Redbox 2003 Annual Report Download - page 22

accepted in the United States of America. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those
related to property and equipment, stock-based compensation, income taxes and contingencies. We base our
estimates on historical experience and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under
different assumptions or conditions.
Property and Equipment: Property and equipment are depreciated in accordance with the methods disclosed
in Note 2 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. We are
depreciating the cost of our Coinstar machines over a five-year period and have determined that a life of five years
is appropriate based on our analysis that included a review of historical data and trends, as well as other relevant
factors. We will continue to evaluate the useful life of our Coinstar units, as well as our other property and
equipment as necessary, and will determine the need to make changes when and if appropriate. Any changes to the
estimated lives of the Coinstar units may cause actual results to differ based on different assumptions or conditions.
Stock-based Compensation: We have several stock-based compensation programs which are described
more fully in Note 10 to our Consolidated Financial Statements included elsewhere in this Annual Report on
Form 10-K. We account for stock-based awards to employees using the intrinsic value method in accordance
with Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees.Ifwe
had determined compensation cost for our stock-based compensation consistent with the method prescribed in
SFAS No. 123, Accounting for Stock-Based Compensation, our net income would have decreased by $4.6
million in 2003, our net income would have increased by $451,000 in 2002 and our net loss would have
increased in 2001 by $4.7 million. The increase in net income in 2002 is mainly due to a one-time income tax
benefit recognized in 2002 from stock options outstanding in years prior to 2002.
Deferred Tax Assets and Income Tax Benefit: Deferred tax assets totaling $49.8 million were recognized
on our balance sheet in the fourth quarter of 2002, resulting in a tax benefit of $42.6 million. Prior to this time,
we provided a full valuation allowance against our deferred tax assets. The deferred tax assets primarily represent
the income tax benefit of net operating losses (“NOL”) we have incurred since inception. As required by SFAS
No. 109, Accounting for Income Taxes, we did not recognize any tax assets on our balance sheet until it was
“more likely than not” that the tax assets related to our domestic operations would be realized. We have retained
a valuation allowance against our deferred tax assets resulting from our International operations. Based upon a
review of historical operating performance and our expectation that we will generate sustainable consolidated net
income for the foreseeable future, we believe it is more likely than not that the domestic deferred tax assets will
be fully utilized. We will reevaluate our ability to utilize our NOL carryforwards in future periods and, in
compliance with SFAS No. 109, record any resulting adjustments that may be material to deferred income tax
expense. In addition, we will reduce the deferred income tax assets for the benefits of NOL carryforwards
actually used in future quarters. The future impact on net income may therefore be positive or negative,
depending on the net result of such adjustments and charges.
Impairment of Intangible Assets: We assess the impairment of intangibles and long-lived assets whenever
events or changes in circumstances indicate that the carrying value may not be recoverable. Intangible assets are
also reviewed for impairment annually or whenever events or changes in circumstances indicate that the carrying
value may not be recoverable. Factors considered important that could trigger an impairment review include
significant underperformance relative to expected historical or projected future operating results, changes in the
manner of our use of the acquired assets and the strategy for our overall business and negative industry or
economic trends.
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