Redbox 2005 Annual Report Download - page 23

Cash and cash equivalents, cash in machine or in transit, and cash being processed: We consider all
highly liquid securities purchased with a maturity at purchase of three months or less to be cash equivalents.
Cash in machine or in transit represents coin residing in our coin-counting or entertainment services
machines, cash being processed by carriers, or cash deposits in transit. Cash being processed represents cash
which we are obligated to use to settle our accrued liabilities payable to retailers. We have the contractual right
and obligation to pick up and process all coins in our machines, although in certain circumstances, we may not be
able to immediately access the coins until they have been deposited into one of our regional bank accounts.
We have estimated the value of our entertainment services coin-in-machine which was approximately $5.0
million and $4.4 million at December 31, 2005 and 2004, respectively. Coin-in-machine represents the cash
deposited into our entertainment services machines at period end which has not yet been collected. Based on our
estimate of coin-in-machine, we have recognized the related revenue, the corresponding reduction to inventory
and increase to accrued liabilities which represents the direct operating expenses associated with the
coin-in-machine estimate.
Inventory: Inventory, which consists primarily of plush toys and other products dispensed from our
entertainment services machines, is stated at the lower of cost or market. The cost of inventory includes mainly
the cost of materials, and to a lesser extent, labor, overhead and freight. Cost is determined using the average cost
method. Inventory, which is considered finished goods, consists of purchased items ready for resale or use in
vending operations.
Property and equipment: Property and equipment are depreciated in accordance with the methods
disclosed in Note 2 to our Consolidated Financial Statements. We are depreciating the cost of our coin-counting
and entertainment services machines over periods that range from 3 to 10 years and have determined that these
lives are appropriate based on our analysis which included a review of historical data and trends, as well as other
relevant factors. We will continue to evaluate the useful life of our coin-counting and entertainment services
machines, 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 our machines may cause actual results to
differ based on different assumptions or conditions.
Purchase price allocations: In connection with our acquisitions of our entertainment and e-payment
subsidiaries, we have allocated the respective purchase prices plus transaction costs to the estimated fair values
of assets acquired and liabilities assumed. These purchase price allocation estimates were based on our estimates
of fair values and estimates from third-party consultants. Adjustments to our purchase price allocation estimates
are made based on our final analysis of the fair value during the allocation period, which is within one year of the
purchase date.
Goodwill and intangible assets: Goodwill represents the excess of cost over the estimated fair value of net
assets acquired, which is not being amortized. We test goodwill for impairment at the reporting unit level on an
annual or more frequent basis as determined necessary. SFAS No. 142 requires a two-step goodwill impairment
test whereby the first step, used to identify potential impairment, compares the fair value of a reporting unit with
its carrying amount including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill
of the reporting unit is considered not impaired and the second test is not performed. The second step of the
impairment test is performed when required and compares the implied fair value of the reporting unit goodwill
with the carrying amount of that goodwill. If the carrying amount of the reporting unit goodwill exceeds the
implied fair value of that goodwill, an impairment loss shall be recognized in an amount equal to that excess.
Based on the annual goodwill test for impairment we performed for the years ended December 31, 2005 and
2004, we determined there is no impairment of our goodwill.
Our intangible assets are comprised primarily of retailer relationships acquired in connection with our
acquisition of ACMI in 2004, Amusement Factory in 2005 and other smaller acquisitions during 2004 and 2005.
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