Redbox 2003 Annual Report Download - page 21

primarily of depreciation charges on Coinstar units, and to a lesser extent, depreciation on computer equipment,
leased automobiles, furniture and fixtures and leasehold improvements.
Since 1995, we have devoted significant resources to building our 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 units. The cost of this expansion and the significant depreciation expense of our
installed network resulted in significant operating losses in prior years. We have maintained an operating profit
for over a year through continuous improvements to our systems and processes. We expect to continue to
evaluate new marketing and promotional programs to increase the breadth and rate of customer utilization of our
Coinstar service. We also intend to continue to engage in systems and product research and development. We
believe our prime retail locations form a strategic platform from which we will be able to deliver additional
value-added products and services to consumers and our retail partners that may create additional revenue
streams independent of coin counting. In the future we envision the Coinstar unit as a touch-point for a range of
consumer products and services such as prepaid cards, prepaid cellular services and payroll debit cards.
We believe that our future coin-counting revenue growth, operating margin gains and profitability will
depend on the success of our efforts to increase customer usage, retain our current retail partners, expand our
installed base with retail partners in existing markets, expand into new geographies and distribution formats and
undertake ongoing marketing and promotional activities that will sustain the growth in unit coin volume over
time. Given the unpredictability of the timing of installations with retail partners and the resulting revenues, the
growth in coin processing volumes of our installed base and the continued market acceptance of our services by
consumers and retail partners, our operating results for any future periods may be subject to significant variation,
and we believe that period-to-period comparisons of our results of operations are not necessarily predictive and
should not be relied on as indications of future performance.
On February 6, 2003, we acquired substantially all of the assets and assumed certain liabilities of Prizm
Technologies, Inc., a privately held corporation. Prizm’s proprietary technology allows consumers to conduct a
range of automated prepaid wireless transactions at its TOP-UP™terminals, such as adding minutes to a prepaid
wireless handset. The purchase was accounted for as a business combination under the provisions of Statement of
Financial Accounting Standards (“SFAS”) No. 141, Business Combinations. The fair value of the assets acquired
and liabilities assumed were included in our financial statements as of February 6, 2003, the acquisition date. The
purchase price of this acquisition did not have a material impact on our consolidated financial position. In June
2003, we entered into an agreement with the shareholders of Prizm pursuant to which they agreed to relinquish
any claims for additional consideration in connection with the “earn-out” provisions in the asset purchase
agreement in exchange for a maximum payment of $400,000 contingent on meeting certain terms and conditions
through the end of the year. These terms and conditions were met in full and we remitted payment by December
31, 2003. Goodwill was previously recorded in accordance with SFAS No. 142, Goodwill and Other Intangible
Assets, which will be tested periodically for impairment.
On July 9, 2003, we announced that we were unable to reach mutually acceptable economic terms with
Safeway, Inc. with respect to continuing to provide Coinstar units and related services in the Safeway
supermarket chain. As a result, our contract with Safeway was terminated effective August 6, 2003. Until we
de-install all machines, we will continue to receive revenue from Coinstar units remaining in Safeway stores.
Coinstar units in Safeway stores generated approximately $13.7 million or 7.8% of our 2003 revenue. We
anticipate that approximately 1,000 machines will be de-installed from Safeway stores. We removed 90% of
our machines from Safeway supermarket locations in the third and fourth quarters of 2003 and plan to
complete the de-installation process during the first quarter of 2004. As a result of the return of the machines
from Safeway, we canceled purchase orders for additional machines.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our
consolidated financial statements, which have been prepared in accordance with accounting principles generally
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