Redbox 2005 Annual Report Download - page 11

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entertainment services machines to levels that would enable us to operate profitably in lower density markets. If
we are unable to do so, our future operating results could be adversely affected.
We may be unable to identify and define product trends, as well as to anticipate, gauge and react to changing
consumer demands in a timely manner.
To be competitive, we need to develop new services that are accepted by the market and establish third-
party relationships necessary to develop and commercialize such services. For example, toy and other products
dispensed in our entertainment services machines must appeal to a broad range of consumers whose preferences
cannot be predicted with certainty and are subject to change. If we misjudge the market for our toy products, we
may be faced with significant excess inventories for some products and missed opportunities for other products.
In addition, because we place orders for toy products well in advance of purchases by consumers, we could
experience excess inventory if our consumers purchase fewer products than anticipated. In order to develop and
commercialize new non-entertainment vending products or services, we will need to enhance the capabilities of
our coin-counting and entertainment services machines and our network and establish market acceptance of such
products or services. We cannot assure you that new or additional products or services that we may attempt to
commercialize will be successful.
We may be unable to achieve the strategic and financial objectives for our entry into the entertainment
services business, and our failure to do so could materially and adversely affect our business, operating results
and financial condition.
We first entered the entertainment services business as a result of our acquisition of ACMI on July 7, 2004.
Since that time, we have further expanded this line of business through acquisitions, such as Amusement Factory.
Our entertainment services business now represents our largest source of revenue. There are a number of
financial and operational risks associated with our entry into this line of business.
• We may be unable to leverage the historically lower growth and lower margin entertainment services
business with our coin counting business.
• We may be unable to duplicate the operating results for the entertainment services business in line with
pre-acquisition historical results or our expectations.
• We may be unable to successfully integrate the acquired business’ disparate operational, technical and
administrative functions. Acquisition integration will take time and will divert significant management
attention and other assets.
• We may be unable to adequately anticipate and address the operational risks that are peculiar to this line
of business and the entertainment services industry generally. For example, as compared to our coin-
counting business, our entertainment services business incurs higher operating expenses, due in part to
such factors as maintaining inventory of consumer products to support our skill-crane and bulk vending
machine businesses. Our experience in evaluating inventory of this kind is limited.
• We may have assumed unknown liabilities when we acquired various entities and assets that now
comprise our entertainment services business.
• We may incur adverse accounting charges. For example, in connection with our acquisition of ACMI,
we recorded approximately $136.1 million of goodwill in connection with the acquisition that will not
be amortized, but instead must be tested periodically for impairment. Any impairment of this goodwill
in the future could result in substantial charges to our operating results.
• We are subject to certain operational restrictions in view of our senior secured credit facility used to
finance our acquisition of ACMI.
For these and other reasons, we may be unable to achieve the strategic and financial objectives for our entry
into the entertainment services business. Our failure to do so could materially and adversely affect our
businesses, operating results and financial condition.
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