstar units in 1994 and placed approximately 78%
of our current installed base in 1997, 1998 and 1999. Therefore, there is
limited historical financial information on which to base an evaluation of our
performance. You should consider our prospects in light of the risks, expenses
and difficulties frequently encountered by companies in an early stage of
development and operation, particularly companies in new or rapidly evolving
markets. We cannot be certain that we will install a sufficient number of our
Coinstar units or obtain sufficient market acceptance to allow us to achieve
or sustain profitability, or generate sufficient cash flow to meet our capital
and operating expenses and debt service obligations.

Our coin processing service is our major source of revenue and our current
market is limited. We have derived until now, and expect for the foreseeable
future to derive, substantially all of our revenue from the operation of
Coinstar units. Accordingly, market acceptance of our coin processing service
is critical to our future success. Since there is only a limited current
market for our coin processing service, we cannot assure you that

12
<PAGE>

an acceptable level of demand will be achieved or sustained. If sufficient
demand for our coin processing service does not develop due to lack of market
acceptance, technological change, competition or other factors, our business,
financial condition and results of operations and ability to achieve
sufficient cash flow to service our indebtedness could be seriously harmed. To
date, we have not derived any significant revenue from our e-services
technology and do not anticipate significant revenue from this source in the
near future.

Our future operating results remain uncertain. You should not consider prior
growth rates in our revenue to be indicative of our future operating results.
The timing and amount of future revenues will depend almost entirely on our
ability to obtain new agreements with potential retail partners for the
installation of Coinstar units, the successful deployment and operation of our
coin processing network and on customer utilization of our service. Our future
operating results will depend upon many other factors, including:

. the level of product and price competition,

. the processing fee we charge consumers to use our service, which we
increased to 8.9% in December 1998 and which may change again in the
future,

. the amount of our processing fee that we share with our retail partners,

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

. our ability to develop and market product enhancements and new products,
such as our Coinstar Shopper,

. our ability to enter into and penetrate new international markets, such
as the United Kingdom, Canada, the European Union and other selected
foreign markets,

. the timing of product enhancements, activities of and acquisitions by
competitors,

. the ability to hire additional and/or retain employees, and

. the timing of such hiring and the ability to control costs.

Our stock price has been and may continue to be volatile. Our common stock
price has fluctuated substantially since our initial public offering in July
1997. The market price of our common stock could decline from current levels
or continue to fluctuate. The market price of our common stock may be
significantly affected by the following factors, including:

. operating results below market expectations,

. trends and fluctuations in use of Coinstar units,

. changes in, or our failure to meet financial estimates by securities
analysts,

. period-to-period fluctuations in our financial results,

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

. the termination of one or more retail distribution contracts,

. timing of installations relative to financial reporting periods,

. release of reports,

. industry developments,

. market acceptance of the Coinstar service by retail partners and
consumers, and

. economic and other external factors.

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

13
<PAGE>

Our business is dependent on continued market acceptance by consumers. We
are substantially dependent on continued market acceptance of our coin
processing service by consumers. The self-service coin processing market is
relatively new and evolving and we cannot predict the future growth rate and
size of this market. While consumers to date have been somewhat receptive to
our existing installed base of Coinstar units, we cannot be certain that the
operating results of the installed units will continue to be favorable or that
past results will be indicative of future market acceptance of our service.

We believe that market acceptance of the Coinstar unit is dependent on the
consumer's perception that the units are conveniently located, easy to use,
accurate and reliable. Even if we are successful in promoting awareness of the
Coinstar unit among consumers, consumers may not utilize the Coinstar units in
sufficient numbers and frequency to make us profitable. In addition, the
increasing use of alternatives to coin and currency transactions such as
credit and debit cards, checks, wire transfers, smart cards and other forms of
electronic payment may adversely affect market acceptance and ongoing use of
the Coinstar service. If our coin-processing service does not achieve general
market acceptance among consumers or does so less rapidly than expected, our
business, financial condition and results of operations and ability to achieve
sufficient cash flow to service our indebtedness could be seriously harmed.

Our business is dependent on our retail partners, which are primarily
supermarket chains. Market acceptance of the Coinstar unit depends on the
willingness of potential retail partners to agree to installation and
retention of Coinstar units in their stores, primarily supermarkets. We
believe that market acceptance by potential retail partners will depend on our
ability to demonstrate the utility of the Coinstar unit as a customer service
and as a means to provide other tangible benefits to potential and existing
retail partners, including increased customer traffic and customer spending in
the form of voucher dollars in the store. If our service does not achieve
market acceptance, especially among supermarket chains, or does so less
rapidly than expected, our business, financial condition and results of
operations and ability to achieve sufficient cash flow to service our
indebtedness could be seriously harmed.

We generally have separate agreements with each of our retail partners,
providing for our exclusive right to provide coin processing services in
retail locations. Coinstar units in service in two supermarket chains, The
Kroger Co., and Safeway, Inc. accounted for approximately 32% and 11%,
respectively, of our revenue in 1999. (In May 1999, Kroger and Fred Meyer
merged to become The Kroger Co.). The termination of any one or more of our
contracts with our retail partners could seriously harm our business,
financial condition, results of operations and ability to achieve sufficient
cash flow to service our indebtedness.

Our quarterly operating results may fluctuate due to different usage rates
of individual Coinstar units, seasonality of use and other factors. Customer
utilization of our coin processing service varies substantially from unit to
unit, making our revenue difficult to forecast. Customer utilization is
affected by the timing and success of promotions by us and our retail
partners, age of the installed unit, adverse weather conditions and other
factors, many of which are not in our control. Based on our limited operating
history, we believe that coin processing volumes are affected by seasonality;
in particular we believe that on a relative basis, coin processing volumes
have been lower in the months of January, February, September and October.
This trend mirrors the seasonality patterns of our supermarket partners. We
cannot be certain, however, that such seasonal trends will continue. Any
projections of future trends in use are inherently uncertain due to a variety
of factors, including success in the timely deployment of a substantial number
of additional Coinstar units, consumer awareness and demand for our coin
processing services, our limited operating history, and the lack of comparable
companies engaged in the coin processing business.

The timing and number of Coinstar units installed during the quarter affect
our quarterly operating results. The timing of Coinstar unit installations
during a particular quarter is largely dependent on installation schedules
determined by agreements with our retail partners, the variable length of
trial periods of our retail partners and the planned coordination of multiple
installations in a given geographic region.

As a result of these and other factors, revenue for any quarter is subject
to significant variation, and we believe that period-to-period comparisons of
our results of operations are not necessarily meaningful and should

14
<PAGE>

not be relied upon as indications of future performance. Because our operating
expenses are based on anticipated revenue trends and because a large
percentage of our expenses are relatively fixed, revenue variability could
cause significant and disproportionate variations in operating results from
quarter to quarter and could result in significant losses. To the extent such
expenses precede, or are not followed by, increased revenue, our operating
results would be seriously harmed.

We have substantial indebtedness. As of December 31, 1999, we had
outstanding indebtedness of $61.8 million, which included $61.0 million of our
13.0% senior subordinated discount notes due 2006 and our capital lease
obligations. We must begin paying cash interest on the senior notes in April
2000. Beginning at that time, we will have debt service obligations of
approximately $7.9 million per year until October 2006, when the principal
amount of $61.0 million will be due. Our ability to meet our debt service
requirements will depend upon achieving significant and sustained growth in
our expected cash flow, which will be affected by our success in implementing
our business strategy, prevailing economic conditions and financial, business
and other factors, some of which are beyond our control. Accordingly, we
cannot be certain as to whether or when we will have sufficient resources to
meet our debt service obligations. If we are unable to generate sufficient
cash flow to service our indebtedness, we will have to reduce or delay planned
capital expenditures, sell assets, restructure or refinance our indebtedness
or seek additional equity capital. We cannot assure you that any of these
strategies can be effected on satisfactory terms, if at all, particularly in
light of our high levels of indebtedness. In addition, the extent to which we
continue to have substantial indebtedness could have significant consequences,
including our ability to obtain additional financing in the future for working
capital, capital expenditures, product research and development, acquisitions
and other general corporate purposes may be materially limited or impaired. A
substantial portion of our cash flow from operations may need to be dedicated
to the payment of principal and interest on our indebtedness and therefore not
available to finance our business, and our high degree of indebtedness may
make us more vulnerable to economic downturns, limit our ability to withstand
competitive pressures or reduce our flexibility in responding to changing
business and economic conditions.

Our market is increasingly competitive. We are the first company to provide
a national network of self-service coin processing machines that provide a
convenient, accurate and reliable means for consumers to convert loose coins
into cash. We compete regionally with several direct competitors that operate
self-service coin processing machines. We cannot be certain that these
competitors have not or will not substantially increase their installed units
and expand their service nationwide. We compete indirectly with manufacturers
of machines and devices that enable consumers to count or sort coins
themselves, and we also compete or may compete directly or indirectly with
banks and similar depository institutions for coin conversion customers. We
may also compete with supermarket retailers that decide to purchase and
service their own coin counting equipment. We believe banks are the primary
alternative available to consumers for converting coins into cash, and they
generally do not charge a fee for accepting rolled coins. As the market for
coin processing develops, banks and other businesses may decide to offer
additional coin processing services, either as a customer service or on a
self-service basis, and compete directly with us.

In addition, we may face new competition as we seek to expand into
international markets and develop new products, services and enhancements. Our
ability to expand internationally may subject us to competition with banks
that offer services competitive with ours and with manufacturers and other
companies that have established or are seeking to establish coin-counting
networks competitive with ours. Many of the competitors have greater
experience than we do in operating in these international markets. Moreover,
new products that we intend to develop, such as those involving the Internet,
may subject us to competition from companies with significantly greater
technological resources and experience.

Many of our potential competitors have longer operating histories, greater
name recognition, larger customer bases and significantly greater financial,
technical, marketing and public relations resources than we have. These
competitors may be able to undertake more extensive marketing campaigns, adopt
more aggressive pricing policies and make more attractive offers to consumers
and businesses. Our competitors might succeed in developing technologies,
products or services that are more effective, less costly or more widely used
than those that have been or are being developed by us or that would render
our technologies or products obsolete or

15
<PAGE>

noncompetitive. We cannot be certain that we will be able to compete
effectively with current or future competitors. Competitive pressures could
seriously harm our business, financial condition and results of operations and
our ability to achieve sufficient cash flow to service our indebtedness.

The success of our potential new services and products is uncertain. We have
committed, and expect to continue to commit, significant resources and capital
to develop and market existing product and service enhancements and new
products and services such as through value-added services and promotions. Two
examples are Meals.com and the in-store Coinstar Shopper kiosk. The products
and services offered by Meals.com are relatively untested, and we cannot
assure you that we will achieve market acceptance for any such products and
services. In addition, the Coinstar Shopper kiosk is in early trials at a
limited number of retail locations. Moreover, these and other new products and
services may be subject to significant competition with offerings by potential
Internet competitors in addition to companies that compete in our coin
processing business. Many of these potential Internet competitors have
significantly greater technological expertise and financial and other
resources than we do. In addition, new products, services and enhancements may
pose a variety of technical challenges and require us to enhance the
capabilities of our network and attract additional qualified employees. The
failure to develop and market new products, services or enhancements
successfully could seriously harm our business, financial condition and
results of operations and ability to achieve sufficient cash flow to service
our indebtedness.

Our failure to manage growth could harm our business. We have experienced
rapid growth and intend to continue to expand our operations aggressively. The
growth in the size and scale of our business has placed, and we expect it will
continue to place, significant demands on our operational, administrative and
financial personnel and operating systems. Our additional planned expansion
may further strain management and other resources. Our ability to manage
growth effectively will depend on our ability to improve our operating
systems, to expand, train and manage our employee base, to identify additional
manufacturing capacity and to develop additional service capacity. In
addition, we will be required to establish relationships with additional
third-party service providers. We may be unable to effectively manage the
expansion of our operations, to implement and develop our systems, procedures
or controls, to adequately support our operations or to achieve and manage the
currently projected installations. If we are unable to manage growth
effectively, our business, financial condition and results of operations and
our ability to achieve sufficient cash flow to service our indebtedness could
be seriously harmed.

We depend upon third-party manufacturers and service providers, and sole-
source manufacturers. We do not conduct manufacturing operations and depend,
and will continue to depend, on outside parties for the manufacture of the
Coinstar unit and its key components. We intend to significantly expand our
installed base, and such expansion may be limited by the manufacturing
capacity of our third-party manufacturers and suppliers. Although we expect
that our current contract manufacturer, SeaMed (a division of Plexus
Corporation), will be able to produce sufficient units to meet projected
demand, SeaMed or other manufacturers in reality may not be able to meet our
manufacturing needs in a satisfactory and timely manner. If there is an
unanticipated increase in demand for Coinstar unit installations, we may be
unable to meet such demand due to manufacturing constraints.

Although we have a contract with SeaMed, SeaMed does not have an obligation
to continue the manufacture of the Coinstar unit or its components. In July
1999, SeaMed merged with Plexus Corp. of Neenah, Wisconsin. SeaMed's
management has assured us that the combined entity will continue to meet our
manufacturing needs. However, we cannot be certain that Plexus will continue
to operate in Redmond, Washington or continue to meet our manufacturing needs.

In addition, we obtain some key hardware components used in the Coinstar
units from sole source suppliers. We cannot be certain that we will be able 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
Coinstar units, either of which could seriously harm our business, financial
condition and results of operations and ability to achieve sufficient cash
flow to service our indebtedness.

16
<PAGE>

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 armored carriers and other third party providers to arrange for pick-up,
processing and deposit of coins. We generally contract with one transportation
provider and coin processor to service a particular region. Many of these
service providers do not have long-standing relationships with us and either
party generally can terminate our contracts with them 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 service
in the event of sudden disruption in service from an armored carrier company.
Any failure by us to maintain our existing relationships or to establish new
relationships on a timely basis or on acceptable terms would harm our
business, financial condition and results of operations and our ability to
achieve sufficient cash flow to service our indebtedness.

Moreover, as with any business that handles large volumes of cash, we are
susceptible to theft, counterfeit and other forms of fraud, including security
breaches of our computing system that performs important accounting functions.
We cannot be certain that we will be successful in developing product
enhancements and new services to thwart such activities.

We may be unable to adequately protect or enforce our patents and
proprietary rights. Our future 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 eight United States patents and one International patent
relevant to aspects of self-service coin processing.

We cannot assure you that any of our patents will be held valid if
challenged, that any pending patent applications will issue, or that other
parties will not claim rights in or ownership of our patents and other
proprietary rights. Moreover, patents issued to us may be circumvented or fail
to provide adequate protection. Our competitors might independently develop or
patent technologies that are substantially equivalent or superior to our
technologies.

Since 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. We cannot be certain that others
will not assert patent infringement claims or claims of misappropriation
against us based on current or pending United States and/or foreign patents,
copyrights or trade secrets or that such claims will not be successful. In
addition, 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 processing service and use
our processing equipment in the United States and abroad, and could result in
an award of substantial damages. In the event of a successful claim of
infringement, we may need or be required to obtain one or more licenses from,
as well as grant one or more licenses to, others. We cannot assure you that we
could obtain necessary licenses from others at a reasonable cost or at all.

We also rely on trade secrets to develop and maintain our competitive
position. Although we protect our proprietary technology in part by
confidentiality agreements with our employees, consultants and corporate
partners, we cannot assure you that these agreements will not be breached,
that we will have adequate remedies for any breach or that our trade secrets
will not 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 and ability to achieve sufficient cash flow to service our
indebtedness.

There are many risks associated with doing business in international
markets. We intend to increase our deployment of Coinstar units in select
international markets. We have only recently begun to expand our business
internationally in the United Kingdom and Canada and, accordingly, have
limited experience in operating in international markets. We anticipate that
our international operations will become increasingly significant to our

17
<PAGE>

business. International transactions pose a number of risks, including failure
of customer acceptance, risks of regulatory delays or disapprovals with
respect to our products and services, and competition from potential and
current coin-counting businesses. Exposure to exchange rate risks,
restrictions on the repatriation of funds, political instability, adverse
changes in tax, tariff and trade regulations, difficulties with foreign
distributors, difficulties in managing an organization spread over several
countries, and weaker legal protection for intellectual property rights. These
risks could seriously harm our business, financial condition, and results of
operations and ability to achieve sufficient cash flow to service our
indebtedness.

Our expansion into Europe will present challenges different from those faced
in the United States. We expect to face greater competition than currently is
the case in the United States because banks in Europe typically offer coin-
counting services to their customers and most of the world's self-service
coin-counting machine manufacturers are located in Europe. Some of these
manufacturers have been involved in attempts to set up networks similar to
ours. In addition, local laws and market conditions may require us to change
our fee structure. We also will face a number of technical challenges as we
attempt to expand into Europe. In several areas, close national borders may
require that our units be able to handle as many as six different national
coin sets, as well as the new Euro coin. Supermarkets in Europe tend to be
smaller than those in the United States. Because of this, floor space is more
of an issue than in the typical supermarket in the United States. As a result,
it may be necessary for us to reduce the size of our unit to succeed in
Europe. Reducing our unit size could present technical challenges and the
smaller capacity that might result from a smaller unit could increase
operating costs in servicing the units. Many local laws do not permit stores
to be operated on a 24-hour, seven-day per week basis. This could reduce
volumes and present challenges in our servicing of the units. We also expect
to face higher telecommunications costs in Europe than in the United States,
and a European network may need to make extensive use of cellular
communications.

We depend upon key personnel and need to hire additional personnel. Our
performance is substantially dependent on the continued services of our
executive officers and key employees, all of which we employ on an at-will
basis. Our long-term success will depend on our ability to recruit, retain and
motivate highly skilled personnel. Competition for such personnel is intense.
We have at times experienced difficulties in recruiting qualified personnel,
and we may experience difficulties in the future. On November 30, 1999 we
announced that Kirk Collamer, our chief financial officer, was resigning and
his resignation was effective on February 29, 2000. The inability to attract
and retain necessary technical and managerial personnel could seriously harm
our business, financial condition and results of operations and our ability to
achieve sufficient cash flow to service our indebtedness. Currently, we
maintain a "key man" life insurance policy on our chairman Jens Molbak, in the
amount of $2.0 million.

Defects in or failures of our operating system could harm our business. We
collect financial and operating data, and monitor performance of Coinstar
units, through a wide-area communications network connecting each of the
Coinstar units with a central computing system at our headquarters. This
information is used to track the flow of coins, verify coin counts and
schedule the dispatch unit service and coin pick-up. The operation of Coinstar
units 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 or when the volume of services provided increases. Although each
Coinstar unit is designed to store all data collected, thereby helping to
ensure that critical data is not lost due to an operating systems failure, our
inability to collect the data from our Coinstar units could lead to a delay in
processing coins and crediting the accounts of our retail partners for
vouchers already redeemed. The design of the operating systems to prevent loss
of data may not operate as intended. Any loss or delay in collecting coin
processing data would seriously harm our operations.

We have in the past experienced limited delays and disruptions resulting
from upgrading or improving our operating systems. Although such disruptions
have not had a material effect on our operations, future upgrades or
improvements could result in delays or disruptions that would seriously harm
our operations.

The communications network on which we rely 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, any breach of security

18
<PAGE>

whether intentional or from a computer virus could seriously harm us. Any
service disruptions, either due to errors or delays in our software or
computing systems or interruptions or breaches in the communications network,
or security breaches of the system, could seriously harm our business,
financial condition and results of operations and ability to achieve
sufficient cash flow to service our indebtedness.

We must keep pace with rapid technological changes to remain
competitive. The self-service coin processing market is relatively new and
evolving. We anticipate that, as the market matures, it will be subject to
technological change, new services and product enhancements, particularly as
we expand our service offerings. Accordingly, our success may depend in part
upon our ability to keep pace with continuing changes in technology and
consumer preferences while remaining price competitive. Our failure to develop
technological improvements or to adapt our products and services to
technological change on a timely basis could, over time, seriously harm our
business, financial condition and results of operations and our ability to
achieve sufficient cash flow to service our indebtedness.

We do not intend to pay dividends in the foreseeable future. We have never
declared or paid any cash dividends on our common stock. We currently intend
to retain any future earnings for funding growth and, therefore, do not expect
to pay any dividends in the foreseeable future.

Some anti-takeover provisions may affect the price of our common
stock. Provisions of our certificate of incorporation, bylaws and rights plan
and of Delaware law could make it more difficult for a third party to acquire
us, even if doing so would be beneficial to our stockholders.

Item 2. Properties.

Our principal administrative, marketing and product development facilities
are located in a 46,070 square foot facility in Bellevue, Washington, under a
lease, which expires in August 2004. We also lease a 10,196 square foot
facility in Bellevue, Washington, under a lease, which expires in March 2002.
This additional space is under a sublease agreement with a third party.

Item 3. Legal Proceedings.

During 1999, we were involved in litigation concerning alleged patent
infringements with CoinBank Automated Systems, Inc. On October 12, 1999, we
settled the litigation. The settlement provided for the dismissal with
prejudice of each party's respective claims. As part of the settlement,
CoinBank granted us a worldwide, perpetual, non-exclusive license to certain
CoinBank technology and a purchase option to purchase CoinBank Automated
Systems, Inc. In consideration for the purchase option, CoinBank received
$600,000 and 30,000 shares of our common stock. The settlement ended the
dispute over the patents-in-suit and included a release and covenant not to
sue. At the expiration of the option, we decided not to buy CoinBank Automated
Systems, Inc.

Item 4. Submission of Matters to a Vote of Security Holders.

No matters were submitted to a vote of security holders during the fourth
quarter of 1999.

19
<PAGE>

PART II

Item 5. Market for Registrant's Common Stock and Related Stockholder Matters.

Market Information

Our common stock is traded on the Nasdaq National Market under the symbol
"CSTR." The following table sets forth the high and low closing prices per
share as reported by the Nasdaq National Market for our common stock for each
quarter during the last two fiscal years. The quotations represent inter-
dealer prices without retail markup, markdown or commission and may not
necessarily represent actual transactions.

<TABLE>
<CAPTION>
High Low
------- ------
<S> <C> <C>
Fiscal 1998:

First Quarter.................................................... $ 9.125 8.000
Second Quarter................................................... 9.875 6.500
Third Quarter.................................................... 9.750 4.750
Fourth Quarter................................................... 10.750 5.313

Fiscal 1999:

First Quarter.................................................... $17.750 9.688
Second Quarter................................................... 28.688 15.000
Third Quarter.................................................... 30.188 9.000
Fourth Quarter................................................... 14.188 7.063
</TABLE>

The last reported sale price of our common stock on the Nasdaq National
Market on February 29, 2000 was $14.00 per share.

Holders

As of February 29, 2000, there were approximately 203 holders of record of
our common stock. This does not include the number of persons whose stock is
in nominee or "street name" accounts through brokers.

Dividends

We have never paid cash dividends on our common stock. We intend to retain
any future earnings to fund the development and growth of our business and
therefore do not anticipate paying any cash dividends in the forseeable
future. Furthermore, our line of credit agreement prohibits the payment of
dividends without the bank's prior written consent.

20
<PAGE>

Item 6. Selected Financial and Other Data.

The following selected financial data is qualified by reference to, and
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Financial Statements of
Coinstar and related Notes thereto included elsewhere in this Annual Report on
Form 10-K.

<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- -------
(Dollars and shares in thousands, except
per share, per unit data and where noted)
<S> <C> <C> <C> <C> <C>
Statements of Operations Da-
ta:
Revenue...................... $ 77,733 $ 47,674 $ 25,007 $ 8,312 $ 1,063
Expenses:
Direct operating............ 38,836 26,565 17,899 7,258 1,336
Regional sales and
marketing.................. 6,381 3,778 3,088 1,505 349
Product research and
development................ 5,571 4,744 6,362 3,969 1,830
Selling, general and
administrative............. 15,021 14,112 11,079 5,351 2,790
Depreciation and
amortization............... 20,315 13,237 8,679 4,135 1,117
-------- -------- -------- -------- -------
Loss from operations......... (8,391) (14,762) (22,100) (13,906) (6,359)
Other income (expense)
Interest income............. 2,350 1,367 2,329 848 398
Interest expense............ (11,314) (10,817) (9,822) (2,661) (208)
Other income (expense)...... (768) 240 -- -- --
-------- -------- -------- -------- -------
Net loss before extraordinary
item........................ (18,123) (23,972) (29,593) (15,719) (6,169)
Extraordinary item loss
related to early retirement
of debt..................... (3,250) -- -- (248) --
-------- -------- -------- -------- -------
Net loss..................... $(21,373) $(23,972) $(29,593) $(15,967) $(6,169)
======== ======== ======== ======== =======
Loss per share before
extraordinary item, basic
and diluted(1).............. $ (1.02) $ (1.58) $ (3.81) $ (20.06) $ (8.23)
Extraordinary item per share,
basic and diluted(1)........ (0.18) -- -- (0.31) --
-------- -------- -------- -------- -------
Loss per share, basic and
diluted(1).................. $ (1.20) $ (1.58) $ (3.81) $ (20.37) $ (8.23)
======== ======== ======== ======== =======
Weighted average shares
outstanding(1).............. 17,857 15,150 7,761 784 750

Other Data:
Number of new Coinstar units
installed during the
period...................... 2,139 1,609 1,703 1,238 215
Installed base of Coinstar
units at end of the period.. 6,952 4,813 3,204 1,501 263
Average age of network for
the period (months)......... 20.7 15.5 10.0 6.5 7.6
Number of regional markets... 85 58 40 23 11
Dollar value of coins
processed................... 873,395 623,258 332,526 115,476 17,701
Direct contribution
(loss)(2)................... 38,897 21,109 7,108 1,054 (273)
Revenue per average installed
unit(3)..................... 12,545 11,893 10,709 9,860 2,325
Direct contribution per
average installed
unit(2)(3).................. 6,279 5,281 3,044 1,250 (2,395)
EBITDA(6).................... 11,923 (1,525) (13,421) (9,771) (5,242)
International revenue........ 222 20 -- -- --
International direct
operating expenses(5)....... 1,223 754 -- -- --
E-services revenue........... 44 -- -- -- --
E-services direct operating
expenses(7)................. 2,160 -- -- -- --
Adjusted EBITDA (8).......... 15,040 (791) (13,421) (9,771) (5,242)

<CAPTION>
December 31,
-----------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and
short-term investments(4)... $ 88,032 $ 41,871 $ 56,803 $ 56,310 $14,120
Total assets................. 163,380 98,833 103,546 82,531 19,601
Total debt, including current
portion..................... 61,831 88,056 78,945 70,065 1,658
Mandatorily redeemable
preferred stock............. -- -- -- 24,972 23,548
Paid in capital.............. 159,054 62,372 61,553 6,871 5,409
Total stockholders' equity
(deficit)................... $ 55,266 $(20,039) $ 3,109 $(21,976) $(7,471)
</TABLE>

21
<PAGE>

- ---------------------
(1) See Note 9 to Financial Statements for an explanation of the
determination of the number of shares used in computing loss per share
information, basic and diluted.

(2) Direct contribution (loss) is defined as revenue less direct operating
expenses. We use direct contribution (loss) as a measure of operating
performance to assist in understanding our operating results. Direct
contribution (loss) is not a measure of financial performance under
generally accepted accounting principles (GAAP) and should not be
considered in isolation or an alternative to gross margin, income (loss)
from operations, net income (loss), or any other measure of performance
under GAAP.

(3) Based on monthly averages of units in operation over the applicable
period.

(4) Cash, cash equivalents and short-term investments include funds in
transit, which represent amounts being processed by armored car carriers
or residing in Coinstar units, of $31.3 million, $23.0 million and
$14.2 million at December 31, 1999, 1998 and 1997, respectively. Funds in
transit prior to such dates are negligible.

(5) International direct operating expenses represent the costs incurred by
Coinstar International Inc., our wholly owned subsidiary, related to the
exploration of international expansion. All costs related to
international development (such as market research and travel) are
expensed as incurred in accordance with the American Institute of
Certified Public Accountants Statement of Position ("SOP") 98-5,
Reporting on the Costs of Start-up Activities, issued on April 3, 1998.

(6) EBITDA represents earnings before interest expense, income taxes,
depreciation, amortization and other income/expense. EBITDA does not
represent and should not be considered as an alternative to net income or
cash flow from operations as determined by GAAP. We do, however, believe
that EBITDA provides useful information regarding our ability to service
and/or incur indebtedness.

(7) E-services direct operating expenses represent the costs related to
exploring services on the Internet and are exclusive of overhead
allocations from Coinstar, Inc.

(8) Adjusted EBITDA is EBITDA as adjusted for international and e-services
revenues and direct operating expenses.

22
<PAGE>

Item 7. 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
Annual Report on Form 10-K. Except for the historical information, the
following discussion in this Annual Report on Form 10-K 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 as well as those discussed under the captions "Risk Factors"
and "Business" as well as those discussed elsewhere in this Annual Report on
Form 10-K. Readers are cautioned not to place undue reliance on these forward-
looking statements, which speak only as of the date of this report. We
undertake no obligation to revise any forward-looking statements in order to
reflect events or circumstances that may subsequently arise. Readers are urged
to carefully review and consider the various disclosures made in this report
and in our other reports filed with the 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 currently derive substantially all our revenue from coin processing
services generated by our installed base of Coinstar units located in
supermarket chains in 41 states across the United States, the United Kingdom
and Canada. We generate revenue based on a processing fee charged on the total
dollar amount of coins processed in a transaction. In December 1998, we
changed this processing fee at most locations to 8.9% from the previous rate
of 7.5%. Coin processing fee revenue is recognized at the time the customers'
coins are counted by the Coinstar unit. Overall revenue growth is dependent on
both the rate of new installations and the growth in coin processing volumes
of our installed base. Our experience to date is that coin processing volumes
per unit have generally increased with the length of time the unit is in
operation as trial levels of the service increase, driving initial trial and
repeat usage for the service. Given our limited operating history, there can
be no assurance, however, that unit volumes will continue to increase as a
function of the time the unit is in operation, or that unit volumes will be
affected by such other factors. We expect that as we continue to aggressively
expand installations relative to the size of our installed base, the average
revenue per unit may decrease even as the per unit dollar volume of more
mature units increases. We believe that coin processing volumes per unit may
also be affected by other factors such as public relations, advertising and
other activities that promote trials of the units, as well as the amount of
consumer traffic in the stores in which the units are located and seasonality.
Based on our limited operating history, we believe that seasonality affects
coin processing volumes because on a relative basis, coin processing volumes
have been lower in the months of January, February, September, and October.
This trend mirrors the seasonality patterns of our supermarkets partners.

We formed a wholly owned subsidiary, Coinstar International, Inc., in March
1998 to explore expanding our operations internationally. Coinstar
International is piloting 21 Coinstar units in Canada to determine the
viability of the Canadian market for our services and is piloting eight
Coinstar units in the United Kingdom. In addition, Coinstar International is
investigating the viability of our services in certain European countries. We
also formed a wholly owned subsidiary, MyShoppinglist.com (now known as
Meals.com, Inc.), in December 1998 to explore the development and deployment
of e-services technology, including the Coinstar Shopper unit. On February 10,
2000, we sold approximately an 11% interest in Meals.com, Inc. to an outside
investor group for $5.5 million. In addition to the outside investment, we
invested $10.0 million of cash as equity and provided a $15.6 million credit
facility to Meals.com, Inc.. To date, we have expended $5.6 million on behalf
of Meals.com, Inc. These expenditures served as the initial draw, bringing the
credit facility's available balance to $10.0 million. Interest accretes on the
credit facility at Imperial Bank's prime commercial lending rate plus
300 basis points.

Our direct operating expenses are comprised of the regional expenses
associated with Coinstar coin-counting unit operations and support and consist
primarily of coin pick-up and processing, field operations support and related
expenses, retail operations support and the amount of our service fee that we
share with our retail partners. Coin pick-up and processing costs, which
represent a large portion of direct operating expenses,

23
<PAGE>

vary based on the level of total coin processing volume and the density of the
units within a region. We believe that while coin pick-up and processing costs
are variable based on units in service and coin volume generated, economies
related to these direct expense components can be achieved through increasing
the density of units in operation in regional markets. Field service
operations and related expenses vary depending on the number of geographic
regions in which Coinstar units are located and the density of the units
within a region. Regional sales and marketing expenses are comprised of
ongoing marketing, advertising and public relations efforts in existing market
regions and startup marketing expenses incurred to launch our services in new
regional markets. Product research and development expense consists of the
development costs of the Coinstar unit software, network applications,
Coinstar unit improvements and new product development. Selling, general and
administrative expenses are comprised of management compensation,
administrative support for field operations, the customer service center,
sales and marketing support, systems and engineering support, computer network
operations, accounting, human resources and occupancy expenses. Depreciation
and amortization consists primarily of depreciation charges on Coinstar units
and, to a lesser extent, depreciation on furniture and fixtures, automobiles,
computer equipment and amortization of intangibles. Other income consists of
rental income from a sublease of unused office space.

Since 1995, we have devoted significant resources to building the sales and
marketing organization, adding administrative personnel and developing the
network systems and infrastructure to support the rapid growth of our
installed base of Coinstar coin-counting units. The cost of this expansion and
the significant depreciation expense of our installed network have resulted in
significant operating losses to date and an accumulated deficit of $103.8
million as of December 31, 1999. We expect to continue to evaluate new
marketing and promotional programs to increase the breadth and rate of
customer utilization of our service and to engage in systems and product
research and development. We expect these expenses will negatively impact our
operating results. We believe that our future revenue growth, operating margin
gains and profitability will be dependent upon the penetration of our
installed base with retail partners in existing markets, expansion and
penetration of installations in new market regions and successful ongoing
marketing and promotional activities to sustain the growth in unit coin volume
over time. Given our limited operating history, unpredictability of the timing
of installations with retail partners and the resulting revenues, and the
continued market acceptance of our service by consumers and retail partners,
our operating results for any quarter are subject to significant variation,
and we believe that period-to-period comparisons of our results of operations
are not necessarily meaningful and should not be relied upon as indications of
future performance.

Results of Operations

The following table shows revenue and expense as a percent of revenue for
the last three years:

<TABLE>
<CAPTION>
Year Ended
December 31,
---------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Revenue................... 100 % 100 % 100 %
Expenses:
Direct operating........ 50.0 55.7 71.6
Regional sales and
marketing.............. 8.2 7.9 12.3
Product research and
development............ 7.2 10.0 25.4
Selling, general and
administrative......... 19.3 29.6 44.3
Depreciation and
amortization........... 26.1 27.8 34.7
----- ----- -----
Loss from operations...... (10.8)% (31.0)% (88.4)%
</TABLE>

Years Ended December 31, 1999 and 1998

Revenue

Revenue increased to $77.7 million in 1999 from $47.7 million in 1998. The
increase was due principally to the increase in the number of Coinstar units
in service during 1999, the increase in the volume of coins processed by the
units in service during this period and an 18.6% increase in the processing
fee effective

24
<PAGE>

December 1998. The installed base of Coinstar units increased to 6,952 as of
December 31, 1999, from 4,813 units as of December 31, 1998. The dollar value
of coins processed increased to $873.4 million during 1999 from $623.3 million
in 1998.

Direct Operating Expenses

Direct operating expenses increased to $38.8 million in 1999 from $26.6
million in 1998. The increase in direct operating expenses was primarily
attributable to increased coin pick-up and processing costs, as a result of
the increased dollar volumes processed by the network, the increase in field
service personnel expenses associated with the hiring and training of new
field service personnel to support our growth and its expansion into 27 new
regional markets as of December 31, 1999 and the increase in revenue sharing
with our partners as a result of a 63% increase in revenue from 1998 to 1999.
The increase is also as a result of an increase in the revenue sharing
percentage from an effective rate of .50% in 1998 to a flat 1.0% in 1999.
Direct operating expenses as a percentage of revenue decreased to 50.0% in the
1999 period from 55.7% in 1998. The decrease in direct operating expenses as a
percentage of revenue was the result of (i) the realization of coin pick-up
and processing cost economies from regional densities and utilization of
cheaper, more efficient coin pick-up methods, and (ii) field service expenses
per unit declined as a percentage of revenue as we increased our density in
our existing markets.

Regional Sales and Marketing

Regional sales and marketing expenses increased to $6.4 million in 1999 from
$3.8 million in 1998. The increase in regional marketing expense was the
result of an increased level of television advertising and other promotional
activity. Regional sales and marketing as a percentage of revenue increased to
8.2% in 1999 from 7.9% in 1998.

Product Research and Development

Product research and development expenses increased to $5.6 million in 1999
from $4.7 million in 1998. The increase in product research and development
was primarily due to investments made in e-services initiatives. Product
research and development as a percentage of revenue decreased to 7.2% in 1999
from 10.0% in 1998.

Selling, General and Administrative

Selling, general and administrative expense increased to $15.0 million in
1999 from $14.1 million in 1998. The principal component of such expenses was
employee compensation and the period-to-period increase primarily reflects an
investment in higher staffing levels to support our rapid growth and
expansion. Selling, general and administrative expense as a percentage of
revenue decreased to 19.3% in 1999 from 29.6% in 1998. The decrease in
selling, general and administrative expense as a percentage of revenue was the
result of (i) increasing volumes processed by the network combined with (ii)
the realization of improved operating efficiencies.

Depreciation and Amortization

Depreciation and amortization expense increased to $20.3 million in 1999
from $13.2 million in 1998. The increase was primarily due to the increase in
the installed base of Coinstar units and amortization of software development
costs. Depreciation and amortization as a percentage of revenue decreased to
26.1% in 1999 from 27.8% in 1998. The decrease in depreciation and
amortization as a percentage of revenue was the result of increasing volumes
processed through the network.

Other Income and Expense

We generated other income of $104,000 in 1999 primarily due to subleasing
excess office space. On March 12, 1999, the sublessee broke the lease, and we
entered into a new sublease as of November 1, 1999.

25
<PAGE>

Interest income increased to $2.4 million in 1999 from $1.4 million in 1998.
The increase in interest income is attributed to an increase in invested cash
balances resulting from a follow-on stock offering completed in June 1999.

Interest expense increased to $11.3 million in 1999 from $10.8 million in
1998. The increase was primarily due to the compounding interest accretion on
the senior subordinated discount notes and amortization of the related
discount. No cash interest payments are due on the notes until April 2000.
Other expenses of $768,000 in 1999 related primarily to a litigation
settlement.

The loss related to the early retirement of debt of $3.2 million is related
to the repurchase of $34 million of high yield notes during 1999.

Net Loss

Net loss decreased to $21.4 million in 1999 from $24.0 million in 1998. The
decrease in the net loss was primarily due to an increase in our contribution
margin combined with a reduction in the rate of growth of expenses. As a
result, the reduction in net loss reflects improved operating leverage of the
Coinstar network. In the longer term, we expect that it will not be required
to add as much infrastructure as we have in the past to support our installed
base and as a result we expect to achieve profitability as our direct
contribution margin from our larger base of installed units grows
proportionately faster than expenses. There can be no assurance, however, that
we will install a sufficient number of units or obtain sufficient market
acceptance to allow us to achieve or sustain profitability.

Years Ended December 31, 1998 and 1997

Revenue

Revenue increased to $47.7 million in 1998 from $25.0 million in 1997. The
increase was due principally to the increase in the number of Coinstar units
in service during 1998 and the increase in the volume of coins processed by
the units in service during this period. The installed base of Coinstar units
increased to 4,813 as of December 31, 1998 from 3,204 units as of December 31,
1997. The dollar value of coins processed increased to $623.3 million during
1998 from $332.5 million in 1997.

Direct Operating Expenses

Direct operating expenses increased to $26.6 million in 1998 from $17.9
million in 1997. The increase in direct operating expenses was primarily
attributable to increased coin pick-up and processing costs, as a result of
the increased dollar volumes processed by the network and the increase in
field service personnel expenses associated with the hiring and training of
new field service personnel to support our growth and expansion into 18 new
regional markets as of December 31, 1998. Direct operating expenses as a
percentage of revenue decreased to 55.7% in 1998 from 71.6% in 1997. The
decrease in direct operating expenses as a percentage of revenue was the
result of (i) the realization of coin pick-up and processing cost economies
from regional densities and utilization of cheaper, more efficient coin pick-
up methods, and (ii) field service expenses per unit declined as a percentage
of revenue as we increased our density in our existing markets.

Regional Sales and Marketing

Regional sales and marketing expenses increased to $3.8 million in 1998 from
$3.1 million in 1997. The increase in regional marketing expense was the
result of an increased level of television advertising offset partially by a
decrease in new market launches and promotional activity. Regional sales and
marketing as a percentage of revenue decreased to 7.9% in 1998 from 12.3% in
1997. The decrease in regional sales and marketing as a percentage of revenue
was the result of (i) increasing volumes processed by the network and
(ii) lower advertising costs per unit as we increased the density of units
within a region.

26
<PAGE>

Product Research and Development

Product research and development expenses decreased to $4.7 million in 1998
from $6.4 million in 1997. The decrease in product research and development
costs reflects the decrease in expenditures associated with the completion of
the development of our new coin counting technology and the completion of our
new operating system. Product research and development as a percentage of
revenue decreased to 10.0% in 1998 from 12.3% in 1997. While we currently
expense all product research and development costs, a portion, related to
internally developed software, may be capitalized in the future.

Selling, General and Administrative

Selling, general and administrative expense increased to $14.1 million in
1998 from $11.1 million 1997. The principal component of such expenses was
employee compensation and the period-to-period increase primarily reflects an
investment in higher staffing levels to support our rapid growth and
expansion. Selling, general and administrative expense as a percentage of
revenue decreased to 29.6% in 1998 from 44.3% in 1997. The decrease in
selling, general and administrative expense as a percentage of revenue was the
result of (i) increasing volumes processed by the network combined with (ii)
the realization of improved operating efficiencies.

Depreciation and Amortization

Depreciation and amortization expense increased to $13.2 million in 1998
from $8.7 million in 1997. The increase was primarily due to the increase in
the installed base of Coinstar units during these periods. Depreciation and
amortization as a percentage of revenue decreased to 27.8% in 1998 from 34.7%
in 1997. The decrease in depreciation and amortization as a percentage of
revenue was the result of increasing volumes processed through the network.

Other Income and Expense

We generated other income of $240,000 in 1998 due to the subleasing of
excess office space.

Interest income decreased to $1.4 million in 1998 from $2.3 million in 1997.
The decrease in interest income is attributed to a reduction in invested cash
balances resulting from the sale of certain short-term investments to finance
the installation of Coinstar units during the period.

Interest expense increased to $10.8 million in 1998 from $9.8 million in
1997. The increase was primarily due to the accretion of the senior
subordinated discount notes. No cash interest payments are due on the notes
until April 2000.

Net Loss

Net loss decreased to $24.0 million in 1998 from $29.6 million in 1997. The
decrease in the net loss was primarily due to an increase in our contribution
margin combined with a reduction in the rate of growth of expenses. As a
result, the reduction in net loss reflects improved operating leverage of the
Coinstar network. In the longer term, we expect that it will not be required
to add as much infrastructure as we have in the past to support our installed
base and as a result we expect to achieve profitability as our direct
contribution margin from our larger base of installed units grows
proportionately faster than expenses. There can be no assurance, however, that
we will install a sufficient number of units or obtain sufficient market
acceptance to allow us to achieve or sustain profitability.

Income Taxes

At December 31, 1999, 1998 and 1997, we had net deferred tax assets of
approximately $35.2 million, $28.0 million and $19.8 million, respectively,
resulting primarily from net operating loss and credit

27
<PAGE>

carryforwards available to offset future income tax obligations. Such federal
carryforwards expire through 2019. Based upon our history of operating losses
and expiration dates of the loss carryforwards, we have recorded a valuation
allowance to the full extent of our net deferred tax assets.

Liquidity and Capital Resources

As of December 31, 1999, we had cash and cash equivalents of $78.7 million,
short-term investments of $9.3 million and working capital of $43.4 million.
Cash and cash equivalents include $31.3 million of funds in transit, which
represent amounts being processed by armored car carriers or residing in
Coinstar units. Net cash provided by operating activities was $21.7 million
for the twelve months ended December 31, 1999, compared to net cash provided
by operating activities of $9.5 million for 1998. Improvement in cash provided
by operating activities was the result of a $2.6 million improvement in our
net loss and a $5.8 million increase in accrued liabilities.

Net cash used by investing activities for the twelve months ended December
31, 1999 was $41.1 million compared to $9.0 million used in 1998. Capital
expenditures during the twelve months ended December 31, 1999 were $36.5
million and in 1998 were $23.0 million. Capital expenditures increased
primarily due to the increased purchases of Coinstar units, and the addition
of capitalized software development costs in 1999.

Net cash provided by financing activities for the twelve months ended
December 31, 1999 was $60.5 million, which primarily was the result of (1)
issuance of additional shares of common stock with net proceeds of $93.6
million, and (2) proceeds from the exercise of stock options and employee
stock purchases, offset by (3) early retirement of long term debt. Net cash
used by financing activities for 1998 was $921,541 which was the result of the
proceeds of the exercise of employee stock options and stock purchases, offset
by the repayment of long term debt.

With respect to financing activities, we completed a public offering of
4,000,000 shares of common stock in June 1999 at a purchase price of $22.375
per share for net proceeds of approximately $83.8 million, net of issuance
costs. The net proceeds received have been and will continue to be used to
expand the network in the United States, to support planned expansion
internationally, to develop and market new products and product enhancements,
for working capital and general corporate purposes. In July 1999 the
underwriters exercised their option to purchase an additional 466,400 shares
of common stock at a purchase price of $22.375 per share for net proceeds of
approximately of $9.8 million, net of issuance costs.

As of December 31, 1999, we had available secured irrevocable letters of
credit with three banks that totaled $6.6 million. These letters of credit,
which expire through March 31, 2000, are available to collateralize certain
obligations to third parties. As of December 31, 1999, no amounts were
outstanding under these letters of credit agreements.

On February 19, 1999, we entered into a Credit Agreement with Imperial Bank,
for itself and as agent of Bank Austria Creditanstalt Corporate Finance, Inc.
The Credit Agreement provides us with a credit facility of up to $25 million,
consisting of revolving loans of $5 million from each of the lenders, and term
loans of $5 million from each of the lenders. The Credit Agreement requires us
to maintain certain financial covenants during the term of the agreement,
which, among other things, prohibit us from paying dividends without the
lenders' consent. In addition, amounts available under the term loans will
increase to $7.5 million per lender after we have satisfied certain debt
ratios.

In connection with the Credit Agreement, we issued to each of the lenders a
warrant to purchase 51,326 shares of our common stock. The exercise price for
the warrants, which will expire on February 19, 2009, is $12.177 per share.
The value of the warrants issued in connection with the Credit Agreement are
recorded as contributed capital and represent discounts, which are being
amortized ratably over the term of the related debt. We have agreed, pursuant
to a Registration Rights Agreement dated February 19, 1999 with the lenders,
to file a registration statement on Form S-3 to register the shares issuable
upon exercise of the warrants within 60 days

28
<PAGE>

following the date on which we have satisfied all of our obligations in full
under the Credit Agreement and the lenders have no further commitment to make
loans or extend credit under the Credit Agreement. We must use reasonable
efforts to cause the registration statement to be declared effective no later
than 120 days following the loan termination date and must keep the
registration available for at least 45 days following the date the
registration statement is declared effective. The Registration Rights
Agreements also obligates us under certain circumstances to include the common
stock issuable upon exercise of the warrants in certain registration
statements we may file.

On June 7, 1999, we amended the Credit Agreement with the lenders to allow
our domestic subsidiaries, or us to develop electronic commerce or Internet
related businesses subject to certain aggregate limits. On June 14, 1999, the
lenders issued a limited waiver of certain mandatory prepayments and reduction
of the revolving commitment of the Credit Agreement upon the issuance of
equity by us. The limited waiver requires us to maintain minimum deposits with
Imperial Bank for the term of the Credit Agreement.

On March 3, 1999, we acquired from Compucook, Inc., assets consisting of
Internet domain names, software, fixed assets, contracts, and web site
content. In consideration of the purchase, we issued 25,000 common stock
warrants at an exercise price of $15.63 per warrant, which expire on March 2,
2004. On April 15, 1999, we acquired from Nu World Marketing Limit, Inc.,
assets consisting of Internet domain names, fixed assets, contracts, and web
site content. As consideration for this purchase, we issued 25,000 shares of
common stock at $15.45 per share.

In connection with a litigation settlement, on October 1, 1999, we issued
30,000 shares of our common stock to Cash Technologies Inc., parent company of
CoinBank Automated Systems Inc., and paid $600,000 in cash as consideration
for a purchase option to purchase CoinBank. We did not exercise our option.

As of December 31, 1999, we had outstanding $61.0 million of our senior
notes. We have repurchased a total of $34.0 million of the notes. We must
begin paying cash interest on the notes in April 2000. Beginning at that time,
we will have debt service obligations of over $7.9 million per year until
October 2006 when the principal amount of $61.0 million plus accrued interest
will be due. The Indenture governing the notes contains covenants that, among
other restrictions, limit our ability to pay dividends or make other
restricted payments, engage in transactions with affiliates, incur additional
indebtedness, effect asset dispositions, or merge or sell substantially all
our assets.

On February 10, 2000, we sold approximately an 11% interest in our
Meals.com, Inc. e-services subsidiary to an outside investor group for $5.5
million. In addition to the outside investment, we invested $10.0 million of
cash as equity and provided a $15.6 million credit facility. To date, we have
expended $5.6 million on behalf of Meals.com, Inc. These expenditures served
as the initial draw, bringing the credit facility's available balance to $10.0
million. Interest accretes on the credit facility at Imperial Bank's
commercial lending prime rate plus 300 basis points.

We believe existing cash equivalents, short-term investments, and our Credit
Agreement will be sufficient to fund our cash requirements and capital
expenditure needs for at least the next 12 months for the continued expansion
of the domestic Coinstar network at the recent installation rate; to continue
to fund the pilot deployment of Coinstar units internationally; and to fund
the development and marketing of new products and enhancements. After that
time, the extent of additional financing needed will depend on the success of
our business. If we significantly increase installations beyond planned levels
or if unit coin processing volumes generated are lower than historical levels;
our cash needs will be increased. Our future capital requirements will depend
on a number of factors, including the timing and number of installations, the
type and scope of service enhancements, the level of market acceptance of our
service, the feasibility of international expansion, and potential new product
and service offerings and product and service enhancements.

29
<PAGE>

Quarterly Financial Results

The following table sets forth selected unaudited quarterly financial
information and operating data for the last eight quarters. This information
has been prepared on the same basis as our unaudited consolidated financial
statements and includes, in the opinion of management, all normal and
recurring adjustments that management considers necessary for a fair statement
of the quarterly results for the periods. The operating results and data for
any quarter are not necessarily indicative of the results for future periods.

<TABLE>
<CAPTION>
Three-month periods ended
-------------------------------------------------------------------------------
Dec. 31, Sep. 30, June 30, Mar. 31, Dec. 31, Sep. 30, June 30, Mar. 31,
1999 1999 1999 1999 1998 1998 1998 1998
-------- -------- -------- -------- -------- -------- -------- ---------
(Dollars in thousands except per unit data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statements of Operations
Data:
Revenue................. $ 21,959 $ 21,723 $ 18,258 $ 15,791 $ 14,802 $ 13,576 $ 10,472 $ 8,823
Expenses:
Direct operating....... 10,938 10,783 9,176 7,939 7,458 7,141 6,142 5,823
Regional sales and
marketing............. 2,756 1,294 1,012 1,318 1,077 930 854 917
Product research and
development........... 1,441 2,035 1,155 940 1,138 867 1,329 1,410
Selling, general and
administrative........ 4,135 3,877 3,628 3,381 3,579 3,531 3,726 3,276
Depreciation and
amortization.......... 5,934 5,698 4,580 4,103 3,669 3,635 3,120 2,813
Loss from operations.... $ (3,245) $ (1,964) $ (1,293) $ (1,890) $ (2,119) $ (2,528) $ (4,699) $ (5,416)

Other Data:
Number of new Coinstar
units installed during
the period............. 495 669 547 428 376 405 501 327
Installed base of
Coinstar units at end
of period.............. 6,952 6,457 5,788 5,241 4,813 4,437 4,032 3,531
Average age of network
for the period
(months)............... 21.3 20.4 20.0 19.2 17.5 15.8 14.8 13.4
Number of regional
markets................ 85 82 74 64 58 57 49 42
Dollar value of coins
processed.............. $246,736 $244,089 $205,143 $177,427 $186,166 $180,600 $139,227 $117,2 98
Direct contribution(1).. 11,021 10,941 9,082 7,852 7,344 6,435 4,330 3,000
Direct contribution
margin................. 50.2% 50.4% 49.7% 49.7% 49.6% 47.4% 41.3% 34.0%
Annualized revenue per
average installed
unit(2)................ $ 13,081 $ 14,162 $ 13,343 $ 12,721 $ 12,937 $ 12,703 $ 11,048 $ 10,597
Annualized direct
contribution per
average installed
unit(1)(2)............. 6,573 7,132 6,637 6,331 6,405 6,021 4,568 3,601
EBITDA as defined(5).... 2,689 3,734 3,287 2,213 1,550 1,107 (1,579) (2,603)
E-services revenue...... 39 5 -- -- -- -- -- --
E-services direct
operating expenses(4).. 583 1,200 313 64 -- -- -- --
International revenue... 88 73 46 15 11 9 -- --
International direct
operating expenses(3) 324 218 406 275 369 116 241 28
Adjusted EBITDA(6)...... 3,469 5,074 3,960 2,537 1,908 1,214 (1,338) (2,575)
</TABLE>
- ---------------------
(1) Direct contribution is defined as revenue less direct operating expenses.
We use direct contribution as a measure of operating performance to
assist in understanding our operating results. Direct contribution is not
a measure of financial performance under generally accepted accounting
principles (GAAP) and should not be considered in isolation or an
alternative to gross margin, income (loss) from operations, net income
(loss), or any other measure of performance under GAAP.

(2) Based on actual quarterly results annualized divided by the monthly
averages of units in operation over the applicable period.

(3) International direct operating expenses represent the costs incurred by
Coinstar International related to the exploration of international
expansion. All costs related to international development (such as market
research and travel) are expensed as incurred in accordance with the
American Institute of Certified Public Accountants Statement of Position
98-5, Reporting on the Costs of Start-Up Activities ("SOP 98-5").

(4) E-services direct operating expenses represent the costs incurred by
Coinstar, Inc related to the exploration of e-services products. All
costs related to the Internet development (such as market research and
travel) are expensed as incurred in accordance with the SOP 98-5. Costs
to develop software are accounted for in accordance with SOP 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use.

(5) EBITDA, as defined, represents earnings before interest expense, income
taxes, depreciation, amortization and other income/expense. EBITDA, as
defined, does not represent and should not be considered as an
alternative to net income or cash flow from operations as

30
<PAGE>

determined by GAAP. We, however, believe that EBITDA, as defined, provides
useful information regarding a company's ability to service and/or incur
indebtedness.

(6) Adjusted EBITDA is EBITDA as adjusted for international and e-services
revenues and direct operating expenses.

Based on our limited operating history, we believe that coin processing
volumes have been affected by seasonality. In particular, coin processing
volumes have been lower in the months of January, February, September and
October. This trend mirrors the seasonality of our supermarket partners. There
can be no assurance, however, that such seasonal trends will continue. Any
projections of future seasonality are inherently uncertain due to our limited
operating history and the lack of comparable companies engaged in the coin
processing business.

In addition to fluctuations in revenue resulting from factors affecting
customer usage, timing of unit installations will result in significant
fluctuations in quarterly results. The rate of installations does not follow a
regular pattern, as it depends principally on installation schedules
determined by agreements between us and our retail distribution partners,
variable length of partner trial periods and the planned coordination of
multiple partner installations in a given geographic region.

Quarterly losses from operations during the periods presented were the
result of higher direct operating expenses associated with the significant
increase in our installed base, higher depreciation and amortization expense
from the expansion of the installed base and the significantly higher level of
systems infrastructure and management personnel to support our accelerated
growth. We expect to continue to incur substantial operating losses from
operations as we continue to increase our installed base of Coinstar units.

New Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities. This pronouncement requires an entity to
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. While
management is continuing to evaluate the potential impacts of the standard, as
amended, we believe the impact of adoption will not be material to the
financial statements, taken as a whole. SFAS No. 133, as amended by SFAS No.
137, is effective for fiscal years beginning after June 15, 2000.

Year 2000 Update

During 1998 and 1999, we undertook a program to identify, test, and evaluate
our internal operating systems to determine the impact of the year 2000 on
these systems. These tests involved simulating transactional activity before,
during and after the various impacted dates and assessing the results to
ensure the proper handling of the information by the internal operating
system. In addition, we assessed the impact of the year 2000 on our retail
distribution partners, suppliers, and service providers. As a result of these
tests performed on the internal operating systems, and the assessment of our
partners and suppliers, we did not suffer any adverse impact in transitioning
to the year 2000.

Item 7a. Quantitative and Qualitative Disclosures About Market Risk

We are subject to the risk of fluctuating interest rates in the normal
course of business. Our major market risk relates to short-term investments,
which have a floating rate of interest. These investments are financed through
fixed rate debt. The relationship between fixed and floating rate debt varies
depending on market conditions. We do not enter into speculative derivative
transactions or leveraged swap agreements.

31
<PAGE>

The table below presents principal (or notional) amounts and related
weighted average interest rates outstanding at each of the respective balance
sheet dates. All items described in the table are non-trading and are stated
in U.S. dollars.

<TABLE>
<CAPTION>
Year Ended December 31,
In Thousands -------------------------------------------------------
Interest Rate Risk 1999 2000 2001 2002 2003 Thereafter
- ------------------ ------- ------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Assets
Short-term
investments........... $ 9,160 -- -- -- -- --
Average interest
rate.................. 5.83% -- -- -- -- --
Liabilities
Capital lease
obligations........... $ 1,407 $ 635 $ 184 -- -- --
Average interest rate.. 10.10% 10.04% 9.91% -- -- --
Fixed long-term debt... $60,980 $60,980 $60,980 $60,980 $60,980 $60,980
Average interest rate.. 13.0% 13.0% 13.0% 13.0% 13.0% 13.0%
Variable senior
revolving debt........ $ 500 $ 500 $ 500 $ 500 $ 500 $ 500
Average interest
rate(*)............... 10.50% 10.50% 10.50% 10.50% 10.50% 10.50%
</TABLE>
- ---------------------
* Interest rate represents Imperial Bank's prime rate plus 200 basis points
(10.50% at December 31,1999)

Item 8. Financial Statements and Supplementary Data

See Item 14(a) for an index to the financial statements and supplementary
data required by this item.

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.

None.

PART III

Item 10. Directors and Executive Officers of the Registrant

See the section entitled "Executive Officers" in Part I, Item 1 hereof for
information regarding executive officers.

The information required by this item with respect to directors is
incorporated by reference from the information under the caption of "Election
of Directors," contained in our proxy statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A in connection
with the 2000 Annual Meeting of Stockholders to be held on June 15, 2000. We
will file the proxy statement with the Securities and Exchange Commission
within 120 days of December 31, 1999.

Item 11. Executive Compensation.

The information required by this item is incorporated by reference to the
information under the caption "Executive Compensation" contained in the proxy
statement.

Item 12. Security Ownership of Certain Beneficial Owners and Management.

The information required by this item is incorporated by reference to the
information under the caption "Security Ownership of Certain Beneficial Owners
and Management" contained in the proxy statement.

Item 13. Certain Relationships and Related Transactions.

The information required by this item is incorporated by reference to the
information under the caption "Certain Relationships and Related Transactions"
contained in the proxy statement.

32
<PAGE>

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.

The financial statements required by this item are submitted in a separate
section beginning on page 37 of this Annual Report on Form 10-K.

<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
(a)(1) Index to Financial Statements
Independent Auditors' Report.................................... 36
Consolidated Balance Sheets..................................... 37
Consolidated Statements of Operations........................... 38
Consolidated Statements of Changes In Stockholders' Equity
(Deficit)....................................................... 39
Consolidated Statements of Cash Flows........................... 40
Consolidated Notes to Financial Statements...................... 41
(a)(2) Index to Financial Statement Schedules
All schedules have been omitted because they are not applicable
or not required, or the required information is included in the
financial statements or notes thereto.
(a)(3) Index to Exhibits:
</TABLE>

33
<PAGE>

<TABLE>
<CAPTION>
Exhibit Number Description of Document
-------------- -----------------------
<C> <S>
10.4(1) Form of Indemnity Agreement between the Registrant and its
executive officers and directors.
10.5(1) Series E Preferred Stock and Warrant Purchase Agreement between
Registrant and Acorn Ventures, Inc. dated August 27, 1996.
10.6(1) Office Building Lease between Registrant and Factoria Heights
dated June 1, 1994, as amended on January 24, 1997.
10.7(1) Sublease between Registrant and Maruyama U.S., Inc. dated
January 15, 1997.
10.8(1) Lease agreement between Registrant and Spieker Properties, L.P.
dated January 29, 1997.
10.9(2) Manufacturing Agreement between Registrant and SeaMed
Corporation dated May 14, 1998.
10.10(1) Purchase Agreement between Registrant and Smith Barney Inc.
dated October 22, 1996.
12.1 Ratio of Earnings to Fixed Charges.
21.1(6) Subsidiaries.
23.1 Consent of Deloitte & Touche LLP.
27.1 Financial Data Schedule.
</TABLE>
- ---------------------
(1) Incorporated by reference to the Registrant's Registration Statement on
Form S-4 (No. 333-33233).

(2) Incorporated by reference to the Registrant's Quarterly Report on Form 10-
Q for the Quarter Ended June 30, 1998.

(3) Incorporated by reference to the Registrant's Quarterly Report on Form 10-
Q for the Quarter Ended September 30, 1998.

(4) Incorporated by reference to the Registrant's current Report on Form 8-K
(File Number 000-22555) filed by Coinstar on March 3, 1999.

(5) Incorporated by reference to the Current Report on Form 8-K (File Number
000-22555) filed by Coinstar on February 18, 2000.

(6) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1998.

(b) Reports on Form 8-K.
The Registrant filed no reports on Form 8-K during the quarter ended
December 31, 1999.

(d) Financial Statement Schedules.
The financial statement schedules required by this item are listed under
Item 14(a)(2).

34
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

/s/ Diane L. Renihan
By: _________________________________
Diane L. Renihan
Controller and Chief Accounting
Officer
(Principal Accounting Officer)
Date: March 30, 2000

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----

<S> <C> <C>
/s/ Daniel A. Gerrity President and Chief Executive March 30, 2000
______________________________________ Officer
Daniel A. Gerrity (Principal Executive Officer)

/s/ Diane L. Renihan Controller and Chief Accounting March 30, 2000
______________________________________ Officer (Principal Accounting
Diane L. Renihan Officer)

/s/ Jens H. Molbak Chairman of the Board March 30, 2000
______________________________________
Jens H. Molbak

/s/ Larry A. Hodges Director March 30, 2000
______________________________________
Larry A. Hodges

/s/ David E. Stitt Director March 30, 2000
______________________________________
David E. Stitt

/s/ Ronald A. Weinstein Director March 30, 2000
______________________________________
Ronald A. Weinstein

/s/ William D. Ruckelshaus Director March 30, 2000
______________________________________
William D. Ruckelshaus

/s/ Robert O. Aders Director March 30, 2000
______________________________________
Robert O. Aders
</TABLE>

35
<PAGE>

INDEPENDENT AUDITORS' REPORT

Board of Directors and Stockholders
Coinstar, Inc.
Bellevue, Washington

We have audited the accompanying consolidated balance sheets of Coinstar,
Inc. and subsidiaries (the "Company") as of December 31, 1999 and 1998, and
the related consolidated statements of operations, changes in stockholders'
equity (deficit), and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Coinstar, Inc. and
subsidiaries at December 31, 1999 and 1998, and the results of their
operations, and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with generally accepted accounting
principles.

/s/ Deloitte & Touche LLP

February 4, 2000 (March 24, 2000 as to Note 15)
Seattle, Washington

36
<PAGE>

COINSTAR, INC. and SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
December 31,
-------------------------
1999 1998
------------ -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......................... $ 78,736,908 $37,688,205
Short-term investments available for sale.......... 9,294,825 4,182,315
Prepaid expenses and other current assets.......... 2,337,456 1,043,010
------------ -----------
Total current assets.............................. 90,369,189 42,913,530

PROPERTY AND EQUIPMENT:
Coinstar units..................................... 102,669,587 73,191,704
Computers.......................................... 4,481,264 3,060,899
Office furniture and equipment..................... 1,241,198 1,191,221
Leased vehicles.................................... 2,825,155 1,637,647
Leasehold improvements............................. 437,593 437,593
Coinstar components................................ 94,473 94,865
------------ -----------
111,749,270 79,613,929
Accumulated depreciation........................... (43,649,321) (26,263,528)
------------ -----------
68,099,949 53,350,401
OTHER ASSETS, net of accumulated amortization of
$2,356,150 and $617,961............................ 4,911,337 2,569,187
------------ -----------
TOTAL............................................... $163,380,475 $98,833,118
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable................................... $ 4,866,539 $ 3,828,459
Accrued liabilities................................ 41,417,592 26,987,334
Current portion of long-term debt and capital lease
obligations....................................... 649,640 2,020,696
------------ -----------
Total current liabilities......................... 46,933,771 32,836,489

LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, less
current portion and net of unamortized discounts of
$1,056,118 and $9,315,552.......................... 61,181,184 86,035,758
------------ -----------
Total liabilities................................. 108,114,955 118,872,247

COMMITMENTS AND CONTINGENCIES (Notes 5 and 12)
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $.001 par value authorized,
45,000,000 shares; issued and outstanding,
20,141,207 and 15,217,504 shares.................. 157,737,504 61,858,154
Contributed capital for warrants................... 1,316,128 513,584
Accumulated other comprehensive income............. (1,304) 3,171
Accumulated deficit................................ (103,786,808) (82,414,038)
------------ -----------
Total stockholders' equity (deficit).............. 55,265,520 (20,039,129)
------------ -----------
TOTAL............................................... $163,380,475 $98,833,118
============ ===========
</TABLE>

See notes to consolidated financial statements

37
<PAGE>

COINSTAR, INC. and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
REVENUE.............................. $ 77,732,560 $ 47,673,651 $ 25,007,251
EXPENSES:
Direct operating.................... 38,835,647 26,564,505 17,899,402
Regional sales and marketing........ 6,381,182 3,777,995 3,088,370
Product research and development.... 5,571,323 4,744,110 6,361,568
Selling, general and
administrative..................... 15,021,088 14,112,213 11,078,649
Depreciation and amortization....... 20,314,509 13,237,234 8,679,036
------------ ------------ ------------
Loss from operations................ (8,391,189) (14,762,406) (22,099,774)
OTHER INCOME (EXPENSE):
Interest income..................... 2,350,065 1,366,580 2,328,031
Interest expense.................... (11,314,177) (10,816,858) (9,821,619)
Other............................... (767,725) 239,812 --
------------ ------------ ------------
Net loss before extraordinary item.. (18,123,026) (23,972,872) (29,593,362)
EXTRAORDINARY ITEM
Loss related to early retirement of
debt............................... (3,249,744) -- --
------------ ------------ ------------
NET LOSS............................. $(21,372,770) $(23,972,872) $(29,593,362)
============ ============ ============

LOSS PER SHARE:
Loss per share before extraordinary
item, basic and diluted............ $ (1.02) $ (1.58) $ (3.81)
Extraordinary item per share, basic
and diluted........................ $ (0.18) $ -- $ --
------------ ------------ ------------
Loss per share, basic and diluted... $ (1.20) $ (1.58) $ (3.81)
============ ============ ============
Weighted average shares outstanding,
basic and diluted.................. 17,856,579 15,150,463 7,761,425
============ ============ ============
</TABLE>

See notes to consolidated financial statements

38
<PAGE>

COINSTAR, INC. and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
Series A Accu.
Common Stock Preferred Series B Preferred Contributed Other
----------------------- ------------------ -------------------- capital for Comp. Accumulated
Shares Amount Shares Amount Shares Amount warrants Income Deficit
---------- ------------ -------- -------- -------- ---------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, January
1, 1997........ 793,059 $ 18,396 649,775 $649,775 895,506 $3,582,034 2,621,160 $ 0 $ (28,847,804)
Exercise of
stock options.. 199,078 78,013
Conversion of
Series A
Preferred
stock.......... 649,775 649,775 (649,775) (649,775)
Conversion of
Series B
Preferred
stock.......... 1,023,399 3,582,034 (895,506) (3,582,034)
Conversion of
Mandatorily
Redeemable
Preferred
stock.......... 7,315,795 24,972,084
Exercise of
warrants....... 2,053,523 3,369,852 (2,107,576)
Issuance of
common stock,
net of issuance
costs of
$3,130,306..... 3,000,000 28,369,694
Comprehensive
income
Unrealized loss
on short-term
investments
available for
sale........... (2,962)
Net loss........ (29,593,362)
--------
Comprehensive
income.........
---------- ------------ -------- -------- -------- ---------- ---------- ------- -------------
BALANCE,
December 31,
1997........... 15,034,629 61,039,848 -- -- -- -- 513,584 (2,962) (58,441,166)
Issuance of
shares under
employee stock
purchase plan.. 98,239 738,968
Exercise of
stock options.. 80,418 42,713
Non-cash stock-
based
compensation... 4,218 36,625
Comprehensive
income
Other
comprehensive
income
Unrealized loss
on short-term
investments
available for
sale.......... 6,007
Unrealized gain
on foreign
currency
translation... 126
--------
Other
comprehensive
income.........
--------
Net loss........ (23,972,872)
--------
Comprehensive
income.........
---------- ------------ -------- -------- -------- ---------- ---------- ------- -------------
BALANCE,
December 31,
1998........... 15,217,504 $ 61,858,154 -- $ -- -- $ -- $ 513,584 $ 3,171 $ (82,414,038)
Issuance of
shares under
employee stock
purchase plan.. 77,793 672,510
Exercise of
stock options.. 224,453 810,033
Exercise of
warrants....... 100,057 89,823 (89,823)
Issuance of
common stock
for
acquisitions of
assets......... 25,000 386,250
Issuance of
common stock,
net of issuance
costs of
$6,286,841..... 4,466,400 93,648,859
Issuance of
common stock
for asset
purchase
option......... 30,000 271,875
Contributed
capital for
warrants....... 892,367
Comprehensive
income
Other
comprehensive
income
Unrealized gain
(loss) on
foreign
currency
translation... (4,475)
--------
Other
comprehensive
income.........
--------
Net loss........ (21,372,770)
--------
Comprehensive
income.........
---------- ------------ -------- -------- -------- ---------- ---------- ------- -------------
BALANCE,
December 31,
1999........... 20,141,207 $157,737,504 -- $ -- -- $ -- $1,316,128 $(1,304) $(103,786,808)
========== ============ ======== ======== ======== ========== ========== ======= =============
<CAPTION>
Total
-------------
<S> <C>
BALANCE, January
1, 1997........ $(21,976,439)
Exercise of
stock options.. 78,013
Conversion of
Series A
Preferred
stock.......... --
Conversion of
Series B
Preferred
stock.......... --
Conversion of
Mandatorily
Redeemable
Preferred
stock.......... 24,972,084
Exercise of
warrants....... 1,262,276
Issuance of
common stock,
net of issuance
costs of
$3,130,306..... 28,369,694
Comprehensive
income
Unrealized loss
on short-term
investments
available for
sale........... (2,962)
Net loss........ (29,593,362)
-------------
Comprehensive
income......... (29,596,324)
-------------
BALANCE,
December 31,
1997........... 3,109,304
Issuance of
shares under
employee stock
purchase plan.. 738,968
Exercise of
stock options.. 42,713
Non-cash stock-
based
compensation... 36,625
Comprehensive
income
Other
comprehensive
income
Unrealized loss
on short-term
investments
available for
sale.......... 6,007
Unrealized gain
on foreign
currency
translation... 126
-------------
Other
comprehensive
income......... 6,133
-------------
Net loss........ (23,972,872)
-------------
Comprehensive
income......... (23,966,739)
-------------
BALANCE,
December 31,
1998........... $(20,039,129)
Issuance of
shares under
employee stock
purchase plan.. 672,510
Exercise of
stock options.. 810,033
Exercise of
warrants....... --
Issuance of
common stock
for
acquisitions of
assets......... 386,250
Issuance of
common stock,
net of issuance
costs of
$6,286,841..... 93,648,859
Issuance of
common stock
for asset
purchase
option......... 271,875
Contributed
capital for
warrants....... 892,367
Comprehensive
income
Other
comprehensive
income
Unrealized gain
(loss) on
foreign
currency
translation... (4,475)
-------------
Other
comprehensive
income......... (4,475)
-------------
Net loss........ (21,372,770)
-------------
Comprehensive
income......... (21,377,245)
-------------
BALANCE,
December 31,
1999........... $ 55,265,520
=============
</TABLE>

See notes to consolidated financial statements

39
<PAGE>

COINSTAR, INC. and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Loss............................ $(21,372,770) $(23,972,873) $(29,593,362)
Adjustments to reconcile net loss to
net cash used by operating
activities:
Depreciation and amortization...... 20,314,509 13,237,234 8,679,036
Write off of non-cash portion of
purchase option................... 271,875 -- --
Debt discount amortization......... 8,712,920 10,345,573 9,156,396
Non-cash stock-based compensation.. -- 36,625 --
Unrealized gain (loss) on foreign
currency.......................... (4,475) 117 --
Cash provided (used) by changes in
operating assets and liabilities:
Investment interest receivable..... 45,862 483,502 (389,254)
Prepaid expenses and other current
assets............................ (1,255,585) (21,661) (156,349)
Other assets....................... (646,360) 2,592 (176,978)
Accounts payable................... 1,038,080 590,390 1,458,978
Accrued liabilities................ 14,564,068 8,753,736 10,562,777
------------ ------------ ------------
Net cash provided (used) by
operating activities............... 21,668,124 9,455,235 (458,756)
INVESTING ACTIVITIES:
Purchases of short-term
investments....................... (25,681,907) (24,258,982) (47,962,984)
Sales and maturities of short-term
investments....................... 20,523,535 56,202,659 45,856,665
Purchases of fixed assets.......... (36,508,249) (22,991,701) (29,767,502)
Refund of tax on Coinstar units.... 535,223 -- --
Other.............................. 54,325 2,622 --
------------ ------------ ------------
Net cash provided (used) by
investing activities............... (41,077,073) 8,954,598 (31,873,821)
FINANCING ACTIVITIES:
Payments on long-term debt......... (35,173,750) (1,703,222) (1,045,255)
Borrowings under long-term debt
obligations....................... 500,000 -- --
Proceeds from sale of common stock,
net of issuance costs............. 93,648,859 -- 28,369,694
Proceeds from exercise of stock
options and issuance of shares
under employee stock purchase
plan.............................. 1,482,543 781,681 78,013
Proceeds from exercise of
warrants.......................... -- -- 1,262,276
------------ ------------ ------------
Net cash provided (used) by
financing activities............... 60,457,652 (921,541) 28,664,728
------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS......................... 41,048,703 17,488,292 (3,667,849)
CASH AND CASH EQUIVALENTS:
Beginning of year.................. 37,688,205 20,199,913 23,867,763
------------ ------------ ------------
End of year........................ $ 78,736,908 $ 37,688,205 $ 20,199,914
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for
interest.......................... $ 246,574 $ 486,298 $ 668,058
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Purchase of vehicles financed by
capital lease obligations......... 546,868 504,811 735,970
Cashless exercises of warrants..... 89,823 -- 2,581,426
Purchase of assets with common
stock............................. 386,250 -- --
Purchase of assets with warrants... 169,156 -- --
Issuance of warrants under
revolving credit facility......... 723,211 -- --
Stock issued for purchase option... 271,875 -- --
</TABLE>

See notes to consolidated financial statements

40
<PAGE>

COINSTAR, INC. and SUBSIDIARIES

CONSOLIDATED NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

NOTE 1: ORGANIZATION AND BUSINESS

General: Coinstar, Inc. (the "Company") develops, owns and operates a
network of automated, self-service coin-counting and processing machines that
provide consumers with a convenient means to convert loose coins into cash.
The Company has increased its installed base every year since inception, and
as of December 31, 1999, had an installed base of 6,952 units located in
supermarkets and financial institutions in 41 states.

Principles of consolidation: The financial statements include the accounts
of Coinstar, Inc. and its wholly owned subsidiaries, including Coinstar
International, Inc., which was formed for the purpose of exploring the
expansion of the Coinstar network internationally, and Meals.com, Inc., which
was formed to explore e-services. All intercompany transactions have been
eliminated upon consolidation.

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash and equivalents: The Company considers all highly liquid securities
purchased with a maturity of three months or less to be cash equivalents. Cash
and cash equivalents includes funds in transit, which represent amounts being
processed by armored carriers or residing in Coinstar units, of $31.3 million
and $23.0 million at December 31, 1999 and 1998, respectively.

Securities available for sale: The Company's investments are all classified
as available for sale and are stated at fair value in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting for
Certain Investments in Debt and Equity Securities. This statement specifies
that available for sale securities are reported at fair value with changes in
unrealized gains and losses recorded directly to stockholders' equity. All of
the Company's investments have maturities of one year or less. Realized and
unrealized gains or losses at December 31, 1999 and 1998 were insignificant.
Fair value is based upon quoted market prices.

Long-lived assets: The Company periodically reviews long-lived assets,
including identified intangible assets, for impairment to determine whether
any events or circumstances indicate that the carrying amount of the assets
may not be recoverable. Such review includes estimating expected future cash
flows.

Property and equipment: Property and equipment are depreciated using the
following methods and useful lives:

<TABLE>
<CAPTION>
Type Of Asset Method Useful Life
- ------------- ------------- ---------------
<S> <C> <C>
Coinstar units.................................... Straight-line 60 months
Installation costs for Coinstar units............. Straight-line 36 months
Furniture and equipment........................... Straight-line 60 months
Computer equipment................................ Straight-line 36 months
Automobiles and light trucks...................... Straight-line 36 months
Leasehold improvements............................ Straight-line 60 to 84 months
</TABLE>

In order to achieve volume discounts, the Company prepurchases certain
components of the Coinstar units. When a component is placed into service, the
cost is transferred to the appropriate Coinstar equipment account and
depreciated accordingly.

During 1997, the Company upgraded certain components of the Coinstar unit.
As a result, a provision for additional depreciation in the amount of $107,054
was made to write down the recorded value of the obsolete equipment. During
1998, the Company reduced the carrying value of certain components of the
Coinstar unit

41
<PAGE>

COINSTAR, INC. and SUBSIDIARIES

CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

resulting in a provision for additional depreciation of $170,097. During 1999,
the Company wrote off certain obsolete equipment resulting in a charge of
$483,000. During 1999, the Company received a refund for overpaid use tax
attributable to Coinstar units, which resulted in the reduction of the basis
of the Coinstar units and a reduction in depreciation expense.

Other assets: Other assets include lease and utility deposits, deferred
financing fees for the Company's long-term debt facilities and amounts
relating to software development costs, in accordance with Statement of
Position 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use. Such assets are amortized on a straight-line basis
over two to ten years.

Revenue recognition: Coin processing fees are recognized at the time the
customers' coins are counted by the Coinstar unit. Units in service with the
top two retail distribution partners in 1997 accounted for approximately 25.6%
and 17.2%, respectively, of the Company's revenues. In 1998, the top two
retail distribution partners accounted for approximately 18.7% and 18.9%,
respectively, of the Company's revenues. In 1999, the top two retail
distribution partners accounted for approximately 31.9% and 11.2%,
respectively, of the Company's revenue.

Start-up activities: All start-up costs incurred by the Company relating to
the development of domestic and international markets and e-services are
expensed as incurred.

Fair value of financial instruments: The following methods and assumptions
were used to estimate the fair value of each class of financial instruments:

The carrying amounts for cash and cash equivalents, short-term investments,
and accounts payable approximate fair value because of the short maturity of
these instruments. The fair value of the Company's senior subordinated
discount notes is based on the quoted market price on the last day of the
year. The fair value of the Company's senior revolving line, included in long
term debt, approximates the carrying amount due to its variable rate of
interest.

At December 31, 1999 and 1998, the carrying amount and estimated fair value
of such financial instruments for which fair value can be determined are as
follows:

<TABLE>
<CAPTION>
1999 1998
---------------- ----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------- -------- -------
(In thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents.................... $78,737 $78,737 $37,688 $37,688
Short-term investments....................... 9,295 9,295 4,182 4,182
Accounts payable............................. 4,867 4,867 3,828 3,828
Long-term debt............................... 60,424 64,224 85,684 76,950
</TABLE>

Stock-based compensation: The Company accounts 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. SFAS No. 123, Accounting for Stock-Based Compensation, has been
adopted by the Company for disclosure of certain additional information
related to its stock option plans.

Use of estimates: The preparation of financial statements in conformity with
generally accepted accounting principles 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. Actual results could differ from those estimates.

42
<PAGE>

COINSTAR, INC. and SUBSIDIARIES

CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

New accounting pronouncement: In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards ("SFAS")
133, Accounting for Derivative Instruments and Hedging Activities. This
pronouncement requires an entity to recognize all derivatives as either assets
or liabilities in the statement of financial position and measure those
instruments at fair value. The Company is currently evaluating the effects of
SFAS 133; however, management believes the impact of adoption will not be
material to the financial statements, taken as a whole. SFAS 133 is effective
for fiscal years beginning after June 15, 2000.

NOTE 3: ACCRUED LIABILITIES

Accrued liabilities consisted of the following at December 31:

<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Funds in transit....................................... $31,265,037 $22,982,686
Accrued liabilities to service contract providers...... 1,278,058 1,021,890
Accrued liabilities for taxes.......................... 1,934,922 921,353
Accrued liabilities for interest payable............... 2,090,183 --
Accrued liabilities for marketing expenses............. 2,532,637 509,924
Other.................................................. 2,316,755 1,551,481
----------- -----------
$41,417,592 $26,987,334
=========== ===========
</TABLE>

NOTE 4: LONG-TERM DEBT

Long-term debt, including current portion, consisted of the following at
December 31:

<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Senior subordinated discount notes..................... $60,980,000 $94,999,999
Senior revolving line.................................. 500,000 --
Equipment loan......................................... -- 1,456,491
Less unamortized discounts............................. 1,056,118 9,329,582
----------- -----------
60,423,882 87,126,908
Less current portion................................... -- 1,442,460
----------- -----------
Long-term debt......................................... $60,423,882 $85,684,448
=========== ===========
</TABLE>

Senior subordinated discount notes: On October 22, 1996, the Company
completed a private placement offering of 95,000 units, each of which
consisted of a $1,000 principal amount of 13% senior subordinated discount
notes (the "Notes"), due at maturity in 2006, and warrants to purchase seven
shares of common stock of the Company, at an exercise price of $.01 per
warrant share, subject to adjustment under certain circumstances. Imputed
interest on the discount notes, as represented by the original issue discount
of $29,413,154, accrues until October 1999, at which time interest is payable
in semi-annual installments through maturity.

The Notes are not redeemable at the option of the Company prior to October
1, 2001, other than from the proceeds of a public equity offering. The Notes
are redeemable at the option of the Company, in whole or in part, at any time
on and after October 1, 2001, at specified redemption prices for the relevant
year of redemption, plus accrued and unpaid interest to the date of
redemption.

43
<PAGE>

COINSTAR, INC. and SUBSIDIARIES

CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

NOTE 4: LONG-TERM DEBT (Continued)

In the event of a change of control (as defined in the Notes), each holder
of the Notes has the option to require the Company to repurchase such holder
notes at 101% of the accreted value thereof on the date of repurchase plus
liquidated damages. The Notes are subordinate in rank to all existing and
future senior indebtedness of the Company. The indenture pursuant to which the
Notes were issued contains certain covenants that, among other things, limit
the ability of the Company to make dividend payments, make investments,
repurchase outstanding shares of stock, prepay other debt obligations, incur
additional indebtedness, effect asset dispositions, engage in sale and
leaseback transactions, consolidate, merge or sell all or substantially all of
the Company's assets, engage in transactions with affiliates, or permit its
restricted subsidiaries to effect certain transactions.

Subsequent to the completion of the Company's initial public offering and
pursuant to a related Notes Registration Rights Agreement between the Company
and the initial purchasers of the Notes (the "Registration Rights Agreement"),
the Company completed an exchange offer of the Notes to satisfy its
obligations under the Registration Rights Agreement. The Notes were exchanged
for otherwise substantially identical notes registered under the Securities
Act of 1933, as amended.

The Notes were recorded net of discount of $30,410,654, and the warrants
issued in connection with the Notes were recorded as $997,500 of contributed
capital, each as determined by the relative fair values of the Notes and the
warrants as of the closing date. In addition, the Company has recorded
deferred financing fees related to the Notes of $2,714,354. Additional costs
associated with the exchange offer of $121,063 were added to the deferred
financing cost. The deferred financing costs and discount attributable to the
warrants are being amortized over the term of the Notes.

Early retirement of debt: The Company recorded an extraordinary charge of
$3.2 million, which consisted of premiums paid on the pre-payment of $34
million of Notes, and the write-off of their related deferred financing costs.

Principal payments: Scheduled principal payments on long-term debt are as
follows:

<TABLE>
<S> <C>
February 2005................................................. $ 500,000
October 2006.................................................. 60,980,000
-----------
61,480,000
Less unamortized discounts.................................... 1,056,118
-----------
$60,423,882
===========
</TABLE>

Credit Agreement: On February 19, 1999, the Company entered into a Credit
Agreement with Imperial Bank, for itself and as agent of Bank Austria
Creditanstalt Corporate Finance, Inc. ("Bank Austria" and, together with
Imperial Bank, the "Lenders"). The Credit Agreement provides for a credit
facility of up to $25 million, consisting of revolving loans of $5 million
from each of the Lenders, and term loans of $5 million from each of the
Lenders. The Credit Agreement bears interest at Imperial Bank's prime rate
plus 200 basis points (10.50% at December 31, 1999) and expires in February
2005. The Credit Agreement requires the Company to maintain minimum deposits
with Imperial Bank and to maintain certain financial covenants during the term
of the agreement, which, among other things, prohibits the Company from paying
dividends without the Lenders' consent. In addition, amounts available under
the term loans will increase to $7.5 million per Lender after the Company has
satisfied certain debt ratios.

44
<PAGE>

COINSTAR, INC. and SUBSIDIARIES

CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

NOTE 4: LONG-TERM DEBT (Continued)

In connection with the Credit Agreement, the Company issued to each of the
Lenders a warrant to purchase 51,326 shares of its common stock. The exercise
price for the warrants, which will expire on February 19, 2009, is $12.177 per
share. The values of the warrants issued in connection with the Credit
Agreement were recorded as contributed capital and represent discounts, which
are being amortized ratably over the term of the related debt.

NOTE 5: COMMITMENTS

Lease commitments: The Company entered into two lease agreements for office
space that commenced April 1, 1997, and September 1, 1997, and expire on March
31, 2002 and August 31, 2004, respectively. The agreements require the Company
to pay a portion of operating costs and minimum monthly payments, which
escalate annually, based on a stated schedule. Each agreement allows the
Company to renew each lease for one consecutive period of five years.

The Company has entered into capital lease agreements to finance the
acquisition of certain Coinstar equipment, computer equipment, and
automobiles. The Company retains title to such assets. These capital leases
have terms of 36 months at imputed interest rates, that range from 9.5% to
10.64%. Assets under capital lease obligations aggregated $2,825,155 and
$2,300,694, net of $903,476 and $1,122,119 of accumulated amortization, at
December 31, 1999 and 1998, respectively.

A summary of the Company's minimum lease obligations as of December 31,
1999, are as follows:

<TABLE>
<CAPTION>
Capital Operating
Leases Leases
--------- ----------
<S> <C> <C>
2000...................................................... $ 743,634 $1,319,404
2001...................................................... 552,766 1,349,440
2002...................................................... 252,090 1,177,844
2003...................................................... -- 1,122,723
2004...................................................... -- 759,617
Thereafter................................................ -- --
--------- ----------
Total minimum lease commitments........................... 1,548,490 $5,729,028
==========
Less amounts representing interest........................ 141,548
---------
Present value of lease obligation......................... 1,406,942
Less current portion...................................... 649,640
---------
Long-term portion......................................... $ 757,302
=========
</TABLE>

Rental expense was $1,362,783, $1,365,148, and $889,506 for the years ended
December 31, 1999, 1998 and 1997, respectively.

Service providers: As of December 31, 1999, the Company had outstanding
service contracts with several service providers. These contracts generally
cover a one- to two-year period and have cancellation clauses ranging from 30
to 60 days.

Purchase commitments: The Company has entered into certain purchase
agreements with suppliers of Coinstar units, which require aggregate purchases
in the amount of $7,599,127 in 2000.

45
<PAGE>

COINSTAR, INC. and SUBSIDIARIES

CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

NOTE 5: COMMITMENTS (Continued)

Concentration of suppliers: The Company currently buys a significant
component of the Coinstar unit from a single supplier. Although there are a
limited number of suppliers for the component, management believes that other
suppliers could provide similar equipment, which would require certain
modifications. Accordingly, a change in suppliers could cause a delay in
manufacturing and a possible slow-down of growth, which could materially
adversely, affect future operating results.

Letter of credit: As of December 31, 1999 the Company had available secured
irrevocable letters of credit with three banks which totaled $6.6 million.
These letters of credit, which expire through March 2000, are available to
collateralize certain Company obligations to third parties. As of December 31,
1999, no amounts were outstanding under these letters of credit agreements.

NOTE 6: STOCKHOLDERS' EQUITY

The Company has authorized 5,000,000 shares of its preferred stock ($.001
par value), none of which was outstanding at December 31, 1999 and 1998.

On July 9, 1997, the Company completed its initial public offering of
3,000,000 shares of common stock at a purchase price of $10.50 per share for
proceeds, net of issuance costs, of $28.4 million. As a result of the
Company's initial public offering, 649,775 shares of Series A and 895,506
shares of Series B Preferred Stock outstanding were converted to common stock.
Shares of Series A Preferred Stock were converted into shares of the Company's
common stock on a one-for-one basis, and Series B shares were converted on a
basis of 1.142857 shares of common stock for each share of preferred stock.

In connection with various financing transactions, the Company issued
warrants that entitled the holders to purchase shares of the Company's common
stock and Series B, C, D, E-2, and E-3 Preferred Stock. All preferred stock
warrants were converted to common stock warrants upon completion of the
Company's initial public offering on a basis of 1.142857 common stock warrants
for each Series B Preferred Stock warrant, and on a one-for-one basis for the
Series C, D, E-2, and E-3 Preferred Stock warrants. Certain warrants, which
were to expire upon the closing of the initial public offering, were exercised
for 352,907 shares of common stock at an aggregate exercise price of $1.26
million.

Certain warrants, which also were to expire upon the closing of the initial
public offering, were exercised on a cashless basis resulting in the issuance
of 1,035,715 shares of common stock. The warrants issued in connection with
the sale of the Notes were exercised with cash payments or on a cashless
basis, resulting in the issuance of an aggregate of 664,937 shares of common
stock. The remaining warrants have expiration dates from June 28, 1998, to
December 15, 2000, and have been recorded at amounts, which reflect
management's best estimate of fair value on the date of issuance.

On February 19, 1999, the Company issued warrants in connection with its
credit agreement with Imperial Bank to purchase 102,652 shares of common
stock. The exercise price for the warrants, which will expire on February 19,
2009, is $12.177 per share.

On March 3, 1999, the Company acquired from Compucook, Inc., assets
consisting of Internet domain names, software, fixed assets, contracts, and
web site content. In consideration of the purchase, the Company issued 25,000
common stock warrants at an exercise price of $15.63 per warrant, which expire
on March 2, 2004.

46
<PAGE>

COINSTAR, INC. and SUBSIDIARIES

CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

NOTE 6. STOCKHOLDERS' EQUITY

A summary of the warrants outstanding for the three years in the period
ended December 31, 1999, follows:

<TABLE>
<CAPTION>
Series B Series C
Common Stock Preferred Stock Preferred Stock
----------------------- ------------------- ----------------------
Number of Exercise Number of Exercise Number of Exercise
Shares Price Shares Price Shares Price
--------- ------------ --------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
OUTSTANDING, January 1,
1997................... 665,000 $ .01 43,752 $4.00 1,327,061 $3.00-4.00
Issued................. -- -- -- -- -- --
Exercised.............. (665,000) .01 (43,752) 4.00 (1,277,830) 3.00-4.00
Conversion to common
stock warrants........ 1,042,981 3.25-15.61 -- -- (49,231) 3.25
--------- ------------ -------- ----- ---------- ----------
OUTSTANDING, December
31, 1997 and 1998...... 1,042,981 3.25-15.61 -- -- -- --
Issued................. 127,652 12.18-15.63 -- -- -- --
Exercised.............. (100,057) 3.25-4.00 -- -- -- --
Forfeited.............. (42,924) 3.25-4.00
--------- ------------ -------- ----- ---------- ----------
OUTSTANDING,
December 31, 1999...... 1,027,652 $11.40-15.63 -- -- -- --
========= ======== ==========
<CAPTION>
Series D Series E-2 Series E-3
Preferred Stock Preferred Stock Preferred Stock
----------------------- ------------------- ----------------------
Number of Exercise Number of Exercise Number of Exercise
Shares Price Shares Price Shares Price
--------- ------------ --------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
OUTSTANDING, January 1,
1997 794,346 4.00-4.25 350,000 11.40 550,000 15.61
Issued................. -- -- -- -- -- --
Exercised.............. (700,596) 4.00-4.25 -- -- -- --
Conversion to common
stock warrants........ (93,750) 4.00 (350,000) 11.40 (550,000) 15.61
--------- ------------ -------- ----- ---------- ----------
OUTSTANDING, December 31
1997, 1998, & 1999..... -- -- -- -- -- --
========= ======== ==========
</TABLE>

In November 1998, the Board of Directors approved the adoption of a
Stockholder Rights Plan under which all stockholders receive rights to
purchase shares of a new series of Preferred Stock. The rights are exercisable
only if a person or group acquires 20 percent or more of the Company's common
stock or announces a tender offer for 20 percent or more of the common stock.
If a person acquires 20 percent or more of the Company's common stock, all
rightsholders, except the purchaser, will be entitled to acquire the Company
common stock at a 50 percent discount. The rights trade with the common stock,
unless and until they are separated upon the occurrence of certain future
events. The Board of Directors may terminate the Rights Plan at any time or
redeem the rights prior to the time a person acquires more than 20 percent of
Coinstar's common stock.

In April 1999, the Company acquired certain assets consisting of Internet
domain names, fixed assets, contracts, and web site content from Nu World
Marketing Limit Inc. In consideration for the purchase, the Company issued
25,000 shares of common stock.

In June 1999, the Company completed a public offering of 4,000,000 shares of
common stock at a purchase price of $22.375 per share for net proceeds of
approximately $83.8 million, net of issuance costs. In July 1999,

47
<PAGE>

COINSTAR, INC. and SUBSIDIARIES

CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
the underwriters exercised their option to purchase additional 466,400 shares
of common stock at a purchase price of $22.375 per share for net proceeds of
approximately $9.8 million, net of issuance costs.

NOTE 7: INCOME TAXES

The components of the Company's deferred tax asset at December 31, 1999 and
1998 are as follows:

<TABLE>
<CAPTION>
December 31,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Tax loss and credit carry forwards.................... $32,854,000 $24,236,000
Depreciation and amortization......................... (5,410,000) (3,614,000)
Subordinated debt discount amortization............... 7,312,000 7,124,000
Other................................................. 493,000 216,000
----------- -----------
35,249,000 27,962,000
Valuation allowance................................... (35,249,000) (27,962,000)
----------- -----------
$ 0 $ 0
=========== ===========
</TABLE>

A valuation allowance in the full amount of the net deferred tax asset
balance has been established as it is uncertain that the Company will be able
to realize such tax assets in the future. At December 31, 1999, the Company
had net operating loss and credit carry forwards in the amount of $96,629,000,
which expire through 2019.

The Company recorded deferred tax benefits of $7,287,000, $8,113,000, and
$10,036,000, for each of the years ended December 31, 1999, 1998, and 1997. A
valuation allowance in the amount of the deferred tax benefit was recorded
each year.

NOTE 8: STOCK-BASED COMPENSATION PLANS

In March 1997, the Company adopted the 1997 Equity Incentive Plan, under
which options granted to employees generally vest over four years and expire
after 10 years. The Company has also granted certain options under the 1997
Equity Incentive Plan that have accelerated vesting provisions that are based
on specified performance goals being met. If these goals are met, the options
vest immediately. If the goals are not met, the options vest after five years.
All options with performance-accelerated vesting that were granted in 1998
were vested in 1998. The Equity Incentive Plan is an amendment and restatement
of the Company's 1992 Stock Option Plan, as amended. The Company has reserved
a total of 3,580,000 shares of common stock for issuance under the 1997 Equity
Incentive Plan. Stock options have been granted to officers and employees to
purchase common stock at prices ranging from $0.25 to $25.125 per share which
represented management's best estimate of fair market value at the dates of
grant. The Company did not recognize any compensation expense related to the
options issued under the 1997 Equity Incentive Plan.

In March 1997, the Company adopted the Non-Employee Directors' Stock Option
Plan, under which the Board of Directors has provided for the automatic grant
of options to purchase shares of common stock to non-employee directors of the
Company. The Company has reserved a total of 200,000 shares of common stock
for issuance under the Non-Employee Directors' Stock Option Plan. Stock
options have been granted to non-employee directors to purchase common stock
at prices of $15.625 and $25.125 per share, which represents management's best
estimate of fair market value at the date of grant.

48
<PAGE>

COINSTAR, INC. and SUBSIDIARIES

CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

NOTE 8: STOCK-BASED COMPENSATION PLANS (Continued)

The price ranges of all options exercised were $0.25 to $1.50 in 1998, and
$0.25 to $13.38 in 1999. At December 31, 1999, there were 3,244,997 shares of
unissued common stock reserved for issuance of which 443,128 shares were
available for future grants. Numbers of common and converted Series B
Preferred options under the plans are as follows as of December 31:

<TABLE>
<CAPTION>
1999 1998 1997
------------------- ------------------- ------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
--------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Number of common shares
under option:
Outstanding, beginning
of year............... 1,678,559 $ 7.08 978,502 $5.76 614,950 $0.52
Granted................ 1,567,654 12.14 1,033,944 7.81 544,000 9.93
Series B Preferred
options converted to
common stock options -- -- -- -- 39,998 3.50
Exercised.............. (224,453) 3.61 (84,636) .51 (199,078) 0.39
Canceled or expired.... (219,891) 9.01 (249,251) 7.19 (21,368) 6.94
--------- --------- --------
Outstanding, end of
year................... 2,801,869 10.03 1,678,559 7.08 978,502 5.76
========= ========= ========
Exercisable, end of
year................... 805,063 $ 8.13 464,811 $5.46 192,385 $3.52
========= ========= ========
Number of Series B
preferred shares
under option:
Outstanding, beginning
of year............... -- -- -- -- 35,000 $4.00
Converted to common
stock options......... -- -- -- -- (35,000) 4.00
--------- --------- --------
Outstanding, end of
year................... -- -- -- -- --
========= ========= ========
Exercisable, end of
year................... -- -- -- -- -- --
========= ========= ========
</TABLE>

As a result of the Company's initial public offering, all Series B Preferred
stock options converted to common stock options on a 1.142857 to one basis.

The following table summarizes information about common stock options
outstanding at December 31, 1999:

<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------- ----------------------------------
Number of options Weighted average Number of options
outstanding at remaining Weighted average exercisable at Weighted average
Exercise price December 31, 1999 contractual life exercise price December 31, 1999 exercise price
- -------------- ----------------- ---------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
$ 0.25-3.50............. 149,667 6.03 $ 1.01 130,075 $ 1.04
3.75-7.75.............. 119,226 8.74 5.73 50,310 6.29
8.00-8.00.............. 542,421 8.11 8.00 275,433 8.00
8.13-9.50.............. 133,360 8.27 8.79 60,213 8.78
9.51-9.98.............. 25,000 9.84 9.81 0 0
10.00-13.94............. 1,689,161 9.00 10.86 252,498 10.04
13.95-25.125............ 143,034 9.47 22.11 36,534 22.53
--------- -------
2,801,869 805,063
========= =======
</TABLE>

49
<PAGE>

COINSTAR, INC. and SUBSIDIARIES

CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

NOTE 8: STOCK-BASED COMPENSATION PLANS (Continued)

In March 1997, the Company adopted the Employee Stock Purchase Plan (the
"ESPP") under Section 423(b) of the Internal Revenue Code. Under the ESPP, the
Board of Directors may authorize participation by eligible employees,
including officers, in periodic offerings. The Company has reserved a total of
400,000 shares of common stock for issuance under the Employee Stock Purchase
Plan. Eligible employees may participate through payroll deductions in amounts
related to their basic compensation. At the end of each offering period,
shares are purchased by the participants at 85% of the lower of the fair
market value at the beginning or the end of the offering period. As of
December 31, 1999, payroll deductions totaling $1,411,478 on behalf of
approximately 236 employees were collected for the purchase of shares. Actual
shares purchased by participating employees as of December 31, 1999 totaled
176,032 at an average price of $8.65.

The Company applies APB Opinion No. 25 and related interpretations in
accounting for its plans. Accordingly, no compensation cost has been
recognized for its stock option grants. The weighted average fair value of
options granted during 1999, 1998, and 1997 were $8.04, $3.46 and $2.80,
respectively. The fair value of each option granted during 1999, 1998, and
1997 is estimated on the date of grant using the Black-Scholes option-pricing
model with the following assumptions: four to five year expected life from
date of grant; 84% annualized stock volatility for 1999; 49% stock volatility
for 1998 and 48% stock volatility for 1997; risk-free interest rates from 4.6%
to 6.2%; and no dividends during the expected term. Had compensation costs for
the Company's stock-based compensation plans been determined based on the fair
value at the grant dates for awards under those plans consistent with the
method prescribed in SFAS No. 123, Accounting for Stock-Based Compensation,
the Company's net loss and net loss per share would have increased to the pro
forma amounts indicated below:

<TABLE>
<CAPTION>
December 31,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net loss:
As reported........................ $(21,372,770) $(23,972,872) $(29,593,362)
Pro forma.......................... (24,640,875) (25,512,452) (30,211,943)
Net loss per share, basic and
diluted:
As reported........................ (1.20) (1.58) (3.81)
Pro forma.......................... (1.38) (1.68) (3.89)
</TABLE>

In January 1997, the Board of Directors approved an agreement for
acceleration of exercise provisions for certain stock options granted to
certain employees. Under the terms of the agreement, these employees are
allowed to exercise unvested stock options. Any shares purchased by an
employee relating to unvested stock options will be held in escrow until such
options are vested. In addition, the Company has the right to repurchase such
shares prior to the applicable date of vesting should the employees terminate
their employment status. The agreement has not established a new measurement
date for the affected stock options.

50
<PAGE>

COINSTAR, INC. and SUBSIDIARIES

CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

NOTE 9: LOSS PER SHARE

The weighted average number of shares outstanding used to compute basic and
diluted loss per share were 17,856,579, 15,150,463, and 7,761,425 for the
years ended December 31, 1999, 1998, and 1997, respectively. Because the
results from operations reflect a net loss for all years presented, basic and
diluted loss per share is calculated based on the same weighted average number
of shares outstanding.

The following warrants, options and preferred stock were not included in the
computation of diluted loss per share, as of December 31, because the effect
was antidilutive:

<TABLE>
<CAPTION>
1999 1998 1997
----------------------- ---------------------- ----------------------
Exercise Exercise Exercise
Number Price Number Price Number Price
--------- ------------- --------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Stock warrants.......... 1,027,652 $ 11.40-15.63 1,042,981 $ 3.25-15.61 1,042,981 $ 4.00-15.61
Common stock options.... 2,801,869 0.25-25.125 1,678,559 0.25-13.94 978,502 0.25-13.94
</TABLE>

NOTE 10: RETIREMENT PLAN

In July 1995, the Company adopted a tax-qualified employee savings and
retirement plan under Section 401(k) of the Internal Revenue Code of 1986 (the
"Plan") for all employees who satisfy the age and service requirements under
the Plan. The Plan is funded by voluntary employee salary deferral of up to
15% of annual compensation and employer matching contributions of up to 6% of
annual compensation. Effective October 1, 1998, the Company adopted an
amendment to the Plan, whereby participating employees are 100% vested for the
Company matched contributions. The Company contributed $139,560, $170,243 and
$36,297 to the plan for the years ended December 31, 1999, 1998 and 1997.

NOTE 11: LEGAL PROCEEDINGS

During 1999, The Company was involved in litigation concerning alleged
patent infringements with CoinBank Automated Systems, Inc. On October 12,
1999, the Company settled the litigation. The settlement provided for the
dismissal with prejudice of each party's respective claims. As part of the
settlement, CoinBank granted the Company a worldwide, perpetual, non-exclusive
license to certain CoinBank technology and a purchase option to purchase
CoinBank Automated Systems, Inc. In consideration for the purchase option,
CoinBank received $600,000 and 30,000 shares of the Company's common stock.
The settlement ended the dispute over the patents-in-suit and included a
release and covenant not to sue. At the expiration of the option, the Company
decided not to buy CoinBank Automated Systems, Inc.

NOTE 12: TERMINATION OF SUPPLIER RELATIONSHIP

Through April 1999, Scan Coin AB of Malmo, Sweden, was the Company's sole
source provider of its coin counting device. Coinstar and Scan Coin have been
in a contract dispute since September 1998, at which time Scan Coin claimed
that the Company had breached the contract and made claims to certain of the
Company's intellectual property. On May 5, 1999, Scan Coin terminated its
agreement with the Company and reasserted the breach of contract claim and the
claim to certain of the Company's intellectual property. The parties have been
working to settle the dispute amicably since that time. There is no assurance,
however, that the disagreement will be settled amicably, and litigation may
commence.

51
<PAGE>

COINSTAR, INC. and SUBSIDIARIES

CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

NOTE 13: SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

Following is a presentation of selected financial data for each of the four
quarters of 1999 and 1998:

<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------------------------
Dec.
Dec 31, Sept. 30, June 30, Mar 31, 31, Sept. 30, June 30, Mar 31,
1999 1999 1999 1999 1998 1998 1998 1998
------- --------- -------- ------- ------- --------- -------- -------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statements of Operations
Data:
Revenue................. $21,960 $21,723 $18,258 $15,791 $14,802 $13,576 $10,472 $ 8,823
Expenses:
Direct operating....... 10,938 10,783 9,176 7,939 7,458 7,141 6,142 5,823
Regional sales and
marketing............. 2,756 1,294 1,012 1,318 1,077 930 854 917
Product research and
development........... 1,441 2,035 1,155 940 1,138 867 1,329 1,410
Selling, general and
administrative........ 4,135 3,877 3,628 3,381 3,579 3,531 3,726 3,276
Depreciation and
amortization.......... 5,934 5,698 4,580 4,103 3,669 3,635 3,120 2,813
------- ------- ------- ------- ------- ------- ------- -------
Loss from operations.... $(3,244) $(1,964) $(1,293) $(1,890) $(2,119) $(2,528) $(4,699) $(5,416)
Other income (expense):
Interest income........ 918 1,151 118 163 206 273 386 501
Interest expense....... (2,381) (3,089) (2,993) (2,851) (2,827) (2,758) (2,660) (2,571)
Other income
(expense)............. (831) -- 19 44 78 59 63 39
------- ------- ------- ------- ------- ------- ------- -------
Net loss before
extraordinary item..... $(5,538) $(3,902) $(4,149) $(4,534) $(4,662) $(4,954) $(6,910) $(7,447)
======= ======= ======= ======= ======= ======= ======= =======
Extraordinary loss
related to early
retirement of debt..... (2,506) (744) -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Net loss................ $(8,044) $(4,646) $(4,149) $(4,534) $(4,662) $(4,954) $(6,910) $(7,447)
======= ======= ======= ======= ======= ======= ======= =======
Loss per share, basic
and diluted............ $ (0.40) $ (0.23) $ (0.26) $ (0.30) $ (0.31) $ (0.33) $ (0.46) $ (0.49)
======= ======= ======= ======= ======= ======= ======= =======
Weighted average shares
outstanding, basic and
diluted................ 20,123 20,016 15,852 15,358 15,216 15,187 15,116 15,080
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>

NOTE 14: BUSINESS SEGMENT INFORMATION

SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information establishes standards for the way that companies report
information about operating segments. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers.

The Company generates substantially all of its revenues through a common
delivery infrastructure, and therefore the Company has only one reportable
segment. Substantially all revenues are generated from domestic sources.
Substantially all Company long-lived assets are physically located within the
United States.

The Company's chief operating decision maker bases decisions on allocations
of resources using readily available information. As of December 31, 1999,
such information consisted of the Company's consolidated information. The
Company will continue to evaluate its operating and reportable segments based
upon information available to and used by the chief operating decision maker.

52
<PAGE>

COINSTAR, INC. and SUBSIDIARIES

CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

NOTE 15: SUBSEQUENT EVENT

On February 10, 2000, Meals.com, Inc., the Company's e-services subsidiary,
sold equity to an outside investor group for $5.5 million, which represented
approximately an 11% interest. As part of the financing, Coinstar, Inc.
invested $10.0 million of cash in exchange for preferred stock and provided a
$15.6 million credit facility. To date, the Company has expended $5.6 million
on behalf of Meals.com, Inc. These expenditures served as the initial draw,
bringing the credit facility's available balance to $10.0 million. Interest
accretes on the credit facility at Imperial Bank's prime commercial lending
rate plus 300 basis points.

On March 16 and on March 24, 2000, Meals.com, Inc. granted options to buy
shares of its common stock to its employees and employees of Coinstar, Inc.
Such options were issued with an exercise price equal to the fair market value
of the common stock on the date of grant. Unearned compensation has been
recorded for the options issued to certain Coinstar, Inc. employees based on
the requirements outlined in SFAS No. 123, Accounting for Stock Based
Compensation, and Emerging Issues Task Force Bulletin No. 96-18, Accounting
for Equity Instruments That Are Issued to Other Than Employees for Acquiring,
or in Conjunction with Selling, Goods or Services, for options issued to non-
employees.

53
<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit Number Description of Document
-------------- -----------------------
<C> <S>
3.1(1) Amended and Restated Certificate of Incorporation of the
Registrant in effect after the closing of the initial public
offering.
3.2(1) Amended and Restated Bylaws of the Registrant.
4.1 Reference is made to Exhibits 3.1 through 3.2.
4.2(1) Specimen Stock Certificate.
4.3(1) Second Amended and Restated Investor Rights Agreement, dated
August 27, 1996, between the Registrant and certain investors,
as amended October 22, 1996.
4.4(1) Indenture between Registrant and The Bank of New York dated
October 1, 1996.
4.5(1) Warrant Agreement between Registrant and The Bank of New York
dated October 22, 1996.
4.6(1) Notes Registration Rights Agreement between Registrant and
Smith Barney Inc. dated October 22, 1996.
4.7(1) Warrant Registration Rights Agreement between Registrant and
Smith Barney Inc. dated October 22, 1996.
4.8(1) Specimen 13% Senior Discount Note Due 2006.
4.9(3) Rights Agreement dated as of November 12, 1998 between
Registrant and American Securities Transfer and Trust, Inc.
4.10(3) Registrant's Certificate of Designation of Series A Preferred
Stock. Reference is made to Exhibit A of Exhibit 4.9.
4.11(3) Form of Rights Certificate. Reference is made to Exhibit B of
Exhibit 4.9.
4.12(4) Credit Agreement, dated February 19, 1999, between Coinstar,
Inc. and Imperial Bank, for itself and as agent for Bank
Austria Creditanstalt Corporate Finance, Inc.
4.13(4) Form of Warrant, dated February 19, 1999, issued to Imperial
Bank.
4.14(4) Form of Warrant, dated February 19, 1999, issued to Bank
Austria Creditanstalt Corporate Finance, Inc.
4.15(4) Registration Rights Agreement dated February 19, 1999, between
Coinstar, Inc. and Imperial Bank.
4.16(4) Registration Rights Agreement dated February 19, 1999, between
Coinstar, Inc. and Bank Austria Creditanstalt Corporate
Finance, Inc.
4.17(5) Senior secured note dated February 10, 2000, executed by
Meals.com, Inc. on behalf of Coinstar, Inc.
10.1(1) Registrant's 1997 Equity Incentive Plan.
10.2(1) Registrant's 1997 Employee Stock Purchase Plan.
10.3(1) Registrant's 1997 Non-Employee Directors' Stock Option Plan.
10.4(1) Form of Indemnity Agreement between the Registrant and its
executive officers and directors.
10.5(1) Series E Preferred Stock and Warrant Purchase Agreement between
Registrant and Acorn Ventures, Inc. dated August 27, 1996.
10.6(1) Office Building Lease between Registrant and Factoria Heights
dated June 1, 1994, as amended on January 24, 1997.
10.7(1) Sublease between Registrant and Maruyama U.S., Inc. dated
January 15, 1997.
10.8(1) Lease agreement between Registrant and Spieker Properties, L.P.
dated January 29, 1997.
10.9(2) Manufacturing Agreement between Registrant and SeaMed
Corporation dated May 14, 1998.
10.10(1) Purchase Agreement between Registrant and Smith Barney Inc.
dated October 22, 1996.
12.1 Ratio of Earnings to Fixed Charges.
21.1(6) Subsidiaries.
23.1 Consent of Deloitte & Touche LLP.
27.1 Financial Data Schedule.
</TABLE>
- ---------------------
(1) Incorporated by reference to the Registrant's Registration Statement on
Form S-4 (No. 333-33233).

(2) Incorporated by reference to the Registrant's Quarterly Report on Form 10-
Q for the Quarter Ended June 30, 1998.

(3) Incorporated by reference to the Registrant's Quarterly Report on Form 10-
Q for the Quarter Ended September 30, 1998.

(4) Incorporated by reference to the Registrant's current Report on Form 8-K
(File Number 000-22555) filed by Coinstar on March 3, 1999.

(5) Incorporated by reference to the Current Report on Form 8-K (File Number
000-22555) filed by Coinstar on February 18, 2000.

(6) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1998.

<PAGE>

Exhibit 12.1

COINSTAR, INC.

COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES

<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
EARNINGS:
Net loss............... $(21,372,770) $(23,972,872) $(29,593,362) $(15,967,335) $(6,168,715)
ADD BACK FIXED
CHARGES:
Interest expense
including amortization
of deferred financing
costs................. 11,314,177 10,816,858 9,821,619 2,661,374 207,687
Assumed interest
component of rent
expense (1)........... 454,261 454,594 297,095 120,187 99,843
------------ ------------ ------------ ------------ -----------
Total fixed charges.. 11,768,438 11,271,452 10,118,714 2,781,561 307,530
------------ ------------ ------------ ------------ -----------
Adjusted earnings...... $ (9,604,332) $(12,701,420) $(19,474,648) $(13,185,774) $(5,861,185)
============ ============ ============ ============ ===========
Ratio of earnings to
fixed charges......... (0.82) (1.13) (1.92) (4.74) (19.06)
============ ============ ============ ============ ===========
Deficiency of earnings
to fixed charges...... $(21,372,770) $(23,972,872) $(29,593,362) $(15,967,335) $(6,168,715)
============ ============ ============ ============ ===========
</TABLE>
- ---------------------
(1) Estimated as one-third of operating lease rent expenses.

<PAGE>

Exhibit 23.1

INDEPENDENT AUDITORS' CONSENT

We consent to the incorporation by reference in Registration Statement Nos.
333-30985 and 333-89975 of Coinstar, Inc. on Form S-8 of our report dated
February 4, 2000 (March 24, 2000 as to Note 15), included in this Annual
Report on Form 10-K of Coinstar, Inc. for the year ended December 31, 1999.

/s/ Deloitte & Touche LLP

Seattle, Washington
March 30, 2000

<PAGE>

<ARTICLE> 5

<S> <C> <C>
<PERIOD-TYPE> 3-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> OCT-01-1999 JAN-01-1999
<PERIOD-END> DEC-31-1999 DEC-31-1999
<CASH> 78,736,908 78,736,908
<SECURITIES> 9,294,825 9,294,825
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 90,369,189 90,369,189
<PP&E> 111,749,270 111,749,270
<DEPRECIATION> 43,649,321 43,649,321
<TOTAL-ASSETS> 163,380,475 163,380,475
<CURRENT-LIABILITIES> 46,933,771 46,933,771
<BONDS> 0 0
0 0
0 0
<COMMON> 157,737,504 157,737,504
<OTHER-SE> (102,471,984) (102,471,984)
<TOTAL-LIABILITY-AND-EQUITY> 163,380,475 163,380,475
<SALES> 0 0
<TOTAL-REVENUES> 21,959,461 77,732,560
<CGS> 0 0
<TOTAL-COSTS> 25,204,664 86,123,749
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 2,380,858 11,314,177
<INCOME-PRETAX> (5,536,284) (18,123,026)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (5,536,284) (18,123,026)
<DISCONTINUED> 0 0
<EXTRAORDINARY> (2,506,239) (3,249,744)
<CHANGES> 0 0
<NET-INCOME> (8,042,523) (21,372,770)
<EPS-BASIC> (.40) (1.20)
<EPS-DILUTED> (.40) (1.20)

</TABLE>