Redbox 2008 Annual Report Download - page 80

that new distribution terms proposed by USHE would prohibit Redbox from renting Universal Studios DVDs for
45 days after their public release, would limit how many Universal Studios DVDs each Redbox kiosk could carry,
and would require Redbox to destroy, rather than sell at a discount, previously-viewed DVDs from its kiosks.
Redbox asserts that USHE’s conduct violates antitrust laws, constitutes copyright abuse, and tortiously interferes
with contracts between Redbox and its DVD suppliers. On December 5, 2008, USHE and its co-defendants moved
to dismiss the complaint. As of December 31, 2008, the lawsuit was still in the preliminary pleading stages with no
substantive rulings by the court.
We currently conduct limited manufacturing operations and obtain key hardware components used in our coin-
counting and entertainment services machines from a limited number of suppliers. Although we use a limited
number of suppliers, we believe that other suppliers could provide similar equipment, which may require certain
modifications or may have a longer lead time from order date. Accordingly, a change in suppliers could cause a
delay in manufacturing and a possible slow-down of growth, which could have a materially adverse affect on future
operating results.
NOTE 17: RELATED PARTY AND OTHER TRANSACTIONS
As of December 31, 2007 and 2006, approximately $219,000 and $448,000, respectively, of our accounts
receivable balance is due from a related party of our e-payment subsidiary. This receivable arose in the ordinary
course of business and relates to the purchase of prepaid air time. In addition, approximately $5.5 million of our
other accrued liabilities balance at December 31, 2007 is our best estimate of the amount due to a related party of our
e-payment subsidiary relating to the amount that was refunded to us on their behalf relating to a telecommunication
fee refund as a result of an Internal Revenue Service ruling that telecommunication fees paid during the period of
March 1, 2003 through July 31, 2006 were improperly collected by the United States government. In the third
quarter of 2007, we have recognized $2.7 million of income from equity investments, or 49% of the $5.5 million
payable, related to our equity interest in the third party. We received this refund in the amount estimated in February
2008.
During the third quarter of 2007, direct operating expenses in our income statement included a telecommu-
nication fee refund in the amount of $11.8 million as a result of an Internal Revenue Service ruling that
telecommunication fees paid during the period of March 1, 2003 through July 31, 2006 were improperly collected
by the United States government. The $11.8 million represents the refund amount as filed on our fiscal year 2006
federal income tax return. This telecommunication fee refund, along with the $5.5 million amount received by us on
behalf of our equity investment related party and accrued interest, totaling of $17.6 million is included in accounts
receivable, net as of December 31, 2007. In February 2008, we received the refund in the amount that we estimated.
In the second quarter of 2008 we settled a proxy contest which resulted in one additional member to our Board
of Directors, and one additional independent director to be added by March 1, 2009. Expenses related to this proxy
contest, including the solicitation of stockholders, were approximately $4.1 million. We also incurred expenses
associated with the write-off of in-process acquisition expenses of $1.0 million for due diligence and professional
service costs in connection with acquisitions that were being considered in the past and for which discussions have
now been terminated.
During the second quarter of 2008, we entered into a settlement agreement with Incomm Holding, Inc. and
certain of its affiliates (“Incomm”). As a result, we and Incomm have agreed to dissolve a related party of our
E-payment subsidiary of which we own 49%. A previous liability owed to the related party was relieved. The net
settlement, after attorney fees, was approximately $2.0 million of income.
NOTE 18: SUBSEQUENT EVENTS
Acquisition of Redbox: On February 12, 2009, we entered into a Purchase and Sale Agreement (the “GAM
Purchase Agreement”) with GetAMovie Inc. (“GAM”), pursuant to which we agreed to acquire (i) GAM’s 44.4%
voting interests (the “Interests”) in Redbox and (ii) GAM’s right, title and interest in a Term Promissory Note dated
May 3, 2007 made by Redbox in favor of GAM in the principal amount of $10.0 million (the “Note”), in exchange
for a combination of cash and our common stock, par value $0.001 per share (the “Common Stock”).
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