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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10 - K
X Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for fiscal year ended March 31, 2002 or Transition report pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission file number 0-15159
RENTRAK CORPORATION
(exact name of registrant as specified in its charter)
Oregon 93-0780536
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification Number)
7700 NE Ambassador Place, Portland, Oregon 97220
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (503) 284-7581
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Common stock $.001 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K, or any amendment to
this Form 10-K [ ]
As of June 24, 2002, the aggregate market value of the registrant's common stock
held by non-affiliates of the registrant, based on the last sales price as
reported by NASDAQ, was $50,412,605.
As of June 24, 2002, the Registrant had 9,827,231 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
PORTIONS OF THE DEFINITIVE PROXY STATEMENT FOR THE 2002 ANNUAL MEETING OF THE
SHAREHOLDERS ARE INCORPORATED BY REFERENCE INTO PART II and III OF THIS FORM
10-K
1
TABLE OF CONTENTS
Item PART I Page
1. Business 3
2. Properties 8
3. Legal Proceedings 8
4. Submission of Matters to a Vote of Security Holders 9
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters 9
6. Selected Financial Data 11
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
7A. Quantitative and Qualitative Disclosures About Market Risk 22
8. Financial Statements and Supplementary Data 23
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 53
PART III
10. Directors and Executive Officers of the Registrant 53
11. Executive Compensation 53
12. Security Ownership of Certain Beneficial Owners 54
and Management
13. Certain Relationships and Related Transactions 54
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 55
2
PART I
ITEM 1. BUSINESS
GENERAL
The Company's primary business is the collection, processing, analysis and
presentation of rental and sales information regarding videocassettes and
digital videodiscs ("DVD's") leased to home video specialty stores and other
retailers by way of its Pay Per Transaction system (the "PPT System"). Under the
Company's PPT System, home video specialty stores and other retailers that rent
videocassettes and DVD's ("Units") to consumers ("Retailers"), including grocery
stores and convenience stores, lease Units, and other media from Rentrak for a
low up-front fee and share a portion of each retail rental transaction with the
Company. The Company's PPT System generated 71 percent, 71 percent and 83
percent of total revenues in fiscal years 2002, 2001 and 2000, respectively.
The Company engages in additional lines of business through the following
subsidiaries:
3PF.COM, Inc. (formerly ComAlliance), provides order processing, inventory
management, and fulfillment services to Internet retailers and wholesalers and
to other businesses requiring just-in-time fulfillment. 3PF.COM, Inc.'s Web-site
can be accessed at www.3PF.COM.
BlowOut Video, Inc., sells videocassettes and DVD's ("Units") through its
Website www.blowoutvideo.com, and through three retail outlets.
PAY-PER-TRANSACTION SYSTEM
The Company distributes Units principally to home video specialty stores through
its PPT System. The PPT System enables Retailers to obtain Units at a
significantly lower initial cost than if they purchased the Units from
traditional video distributors.
Under the PPT System, after the Retailer is approved for participation in the
PPT System, Units are leased to the Retailer for a low initial fee (the "Order
Processing Fee") plus a percentage of revenues generated by the Retailer from
rentals to consumers (the "Transaction Fee"). The Company retains a portion of
each Order Processing Fee and Transaction Fee and remits the remainder to the
appropriate motion picture studios or other licensee or owner of the rights to
certain video programming ("Program Suppliers") that hold the distribution
rights to the Units. Due to the lower cost of "bringing Units in the door",
Retailers generally obtain a greater number of Units under the PPT System than
the traditional distribution method. The intended benefit to the Retailer is a
higher volume of rental transactions, as well as a reduction in capital cost and
risk. The intended benefit to the Program Supplier is an increase in the total
number of Units shipped, resulting in increased revenues and opportunity for
profit. The intended benefit to the consumer is the potential of finding more
copies of certain newly released hit titles and a greater selection of other
titles at Retailers participating in the PPT System ("Participating Retailers").
The Company markets its PPT System throughout the United States and Canada.
Following the sale of a 5.6 percent interest in Rentrak Japan Co., Ltd.
("Rentrak Japan"), a Japanese corporation which markets a similar service to
video retailers in Japan, in October 2001, the Company no longer received
revenues from the Asian markets.
In February 1998, the Company entered into a Shareholders Agreement and a PPT
License
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Agreement with Columbus Holdings Limited and Rentrak UK Limited to develop the
Company's PPT distribution and information processing business in the United
Kingdom through Rentrak UK. The Company presently owns a 92 percent equity
interest in Rentrak UK. As of March 31, 2000, Rentrak UK was not generating
income or positive cash flow and the Company's investment of $222,000 was
written off. During the year ended March 31, 2001, Rentrak UK continued to
generate no income or cash flow. During the year ended March 31, 2002, Rentrak
UK improved its performance producing minimal income and cash flow. Management
of the Company has made changes to decrease the cost of operations, including
space and staffing costs, and it is continuing to closely evaluate the financial
performance of operations. Management is considering various alternatives
including selling or closing down Rentrak UK's operations.
The Company currently offers substantially all of the titles of a number of
Program Suppliers, including Buena Vista Pictures Distribution, Inc., a
subsidiary of The Walt Disney Company, Paramount Home Video, Inc., Universal
Studios Home Video, Inc., Twentieth Century Fox Home Entertainment (formerly Fox
Video), a subsidiary of Twentieth Century Fox Film Corporation and MGM Home
Entertainment, a subsidiary of the Metro Goldman Meyer Company. The Company's
arrangements with Program Suppliers are of varying duration, scope and
formality. In some cases, the Company has obtained Units pursuant to contracts
or arrangements with Program Suppliers on a title-by-title basis and in other
cases the contracts or arrangements provide that all titles released for
distribution by such Program Supplier will be provided to the Company for the
PPT System. Many of the Company's agreements with Program Suppliers, including
all major Program Suppliers, may be terminated upon relatively short notice.
Therefore, there is no assurance that any of the Program Suppliers will continue
to distribute Units through the PPT System, continue to have available for
distribution titles which the Company can distribute on a profitable basis, or
continue to remain in business. Even if titles are otherwise available from
Program Suppliers to the Company, there is no assurance that they will be made
available on terms acceptable to the Company. During the last three years, the
Company has not experienced any material difficulty acquiring suitable Units for
the Company's markets on acceptable terms and conditions from Program Suppliers
that have agreed to provide the same to the Company. The Company has one Program
Supplier that supplied product that generated 17 percent, a second that
generated 15 percent, and a third that generated 13 percent of Rentrak revenues
for the year ended March 31, 2002. There were no other Program Suppliers who
provided product that generated more than 10 percent of revenues for the year
ended March 31, 2002.
The Company currently receives a significant amount of product from three
Program Suppliers. Although management does not believe that these relationships
will be terminated in the near term, a loss of any of these suppliers could have
an adverse effect on the Company's operating results.
Certain Program Suppliers have requested, and the Company has provided,
financial or performance commitments from the Company, including advances,
warrants, or guarantees, as a condition of obtaining certain titles. The Company
determines whether to provide such commitments on a case-by-case basis,
depending upon the Program Supplier's success with such titles prior to home
video distribution and the Company's assessment of expected success in home
rental distribution. The Company intends to continue this practice of providing
such commitments and there is no assurance that this practice will not in the
future result in losses which may be material.
4
DISTRIBUTION OF CASSETTES AND DVD'S ("UNITS")
The Company's proprietary Rentrak Profit Maker Software (the "RPM Software")
allows Participating Retailers to order Units through their Point of Sale
("POS") system software and provides the Participating Retailers with
substantial information regarding all offered titles. Ordering occurs via a
networked computer interface. To further assist the Participating Retailers in
ordering, the Company also produces a monthly product catalogue called "Ontrak."
To be competitive, Retailers must be able to rent their Units on the "street
date" announced by the Program Supplier for the title. Rentrak has contracted
with its subsidiary 3PF.COM to distribute Rentrak's Units via overnight air
courier to assure delivery to Participating Retailers on the street date. The
freight costs of such distribution comprise a portion of the Company's cost of
sales.
COMPUTER OPERATIONS
To participate in the Company's PPT System, Retailers must install Rentrak
approved computer software and hardware to process all of their rental and sale
transactions. Participating Retailers are required to use one of the POS
software vendors approved by the Company as conforming to the Company's
specifications. The Company's RPM Software resides on the Retailer's POS
computer system and transmits a record of PPT transactions to the Company over a
telecommunications network. The RPM Software also assists the Retailer in
ordering newly released titles and in managing the inventory of Units.
The Company's information system processes these transactions and prepares
reports for Program Suppliers and Participating Retailers. In addition, it
determines variations from statistical norms for potential audit action. The
Company's information system also transmits information on new titles and
confirms orders made to the RPM Software at the Retailer location.
RETAILER AUDITING
From time to time, the Company audits Participating Retailers in order to verify
that they are reporting all rentals and sales of Units on a consistent, accurate
and timely basis. Several different types of exception reports are produced
weekly. These reports are designed to identify any Participating Retailers who
vary from the Company's statistical norms. Depending upon the results of the
Company's analysis of the reports, the Company may conduct an in-store audit.
Audits may be performed with or without notice and any refusal to allow such an
audit can be cause for immediate termination from the PPT System. If audit
violations are found, the Participating Retailer is subject to fines, audit
fees, immediate removal from the PPT System and/or repossession of all leased
Units.
SEASONALITY
The Company believes that the home video industry is seasonal because Program
Suppliers tend to introduce hit titles at two periods of the year, early summer
and Christmas. Since the release to home video usually follows the theatrical
release by approximately six months (although significant variations occur on
certain titles), the seasonal peaks for home video also generally occur in early
summer and at Christmas. The Company believes its volume of rental transactions
reflects, in part, this seasonal pattern, although the growth of Program
Suppliers, titles available to the Company, and Participating Retailers may tend
to obscure any seasonal effect. The Company believes such seasonal variations
may be reflected in future quarterly patterns of its revenues and
5
earnings.
RETAILER FINANCING PROGRAM
In 1992, the Company established a Retailer Loan Program whereby, on a selective
basis, it provided financing to Participating Retailers that the Company
believed had the potential for substantial growth in the industry. The
underlying rationale for this program was the belief that the Company could
expand its business and at the same time participate in the rapid growth
experienced by the video retailers in which it invested. During fiscal 2001, the
Company discontinued new financings under this program and provided reserves of
$6.6 million representing the entire outstanding balance of the program loans.
The Company continues to seek enforcement of agreements entered into in
connection with this program in accordance with their terms to the extent
practicable.
COMPETITION
The Cassette and DVD distribution business is a highly competitive industry that
is rapidly changing. The traditional method of distributing these Cassettes and
DVD's ("Units") to Retailers is through purchase transactions; i.e., a Retailer
purchases Units from a distributor and then offers the Units for rental or sale
to the general public. As described in greater detail above (see
"Pay-Per-Transaction System"), the Company's PPT System offers Retailers an
alternative method of obtaining Units. Accordingly, the Company faces intense
competition from all of the traditional distributors, including Ingram
Entertainment, Inc., VPD, and Video One Canada, Ltd. These and other traditional
distributors have extensive distribution networks, long-standing relationships
with Program Suppliers and Retailers, and, in some cases, significantly greater
financial resources than the Company.
In the last two years certain traditional distributors have taken steps to offer
Units to Retailers on a revenue sharing basis. For example, several traditional
distributors have executed licensing agreements with Supercomm, Inc.
("Supercomm"), a wholly-owned subsidiary of The Walt Disney Company, to market
product on revenue sharing terms. Several traditional distributors have also
executed revenue sharing agreements with motion picture studios ("Studios").
The Company also competes with Supercomm on two levels: (1) domestically - for
processing data for certain Studios' direct relationships with Blockbuster Video
and other Retailers; and (2) internationally in certain markets. Supercomm also
processes data for traditional distributors such as Ingram who then compete with
the Company for revenue sharing Units as well as traditional Units.
The Company also faces direct competition from the Studios. Beginning in 1997,
several major Studios offered Retailers discounted pricing if such Retailers
substantially increased the quantity of Units purchased. Also, some major
Studios have offered Units to Retailers on a lease basis. In addition, all major
Studios sell Units directly to major Retailers including Blockbuster, the
world's largest chain of home video specialty stores. The Company believes all
of the major Studios have executed direct revenue sharing agreements with
Blockbuster and Hollywood Entertainment, the world's second largest chain of
home video specialty stores. The Company also believes that certain Studios have
executed direct revenue sharing agreements with several other large Retailers.
The Company does not believe that the Studios have executed direct revenue
sharing agreements with other smaller Retailers, but there can be no assurance
that they will not do so in the future.
6
The Studios also compete with the Company by releasing certain Unit titles on a
"sell-through" basis; i.e., they bypass the traditional rental period by selling
the Units directly to consumers at a price of approximately $9.95 -- $19.95. To
date, such "sell-through" distribution has generally been limited to certain
newly released hit titles with wide general family appeal. However, because the
Company's PPT business is partially dependent upon the existence of a rental
period, a shift toward such "sell-through" distribution, particularly with
respect to popular titles, could have a material adverse effect on the Company's
business.
The Company also competes with businesses that use alternative distribution
methods to provide video entertainment directly to consumers, such as the
following: (1) direct broadcast satellite transmission systems; (2) traditional
cable television systems; (3) pay-per-view cable television systems; and (4)
delivery of programming via the Internet. Each of these distribution methods
employs digital compression techniques to increase the number of channels
available to consumers and, therefore, the number of movies that may be
transmitted. Technological improvements in this distribution method,
particularly "video-on-demand," may make this option more attractive to
consumers and thereby materially diminish the demand for Unit rentals. Such a
consequence could have a material adverse effect on the Company's business.
FOREIGN OPERATIONS
On December 20, 1989, the Company entered into an agreement with Culture
Convenience Club, Co., Ltd. ("CCC"), a Japanese corporation, which is Japan's
largest video specialty retailer. Pursuant to the agreement, the parties formed
Rentrak Japan, a Japanese corporation. Rentrak Japan was formed to implement the
PPT System in Japan. The Company provided its PPT technology and the use of
certain trademarks and service marks to Rentrak Japan, and CCC provided
management personnel, operating capital, and adaptation of the PPT technology to
meet Japanese requirements.
Beginning in 1994, the Company became entitled to a royalty of 1.67% for all
sales of up to $47,905,000 plus one-half of one percent of sales greater than
$47,905,000 in each royalty year (June 1 - May 31). Additionally, the Company
received one-time royalty payments of $1,000,000 in fiscal year 1995 and
$1,000,000 in fiscal year 1999. In December 1999, the Company received a
prepayment of $2,500,000 in exchange for $4,000,000 of credit related to the
annual royalty, which was recognized in revenues as royalties were earned under
the terms of the contract.
Effective April 2, 2001 the Company and Rentrak Japan entered into a
restructuring agreement of their relationship. The Company transferred exclusive
rights to implement its PPT System within specified countries in the Far East,
including related trademark and other intellectual property rights, to Rentrak
Japan. In exchange for the transfer, Rentrak Japan made a lump sum payment of
$5.7 million to the Company and released certain of the Company's payment
obligations totaling $1.3 million. As part of the transaction, Rentrak Japan's
obligation to pay annual royalties to the Company in connection with use of its
PPT System was terminated. (See Note 1(b) of the Notes to the Consolidated
Financial Statements.)
TRADEMARKS, COPYRIGHTS, AND PROPRIETARY RIGHTS
The Company has registered its "RENTRAK", "PPT", "Pay Per Transaction",
"Ontrak", "BudgetMaker", "DataTrak", "Prize Find" , "Blowout Video", "Fastrak",
"GameTrak", "RPM", "Videolink+", "Unless You're Rich Enough Already",
"Sportrak", "Movies For The Hungry Mind", "VidAlert", "Active Home Video",
"Movie Wizard", and "Gotta Have It Guarantee" marks under federal trademark
laws. The Company has applied and obtained registered status in several
7
foreign countries for many of its trademarks. The Company claims a copyright in
its RPM Software and considers it to be proprietary.
EMPLOYEES
As of March 31, 2002, including all subsidiaries, the Company employed 284
active employees. The Company considers its relations with its employees to be
good.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
See Note 12 of the Notes to the Consolidated Financial Statements for
information regarding the Company's business segments.
ITEM 2. PROPERTIES
The Company currently maintains its headquarter offices in Portland, Oregon
where it leases 48,807 square feet of office space. The lease began on January
1, 1997 and expires on December 31, 2006. The Company's subsidiary, 3PF.COM,
Inc., maintains two distribution facilities in Wilmington, Ohio and one in
Columbus, Ohio where it leases 102,400, 121,600 and 388,264 square feet,
respectively. These distribution facilities also include administrative office
space. These three distribution facility leases expire on June 30, 2002,
December 31, 2010 and February 28, 2008, respectively. Management believes its
office space and distribution facility space is adequate and suitable for its
current operations. However, management does recognize that the Company
currently has excess distribution facility capacity which it is addressing by
attracting new clients and tenants. Management does not anticipate a problem in
obtaining additional suitable space to meet its needs as necessary.
ITEM 3. LEGAL PROCEEDINGS
On November 15, 2000, 3PF.COM, Inc., a subsidiary of the Company, filed a
proceeding with the American Arbitration Association against Reel.com, Inc., a
division of Hollywood Entertainment Corporation ("Hollywood"), for breach of a
servicing, warehousing, and distribution agreement, and against Hollywood in
connection with its guarantee of the obligations of Reel.com, Inc., under the
agreement. 3PF.COM, Inc., sought damages in excess of $3.3 million, together
with prejudgment interest and attorney fees. On August 6, 2001, Hollywood filed
a proceeding with the American Arbitration Association against the Company for
the alleged breach of a settlement agreement among the Company, Hollywood, and
two individuals dated January 23, 2000, relating to the Company's obligation to
provide Hollywood with documents and data with regard to Hollywood's obligation
to indemnify the Company against claims by a movie studio. Hollywood sought
damages in the amount of $2.0 million. Both proceedings were settled in April
2002 by a confidential settlement agreement pursuant to which Hollywood agreed
to pay the Company $1.925 million.
On February 20, 2001, the Company filed a complaint against Ron Berger, Chairman
and Chief Executive Officer and a director of Rentrak until September 2000, in
the Circuit Court of the State of Oregon for the County of Multnomah (No.
0102-01814), seeking cancellation of shares of Rentrak common stock acquired by
Mr. Berger through an option loan program offered to the Company's officers in
June 2000 and damages for the conversion of an automobile and computer equipment
plus an over-advance payment of business expenses less setoffs. On or about
March 29, 2001, Mr. Berger filed a counterclaim seeking damages of approximately
8
$1.76 million plus attorney fees from Rentrak for conversion of Mr. Berger's
director's fees and dividends from Rentrak Japan, breach of an agreement to
compensate Mr. Berger for cancellation of options to purchase Rentrak stock,
failure to pay accumulated wages and compensation, breach of an agreement to
provide options to purchase stock in Rentrak's subsidiary 3PF.COM, Inc., and
failure to provide certain insurance benefits. On June 15, 2001, the Company
filed an amended complaint alleging tort claims arising out of Mr. Berger's
activities as an officer and director of the Company involving Video City, Inc.,
and seeking damages of not less than $6.0 million. Effective May 6, 2002, the
parties resolved the litigation pursuant to a confidential settlement agreement
pursuant to which the parties agreed to dismiss their respective lawsuits and to
seek nothing further from the other in litigation.
The Company may from time to time also be a party to legal proceedings and
claims that arise in the ordinary course of its business. In the opinion of
management, the amount of any ultimate liability with respect to these potential
actions is not expected to materially affect the financial position or results
of operations of the Company as a whole. The Company currently has no
outstanding litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders of the Company through the
solicitation of proxies or otherwise during the fourth quarter of the fiscal
year covered by this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's common stock, $.001 par value, is traded on the Nasdaq National
Market, where its prices are quoted under the symbol "RENT". As of May 31, 2002
there were approximately 314 holders of record of the Company's common stock. On
May 31, 2002, the closing sales price of the Company's common stock as quoted on
the Nasdaq National Market was $5.90.
EQUITY COMPENSATION PLAN INFORMATION
The information under the heading "Equity Compensation Plan Information" in the
Company's Definitive Proxy Statement for its 2002 Annual Meeting of Shareholders
to be filed with the Securities and Exchange Commission pursuant to Regulation
14A under the Securities Exchange Act of 1934, as amended, is incorporated
herein by reference.
9
The following table sets forth the reported high and low sales prices of the
Company's common stock for the periods indicated as regularly quoted on the
Nasdaq National Market.
QUARTER ENDED HIGH LOW
- --------------------- ------- -------
JUNE 30, 2000 $5.88 $3.12
- --------------------- ------- -------
SEPTEMBER 30, 2000 $4.16 $3.00
- --------------------- ------- -------
DECEMBER 31, 2000 $3.69 $1.50
- --------------------- ------- -------
MARCH 31, 2001 $4.09 $2.03
- --------------------- ------- -------
JUNE 30, 2001 $4.90 $2.99
- --------------------- ------- -------
SEPTEMBER 30, 2001 $3.74 $2.86
- --------------------- ------- -------
DECEMBER 31, 2001 $5.93 $3.00
- --------------------- ------- -------
MARCH 31, 2002 $8.00 $5.50
- --------------------- ------- -------
The Company issued a total of 45,000 shares of its common stock in March 2002 to
a former financial advisor pursuant to a cashless exercise and in full
satisfaction of common stock purchase warrants related to a total of 200,000
shares of common stock issued in connection with financial advisory engagement s
in 1997 and 1999. The Company relied on the exemption from registration provided
by Section 4(2) of the Securities Act of 1933 with respect to the issuance of
shares.
DIVIDENDS
Holders of the Company's common stock are entitled to receive dividends if, as,
and when declared by the Board of Directors out of funds legally available
therefore, subject to the dividend and liquidation rights of any preferred stock
that may be issued.
No cash dividends have been paid or declared during the last five fiscal years.
The present policy of the Board of Directors is to retain earnings to provide
funds for operation and expansion of the Company's business. The Company does
not intend to pay cash dividends in the foreseeable future.
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ITEM 6. SELECTED FINANCIAL DATA
- ------------------------------------------------------------------------------------------------------------------------------------
(In Thousands Except Per Share Amounts)
Year Ended March 31,
2002 2001 2000 1999 1998
---------------------------------------------------------------------------------
Statement of Operations Data
Net revenues:
Order processing fees $ 16,648 $ 18,563 $ 23,086 $ 22,420 $ 25,313
Transaction fees 44,114 55,752 61,487 72,835 78,671
Sell-through fees 6,645 6,578 7,811 11,347 9,383
Other (2) 35,207 36,974 22,788 19,043 11,060
---------------------------------------------------------------------------------
Total net revenues 102,614 117,887 115,172 125,645 124,427
Cost of sales 76,812 93,600 91,706 103,943 100,974
---------------------------------------------------------------------------------
Gross profit
25,802 24,287 23,466 21,702 23,453
Selling and administrative 20,754 34,455 28,237 17,853 16,248
expense
Net (gain) loss on litigation (1,563) (225) (7,792) 1,099 -
settlements
Other income (expense) (2) 7,895 (2,149) (1,519) 597 652
---------------------------------------------------------------------------------
Income (loss) from continuing operations before
discontinued operations and (provision) benefit
for income taxes 14,506 (12,092) 1,502 3,347 7,857
Income tax (provision) benefit (5,512) 4,515 (451) (1,304) (3,199)
---------------------------------------------------------------------------------
Income (loss) from continuing operations before
discontinued operations 8,994 (7,577) 1,051 2,043 4,658
Discontinued Operations: (1)
Gain on disposal of subsidiaries - - 2,374 - -
---------------------------------------------------------------------------------
Net income (loss) $ 8,994 $ (7,577) $ 3,425 $ 2,043 $ 4,658
---------------------------------------------------------------------------------
Earnings (loss) per share
Diluted
Continuing operations $ 0.85 $ (0.63) $ 0.10 $ 0.18 $ 0.41
Discontinued operations 0.22
---------------------------------------------------------------------------------
Earnings (loss) per common share $ 0.85 $ (0.63) $ 0.32 $ 0.18 $ 0.41
=================================================================================
Common shares and common share equivalents
used to compute diluted EPS 10,613 11,985 10,759 11,066 11,445
---------------------------------------------------------------------------------
2002 2001 2000 1999 1998
---------------------------------------------------------------------------------
Balance Sheet Data
Working Capital $ 11,636 $ 3,643 $ 9,871 $ 4,586 $ 1,062
Total Assets 38,612 39,126 50,473 49,457 51,609
Long-term Liabilities 496 1,175 1,677 - -
Stockholders' Equity 17,278 11,387 18,081 14,292 13,254
(1) See Note 13 of the Notes to the Consolidated Financial Statements.
(2) See Note 1(b) of the Notes to the Consolidated Financial Statements.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
Certain information included in the Annual Report on Form 10-K (including
Management's Discussion and Analysis of Financial Condition and Results of
Operations regarding revenue growth, gross profit margin and liquidity)
constitute forward-looking statements that involve a number of risks and
uncertainties. Forward looking statements may be identified by the use of
forward-looking words such as "may", "will", "expects", "intends",
"anticipates", "estimates", or "continues" or the negative thereof or variations
thereon or comparable terminology. The following factors are among the factors
that could cause actual results to differ materially from the forward-looking
statements: the Company's ability to continue to market the PPT System
successfully, the financial stability of the Participating Retailers and their
performance of their obligations under the PPT System, non-renewal of the
Company's line of credit, business conditions and growth in the video industry
and general economic conditions, both domestic and international; competitive
factors, including increased competition, expansion of revenue sharing programs
other than the PPT System by Program Suppliers, new technology, and the
continued availability of Cassettes from Program Suppliers. This Annual Report
on Form 10-K further describes some of these factors.
RESULTS OF OPERATIONS
RENTRAK CORPORATION
STATEMENTS OF OPERATIONS
For The Years Ended March 31, 2002, 2001, and 2000
2002 2001 2000
-------------------------------------------------------------
REVENUES $ 102,614,147 $ 117,886,955 $ 115,172,414
OPERATING COSTS AND EXPENSES
Cost of sales 76,812,474 93,600,177 91,706,290
Selling, general, and administrative 20,753,587 34,455,048 28,236,763
Net gain from litigation settlements (1,563,153) (225,000) (7,791,880)
-------------------------------------------------------------
96,002,908 127,830,225 112,151,173
-------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS 6,611,239 (9,943,270) 3,021,241
Other income (expense) 7,895,263 (2,148,673) (1,519,378)
-------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAX (PROVISION) BENEFIT
AND GAIN FROM DISPOSAL OF DISCONTINUED
OPERATIONS 14,506,502 (12,091,943) 1,501,863
Income tax (provision) benefit (5,512,471) 4,514,575 (450,559)
-------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS 8,994,031 (7,577,368) 1,051,304
Gain from disposal of discontinued operations
including income tax benefit of $483,502 - - 2,373,502
-------------------------------------------------------------
NET INCOME (LOSS) $ 8,994,031 $ (7,577,368) $ 3,424,806
=============================================================
12
FISCAL 2002 COMPARED TO FISCAL 2001
PPT OPERATIONS AND OTHER CONTINUING SUBSIDIARIES
For the year ended March 31, 2002, the Company's total consolidated revenue
decreased $15.3 million to $102.6 million from $117.9 million in the prior
fiscal year. Total consolidated revenue includes the following PPT System fees
in the PPT business segment: order processing fees generated when Cassettes and
DVD's ("Units") are ordered by and distributed to Retailers; transaction fees
generated when Retailers rent Units to consumers; sell-through fees generated
when Retailers sell Units to consumers; communication fees when Retailers'
point-of-sale systems are connected to the Company's information system; and buy
out fees when Retailers purchase Units at the end of the lease term. PPT
business segment revenues also include direct revenue sharing fees from data
tracking and reporting services provided by the Company to Studios, as well as
charges for internet services provided by the Company's subsidiary
formovies.Com, Inc. In addition, total consolidated revenue includes charges to
customers of the Company's subsidiary 3PF.COM, Inc. ("3PF"), which provides
e-commerce order processing, fulfillment and inventory management services, and
other revenues which include sales of Units through the Company's retail
subsidiary BlowOut Video, Inc., and both royalty payments from Rentrak Japan and
from the business restructuring with Rentrak Japan.
The decrease in total consolidated revenue in fiscal 2002 was primarily due to a
decrease in the PPT System revenues in the PPT business segment as the result
of: (i) a decline in the number of total titles released to the PPT System, as
well as the number of theatrical titles released and the box office performance
of those titles; and (ii) PPT "output programs" and other PPT programs that
result in an increased total number of Units leased for a reduced amount of fees
per Unit. In addition, PPT System revenue was also affected by the willingness
of program suppliers to engage in direct revenue sharing arrangements with the
largest retailer chains. These changes caused decreases in the Company's PPT
System order processing-fee revenue as well as its transaction-fee revenue. The
PPT business segment revenue decline was partially offset by an increase in
direct revenue sharing fees as the result of increased business activity from
these Studio agreements. The decrease in total consolidated revenue was
additionally due to: (i) decreased revenue from 3PF's services resulting
primarily from the loss of customers; and (ii) a decline in revenue from Blowout
Video, Inc. due to reductions in business activity and the closure of four of
its retail stores during the fiscal year. These revenue decreases were partially
offset by the royalty revenue as the result of a business restructuring with
Rentrak Japan in fiscal 2002.
In fiscal 2002, PPT business segment revenues were 73.7 million, a decrease of
$12.0 million, or 14 percent, from $85.7 million in fiscal 2001. During the
year, order processing-fee revenue decreased to $16.9 million from $19.4 million
in fiscal 2001, a decrease of $2.5 million, or 13 percent. Transaction-fee
revenue totaled $44.1 million, a decrease of $11.6 million, or 21 percent, from
$55.7 million the previous fiscal year. Sell-through revenue was $6.6 million in
fiscal 2002 as compared to $6.6 million in fiscal 2001. Communication fee
revenue was $1.3 million in fiscal 2002 as compared to $1.5 million in fiscal
2001, a decrease of $0.2 million, or 13 percent.
Also included in the PPT business segment are the following revenues: (i) direct
revenue sharing fees totaling $4.2 million in fiscal 2002, an increase of $2.3
million, or 121 percent, from the $1.9 million in fiscal 2001; and (iii) $0.6
million in other royalty and other revenues
13
earned in fiscal 2002.
Royalty and other revenue from Rentrak Japan totaled $6.4 million during fiscal
2002, as a result of the business restructuring with Rentrak Japan, compared to
$1.1 million in Rentrak Japan royalty revenue in the previous fiscal year.
Cost of sales for the PPT business segment in fiscal 2002 decreased to $56.8
million from $67.3 million the prior fiscal year, a decrease of $10.5 million,
or 16 percent. The change is primarily due to the factors that led to changes in
revenue as noted above. In fiscal 2002 the Company's PPT business segment gross
profit margin, excluding the royalty revenue from Rentrak Japan, increased to 23
percent from 21 percent the previous year.
PPT business segment selling and administrative expenses were $11.6 million in
fiscal 2002 compared to $25.1 million in fiscal 2001. This decrease of $13.5
million, or 53 percent, was primarily attributable to the following items all
reported in the quarter ended September 30, 2000: (i) a $1.3 million severance
payment to the Company's former chairman and chief executive officer; (ii) $0.6
million in legal costs and proxy solicitation costs incurred by the Company
related to the proxy contest at the 2000 annual shareholders meeting; (iii) $0.4
million in costs to reimburse the dissident shareholder group for their legal
and other costs associated with the proxy contest; (iv) $6.1 million of costs
associated with the reserve or write-off of investments related to the Company's
Retailer Financing Program; (v) $1.0 million in write-offs of investments and
other assets deemed by the Company to be non-realizable; (vi) $1.4 million in
write-offs of accounts receivable based on the Company's assessment of the
collectibility of those accounts due to changes in the financial condition and
payment ability of those customers and (vii) a $0.5 million loss realized on the
sale of stock received previously by the Company pursuant to the settlement of a
claim with a prior customer. Additionally, the Company's legal costs in fiscal
2002, related to the PPT business, decreased by an approximate $1.6 million from
the prior fiscal year.
The net gain from the litigation settlement with a prior customer of the
Company, Hollywood Entertainment, was $1,563,000 for fiscal 2002 compared to
$225,000 for fiscal 2001, an increase of approximately $1.4 million. While the
settlements in both fiscal years were related to the same prior customer, they
related to separate claims. The $1,563,000 of proceeds from the claim settled in
fiscal 2002 was received in May 2002 from Hollywood Entertainment and related to
a breach of a fulfillment contract while most of the proceeds from the
settlement relating to the $225,000 recognized in fiscal 2001 were received in
fiscal 2000 when the claim was finalized; the $225,000 represents the receipt of
an insurance settlement in fiscal 2001 relating to this claim.
PPT other income (expense) was an expense of $2.1 million in fiscal 2001
compared to income of $7.9 million for fiscal 2002, an increase of $10.0
million. This increase is primarily due to: (i) a $0.1 million decrease in
interest income; (ii) a $0.8 million decrease in interest expense due to the
payoff of the line of credit at the beginning of fiscal 2002; (iii) a decrease
in loss on the sale of investment securities, a loss realized on the sale of
stock received previously by the Company pursuant to the settlement of a claim
with a customer and the write-off of assets, or write-down of various assets to
their net realizable value, totaling $1.7 million in fiscal 2001 compared to $0
in fiscal 2002; and (iv) a $8.0 million recognition of other income related to
the business restructuring with Rentrak Japan in fiscal 2002.
14
As a result of the above, for the fiscal year ended March 31, 2002, the Company
recorded pre-tax income of $19.9 million, or 25 percent of total revenue, from
its PPT business, segment, including royalty revenue and other income from the
Rentrak Japan business restructuring, compared to a pre-tax loss of $7.6
million, or 9 percent of total revenue, in the prior fiscal year.
The Cassette and DVD distribution business is a highly competitive industry that
is rapidly changing. The effect of these changes could have a material impact on
the Company's operations. Item 1. Business--Competition of this report further
describes certain of these factors.
Included in other consolidated revenue are the results from other subsidiaries,
primarily the operations of 3PF.COM, Inc. ("3PF") and Blowout Video, Inc.
Total revenues from 3PF decreased to $17.5 million for fiscal 2002 compared to
$23.4 million for fiscal 2001, a decrease of $5.9 million, or 25 percent. This
decrease was primarily due to the loss of two key customers, one at the end of
fiscal 2001 and the other early in 2002, whose fiscal 2001 revenues totaled
approximately $9.7 million, offset partially by significant fiscal 2002 growth
of 3PF's largest customer and modest revenues from the addition of new customers
in fiscal 2002. Cost of sales was $16.9 million, a decrease of $4.8 million from
the $21.7 million recorded in fiscal 2001. This decrease is primarily due to the
corresponding decrease in revenue noted above, offset by the on-going carrying
cost of the unoccupied and unutilized distribution facility capacity. As a
percentage of total 3PF revenue, total cost of sales was 97 percent and 93
percent for fiscal 2002 and 2001, respectively. Selling and administrative
expenses decreased to $4.5 million in fiscal 2002 from $5.5 million in fiscal
2001, a decrease of $1.0 million. As a percentage of total revenue, selling and
administrative expenses increased to 26 percent for fiscal 2002 from 24 percent
for the prior fiscal year. The $1.0 million decrease was primarily due to a $0.7
million recovery of an amount reserved in fiscal 2001 for the anticipated
non-collection of one of 3PF's trade accounts due the Company as the result of a
bankruptcy filing by the customer. This decrease was also the result of
decreased compensation, advertising, travel and entertainment expenses and other
costs as the Company adjusted its overhead infrastructure to better fit the
operating size of its business. The Company expects to continually evaluate its
selling and administrative expenses and appropriately align them in conjunction
with the overall size of business it is operating.
3PF other income (expense) was an expense of $250,000 in fiscal 2002 compared to
$0 in fiscal 2001. This expense was due to a reserve for the expected
non-realization of an investment previously made in a former customer.
As a result of the foregoing factors, for the fiscal year ended March 31, 2002,
3PF recorded a pre-tax loss of $4.1 million, or 23 percent of total revenue.
This compares with pre-tax loss of $3.8 million, or 16 percent of total revenue,
in fiscal 2001.
Total revenue from BlowOut Video, Inc. decreased to $7.3 million in fiscal 2002
from $11.7 million in fiscal 2001, a decrease of $4.4 million, or 38 percent,
primarily due to the decline in overall business activity and the closure of
four of its stores during fiscal 2002. Cost of sales was $5.5 million, a
decrease of $3.2 million from the $8.7 million recorded in fiscal 2001. Total
cost of sales as a percentage of total revenue was 75 percent and 74 percent for
fiscal 2002 and 2001, respectively. As a result, the gross margin decreased to
$1.8
15
million in fiscal 2002 from $3.0 million in fiscal 2002. Selling and
administrative expenses decreased to $3.1 million in fiscal 2002 from $3.6
million in fiscal 2001, a decrease of $0.5 million, as management made
adjustments to better align the overhead structure with the decline in business
activity and operating size. As a percentage of total revenue for BlowOut Video,
Inc., selling and administrative expenses increased to 42 percent for fiscal
2002 from 31 percent for the prior fiscal year.
For the fiscal year ended March 31, 2002, BlowOut Video, Inc. recorded a pre-tax
loss of $1.3 million, or 18 percent of total revenue. This compares with a
pre-tax loss of $0.7 million, or 6 percent of total revenue, in fiscal 2001.
As a result of the above, for the fiscal year ended March 31, 2002, the Company
recorded consolidated pre-tax income from continuing operations of $14.5
million, or 14 percent of total consolidated revenue, compared to a consolidated
pre-tax loss from continuing operations of $12.1 million, or 10 percent of total
consolidated revenue, in the prior fiscal year.
The consolidated effective tax rate providing the tax provision for continuing
operations for fiscal 2002 was 38.0 percent, compared to a consolidated
effective tax rate of 37.3 percent providing the tax benefit for fiscal 2001.
The Company expects to realize the remaining tax benefit at March 31, 2002,
created in fiscal 2001 by net operating loss carryforwards, in future periods.
FISCAL 2001 COMPARED TO FISCAL 2000
CONTINUING OPERATIONS - PPT OPERATIONS AND OTHER CONTINUING SUBSIDIARIES
For the year ended March 31, 2001, the Company's total consolidated revenue
increased $2.7 million to $117.9 million from $115.2 million in the prior fiscal
year. Total consolidated revenue includes the following PPT System fees in the
PPT business segment: order processing fees generated when Cassettes and DVD's
("Units") are ordered by and distributed to Retailers; transaction fees
generated when Retailers rent Units to consumers; sell-through fees generated
when Retailers sell Units to consumers; communication fees when Retailers'
point-of-sale systems are connected to the Company's information system and buy
out fees when Retailers purchase Units at the end of the lease term. PPT
business segment revenues also include direct revenue sharing fees from data
tracking and reporting services provided by the Company to Studios, as well as
charges for internet services provided by the Company's subsidiary
formovies.Com, Inc. In addition, total consolidated revenue includes charges to
customers of the Company's subsidiary 3PF.COM, Inc., which provides e-commerce
order processing, fulfillment and inventory management services, and other
revenues which include sales of Units through the Company's retail subsidiary
BlowOut Video, Inc. and royalty payments from Rentrak Japan.
The increase in total consolidated revenue was primarily due to: (i) increased
revenue from services provided by 3PF.COM, Inc.; and partially offset by (ii)
the number of total titles released to the PPT System, as well as the number of
theatrical titles released and the box office performance of those titles. In
addition, PPT revenue was also affected by a reduction in the total number of
Cassettes leased under the PPT System, due in part to Studios offering more
titles under various "copy depth" programs, intended to increase the number of
Units in distribution by lowering the cost of rental Units to Retailers, than
they have in the past and to the willingness of program suppliers to engage in
direct revenue
16
sharing arrangements with the largest retailer chains. These changes caused
decreases in order processing and transaction revenue.
In fiscal 2001, PPT business segment revenues were $85.7 million, a decrease of
$10.7 million, or 11 percent, from $96.4 million in fiscal 2000. During the
year, order processing-fee revenue decreased to $19.4 million from $23.4 million
in fiscal 2000, a decrease of $4.0 million, or 17 percent. Transaction-fee
revenue totaled $55.7 million, a decrease of $5.7 million, or 9 percent, from
$61.4 million the previous fiscal year. Sell-through revenue was $6.6 million in
fiscal 2001 as compared to $7.8 million in fiscal 2000, a decrease of $1.2
million, or 15 percent. Communication fee revenue was $1.5 million in fiscal
2001 as compared to $1.8 million in fiscal 2000, a decrease of $0.3 million or
17 percent.
Also included in the PPT business segment are the following revenues: (i) direct
revenue sharing fees totaling $1.9 million in fiscal 2001, an increase of $0.4
million, or 27 percent, from the $1.5 million in fiscal 2000; and (ii) $0.6
million in other royalty and other revenues earned in fiscal 2001, an increase
of $0.1 million, or 20 percent from the $0.5 million in fiscal 2000.
Royalty revenue from Rentrak Japan totaled $1.1 million during fiscal 2001, a
decrease of $0.7 million or 39 percent from $1.8 million the previous year.
Cost of sales for the PPT business segment in fiscal 2001 decreased to $67.3
million from $79.6 million the prior year, a decrease of $12.3 million or 15
percent. The change is primarily due to the factors that led to changes in
revenue as noted above. In fiscal 2001, the Company's PPT business segment gross
profit margin increased to 21 percent from 17 percent the previous fiscal year.
PPT business segment selling and administrative expenses were $25.1 million in
fiscal 2001 compared to $22.5 million in fiscal 2000. This increase of $2.6
million, or 12 percent, was primarily attributable to the following items all
reported in the quarter ended September 30, 2000: (i) a $1.3 million severance
payment to the Company's former chairman and chief executive officer; (ii) $0.6
million in legal costs and proxy solicitation costs incurred by the Company
related to the proxy contest at the 2000 annual shareholders meeting and (iii)
$0.4 million in costs to reimburse the dissident shareholder group for their
legal and other costs associated with the proxy contest. While the Company wrote
off or reserved approximately $8.5 million in assets related to the Retailer
Financing Program, investments and accounts receivable during the quarter ended
September 30, 2000, it also increased reserves and wrote off other assets
totaling approximately $9.0 million during the fourth quarter of fiscal 2000.
The net gain from the litigation settlement with a prior customer of the
Company, Hollywood Entertainment, was $225,000 for fiscal 2001 compared to $7.8
million for fiscal 2000, a decrease of approximately $7.6 million. Most of the
proceeds from this settlement were received in fiscal 2000 when the claim was
finalized; the $225,000 represents the receipt of an insurance settlement in
fiscal 2001 relating to this claim.
PPT other income (expense) increased from an expense of $1.4 million in fiscal
2000 to an expense of $2.1 million for fiscal 2001, an increase of $0.7 million.
This increase is primarily due to: (i) a decrease in interest income; (ii) an
increase in interest expense due to an increased use of the line of credit in
fiscal 2001; (iii) an increase in loss on the sale of investment securities;
(iv) a $0.5 million loss realized on the sale of stock received
17
previously by the Company pursuant to the settlement of a claim with a customer
and (v) the write-off of assets or write-down of various assets to their net
realizable value.
As a result of the above, for the fiscal year ended March 31, 2001, the Company
recorded a pre-tax loss of $7.4 million, or 9 percent of total revenue, from its
PPT business segment, including royalty revenue from Rentrak Japan, compared to
pre-tax income of $2.9 million, or 3 percent of total revenue, in the prior
fiscal year.
The Cassette and DVD distribution business is a highly competitive industry that
is rapidly changing. The effect of these changes could have a material impact on
the Company's operations. Item 1. Business--Competition of this report further
describes certain of these factors.
Included in total consolidated revenue are the results from other subsidiaries,
primarily the operations of 3PF.COM, Inc. ("3PF") and Blowout Video, Inc.
Total revenues from 3PF increased to $23.4 million for fiscal 2001 compared to
$11.6 million for fiscal 2000, an increase of $11.8 million, or 102 percent.
This increase was primarily due to increased volume from existing customers.
Cost of sales was $21.7 million, an increase of $11.6 million over the $10.1
million recorded in fiscal 2000. This increase is due to: (1) a $1.1 million
increase in occupancy cost as 3PF expanded its operations into a new facility
late in fiscal 2000 to provide additional operating capacity for business
growth; (2) a $4.5 million increase in freight cost in conjunction with the
overall increase in business growth and revenue; and (3) a $4.3 million increase
in warehouse labor cost in conjunction with the overall increase in business
growth and revenue. As a percentage of total 3PF revenue, total cost of sales
was 93 percent and 87 percent for fiscal 2001 and 2000, respectively. Selling
and administrative expenses increased to $5.5 million in fiscal 2001 from $2.6
million in fiscal 2000, an increase of $2.9 million. As a percentage of total
revenue, selling and administrative expenses increased to 24 percent for fiscal
2001 from 22 percent for the prior year. This $2.9 million increase was due to
increased compensation, advertising, travel and entertainment expenses,
depreciation and other costs as the Company invested in the overhead
infrastructure to support growth in its business. Additionally, the Company
recognized $0.9 million in bad debt expense during fiscal 2001 primarily
relating to a customer that filed for bankruptcy. The Company anticipates its
selling and administrative expenses to moderate or lessen in the future in
conjunction with the overall size of business it is operating.
As a result of the foregoing factors, for the fiscal year ended March 31, 2001,
3PF recorded a pre-tax loss of $3.8 million, or 16 percent of total revenue.
This compares with pre-tax loss of $1.1 million, or 9 percent of total revenue,
in fiscal 2000.
Total revenue from BlowOut Video, Inc. increased to $11.7 million in fiscal 2001
from $9.5 million in fiscal 2000, an increase of $2.2 million, or 23 percent.
Cost of sales was $8.7 million, an increase of $2.7 million over the $6.0
million recorded in fiscal 2000. Total cost of sales as a percentage of total
revenue was 74 percent and 63 percent for fiscal 2001 and 2000, respectively. As
a result, the gross margin decreased to $3.0 million in fiscal 2001 from $3.5
million in fiscal 2000. Selling and administrative expenses increased to $3.6
million in fiscal 2001 from $3.0 million in fiscal 2000, an increase of $0.6
million. As a percentage of total revenue for BlowOut Video, Inc., selling and
administrative expenses decreased to 31 percent for fiscal 2001 from 32 percent
for the prior year.
18
For the fiscal year ended March 31, 2001, BlowOut Video, Inc. recorded a pre-tax
loss of $0.7 million, or 6 percent of total revenue. This compares with pre-tax
income of $0.3 million, or 3 percent of total revenue, in fiscal 2000.
As a result of the above, for the fiscal year ended March 31, 2001, the Company
recorded a consolidated pre-tax loss from continuing operations of $12.1
million, or 10 percent of total consolidated revenue, compared to consolidated
pre-tax income from continuing operations of $1.5 million, or 1 percent of total
consolidated revenue, in the prior fiscal year. The consolidated effective tax
rate providing the tax benefit for continuing operations for fiscal 2001 was
37.3 percent, compared to a consolidated effective tax rate of 30.0 percent
providing the tax provision for continuing operations for fiscal 2000 (see
Discontinued Operations below).
DISCONTINUED OPERATIONS
On November 26, 1996, the Company made a distribution to its shareholders of
1,457,343 shares of common stock of its then subsidiary BlowOut Entertainment,
Inc. ("BlowOut"). BlowOut is not related to the Company's wholly owned
subsidiary BlowOut Video, Inc. The operations of BlowOut were reflected as
discontinued operations in the March 31, 1996 consolidated financial statements.
During the fiscal year ended March 31, 2000, the Company recorded a gain on the
disposal of discontinued operations of $1.9 million related to BlowOut, as the
liability related to BlowOut contingencies was less than estimated. The Company
also reduced the valuation allowance that was recorded against the deferred tax
asset related to liabilities of discontinued operations. This reduction of
approximately $0.5 million in the valuation allowance was recorded as an income
tax benefit from discontinued operations in the accompanying consolidated
statement of operations. There was no remaining liability related to the
discontinued operations at March 31, 2002.
FINANCIAL CONDITION
At March 31, 2002, total assets were $38.6 million, a decrease of $0.5 million
from $39.1 million a year earlier. The Company had $12.0 million of cash on hand
at March 31, 2002, including $1.0 million of restricted cash, compared to $3.3
million at March 31, 2001, an increase of $8.7 million (see the Consolidated
Statement of Cash Flows in the accompanying Consolidated Financial Statements).
Net accounts receivable decreased $0.6 million from $11.9 million at March 31,
2001 to $11.3 million at March 31, 2002, including a $1.0 million reduction in
the allowance for doubtful accounts, primarily due to the recovery of a specific
reserve established in fiscal 2001 for the anticipated non-collection of one of
3PF's trade accounts as the result of a bankruptcy filing by the customer.
Inventory decreased $1.0 million from $3.5 million at March 31, 2001 to $2.5
million at March 31, 2002 primarily due to the reduction of business activity
and closure of four retail stores at BlowOut Video, Inc. during fiscal 2002.
Property and equipment decreased $0.5 million from $4.4 million at March 31,
2001 to $3.9 million at March 31, 2002, primarily due to the write-down of 3PF
equipment value. Total deferred tax assets decreased $6.4 million from $9.7
million at March 31, 2001 to $3.3 million at March 31, 2002, primarily due to
the utilization of a tax loss carry forward created from the loss from
continuing operations during fiscal 2001. The Company believes it will realize
the deferred tax asset as of March
19
31, 2002 in future periods. Other assets decreased $0.3 million from $4.8
million at March 31, 2001 to $4.4 million at March 31, 2002. .
At March 31, 2002, total liabilities were $21.3 million, a decrease of $6.4
million from $27.7 million at March 31, 2001. The line of credit decreased to $0
at March 31, 2002 from $1.9 million at March 31, 2001 due to the payoff of the
line balance at the beginning of fiscal 2002 primarily from working capital
available from the business restructuring with Rentrak Japan and trade
receivable collections. Accounts payable decreased $0.4 million from $18.7
million at March 31, 2001 to $18.3 million at March 31, 2002. Accrued
liabilities decreased $2.7 million from $3.4 million at March 31, 2001 to $0.7
million at March 31, 2002 primarily due to the change in estimate for accrued
tax liability totaling $1.5 million and the elimination of liabilities
associated with the business restructuring with Rentrak Japan totaling $0.6
million. Total deferred revenue decreased approximately $1.2 million from $1.6
million at March 31, 2001 to $0.4 million at March 31, 2002, primarily due to
the forgiveness of the remaining unearned prepaid royalty income credit by
Rentrak Japan in the business restructuring.
Accordingly, at March 31, 2002, stockholders' equity was $17.3 million, an
increase of $5.9 million from $11.4 million at March 31, 2001. Most of this
increase in stockholders' equity is attributable to: (i) the reduction in common
stock and capital in excess of par value as the result of the repurchase of
stock from Rentrak Japan in the business restructuring and the repurchase of
additional stock under the Company's stock repurchase program; and (ii) the
reduction in the accumulated deficit due to the consolidated net income of $9.0
million for fiscal 2002, .
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2002, the Company had cash and other liquid investments of $12.0
million, including $1.0 million of restricted cash, compared to $3.3 million at
March 31, 2001. At March 31, 2002 the Company's current ratio (current
assets/current liabilities) was 1.56 compared to 1.14 a year earlier.
In May 2000 the Company obtained a line of credit with a lender in an amount not
to exceed the lesser of (a) $12 million or (b) the sum of 85% of the net amount
of eligible accounts receivable. Interest under the credit line was payable
monthly at the bank's prime rate plus 1/4 percent (5.0 percent at March 31,
2002). The line was secured by substantially all of the Company's assets. The
terms of the credit agreement included financial covenants requiring: (1) $15
million of tangible net worth to be maintained at all times; (2) a consolidated
net profit to be achieved each fiscal year equal to or exceeding $1.00; and (3)
$5 million of working capital to be maintained at all times. The agreement also
restricted the amount of loans and indebtedness and limits the payment of
dividends on the Company's stock, among other requirements. The Company was in
compliance with the three financial covenants as of March 31, 2002. At March 31,
2002, the Company had $0 of outstanding borrowings under this agreement.
In May 2002 the Company obtained a replacement line of credit with a new lender
for the previous line of credit noted above, which was terminated at that time.
The replacement line of credit is in the amount of $4.5 million. Interest under
this credit line is variable based on the London Interbank Offering Rate (LIBOR)
plus 2 percent. The line is secured by a first priority blanket lien on all of
the Company's assets. The terms of the credit agreement include financial
covenants requiring: (1) a minimum current ratio of 1.10:1.0, measured
20
quarterly; (2) a consolidated quarterly and year-to-date net income equal to or
exceeding $1.00; (3) a leverage ratio of 1.50:1.0, measured quarterly and (4)
$16 million of tangible net worth, measured quarterly. The agreement expires
July 1, 2003. The Company anticipates that it will be in compliance with these
covenants throughout the term of the agreement.
In 1992, the Company established a Retailer Loan Program whereby, on a selective
basis, it provided financing to Participating Retailers that the Company
believed had the potential for substantial growth in the industry. The
underlying rationale for this program was the belief that the Company could
expand its business and at the same time participate in the rapid growth
experienced by the video retailers in which it invested. During fiscal 2001, the
Company discontinued new financings under this program and provided reserves of
$6.6 million representing the entire outstanding balance of the program loans.
The Company continues to seek enforcement of agreements entered into in
connection with this program in accordance with their terms to the extent
practicable.
On March 22, 1999, BlowOut Entertainment, Inc. ("BlowOut"), a former subsidiary
of the Company, filed a petition under Chapter 11 of the Federal Bankruptcy
Code. In 1996, the Company agreed to guarantee any amounts outstanding under
BlowOut's credit facility. As of March 31, 2002, the balance remaining payable
under this obligation was paid in full.
The Company's sources of liquidity include its cash balance, cash generated from
operations and its available credit resources. Based on the Company's current
budget and projected cash needs, the Company believes these available sources of
liquidity will be sufficient to fund the Company's operations and capital
requirements for the fiscal year ending March 31, 2003.
CRITICAL ACCOUNTING POLICIES
The Company considers as its most critical accounting policies those that
require the use of estimates and assumptions, specifically, accounts receivable
reserves and studio guarantee reserves. In developing these estimates and
assumptions, the Company takes into consideration historical experience, current
and expected economic conditions and other relevant data. Please refer to the
Notes to the Consolidated Financial Statements for a full discussion of the
Company's accounting policies.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Credit limits are established through a process of reviewing the financial
history and stability of each customer. The Company regularly evaluates the
collectibility of accounts receivable by monitoring past due balances. If it is
determined that a customer may be unable to meet its financial obligations, a
specific reserve is established based on the amount the Company expects to
recover. An additional general reserve is provided based on aging of accounts
receivable and the Company's historical collection experience. If circumstances
change related to specific customers, overall aging of accounts receivable or
collection experience, the Company's estimate of the recoverability of accounts
receivable could materially change.
STUDIO RESERVES
The Company has entered into guarantee contracts with certain program suppliers
21
providing titles for distribution under the PPT system. These contracts
guarantee the suppliers minimum payments. The Company, using historical
experience and year to date rental experience for each title, estimates the
projected revenue to be generated under each guarantee. The Company establishes
reserves for titles that are projected to experience a shortage under the
provisions of the guarantee. The Company continually reviews these factors and
makes adjustments to the reserves as needed. Actual results could differ from
these estimates and could have a material effect on the recorded studio
reserves.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has considered the provisions of Financial Reporting Release No. 48
"Disclosure of Accounting Policies for Derivative Financial Instruments and
Derivative Commodity Instruments, and Disclosure of Quantitative and Qualitative
Information about Market Risk Inherent in Derivative Financial Instruments,
Other Financial Instruments and Derivative Commodity Instruments." The Company
had no holdings of derivative financial or commodity instruments at March 31,
2002. A review of the Company's other financial instruments and risk exposures
at that date revealed that the Company had exposure to interest rate risk. The
Company utilized sensitivity analyses to assess the potential effect of this
risk and concluded that near-term changes in interest rates should not
materially adversely affect the Company's financial position, results of
operations or cash flows.
22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Item Page
Independent Auditor's Report 24
Report of Independent Public Accountants
Report of Independent Public Accountants 25
Consolidated Balance Sheets as of March 31, 2002 26
and 2001
Consolidated Statements of Operations for the Years 27
Ended March 31, 2002, 2001 and
2000
Consolidated Statements of Stockholders' Equity 28
for the Years Ended March 31, 2002,
2001 and 2000
Consolidated Statements of Cash Flows for the Years 29
Ended March 31, 2002, 2001 and 2000
Notes to Consolidated Financial Statements 30
Financial Statement Schedules -- 52
Schedule II
Schedules not included have been omitted because they are not applicable
or the required information is shown in the financial statements or
notes thereto.
23
INDEPENDENT AUDITOR'S LETTER
The Board of Directors
Rentrak Corporation:
We have audited the accompanying consolidated balance sheet of Rentrak
Corporation and subsidiaries as of March 31, 2002, and the related consolidated
statements of operations, stockholders' equity and comprehensive income, and
cash flows for the year then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Rentrak
Corporation and subsidiaries as of March 31, 2002, and the results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplementary consolidated
information for the year ended March 31, 2002 included in Schedule II required
by the Securities and Exchange Commission is presented for purposes of
additional analysis and is not a required part of the basic financial
statements. Such information has been subjected to the auditing procedures
applied in the audit of the basic financial statements and, in our opinion, is
fairly stated in all material respects in relation to the basic financial
statements taken as a whole.
/s/ KPMG LLP
- ------------
Portland, Oregon
May 24, 2002 (except as to the second paragraph of
Note 5, which is as of May 30, 2002)
24
Report of Independent Public Accountants
To Rentrak Corporation:
We have audited the accompanying consolidated balance sheets of Rentrak
Corporation (an Oregon corporation) and subsidiaries as of March 31, 2001 and
2000, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended March
31,2001. These consolidated financial statements and the schedule referred to
below are the responsibility of the Company's management. Our responsibility is
to express an opinion on these consolidated financial statements and schedule
based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Rentrak Corporation and
subsidiaries as of March 31, 2001 and 2000 and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
2001 in conformity with accounting principles generally accepted in the United
States.
Our audits were made for the purpose of forming an opinion on the consolidated
financial statements taken as a whole. The schedule listed in the index of
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic consolidated
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic consolidated financial statements
and, in our opinion, fairly state in all material respects the financial data
required to be set forth therein in relation to the basic consolidated financial
statements taken as a whole.
Arthur Andersen LLP
Portland, Oregon
May 23, 2001
* This report is a copy of a previously issued Arthur Andersen LLP report and
this report has not been reissued by Arthur Andersen LLP.
25
RENTRAK CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, 2002 and 2001
Assets 2002 2001
---------------- -----------------
Current assets:
Cash and cash equivalents $ 12,028,684 3,322,917
Accounts receivable, net of allowance for doubtful accounts
of $1,086,143 and $2,090,075 11,328,794 11,854,642
Advances to program suppliers 1,101,514 1,328,165
Inventory 2,515,778 3,514,354
Income tax receivable 70,000 279,160
Deferred tax asset 2,295,567 7,319,266
Other current assets 3,134,665 2,589,090
---------------- -----------------
Total current assets 32,475,002 30,207,594
---------------- -----------------
Property and equipment, net 3,907,631 4,439,773
Deferred tax asset 1,002,882 2,419,634
Other assets 1,226,812 2,059,247
---------------- -----------------
Total assets $ 38,612,327 39,126,248
================ =================
Liabilities and Stockholders' Equity
Current liabilities:
Line of credit $ -- 1,917,705
Accounts payable 18,339,610 18,699,289
Accrued liabilities 749,279 3,418,043
Accrued compensation 1,371,064 1,127,785
Deferred revenue 379,106 1,245,643
Net current liabilities of discontinued operations -- 156,046
---------------- -----------------
Total current liabilities 20,839,059 26,564,511
---------------- -----------------
Long-term liabilities:
Deferred revenue -- 379,104
Other 495,586 795,875
---------------- -----------------
Total Liabilities 495,586 1,174,979
---------------- -----------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value. Authorized 10,000,000 shares -- --
Common stock, $0.001 par value. Authorized 30,000,000 shares;
issued and outstanding 9,866,283 shares in 2002 and
12,235,621 shares in 2001 9,866 12,236
Capital in excess of par value 41,730,216 52,471,599
Notes receivable (377,565) (7,728,186)
Cumulative other comprehensive income (loss) 180,453 (49,572)
Accumulated deficit (23,910,288) (32,904,319)
Deferred charge - warrants (355,000) (415,000)
---------------- -----------------
Total stockholders' equity 17,277,682 11,386,758
---------------- -----------------
Total liabilities and stockholders' equity $ 38,612,327 39,126,248
================ =================
See accompanying notes to consolidated financial statements.
26
RENTRAK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended March 31, 2002, 2001, and 2000
2002 2001 2000
------------------ ------------------ ------------------
Revenues:
PPT $ 72,843,847 84,261,793 95,182,063
Other 29,770,300 33,625,162 19,990,351
------------------ ------------------ ------------------
102,614,147 117,886,955 115,172,414
------------------ ------------------ ------------------
Operating costs and expenses:
Cost of sales 76,812,474 93,600,177 91,706,290
Selling and administrative 20,753,587 34,455,048 28,236,763
Net gain from litigation settlements (note 10) (1,563,153) (225,000) (7,791,880)
------------------ ------------------ ------------------
96,002,908 127,830,225 112,151,173
------------------ ------------------ ------------------
Income (loss) from operations 6,611,239 (9,943,270) 3,021,241
------------------ ------------------ ------------------
Other income (expense):
Interest income 195,628 307,240 743,464
Interest expense (17,598) (768,599) (669,373)
Gain (loss) on investments -- (1,687,314) (1,207,483)
Other 7,717,233 -- (385,986)
------------------ ------------------ ------------------
7,895,263 (2,148,673) (1,519,378)
------------------ ------------------ ------------------
Income from continuing operations
before income tax (benefit)
provision and gain from disposal
of discontinued operations 14,506,502 (12,091,943) 1,501,863
Income tax benefit (provision) (5,512,471) 4,514,575 (450,559)
------------------ ------------------ ------------------
Net income (loss) from continuing
operations 8,994,031 (7,577,368) 1,051,304
Gain from disposal of discontinued operations
including income tax benefit of $483,502 -- -- 2,373,502
------------------ ------------------ ------------------
Net income (loss) $ 8,994,031 (7,577,368) 3,424,806
================== ================== ==================
Earnings (loss) per common share:
Basic:
Continuing operations $ 0.86 (0.63) 0.10
Discontinued operations -- -- 0.23
------------------ ------------------ ------------------
Net income (loss) $ 0.86 (0.63) 0.33
================== ================== ==================
Diluted
Continuing operations $ 0.85 (0.63) 0.10
Discontinued operations -- -- 0.22
------------------ ------------------ ------------------
Net income (loss) $ 0.85 (0.63) 0.32
================== ================== ==================
See accompanying notes to consolidated financial statements.
27
RENTRAK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended March 31, 2002, 2001, and 2000
Common stock
-------------------------------------- Capital in
Number of excess of Notes
shares Amount par value Receivable
-------------------- -------------- -------------- ---------------
Balance at March 31, 1999 10,439,948 $ 10,440 43,644,479 --
Issuance of common stock under employee
stock option plans 74,613 75 228,882 --
Net income -- -- -- --
Change in unrealized gain (loss) on investment
securities, net of tax -- -- -- --
Total comprehensive income
Income tax benefit from stock option exercise -- -- 27,699 --
Issuance of warrants -- -- 544,139 --
Amortization of warrants -- -- -- --
-------------------- -------------- ---------------- ---------------
Balance at March 31, 2000 10,514,561 10,515 44,445,199 --
Issuance of common stock under employee
stock option plans 1,721,060 1,721 8,026,400 --
Net income -- -- -- --
Change in unrealized gain (loss) on investment
securities, net of tax -- -- -- --
Total comprehensive income
Issuance of notes receivable -- -- -- (7,728,186)
Amortization of warrants -- -- -- --
-------------------- -------------- ---------------- ---------------
Balance at March 31, 2001 12,235,621 12,236 52,471,599 (7,728,186)
Repurchase of common stock (1,188,400) (1,188) (4,523,061) --
Issuance of common stock under employee
stock option plans 227,812 227 732,511 --
Issuance of common stock 87,000 87 136,473
Repurchase of common stock for cancellation
of notes receivable (1,495,750) (1,496) (7,349,125)
Net income -- -- -- --
Change in unrealized gain (loss) on investment
securities, net of tax -- -- -- --
Cumulative Translation Adjustments
Total comprehensive income
Income tax benefit from stock option exercise -- -- 261,819 --
Cancellation of notes receivable -- -- -- 7,350,621
Amortization of warrants -- -- -- --
-------------------- -------------- ---------------- ---------------
Balance at March 31, 2002 9,866,283 $ 9,866 41,730,216 (377,565)
==================== ============== ================ ===============
See accompanying notes to consolidated financial statements.
Cumulative
other Deferred
Comprehensive Accumulated charge Comprehensive
Income deficit warrants Total income (loss)
------------ -------------- ------------- ---------- ------------
Balance at March 31, 1999 137,747 (28,751,757) (749,005) 14,291,904
Issuance of common stock under employee
stock option plans -- -- -- 228,957
Net income -- 3,424,806 -- 3,424,806 3,424,806
Change in unrealized gain (loss) on investment
securities, net of tax (402,431) -- -- (402,431) (402,431)
------------
Total comprehensive income $ 3,022,375
============
Income tax benefit from stock option exercise -- -- -- 27,699
Issuance of warrants -- -- (544,139) --
Amortization of warrants -- -- 509,652 509,652
------------ ---------------- -------------- ----------
Balance at March 31, 2000 (264,684) (25,326,951) (783,492) 18,080,587
Issuance of common stock under employee
stock option plans -- -- -- 8,028,121
Net income -- (7,577,368) -- (7,577,368) (7,577,368)
Change in unrealized gain (loss) on investment
securities, net of tax 215,112 -- -- 215,112 215,112
------------
Total comprehensive income $(7,362,256)
============
Issuance of notes receivable -- -- -- (7,728,186)
Amortization of warrants -- -- 368,492 368,492
------------ ---------------- -------------- ----------
Balance at March 31, 2001 (49,572) (32,904,319) (415,000) 11,386,758
Repurchase of common stock -- -- -- (4,524,249)
Issuance of common stock under employee
stock option plans -- -- -- 732,738
Issuance of common stock 136,560
Repurchase of common stock for cancellation
of notes receivable (7,350,621)
Net income -- 8,994,031 -- 8,994,031 8,994,031
Change in unrealized gain (loss) on investment
securities, net of tax 49,572 -- -- 49,572 49,572
Cumulative Translation Adjustments 180,453 180,453 180,453
-----------
Total comprehensive income $9,224,056
===========
Income tax benefit from stock option exercise -- -- -- 261,819
Cancellation of notes receivable -- -- -- 7,350,621
Amortization of warrants -- -- 60,000 60,000
------------ ---------------- -------------- ----------
Balance at March 31, 2002 180,453 (23,910,288) (355,000) 17,277,682
============ ================ ============== ==========
See accompanying notes to consolidated financial statements.
28
RENTRAK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended March 31, 2002, 2001, and 2000
2002 2001 2000
---------------- ---------------- ----------------
Cash flows from operating activities:
Net income (loss) $ 8,994,031 (7,577,368) 3,424,806
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Gain on disposal of discontinued operations -- -- (2,373,502)
(Gain) loss on disposition of assets (7,802,747) 597,124 1,207,483
Loss on write-down of property and equipment 425,000 -- --
Gain on litigation settlement -- -- (7,791,880)
Depreciation and amortization 1,438,449 1,266,515 1,780,966
Write-off of intangibles -- -- 421,675
Amortization of warrants 60,000 368,492 509,652
Provision (credit) for doubtful accounts (1,546,301) 7,758,211 6,341,032
Retailer financing program reserves -- 1,333,191 (373,394)
Reserves on advances to program suppliers 1,629,105 106,781 110,918
Deferred income taxes 5,171,886 (4,646,420) (900,272)
Net proceeds from litigation settlement -- -- 1,847,505
Change in specific accounts:
Accounts receivable 2,072,149 4,184,677 (3,231,008)
Advances to program suppliers (1,402,454) 1,547,820 (253,422)
Inventory 998,576 162,449 (1,084,620)
Income tax receivable 209,160 (109,860) 2,864,901
Notes receivable and other current assets (545,575) 2,106,259 1,227,099
Accounts payable (359,679) (6,778,293) 7,233,746
Accrued liabilities and compensation (925,485) 423,558 357,860
Deferred revenue and other liabilities (1,365,477) (756,912) 3,077,119
Net current liabilities of discontinued operations (156,046) (274,877) (942,341)
---------------- ---------------- ----------------
Net cash provided by (used in)
operating activities 6,894,592 (288,653) 13,454,323
---------------- ---------------- ----------------
Cash flows from investing activities:
Purchases of property and equipment (1,379,934) (2,947,221) (1,790,501)
Investments in retailer financing program -- -- (384,500)
Proceeds from retailer financing program -- -- 228,539
Purchases of investments -- -- (398,122)
Proceeds from sale of investments -- 1,605,555 975,305
Proceeds from sale of investment in Rentrak Japan 4,076,237 -- --
Reductions (additions) of other assets and intangibles 797,028 (792,672) (6,693)
---------------- ---------------- ----------------
Net cash used in investing activities 3,493,331 (2,134,338) (1,375,972)
---------------- ---------------- ----------------
Cash flows from financing activities:
Net borrowings (payments) on line of credit (1,917,705) 1,917,705 (7,925,000)
Net borrowing (payments) on notes payable -- (500,000) (2,500,000)
Repurchase of common stock (633,749) -- --
Issuance of common stock 732,738 299,932 228,957
Issuance of common stock to non-employees 136,560 -- --
---------------- ---------------- ----------------
Net cash provided by (used in)
financing activities (1,682,156) 1,717,637 (10,196,043)
---------------- ---------------- ----------------
Net increase (decrease) in cash
and cash equivalents 8,705,767 (705,354) 1,882,308
Cash and cash equivalents at beginning of year 3,322,917 4,028,271 2,145,963
---------------- ---------------- ----------------
Cash and cash equivalents at end of year $ 12,028,684 3,322,917 4,028,271
================ ================ ================
See accompanying notes to consolidated financial statements.
29
(1) Business of Companies, Summary of Significant Accounting Policies,
and Other Items
(a) Introduction
Rentrak Corporation (the Company) (an Oregon corporation) is
principally engaged in the processing of information regarding the
rental and sale of video cassettes and DVD's ("Units") and the
distribution of prerecorded Units to the home video market
throughout the United States and Canada using its
Pay-Per-Transaction (PPT) revenue sharing program.
Under its PPT program, the Company enters into contracts to lease
Units from program suppliers (producers of motion pictures and
licensees and distributors of home video cassettes and DVD's )
which are then leased to retailers for a percentage of the rentals
charged by the retailers.
The Company's wholly owned subsidiary, 3PF.COM, Inc. (3PF),
provides e-fulfillment order processing and inventory management
services to e-tailers, wholesalers, and businesses requiring
just-in-time fulfillment.
The Company's wholly owned subsidiary BlowOut Video, Inc. sells
video cassettes and DVDs through its three retail video stores
that operate under the name of BlowOut Video.
(b) Rentrak Japan
In December 1989, the Company entered into a definitive agreement
with Culture Convenience Club Co., Ltd. (CCC), Rentrak's joint
venture partner in Rentrak Japan, to develop the Company's PPT
distribution and information processing business in certain
markets throughout the world.
On June 16, 1994, the Company and CCC amended the agreement.
Pursuant to this amendment, the Company received a royalty of
1.67% for all sales of up to $47,905,000, plus one-half of 1%
(0.5%) of sales greater than $47,905,000 in each fiscal year. In
addition, the Company received a one-time royalty of $2 million,
of which $1 million was paid in fiscal 1995 and $1 million was
paid in fiscal 1999. The term of the Agreement was extended from
the year 2001 to the year 2039
In December 1999, the Company received a prepayment of $2,500,000
in exchange for $4,000,000 of credit related to the annual royalty
described above. This credit was being recognized as revenue as
royalties were earned under the terms of the contract. As
discussed below in April 2001, this contract was effectively
terminated with Rentrak Japan forfeiting their rights to the
remaining $700,000 prepayment.
Effective April 2, 2001, the Company entered into an agreement
with Rentrak Japan amending the former agreement. As a result of
the amended agreement, the Company granted Rentrak Japan PPT
operating rights in Japan, the Philippines, Singapore, Taiwan,
Hong Kong, the Republic of Korea, the Democratic People's Republic
of Korea, the People's Republic of China, Thailand, Indonesia,
Malaysia, and Vietnam. In addition, the royalty agreement was
terminated. Finally, all intellectual property rights and
trademarks of the PPT system were agreed to be usable by Rentrak
Japan.
Consideration for the above items included a cash payment from
Rentrak Japan to the Company of approximately $5,700,000,
forfeiture by Rentrak Japan of any right of return of
30
the 1999 prepaid royalty of $700,000, and forgiveness by Rentrak
Japan of approximately $600,000 of liabilities due to Rentrak
Japan from the Company. Of these amounts, $6,400,000 was recorded
as revenue consistent with the historical treatment of royalty
payments. The remaining $600,000 was recorded as a gain and is
included in other income in the accompanying consolidated
statement of operations.
In April and October 2001, the Company sold all of its 5.6 percent
interest in Rentrak Japan. In conjunction with the above
agreements, the Company and Rentrak Japan entered into stock
purchase commitments to purchase stock as described below.
The Company sold 300,000 shares of Rentrak Japan stock to a sister
company of Rentrak Japan on April 2, 2001, and its remaining
180,000 shares of Rentrak Japan stock on October 2, 2001 to the
sister company. Total proceeds from the stock sales approximated
$6,400,000. The resulting gain of $6,400,000 related to the sale
of this stock is included in other income in the accompanying
consolidated statement of operations. Finally, Rentrak Japan
purchased 17,000 shares of 3PF common stock on April 27, 2001 for
$1,000,000.
In return, Rentrak Japan sold 1,004,000 shares of the Company's
common stock back to the Company on April 2, 2001 for
approximately $3,890,500.
Based upon the results of the transactions noted above occurring
in the year ended March 31, 2002, the Company had no further
obligations to, or ownership in, Rentrak Japan.
(c) Rentrak UK Limited
In February 1998, the Company entered into a Shareholders
Agreement and a PPT License Agreement with Columbus Holdings
Limited and Rentrak UK Limited (Rentrak UK) to develop the
Company's PPT distribution and information processing business in
the United Kingdom through Rentrak UK. The PPT Agreement remains
in force in perpetuity, unless terminated due to material breach
of contract, liquidation of Rentrak UK, or nondelivery, by the
Company to Rentrak UK, of all retailer and studio software,
including all updates. Pursuant to the PPT Agreement, during the
term of the PPT Agreement, the Company will receive a royalty of
1.67% of Rentrak UK's gross revenues from any and all sources.
Rentrak currently owns 92% of Rentrak UK while Rentrak Japan holds
8%. During the fiscal 2000 year, Rentrak UK did not generate
income or positive cash flow and, as a result, the Company wrote
down assets of $222,000 in that year that were not expected to
generate positive cash flow. During the year ended March 31, 2001,
Rentrak UK continued to generate no income or cash flow. During
the year ended March 31, 2002, Rentrak UK improved its performance
producing minimal income and cash flow. Management of the Company
has made changes to decrease the cost of operations, including
space and staffing costs, and it is continuing to closely evaluate
the financial performance of operations. Management is considering
various alternatives including selling or closing down Rentrak
UK's operations.
(d) Basis of Consolidation
The consolidated financial statements include the accounts of the
Company, its majority owned subsidiaries, and those subsidiaries
in which the Company has a controlling interest after elimination
of all intercompany accounts and transactions. Investments in
affiliated companies owned 20% to 50% are accounted for by the
equity method.
31
(e) Management Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
(f) Revenue Recognition
The PPT agreements generally provide for an initial order
processing fee and continuing transaction fees based on a
percentage of rental revenues earned by the retailer upon renting
the Units to their customers. The Company recognizes
order-processing fees as revenue when the Units are shipped to the
retailers and recognizes transaction fees when the Units are
rented to the consumers. Initial order processing fees cover the
direct costs of accessing Units from program suppliers, handling,
packaging and shipping of the Units to the retailer. Once the
Units are shipped, the Company has no further obligation to
provide services to the retailer.
Revenues derived from fulfillment activities are recognized when
products are shipped and/or services are provided.
During fiscal 2000, the Company received a $2,500,000 prepayment
from a customer in exchange for $4,000,000 in credit related to a
long-term agreement. This prepayment related to periods subsequent
to March 31, 2000 and has therefore been recorded as deferred
revenue on the accompanying consolidated balance sheet. Deferred
revenue of $379,106 recorded March 31, 2002, will be recognized in
future periods as revenues are earned under the terms of the
contract.
Stockholders and former directors, or their families, owned
interests in several stores participating in the PPT program
through fiscal 2000. The Company realized revenues from these
stores of approximately $47,000 during fiscal 2000. No revenues
were recognized from these parties in fiscal 2001 or 2002.
(g) Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with
a maturity of three months or less at acquisition to be cash
equivalents. Included in cash and cash equivalents is $1,000,000
of restricted cash used as security for the Company's operating
cash accounts which is held in highly liquid investments. The
classification of this cash is determined based on the expected
term of the collateral requirement of the operating cash account.
This restriction was relieved subsequent to March 31, 2002 as part
of the financing arrangement described in note 5.
(h) Investment Securities
Statement of Financial Accounting Standards No. 115, Accounting
for Certain Investments in Debt and Equity Securities (SFAS 115),
requires the Company to classify and account for its security
investments as trading securities, securities available for sale
or securities held to maturity depending on the Company's intent
and ability to hold or trade the securities at time of purchase.
Securities available for sale are stated on the balance sheet at
their fair market value with an adjustment to stockholders' equity
reflected in other
32
comprehensive income (loss) as change in net unrealized gains and
losses, net of tax. Securities held to maturity are stated at
amortized cost.
Detail of the proceeds from the sales of available for sale
securities and realized gains and losses on sales of equity
securities for the years ended March 31 are as follows:
Proceeds Gross gains Gross losses
------------------- -------------------- --------------------
2002 $ 161,513 33,150 (14,970)
2001 1,605,555 9,570 (606,694)
2000 975,305 554,971 (121,105)
When, in management's opinion, available for sale securities have
experienced an other than temporary decline, the amount of the
decline in market value below cost is recorded in the statement of
operations as a loss on investments.
In fiscal 2000, management determined that certain investments had
incurred unrealized losses resulting from other than temporary
declines in market value below the cost of the investments.
Unrealized losses from other than temporary declines in market
value of $1,245,157 were recorded in gain (loss) on investments in
the March 31, 2000 consolidated statement of operations. There
were no unrealized losses from other than temporary declines in
market value recognized in the March 31, 2002 and 2001
consolidated statements of operations.
(i) Allowance for Doubtful Accounts
Credit limits are established through a process of reviewing the
financial history and stability of each customer. The Company
regularly evaluates the collectibility of accounts receivable by
monitoring past due balances. If it is determined that a customer
may be unable to meet its financial obligations, a specific
reserve is established based on the amount the Company expects to
recover. An additional general reserve is provided based on aging
of accounts receivable and the Company's historical collection
experience. If circumstances change related to specific customers,
overall aging of accounts receivable or collection experience, the
Company's estimate of the recoverability of accounts receivable
could materially change.
(j) Financial Instruments
A financial instrument is cash or a contract that imposes or
conveys a contractual obligation or right, to deliver or receive,
cash or another financial instrument. The estimated fair value of
all material financial instruments approximated their carrying
values at March 31, 2002 and 2001.
(k) Inventory
Inventory consists of videocassettes, digital videodiscs (DVDs),
and other home entertainment products held for sale and is carried
at the lower of cost (first-in, first-out method) or market value.
(l) Property and Equipment
Depreciation of property and equipment is computed on the
straight-line method over estimated useful lives of three to five
years. Leasehold improvements are amortized over
33
the lives of the underlying leases or the service lives of the
improvements, whichever is shorter.
(m) Income Taxes
The Company accounts for income taxes in accordance with Statement
of Financial Accounting Standards No. 109, Accounting for Income
Taxes (SFAS 109). Under the liability method specified by SFAS
109, deferred tax assets and liabilities are determined based on
the temporary differences between the financial statement basis
and tax basis of assets and liabilities as measured by the enacted
tax rates for the years in which the taxes are expected to be
paid.
(n) Studio Reserves
The Company has entered into guarantee contracts with certain
program suppliers providing titles for distribution under the PPT
system. These contracts guarantee the suppliers minimum payments.
The Company, using historical experience and year to date rental
experience for each title, estimates the projected revenue to be
generated under each guarantee. The Company establishes reserves
for titles that are projected to experience a shortage under the
provisions of the guarantee. The Company continually reviews these
factors and makes adjustments to the reserves as needed.
(o) Foreign Currency Translation
Adjustments from translating foreign functional currency financial
statements into U.S. dollars are included in the Foreign Currency
Translation Adjustment in the consolidated statement of
stockholders' equity. Transaction gains and losses that arise from
exchange rate fluctuations on transactions denominated in a
currency other than the local currency are included in results of
operations.
(p) Earnings Per Share
Basic earnings per common share is computed by dividing net income
by the weighted average number of shares of common stock
outstanding during the period. Diluted earnings per common share
is computed on the basis of the weighted average shares of common
stock outstanding plus common equivalent shares arising from
dilutive stock options.
The weighted average number of shares of common stock and common
stock equivalents and net income (loss) used to compute basic and
diluted earnings (loss) per share for the years ended March 31
were calculated as follows:
34
2002 2001 2000
--------------------------- --------------------------- ---------------------------
Basic Diluted Basic Diluted Basic Diluted
------------- ------------ ------------ ------------- ------------ ------------
Weighted average
number of shares
of common stock
outstanding 10,415,314 10,415,314 11,985,023 11,985,023 10,477,334 10,477,334
Dilutive effect of
stock options -- 197,459 -- -- -- 281,787
------------- ------------ ------------ ------------- ------------ ------------
Weighted average
number of
shares of
common stock
outstanding and
common stock
equivalents 10,415,314 10,612,773 11,985,023 11,985,023 10,477,334 10,759 ,121
============= ============ ============ ============= ============ ============
Net income (loss):
Continuing
operations $ 8,994,031 8,994,031 (7,577,368) (7,577,368) 1,051,304 1,051,304
Discontinued
operations -- -- -- -- 2,373,502 2,373,502
------------- ------------ ------------ ------------- ------------ ------------
Net income
(loss) $ 8,994,031 8,994,031 (7,577,368) (7,577,368) 3,424,806 3,424,806
============= ============ ============ ============= ============ ============
Earnings (loss) per
share:
Continuing
operations $ 0.86 0.85 (0.63) (0.63) 0.10 0.10
Discontinued
operations -- -- -- -- 0.23 0.22
------------- ------------ ------------ ------------- ------------ ------------
Earnings
(loss) per
common share $ 0.86 0.85 (0.63) (0.63) 0.33 0.32
============= ============ ============ ============= ============ ============
Options and warrants to purchase approximately 2,300,000 and
4,400,000 shares of common stock were outstanding during the
fiscal years ended March 31, 2002 and 2000, respectively, but were
not included in the computation of diluted EPS because the
exercise price of the options and warrants were greater than the
average market price of the common shares. Options and warrants to
purchase 3,200,000 shares for the year ended March 31, 2001, were
outstanding but were not included in the computation of diluted
EPS because their effect would be antidilutive due to a loss for
the period.
(q) Advertising Expense
Advertising expense, net of advertising reimbursements, totaled
approximately $216,683, $627,662 and $952,000 for the fiscal years
ended March 31, 2002, 2001, and 2000, respectively.
35
(r) Statements of Cash Flows
The Company had the following non-cash transactions for the fiscal
years ended March 31:
2002 2001 2000
------------------- -------------------- --------------------
Cash paid (received) for:
Interest $ 27,329 253,211 656,723
Income taxes, net of refunds 125,380 111,701 (1,645,085)
Noncash financing and investing activities:
Reclassification of accounts
receivable to other assets and
other investments -- -- 1,023,794
Issuance of warrants -- -- (544,139)
Tax benefit from stock option
exercises (261,819) -- (27,699)
Receipt of note receivable in
litigation settlement (note 10) -- -- 4,000,000
Receipt of common stock in
litigation settlement (note 10) -- -- 1,944,375
Change in unrealized gain (loss)
on investment securities, net of
tax 49,572 215,112 (402,431)
Receipt (forgiveness) of note
receivable in exchange for stock (7,350,621) 7,728,186 --
Exchange of investment in Rentrak
Japan for Rentrak common stock 3,890,500
(s) Comprehensive Income
In June 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income (SFAS 130). The statement
establishes presentation and disclosure requirements for reporting
comprehensive income. Comprehensive income includes charges or
credits to equity that are not the result of transactions with
shareholders. Components of the Company's comprehensive income
(loss) which consist of the change in unrealized gain (loss) on
investment securities (net of tax), net of the reclassification
adjustment for gains (losses) included in net income (loss), and
foreign currency translation adjustments as of March 31 are as
follows:
36
2002 2001 2000
------------------- -------------------- --------------------
Foreign currency translation adjustments $ 180,453 -- --
Unrealized gains (losses) on securities:
Holding gains (losses) arising
during the period, net of tax 60,844 (12,470) (534,988)
Less reclassification adjustment
for gains (losses) included in
net income, net of tax 11,272 (227,582) (132,557)
------------------- -------------------- --------------------
Change in unrealized gain
(loss) on investment
securities, net of tax 49,572 215,112 (402,431)
------------------- -------------------- --------------------
Other Comprehensive Income (Loss) $ 230,025 215,112 (402,431)
=================== ==================== ====================
(t) Impairment of Long-Lived Assets
Long-lived assets, such as property, plant and equipment, and
purchased intangibles subject to amortization, are reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to estimated
undiscounted future cash flows expected to be generated by the
asset. If the carrying amount of an asset exceeds its estimated
future cash flows, an impairment charge is recognized by the
amount by which the carrying amount of the asset exceeds the fair
value of the asset. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell, and
depreciation ceases.
(u) New Accounting Standards
In June 2001, the Financial Accounting Standards Board (FASB)
issued SFAS 141, "Business Combinations," effective July 1, 2001,
and SFAS 141 requires use of the purchase method of accounting for
acquisitions. To date, the adoption of SFAS 141 has not had a
material impact on the Company's financial condition or results of
operations.
In June 2001, the FASB issued SFAS 142, "Goodwill and Other
Intangible Assets," effective for the Company on April 1, 2002.
SFAS 142 specifies that goodwill and some intangible assets will
no longer be amortized but instead will be subject to periodic
impairment testing. The Company expects that adoption of SFAS 142
will not have a material impact on the Company's financial
condition or results of operations.
In June 2001, the FASB issued SFAS 143, "Accounting for Asset
Retirement Obligations," which will be effective for the Company
on April 1, 2002. SFAS 143 addresses the financial accounting and
reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement
costs. The Company expects that
37
adoption of SFAS 143 will not have a material impact on the
Company's financial condition or results of operations.
In August 2001, the FASB issued SFAS 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supersedes
SFAS 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." SFAS 144 also supersedes the accounting and reporting
provisions of APB No. 30, Reporting the Effects of Disposal of a
Segment of a Business, for the disposal of a segment of a
business. The effective date for implementation of SFAS 144 is for
fiscal years beginning after December 15, 2001; however, early
adoption is permitted. SFAS 144 retains many of the fundamental
provisions of SFAS 121, but resolves certain implementation
issues. The Company expects that the adoption of SFAS 144 will not
have a material impact on the Company's financial condition or
results of operations.
In April 2002, the FASB issued SFAS 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13,
and Technical Corrections," effective for the Company on April 1,
2003. SFAS 145 rescinds SFAS 4, "Reporting Gains and Losses from
Extinguishment of Debt", and an amendment of that Statement, SFAS
64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements." SFAS 145 also rescinds SFAS 44, "Accounting for
Intangible Assets of Motor Carriers." SFAS 145 amends SFAS 13,
"Accounting for Leases," to eliminate an inconsistency between the
required accounting for sale-leaseback transactions and the
required accounting for certain lease modifications that have
economic effects that are similar to sale-leaseback transactions.
SFAS 145 also amends other existing authoritative pronouncements
to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. The Company
expects that the adoption of SFAS 145 will not have a material
impact on the Company's financial condition or results of
operations.
(v) Reclassifications
Certain reclassifications have been made to prior year amounts to
conform to the current year presentation.
(2) Investment Securities
The carrying value and estimated fair value of marketable
securities at March 31 were as follows:
Carrying value Unrealized Unrealized Fair value
gross gain gross loss
----------------- ----------------- ----------------- ------------------
2002:
Available for sale -
noncurrent:
Corporate securities $ -- -- -- --
2001:
Available for sale -
noncurrent:
Corporate securities 143,333 13 (79,969) 63,353
38
(3) Property and Equipment
Property and equipment, at cost, consists of:
March 31
-------------------------------------------
2002 2001
-------------------- --------------------
Furniture and fixtures $ 8,670,052 8,532,210
Machinery and equipment 2,183,128 1,875,159
Leasehold improvements 1,914,045 2,092,844
-------------------- --------------------
12,767,343 12,500,213
Less accumulated depreciation (8,859,594) (8,060,440)
-------------------- --------------------
$ 3,907,631 4,439,773
==================== ====================
During 2001, management assessed the operations of 3PF and made the
decision to forgo the renewal of a lease of one of its three warehouses.
In conjunction with this decision, the assets associated with this
building including racking and storage equipment were written down to
fair market value, as determined by a third party. The total loss on the
write-down of these assets approximated $425,000. This amount is included
in cost of sales in the accompanying statement of operations.
(4) Retailer Financing Program
In 1992, the Company established a retailer financing program whereby, on
a selective basis, it provided financing to Participating Retailers that
the Company believed had potential for substantial growth in the
industry. In connection with these financings, the Company typically made
a loan and/or equity investment in the Participating Retailer. In some
cases, the Company obtained a warrant to purchase stock in the
Participating Retailer. As part of such financings, the Participating
Retailer typically agreed to cause all of its current and future retail
locations to participate in the PPT System for a designated period of
time (usually 5-20 years). These financings are speculative in nature and
involve a high degree of risk and no assurance of a satisfactory return
on investment can be given.
During fiscal 2001, the Company discontinued new financings under this
retailer financing program. Write-offs of assets associated with this
program during fiscal 2001 were $6,100,000, including $4,400,000 due to
the Company from Video Update, Inc. The Company seeks to enforce
agreements entered into in connection with this program in accordance
with their terms to the extent practicable.
The loans are reviewed for impairment in accordance with FASB Statement
of Financial Accounting Standards No. 114, Accounting by Creditors for
Impairment of a Loan (SFAS 114). A valuation allowance has been
established for the amount by which the recorded investment in the loan
exceeds the measure of the impaired loan. As the financings are made, and
periodically throughout the terms of the agreements, the Company assesses
the recoverability of the amounts based on the financial position of each
retailer. The amounts the Company could ultimately receive could differ
materially in the near-term from the amounts assumed in establishing the
reserves.
39
As of March 31, 2002 and 2001 the Company had invested or loaned
approximately $6,600,000 under the program and had provided reserves of
approximately $6,600,000. These balances are included in other assets.
The activity in the total reserves for the retailer financing program is
as follows for the fiscal years ended March 31:
2002 2001
-------------------- --------------------
Beginning balance $ 6,598,514 5,684,183
Additions to reserve 50,000 925,216
Write-offs -- --
Recoveries (72,760) (10,885)
-------------------- --------------------
Ending balance $ 6,575,754 6,598,514
==================== ====================
(5) Line of Credit
In May 2000 the Company obtained a line of credit with a lender in an
amount not to exceed the lesser of (a) $12 million or (b) the sum of 85%
of the net amount of eligible accounts receivable. Interest under the
line is payable monthly at the bank's prime rate plus 1/4 percent (5.0
percent at March 31, 2002). The line is secured by substantially all of
the Company's assets. The terms of the credit agreement include financial
covenants requiring: (1) $15 million of tangible net worth to be
maintained at all times; (2) a consolidated net profit to be achieved
each fiscal year equal to or exceeding $1.00, and (3) $5 million of
working capital to be maintained at all times. The agreement also
restricts the amount of loans and indebtedness and limits the payment of
dividends on the Company's stock, among other restrictions. Based upon
the financial results reported as of March 31, 2002 and the twelve month
period then ended, the Company was in compliance with the three financial
covenants at March 31, 2002. At March 31, 2002, the Company had no
outstanding borrowings under this agreement.
On May 26, 2002, the Company cancelled its line of credit described
above. On May 30, 2002, the Company entered into an agreement for a new
secured revolving line of credit. The line of credit carries a maximum
limit of $4,500,000 and expires in May 2003. The Company has the choice
of either the bank's prime interest rate or LIBOR +2%. The line is
secured by substantially all of the Company's assets. The terms of the
credit agreement include financial covenants requiring: (1) $16 million
of tangible net worth to be maintained at all times; (2) a consolidated
net profit to be achieved each fiscal quarter beginning with the quarter
ending September 30, 2002 of a minimum of $1.00; (3) minimum year to date
profit of $1.00 (excluding certain exempted expenses) beginning with the
quarter ending September 30, 2002; and (4) achievement of specific
current and leverage financial ratios. The Company anticipates that it
will be in compliance with these covenants throughout the term of the
agreement.
(6) Related Party Note Payable
During fiscal 2000, the Company's subsidiary, Blowout Video Holding
Company, entered into a $3,000,000 line of credit with a former director
of the Company. The line was to expire in August 2002 and accrued
interest at prime plus 1 1/2%. The line was secured by substantially all
the assets of BlowOut Video Holding Company. This agreement was cancelled
by the Company in fiscal 2001.
40
(7) Income Taxes
The provision (benefit) for income taxes is as follows for the fiscal
years ended March 31:
2002 2001 2000
------------------- -------------------- --------------------
Current tax (benefit) provision:
Federal $ 309,585 -- --
State 31,000 -- 125,192
------------------- -------------------- --------------------
340,585 -- 125,192
Deferred tax provision (benefit) 5,171,886 (4,514,575) 325,367
------------------- -------------------- --------------------
Income tax provision (benefit) $ 5,512,471 (4,514,575) 450,559
=================== ==================== ====================
The reported provision (benefit) for income taxes from continuing
operations differs from the amount computed by applying the statutory
federal income tax rate of 34% to income before provision (benefit) for
income taxes as follows for the fiscal years ended March 31:
2002 2001 2000
------------------- -------------------- --------------------
Provision (benefit) computed at statutory rates $ 4,932,211 (4,111,261) 510,633
State taxes, net of federal benefit 580,261 (468,098) 59,474
Amortization of warrants 22,800 140,027 193,667
Recognition of net operating loss carryforward -- -- (131,507)
Other (22,801) (75,243) (181,708)
------------------- -------------------- --------------------
$ 5,512,471 (4,514,575) 450,559
=================== ==================== ====================
41
Deferred tax assets and (liabilities) from continuing operations are
comprised of the following components at March 31, 2002 and 2001:
2002 2001
-------------------- --------------------
Deferred tax assets:
Current:
Allowance for doubtful accounts $ 222,643 449,138
Program supplier reserves 510,842 520,614
Foreign tax credit -- 500,000
Net operating loss carryforward 960,244 4,616,162
Unrealized loss on investments 119,015 119,015
Capital loss carry forward -- 279,407
Deferred revenue 144,060 473,453
Other 338,763 361,477
-------------------- --------------------
Total current deferred tax assets 2,295,567 7,319,266
-------------------- --------------------
Noncurrent:
Depreciation 204,996 445,631
Retailer financing program reserve 663,040 671,689
Foreign tax credit -- 1,000,000
Deferred revenue -- 144,060
Other 134,846 158,254
-------------------- --------------------
Total noncurrent deferred tax assets 1,002,882 2,419,634
-------------------- --------------------
Total deferred tax assets $ 3,298,449 9,738,900
==================== ====================
As of March 31, 2002, the Company has estimated NOL carryforwards for
federal income tax return purposes of approximately $2,500,000, which
expire in 2021. Although realization of the deferred tax assets is not
assured, management believes it is more likely than not that the Company
will ultimately realize all of its deferred tax assets.
(8) Stockholders' Equity
Stock Options and Warrants
Effective March 31, 1997, the Company adopted the 1997 Non-Officer
Employee Stock Option Plan. The aggregate number of shares which may be
issued upon exercise of options under the plan may not exceed 800,000. In
August 1997, the Company adopted the 1997 Equity Participation Plan. The
aggregate number of shares which may be issued upon exercise of options
under the plan shall not exceed 2,075,000, including an increase of
475,000 shares approved by the Board in May 2002, subject to shareholder
approval. The plans are administered by the Compensation Committee of the
Board which determines the terms and conditions of options issued under
the plans. Options granted to date under the plans are exercisable over
one to five years and expire ten years after date of grant. As of March
31, 2002, the Company had 457,092 and 440,938 options available to be
granted under the 1997 Non-Officer Employee Stock Option Plan and 1997
Equity Participation Plan, respectively.
42
The Company has elected to account for its stock-based compensation plans
in accordance with APB 25, under which no compensation expense has been
recognized. The Company has computed for pro forma disclosure purposes
the value of all options granted during fiscal years 2002, 2001, and
2000, using the Black-Scholes option pricing model as prescribed by SFAS
123 and the following assumptions:
2002 2001 2000
------------------- -------------------- --------------------
Risk-free interest rate 4.08- 5.47% 4.77 - 6.82% 5.37 - 6.91%
Expected dividend yield 0% 0% 0%
Expected lives 5 - 10 years 5 - 10 years 5 - 10 years
Expected volatility 81.28% 78.21% 72.20%
Adjustments were made for options forfeited prior to vesting. Had
compensation expense for these plans been determined in accordance with
SFAS 123, the Company's net income (loss) and earnings (loss) per common
share reflected on the March 31, 2002, 2001, and 2000 consolidated
statements of operations would have been the following unaudited pro
forma amounts:
2002 2001 2000
------------------- -------------------- --------------------
Net income (loss):
As reported $ 8,994,031 (7,577,368) 3,424,806
Pro forma 8,432,485 (8,156,972) 2,293,758
Basic earnings (loss) per share:
As reported 0.86 (0.63) 0.33
Pro forma 0.81 (0.68) 0.22
Diluted earnings (loss) per share:
As reported 0.85 (0.63) 0.32
Pro forma 0.79 (0.68) 0.21
43
The table below summarizes the plans' activity:
Options outstanding
-------------------------------------------
Number of shares Weighted average
exercise price
-------------------- --------------------
Balance at March 31, 1999 3,446,106 $ 4.73
Granted:
Option price = fair market value 607,837 3.97
Option price > fair market value 15,000 7.38
Option price < fair market value 12,500 2.81
Issued (74,613) 3.08
Canceled (147,128) 5.75
-------------------- --------------------
Balance at March 31, 2000 3,859,702 4.60
Granted:
Option price = fair market value 393,575 3.80
Option price > fair market value 5,420 4.61
Issued (1,721,060) 4.67
Canceled (872,948) 5.12
-------------------- --------------------
Balance at March 31, 2001 1,664,689 4.07
Granted:
Option price = fair market value 400,500 3.29
Issued (227,812) 3.22
Canceled (211,918) 4.84
-------------------- --------------------
Balance at March 31, 2002 1,625,459 $ 3.97
==================== ====================
Using the Black Scholes methodology, the total value of options granted
during fiscal years 2002, 2001, and 2000 was approximately $965,000,
$1,524,000, and $2,560,000, respectively, which would be amortized on a
pro forma basis over the vesting period of the option. The weighted
average fair value of options granted during the years ended March 31,
2002, 2001, and 2000 was $3.29, $3.82, and $4.03, respectively. Options
to purchase 978,380, 1,026,899, and 2,494,190 shares of common stock were
exercisable at March 31, 2002, 2001, and 2000, respectively. These
exercisable options had weighted average exercise prices of $4.31, $4.39,
and $4.70 at March 31, 2002, 2001, and 2000, respectively.
44
The following table summarizes information about stock options
outstanding at March 31, 2002:
Options outstanding Options exercisable
------------------------------------------------------- ------------------------------------
Weighted
average
Outstanding as remaining Weighted Exercisable as Weighted
Range of of March 31, contractual average of March 31, average
exercise prices 2002 life exercise price 2002 exercise price
---------------- ---------------- ---------------- --------------- ---------------- ----------------
$ 1.00 - 2.59 40,000 8.8 $ 2.188 5,000 $ 2.189
2.60 - 6.49 1,575,459 6.0 3.979 963,380 4.335
6.50 - 9.50 10,000 7.3 9.500 10,000 9.50
---------------- ----------------
1,625,459 978,380
================ ================
The Company issued warrants in 1995 and 1998 which were valued by an
outside valuation firm using standard warrant valuation models. The value
of the warrants of $4,133,977 was recorded in the equity section and is
being amortized over the associated periods to be benefited by each
warrant. In fiscal 2002, 2001, and 2000, expense associated with these
warrants was approximately $60,000, $368,000, and $510,000, respectively.
As of March 31, 2002, warrants to purchase 1,234,562 shares of common
stock were outstanding related to the above issuances.
In May 1995, the board of directors approved a shareholders' rights plan
designed to ensure that all of the Company's shareholders receive fair
and equal treatment in the event of certain proposals to acquire control
of the Company. Under the rights plan, each shareholder received a
dividend of one right for each share of the Company's outstanding common
stock, entitling the holders to purchase one additional share of the
Company's common stock. The rights become exercisable after any person or
group acquires 15% or more of the Company's outstanding common stock, or
announces a tender offer which would result in the offeror becoming the
beneficial owners of 15% or more of the Company's outstanding stock.
Prior to the time that a person or group acquires beneficial ownership of
15% or more of the Company's outstanding stock, the board of directors,
at their discretion, may waive this provision with respect to any
transaction or may terminate the rights plan.
EXECUTIVE LOAN PROGRAM
In June 2000, the board of directors approved an offer to make loans
available to those officers of the Company who were under an employment
contract for the purpose of allowing them to exercise their vested,
unexercised "out of the money" employee stock options. The purpose of
this program was to enable executives to exercise certain of their
options and thereby hold shares resulting from the exercise of such
options in advance of a possible spin-off or split-up of 3PF, and to
enhance the Company's efforts to retain its key employees. The loans
under this program bear interest at the federal funds rate in effect on
the date of the loan and interest is payable annually. The principal
amount of the loan is due on the earliest to occur of: (1) one year prior
to the expiration of the term of the borrower's current employment
agreement with the Company, (2) one year after the borrower leaves the
Company's employment unless such departure follows a "change of control"
(as defined in the loan agreements), (3) five years from the date of the
loan, or (4) one year from the date of the borrower's death. The loans
are secured by the stock purchased upon the exercise of the options. The
loans are without recourse (except as to the stock securing the loans) as
to principal and are with full recourse
45
against the borrower as to interest. The offer to make these loans
expired September 30, 2000. Prior to September 30, 2000, several
employees accepted this offer and obtained loans from the Company.
Because the loan proceeds were immediately used to pay the exercise price
of the options to the Company, there was no net outflow of cash from the
Company in connection with these loans.
During 2001, a former officer of the Company, who was loaned, on June 16,
2000, $6,629,386 to purchase 1,362,008 shares of stock upon exercise of
his employee stock options and, during the quarter ended September 30,
2000, was loaned $721,235 to purchase 133,742 shares of stock upon
exercise of his employee stock options, terminated his agreements with
the Company. Accordingly, the common stock and related notes receivable
totaling $7,350,621 were reversed in a non-cash transaction.
(9) COMMITMENTS
Leases
The Company leases certain facilities and equipment under operating
leases expiring at various dates through 2009. Approximate rental
payments over the term of the leases exceeding one year are as follows:
Year ending March 31:
2003 $ 3,341,280
2004 3,241,871
2005 3,274,738
2006 3,109,122
2007 2,915,415
2008 and thereafter 4,164,892
-------------------
$ 20,047,318
===================
The leases provide for payment of taxes, insurance, and maintenance by
the Company. The Company also rents vehicles and equipment on a
short-term basis. Rent expense under operating leases was approximately
$3,581,000, $2,954,000, and $2,335,000 for the fiscal years ended March
31, 2002, 2001, and 2000, respectively.
GUARANTEES AND ADVANCES
The Company has entered into several guarantee contracts with program
suppliers providing titles for distribution under the PPT system. In
general, these contracts guarantee the suppliers minimum payments. In
some cases these guarantees are paid in advance. Any advance payments
made by the Company that will be realized within the current year are
included in advances to program suppliers. The long-term portion is
included in other assets. Both the current and long-term portion are
amortized to cost of sales as revenues are generated from the related
cassettes.
The Company, using empirical data, estimates the projected revenue stream
to be generated under these guarantee arrangements and accrues for
projected payments or reduces the carrying amount of advances to program
suppliers for any guarantee that it estimates will not be fully recovered
through future revenues. As of March 31, 2002 and 2001, the Company has
46
reserved approximately $2,200,000 and $2,400,000, respectively, for
potential payments under such guarantee arrangements.
On March 22, 1999, BlowOut filed for Chapter 11 of the Federal Bankruptcy
Code in the United States Bankruptcy Court for the District of Delaware.
At that same time BlowOut filed a motion to sell substantially all the
assets of BlowOut. BlowOut is not related to the Company's wholly owned
subsidiary BlowOut Video, Inc. The sale, to a third party video retailer,
was approved on May 10, 1999 and closed on May 17, 1999. The Company was
the principal creditor of BlowOut. In 1996, the Company had agreed to
guarantee up to $7 million of indebtedness of BlowOut (Guarantee).
Pursuant to the terms of the Guarantee, the Company agreed to guarantee
any amounts outstanding under BlowOut's credit facility. As the sale of
the BlowOut assets were not sufficient to cover the amounts due under
this facility, the Company, pursuant to the guarantee, has agreed to a
payment plan to fulfill BlowOut's obligation under its credit facility.
The payments, as made, were recorded as a reduction of "net current
liabilities of discontinued operations" on the accompanying balance
sheet. As of March 31, 2002, all amounts related to this obligation had
been paid.
OTHER
In June 2000, the Company entered into an agreement with one of its
customers to modify an existing contract. Under terms of the agreement
the customer made a payment to the Company in the amount of $2,500,000
and also increased its obligation to purchase PPT product. Subsequent to
the signing of the agreement, the customer took the position that it was
entitled to a refund of the payment, as additional agreements were not
finalized as expected. On March 31, 2001, the Company entered into a
settlement agreement with the customer whereby $1,600,000 of the
$2,500,000 payment was determined to be consideration for modification of
the aforementioned existing contract, while the remaining $900,000 was
held by the Company as credit to be applied to future receivables
generated by the customer. The $900,000 credit is to be allocated towards
future receivables at the rate of $75,000 per quarter, beginning with the
quarter ended March 31, 2001. The long-term portion of this credit has
been included in other long-term liabilities on the accompanying balance
sheet.
(10) CONTINGENCIES
On November 15, 2000, 3PF filed a proceeding with the American
Arbitration Association against Reel.com, Inc., a division of Hollywood
Entertainment Corporation ("Hollywood"), for breach of a servicing,
warehousing, and distribution agreement, and against Hollywood in
connection with its guarantee of the obligations of Reel.com, Inc., under
the agreement. 3PF sought damages in excess of $3,300,000, together with
prejudgment interest and attorney fees. On August 6, 2001, Hollywood
filed a proceeding with the American Arbitration Association against the
Company for the alleged breach of a settlement agreement among the
Company, Hollywood, and two individuals dated January 23, 2000, relating
to the Company's obligation to provide Hollywood with documents and data
with regard to Hollywood's obligation to indemnify the Company against
claims by a movie studio. Hollywood sought damages in the amount of
$2,000,000. On March 13, 2002, an arbitrator awarded damages to the
Company of $1,600,000 related to the November 15, 2000 claim. This amount
is reflected as a gain and is included in other income in the
accompanying consolidated statement of operations. In April 2002, in a
confidential settlement agreement, Hollywood agreed to pay an additional
$325,000 to the Company to resolve all outstanding issues between the two
parties.
On February 20, 2001, the Company filed a complaint against Ron Berger,
Chairman and Chief Executive Officer and a director of Rentrak until
September 2000, in the Circuit Court of the
47
State of Oregon for the County of Multnomah (No. 0102-01814), seeking
cancellation of shares of Rentrak common stock acquired by Mr. Berger
through an option loan program offered to the Company's officers in June
2000 and damages for the conversion of an automobile and computer
equipment plus an over-advance payment of business expenses less setoffs.
On or about March 29, 2001, Mr. Berger filed a counterclaim seeking
damages of approximately $1.76 million plus attorney fees from the
Company for conversion of Mr. Berger's director's fees and dividends from
Rentrak Japan, breach of an agreement to compensate Mr. Berger for
cancellation of options to purchase Company stock, failure to pay
accumulated wages and compensation, breach of an agreement to provide
options to purchase stock in 3PF, and failure to provide certain
insurance benefits. On June 15, 2001, the Company filed an amended
complaint alleging tort claims arising out of Mr. Berger's activities as
an officer and director of the Company involving Video City, Inc., and
seeking damages of not less than $6,000,000. Effective May 6, 2002, the
parties resolved the litigation pursuant to a confidential settlement
agreement pursuant to which the parties agreed to dismiss their
respective lawsuits and to seek nothing further from the other in
litigation.
The Company is also a party to legal proceedings and claims that arise in
the ordinary course of its business. In the opinion of management, the
amount of any ultimate liability with respect to these actions is not
expected to materially affect the financial position or results of
operations of the Company.
(11) EMPLOYEE BENEFIT PLANS
On January 1, 1991, the Company established an employee benefit plan (the
401(k) Plan) pursuant to Section 401(k) of the Internal Revenue Code for
certain qualified employees. Contributions made to the 401(k) Plan are
based on percentages of employees' salaries. The total amount of the
Company's contribution is at the discretion of the board of directors.
Contributions under the 401(k) Plan for the years ended March 31, 2001
and 2000 were approximately $82,000 and $77,000, respectively. As of
March 31, 2002, the board of directors had not made a decision regarding
contributions for the year ended March 31, 2002.
The Company has an Employee Stock Purchase Plan (the Plan). The board of
directors has reserved 200,000 shares of the Company's common stock for
issuance under the Plan, of which 143,773 shares remain authorized and
available for sale to employees. All employees meeting certain
eligibility criteria may be granted the opportunity to purchase common
stock, under certain limitations, at 85% of market value. Payment is made
through payroll deductions.
Under the Plan, employees purchased 3,079 shares for aggregate proceeds
of $11,005, 4,000 shares for aggregate proceeds of $13,561, and 3,257
shares for aggregate proceeds of $14,370, in fiscal 2002, 2001, and 2000,
respectively.
48
(12) BUSINESS SEGMENTS, SIGNIFICANT SUPPLIERS, AND MAJOR CUSTOMER
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 131, Disclosures about
Segments of an Enterprise and Related Information, (SFAS 131). SFAS 131
requires the Company to report certain information about operating
segments. The Company classifies its services in three segments, PPT,
3PF.COM, and Other. Other services include operations of BlowOut Video, a
video retailer, website services, and amounts received pursuant to
royalty agreements.
BUSINESS SEGMENTS
2002 2001 2000
------------------- -------------------- --------------------
Net sales (1):
PPT $ 73,715,459 85,735,385 96,390,304
3PF.COM (2) 17,521,877 23,389,443 11,648,725
Other 13,775,151 11,390,382 9,412,898
------------------- -------------------- --------------------
$ 105,012,487 120,515,210 117,451,927
=================== ==================== ====================
Income (loss) from operations:
PPT $ 6,225,420 (6,694,623) 1,892,205
3PF.COM (2) (3,858,411) (3,788,576) (1,131,354)
Other 4,244,230 539,929 2,260,390
------------------- -------------------- --------------------
$ 6,611,239 (9,943,270) 3,021,241
=================== ==================== ====================
Identifiable assets (1):
PPT $ 42,186,157 38,202,038 44,571,673
3PF.COM 5,831,188 8,425,876 2,703,360
Other 3,909,735 5,566,431 6,195,923
------------------- -------------------- --------------------
$ 51,927,080 52,194,345 53,470,956
=================== ==================== ====================
(1) Total amounts differ from those reported on the consolidated
financial statements as intercompany transactions and investments
in subsidiaries are not eliminated for segment reporting purposes.
(2) 3PF.COM's revenues related to the shipment of cassettes to
Rentrak's PPT Customers was $2,200,000, $3,300,000, and $3,300,000
for the years ended March 31, 2002, 2001, and 2000, respectively.
The Company has one program supplier that supplied product that generated
17%, a second that generated 15%, and a third that generated 13% of the
Company's revenues for the year ended March 31, 2002. The Company has one
program supplier that supplied product that generated 18%, a second that
generated 15%, and a third that generated 13% of the Company's revenues
for the year ended March 31, 2001. The Company has one program supplier
that supplied product that generated 25%, a second that generated 19%,
and a third that generated 13% of the Company's revenues for the year
ended March 31, 2000. There were no other program suppliers who provided
product accounting for more than 10% of sales for the years ended March
31, 2002, 2001, and 2000.
49
The Company currently receives a significant amount of product from three
program suppliers. Although management does not believe that these
relationships will be terminated in the near term, a loss of one of these
suppliers could have an adverse affect on operating results.
No customer accounted for more than 10% of the Company's revenue in
fiscal 2002, 2001, or 2000.
(13) Discontinued Operations
On November 26, 1996, the Company made a distribution to its shareholders
of 1,457,343 shares of common stock (the BlowOut Common Stock) of
BlowOut. BlowOut is not related to the Company's wholly owned subsidiary
BlowOut Video, Inc. During the year ended March 31, 2000, the Company
recorded a gain on the disposal of discontinued operations of $1,900,000
related to BlowOut, as the liability related to BlowOut contingencies was
less than estimated. The Company also reduced the valuation allowance
that was recorded against the deferred tax asset related to liabilities
of discontinued operations. This reduction of approximately $500,000 in
the valuation allowance was recorded as an income tax benefit from
discontinued operations in the accompanying consolidated statement of
operations. There was no remaining liability related to discontinued
operations at March 31, 2002.
50
(14) RENTRAK CORPORATION
QUARTERLY FINANCIAL DATA
FOR THE QUARTERS ENDED JUNE 30, 2000 TO MARCH 31, 2002
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
QUARTER ENDED: 2001 (1) 2001 2001 (2) 2002 (3)
------------------------------------------------------------------------------------------
REVENUE $28,973,887 $23,736,933 $26,432,286 $23,471,041
INCOME FROM OPERATIONS 2,277,726 598,251 1,232,201 2,503,061
NET INCOME 4,694,913 433,785 2,238,688 1,626,645
EARNINGS PER SHARE:
BASIC $0.42 $0.04 $0.23 $0.17
DILUTED $0.42 $0.04 $0.23 $0.16
- ------------------------------------------------------------------------------------------------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
QUARTER ENDED: 2000 2000 (4) 2000 (5) 2001 (6)
------------------------------------------------------------------------------------------
REVENUE $29,479,624 $24,890,555 $32,784,629 $30,732,147
INCOME (LOSS) FROM OPERATIONS 407,795 (15,248,758) 519,229 4,378,464
NET INCOME (LOSS) 249,999 (9,568,993) 229,510 1,512,116
EARNINGS PER SHARE:
BASIC AND DILUTED $0.02 ($0.77) $0.02 $0.12
(1) The June 30, 2001 quarter included results from the Rentrak Japan
restructuring agreement. The agreement resulted in the recognition of
$6.4 million in royalty revenue and a $5.6 million gain in other income
during the quarter.
(2) The December 31, 2001 quarter included recovery of a specific allowance
in the amount of $0.9 million, established in the June 30, 2001
quarter, for doubtful accounts related to a customer of the Company's
subsidiary 3PF.Com, Inc. The quarter also included other income of $2.4
million related to the Rentrak Japan restructuring.
(3) The March 31, 2002 quarter included recognition of a $1.6 million gain
from a litigation settlement with a prior customer, as well as recovery
in the amount of $0.7 million of a specific allowance, established in
the December 31, 2000 quarter, for doubtful accounts related to a
customer of the Company's subsidiary 3PF.Com, Inc.
(4) The September 30, 2000 quarter included significant charges primarily
related to accounts receivable write-offs, write-off of investments,
costs associated with a proxy contest, and a severance payment to the
Company's former chairman and chief executive officer.
(5) The December 31, 2000 quarter included a specific allowance for
doubtful accounts in the amount of $0.9 million related to a customer
of the Company's subsidiary 3PF.Com, Inc.
(6) The March 31, 2001 quarter included recognition of $1.6 million in
revenue from a customer in exchange for cancellation of certain of the
Company's rights.
51
RENTRAK CORPORATION
Valuation and Qualifying Accounts
Schedule II
Balance at Charged to Balance at
Beginning of Write Off and Other Recoveries End of
Year Ended: Period Expenses Accounts (Deductions) Period
- -------------------------------------------------------------------------------------------------------------------------
Allowance for doubtful accounts
March 31, 2000 $ 355,241 6,341,030 - (5,859,326) 836,945
March 31, 2001 836,945 7,758,211 - (6,505,081) 2,090,075
March 31, 2002 2,090,075 (1,546,300) - 542,368 1,086,143
Advances to program suppliers reserve
March 31, 2000 $ 1,165,160 110,918 - - 1,276,078
March 31, 2001 1,276,078 93,959 - - 1,370,037
March 31, 2002 1,370,037 - - (25,717) 1,344,320
Other Current Assets-
Retailer Financing Program reserve
(500,000)
March 31, 2000 $ 994,935 - 1 - 494,935
March 31, 2001 494,935 343,500 - - 838,435
March 31, 2002 838,435 - - - 838,435
Other Assets-
Retailer Financing Program reserve
(4,615,665)
March 31, 2000 $ 8,580,753 1,245,157 2 (20,997) 5,189,248
March 31, 2001 5,189,248 581,715 - (10,884) 5,760,079
March 31, 2002 5,760,079 50,000 - (72,760) 5,737,319
1 - Reclassified from Other Current Assets to Other Assets.
2 - Eliminated against Other Assets.
52
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On May 9, 2002, the Audit Committee of our Board of Directors approved the
dismissal of our independent public accountants, Arthur Andersen LLP. Arthur
Andersen LLP's reports on our financial statements for the fiscal years ended
March 31, 2001 and 2000 did not contain an adverse opinion or disclaimer of
opinion and were not qualified or modified as to uncertainty, audit scope or
accounting principles. During fiscal years ended March 31, 2001 and 2000, and
during the subsequent interim periods through the date of dismissal, May 9,
2002, there have not been any disagreements between us and Arthur Andersen LLP
on any matters of accounting principles or practices, financial statement
disclosure or auditing scope or procedure, or any reportable events as defined
under Item 304(a)(1)(v) of Regulation S-K promulgated by the Securities and
Exchange Commission.
Also, on May 9, 2002, based on the recommendation of the Audit Committee of our
Board of Directors, we engage the firm of KPMG LLP to be our independent public
accountants. We did not consult KPMG LLP at any time prior to May 9, 2002, with
respect to the application of accounting principles to a specified transaction,
either completed or proposed, or the type of audit opinion that might be
rendered on our financial statements, or concerning any disagreement or
reportable event with Arthur Andersen LLP.
We have been unable to obtain the consent of Arthur Andersen LLP, our former
independent public accountants, as to the incorporation by reference of their
report for our fiscal years ended March 31, 2001 and March 31, 2000, into our
previously filed registration statements under the Securities Act of 1933, and
we have not filed that consent with the Annual Report on Form 10-K in reliance
upon Rule 437a of the Securities Act of 1933. Because we have not been able to
obtain Arthur Andersen LLP's consent, you may not be able to recover against
Arthur Andersen LLP under Section 11 of the Securities Act for any untrue
statements of a material fact contained in our financial statements audited by
Arthur Andersen LLP or any omission to state a material fact required to be
stated therein.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instruction G(3) to Form 10-K, the information called for by
this item 10 is incorporated by reference from the Company's definitive Proxy
Statement for its 2002 Annual Meeting of Shareholders to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended. See "Election of Directors",
"Executive Officers" and "Compliance with Section 16(a) of the Securities
Exchange Act of 1934."
ITEM 11. EXECUTIVE COMPENSATION
Pursuant to General Instruction G(3) to Form 10-K, the information called for by
this item 11 is incorporated by reference from the Company's definitive Proxy
Statement for its 2002 Annual Meeting of Shareholders to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended. See "Executive Compensation."
53
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Pursuant to General Instruction G(3) to Form 10-K, the information called for by
this item 12 is incorporated by reference from the Company's definitive Proxy
Statement for its 2002 Annual Meeting of Shareholders to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended. See "Security Ownership of Certain
Beneficial Owners and Management".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to General Instruction G(3) to Form 10-K, the information called for by
this item 13 is incorporated by reference from the Company's definitive Proxy
Statement for its 2002 Annual Meeting of Shareholders to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended. See "Compensation Committee
Interlocks and Insider Participation" and "Certain Relationships and
Transactions".
54
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
The following documents are filed as part of the Report:
CONSOLIDATED FINANCIAL STATEMENTS: The Consolidated
Financial Statements of the Company are included in
Item 8 of this Report as follows:
Independent Auditor's Report
Report of Independent Public Accountants
Consolidated Balance Sheets as of March 31, 2002 and
2001
Consolidated Statements of Operations for the Years
Ended March 31, 2002, 2001 and 2000
Consolidated Statements of Stockholders' Equity for
the Years Ended March 31, 2002, 2001 and 2000
Consolidated Statements of Cash Flows for the Years
Ended March 31, 2002, 2001 and 2000
Notes to Consolidated Financial Statements
(a)(2) FINANCIAL STATEMENT SCHEDULES
CONSOLIDATED FINANCIAL STATEMENT SCHEDULES: The
following consolidated financial statement schedule
has been included in Item 8 of this Report:
Schedule II - Valuation and Qualifying Accounts
Schedules not included have been omitted because they are not
applicable or the required information is shown in the
financial statements or notes thereto.
(a)(3) EXHIBITS: The exhibits required to be filed pursuant to Item
601 of Regulation S-K are set forth in the Exhibit Index.
(b) FORM 8-K REPORTS. During the fourth quarter of fiscal 2002, the
Company filed no reports on Form 8-K.
55
(c) Exhibits (See Exhibit Index)
1. A shareholder may obtain a copy of any exhibit included in this
Report upon payment of a fee to cover the reasonable expenses of
furnishing such exhibits by written request to Rick Nida, Vice President
Investor Relations, Rentrak Corporation, PO Box 18888, Portland, Oregon
97218.
56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
RENTRAK CORPORATION
By /S/ F. Kim Cox
--------------------------------------
F. Kim Cox, President
Date June 28, 2002
--------------------------------------
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and the dates indicated.
Principal Executive Officer and Director:
By /S/ Paul A. Rosenbaum June 28, 2002
------------------------
Paul A. Rosenbaum, Chairman and Chief
Executive Officer and Director
Principal Financial Officer:
By /S/ Mark L. Thoenes June 28, 2002
--------------------------
Mark L. Thoenes, Chief Financial Officer
Majority of Directors:
*By /S/ Cecil D. Andrus June 28, 2002
---------------------------
Cecil D. Andrus, Director
*By /S/ George H. Kuper June 28, 2002
------------------------
George H. Kuper, Director
*By /S/ Joon S. Moon June 28, 2002
--------------------------
Joon S. Moon, Director
*By /S/ James G. Petcoff June 28, 2002
------------------------
James G. Petcoff, Director
*By /S/ Stanford Stoddard June 28, 2002
------------------------
Stanford Stoddard, Director
*By /S/ Mark L. Thoenes June 28, 2002
------------------------
Mark L. Thoenes, Attorney-in-Fact
57
EXHIBIT INDEX
The following exhibits are filed herewith or, if followed by a number in
parentheses, are incorporated herein by reference from the corresponding exhibit
filed in the report or registration statement identified in the footnotes
following this index:
Exhibit
Number Exhibit
2 Agreement Concerning Changes to Business Cooperation Agreement
(Framework) between Rentrak Japan Co., Ltd. and Rentrak
Corporation. (1)
3.1 Amended and Restated Articles of Incorporation and amendments
thereto. (2)
3.2 1995 Restated Bylaws, as amended to date. (3)
10.1* 1986 Second Amended and Restated Stock Option Plan and Forms of
Stock Option Agreements. (4)
10.2* Amendment to 1986 Second Amended and Restated Stock Option Plan
dated May 19, 2000. (5)
10.3 Guarantee Agreement dated as of June 26, 1996, between Rentrak
Corporation and BlowOut Entertainment, Inc. (6)
10.4* Amended and Restated Employment Agreement with Marty Graham
dated May 17, 1997. (7)
10.5* Addendum to Employment Agreement with Marty Graham dated
June 8, 2000. (8)
10.6* Amendment to Employment Agreement with Marty Graham dated
September 1, 2000. (9)
10.7* Employment Agreement with Michael Lightbourne dated
July 10, 1997. (10)
10.8* Employment Agreement with Christopher Roberts dated
October 27, 1997. (11)
10.9* Addendum to Employment Agreement with Christopher Roberts dated
June 8, 2000. (12)
10.10* The 1997 Equity Participation Plan of Rentrak Corporation,
as amended.
10.11* Form of Non-Qualified Stock Option Agreement under 1997 Equity
Participation Plan. (13)
10.12* Form of Incentive Stock Option Agreement under 1997 Equity
Participation Plan. (14)
10.13* Employment Agreement with F. Kim Cox dated April 1, 1998. (15)
58
10.14* Promissory Note of Michael Lightbourne dated
August 30, 2000. (16)
10.15* Loan Agreement with Michael Lightbourne dated
August 30, 2000. (17)
10.16* Stock Pledge Agreement with Michael Lightbourne dated
August 30, 2000. (18)
10.17 Loan and Security Agreement with Guaranty Business Credit
Corporation dated May 26, 2000. (19)
10.18 General Continuing Guarantee with Guaranty Business Credit
Corporation dated May 26, 2000. (20)
10.19* Employment Agreement with Mark L. Thoenes dated
January 1, 2001. (21)
10.20* Employment Agreement with Timothy J. Erwin dated
January 1, 2001. (22)
10.21* Employment Agreement with Richard A. Nida dated
August 14, 1998, with Addendum dated June 8, 2000. (23)
10.22 Rights Agreement dated as of May 18, 1995, between Rentrak
Corporation and U.S. Stock Transfer Corporation. (24)
10.23* Letter Agreement between Rentrak Corporation and Joon S. Moon
entered into as of March 15, 2001. (25)
10.24* Incentive Stock Option Agreement with Paul A. Rosenbaum dated
March 30, 2001. (26)
10.25* Non-Qualified Stock Option Agreement with Paul A. Rosenbaum
dated March 30, 2001. (27)
10.26* Employment Agreement with Amir Yazdani dated July 1, 2001. (28)
10.27* Employment Agreement with Paul A. Rosenbaum dated
October 1, 2001. (29)
10.28* Consulting Agreement with George H. Kuper dated April 24, 2001.
10.29* The 1997 Non-Officer Employee Stock Option Plan of Rentrak
Corporation. (30)
10.30* Amendment to the 1997 Non-Officer Employee Stock Option Plan
of Rentrak Corporation. (31)
10.31 Second Amendment to the 1997 Non-Officer Employee Stock Option
Plan of Rentrak Corporation.
21 List of Subsidiaries of Registrant.
59
23 Consent of KPMG LLP.
99 Description of Capital Stock of Rentrak Corporation. (30)
60
*Management Contract or Compensatory Plan or Arrangement.
1. Filed as Exhibit 2 to Form 8-K filed on April 17, 2001.
2. Filed in Form S-3 Registration Statement, File No. 33-8511, filed on
November 21, 1994.
3. Filed as Exhibit 3.1 to Form 10-Q filed on February 14, 2001.
4. Filed as Exhibit 10.1 to 1993 Form 10-K filed on June 28, 1993 (File No.
0-15159).
5. Filed as Exhibit 10.30 to 2000 Form 10-K filed on June 29, 2000.
6. Filed as Exhibit 2 to Form 8-K filed on December 9, 1996.
7. Filed as Exhibit 10.1 to Form 10-Q filed on November 3, 1997.
8. Filed as Exhibit 10.23 to 2000 Form 10-K filed on June 29, 2000.
9. Filed as Exhibit 10.13 to 2001 Form 10-K filed on June 29, 2001.
10. Filed as Exhibit 10.2 to Form 10-Q filed on November 3, 1997.
11. Filed as Exhibit 10.3 to Form 10-Q filed on November 3, 1997.
12. Filed as Exhibit 10.24 to 2000 Form 10-K filed on June 29, 2000.
13. Filed as Exhibit 10.14 to Amendment No. 1 to 2001 Form 10-K filed on August
14, 2001.
14. Filed as Exhibit 10.15 to Amendment No. 1 to 2001 Form 10-K filed on August
14, 2001.
15. Filed as Exhibit 10.2 to Form 10-Q filed on November 6, 1998.
16. Filed as Exhibit 10.17 to 2001 Form 10-K filed on June 29, 2001.
17. Filed as Exhibit 10.18 to 2001 Form 10-K filed on June 29, 2001.
18. Filed as Exhibit 10.19 to 2001 Form 10-K filed on June 29, 2001.
19. Filed as Exhibit 10.27 to 2000 Form 10-K filed on June 29, 2000.
20. Filed as Exhibit 10.28 to 2000 Form 10-K filed on June 29, 2000.
21. Filed as Exhibit 10.25 to 2001 Form 10-K filed on June 29, 2001.
22. Filed as Exhibit 10.26 to 2001 Form 10-K filed on June 29, 2001.
23. Filed as Exhibit 10.27 to 2001 Form 10-K filed on June 29, 2001.
61
24. Filed as Exhibit 4 to Form 8-K filed on June 5, 1995.
25. Filed as Exhibit 10.29 to 2001 Form 10-K filed on June 29, 2001.
26. Filed as Exhibit 10.30 to 2001 Form 10-K filed on June 29, 2001.
27. Filed as Exhibit 10.31 to 2001 Form 10-K filed on June 29, 2001.
28. Filed as Exhibit 10.1 to Form 10-Q filed on November 13, 2001.
29. Filed as Exhibit 10.1 to Form 10-Q filed on February 14, 2002.
30. Filed as Exhibit 4.1 to Form S-8 filed on June 5, 1997.
31. Filed as Exhibit 4.1 to Form S-8 filed on October 29, 1997.
32. Filed as Exhibit 99 to 2001 Form 10-K filed on June 29, 2001.
62