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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended: June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from to
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 no.)
7700 NE Ambassador Place, Portland, Oregon 97220
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (503) 284-7581
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 ( )
As of July 31, 2002, the Registrant had 9,720,707 shares of Common Stock
outstanding.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2002 and March 31, 2002
Consolidated Statements of Income for the three month periods ended
June 30, 2002 and June 30, 2001
Consolidated Statements of Cash Flows for the three month periods
ended June 30, 2002 and June 30, 2001
Notes to Consolidated Financial Statements
2
RENTRAK CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
(UNAUDITED)
June 30, March 31,
2002 2002
---------------------------------------------
CURRENT ASSETS:
Cash and cash equivalents $12,206,263 $12,028,684
Accounts receivable, net of allowance for doubtful
accounts of $1,070,013 and $1,086,143 11,500,419 11,237,396
Advances to program suppliers 1,551,518 1,042,768
Inventory 217,790 575,792
Income tax receivable 77,725 70,000
Deferred tax asset 2,194,744 2,295,567
Other current assets 1,373,440 3,084,665
Current assets of discontinued operations 1,725,067 2,180,360
---------------------------------------------
Total current assets 30,846,966 32,515,232
---------------------------------------------
PROPERTY AND EQUIPMENT, net 4,140,962 3,879,819
DEFERRED TAX ASSET 1,002,882 1,002,882
OTHER ASSETS 1,102,257 1,214,394
---------------------------------------------
TOTAL ASSETS $ 37,093,067 $ 38,612,327
=============================================
The accompanying notes are an
integral part of these consolidated
balance sheets.
3
RENTRAK CORPORATION
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(UNAUDITED)
June 30, March 31,
2002 2002
---------------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 17,165,964 $ 18,192,630
Accrued liabilities 1,097,643 549,277
Accrued compensation 1,011,191 1,338,748
Deferred revenue 284,330 379,106
Current liabilities of discontinued operations 263,998 379,298
---------------------------------------------
Total current liabilities 19,823,126 20,839,059
---------------------------------------------
LONG-TERM LIABILITIES:
Lease obligations and customer deposits 335,497 495,586
---------------------------------------------
Total long-term liabilities 335,497 495,586
---------------------------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value;
Authorized: 10,000,000 shares - -
Common stock, $.001 par value;
Authorized: 30,000,000 shares
Issued and outstanding: 9,789,940 shares
at June 30, 2002 and 9,866,283 at
March 31, 2002 9,790 9,866
Capital in excess of par value 41,207,336 41,730,216
Notes receivable (377,565) (377,565)
Cumulative other comprehensive income 180,667 180,453
Accumulated deficit (23,745,784) (23,910,288)
Less - Deferred charge - warrants (340,000) (355,000)
---------------------------------------------
16,934,444 17,277,682
---------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 37,093,067 $ 38,612,327
=============================================
The accompanying notes are an
integral part of these consolidated
balance sheets.
4
RENTRAK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended June 30,
2002 2001
------------------------------------------
REVENUES:
PPT $ 17,866,110 $ 16,257,716
Other 4,561,331 10,819,162
------------------------------------------
22,427,441 27,076,878
------------------------------------------
OPERATING COSTS AND EXPENSES:
Cost of sales 18,289,619 16,514,712
Selling, general, and administrative 4,000,448 7,730,117
Net gain from litigation settlement (361,847) -
------------------------------------------
21,928,220 24,244,829
------------------------------------------
INCOME FROM OPERATIONS
499,221 2,832,049
------------------------------------------
OTHER INCOME (EXPENSE):
Interest income - 77,091
Interest expense - (8,976)
Other - 5,350,737
------------------------------------------
- 5,418,852
------------------------------------------
INCOME FROM CONTINUING
OPERATIONS BEFORE INCOME TAX
PROVISION 499,221 8,250,901
INCOME TAX PROVISION 189,704 3,217,851
------------------------------------------
INCOME FROM CONTINUING
OPERATIONS 309,517 5,033,050
LOSS FROM DISCONTINUED
OPERATIONS, net of tax benefits of $88,881 and $216,186 (145,014) (338,137)
------------------------------------------
NET INCOME $ 164,503 $ 4,694,913
==========================================
EARNINGS PER SHARE:
Basic:
Continuing operations $ 0.03 $ 0.45
Discontinued operations $ (0.01) $ (0.03)
------------------------------------------
Total $ 0.02 $ 0.42
==========================================
Diluted:
Continuing operations $ 0.03 $ 0.45
Discontinued operations $ (0.01) $ (0.03)
------------------------------------------
Total $ 0.02 $ 0.42
==========================================
The accompanying notes are an integral
part of these consolidated statements.
5
RENTRAK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended June 30,
----------------------------------------
2002 2001
----------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 164,503 $ 4,694,913
Adjustments to reconcile income to net cash
provided by (used in) operating activities
Loss from discontinued operations 145,014 338,137
Gain on disposition of assets - (5,247,812)
Depreciation and amortization 470,950 235,523
Amortization of warrants 15,000 15,000
Provision (recovery) for doubtful accounts and other assets (170,000) 1,088,444
Reserves on advances to program suppliers 459,683 191,204
Deferred income taxes 100,823 3,001,666
Change in specific accounts:
Accounts receivable (93,023) (406,703)
Advances to program suppliers (968,433) (638,422)
Inventory 358,002 52,129
Income tax receivable (7,725) (12,906)
Other current assets 1,711,225 (37,488)
Accounts payable (1,026,666) (381,775)
Accrued liabilities & compensation (18,265) 463,403
Deferred revenue and other liabilities (254,651) (963,858)
----------------------------------------
Net cash provided by operations 886,437 2,391,455
----------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (619,956) (513,414)
Proceeds from sale of investments in Rentrak Japan - 1,710,237
Additions of other assets and intangibles - 39,592
----------------------------------------
Net cash provided (used in) investing activities (619,956) 1,236,415
----------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments under line of credit - (1,917,705)
Repurchases of common stock (810,001) (439,070)
Issuance of common stock 526,119 171,000
Issuance of common stock to non-employees - 14,000
----------------------------------------
Net cash used in financing activities (283,882) (2,171,775)
----------------------------------------
6
NET CASH PROVIDED (USED) BY CONTINUING OPERATIONS (17,401) 1,456,095
NET CASH PROVIDED BY DISCONTINUED OPERATIONS 194,980 590,585
NET INCREASE IN CASH AND CASH EQUIVALENTS 177,579 2,046,680
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 12,028,684 3,322,917
----------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $12,206,263 $ 5,369,597
========================================
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the period for -
Interest $ - $ 27,329
Income taxes paid, net of refunds received 12,236 12,906
NON-CASH TRANSACTIONS
Change in unrealized gain (loss) on investment
securities, net of tax - 858
Exchange of investment in Rentrak Japan for
Rentrak common stock - 3,890,500
Payable created for the purchase of common stock 239,074 -
The accompanying notes are an
integral part of these consolidated
statements.
7
RENTRAK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A: Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements of
RENTRAK CORPORATION (the "Company"), have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission (SEC). Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles in the
United States have been condensed or omitted pursuant to such rules and
regulations. The results of operations for the three month period ended June 30,
2002 are not necessarily indicative of the results to be expected for the entire
fiscal year ending March 31, 2003. The Condensed Consolidated Financial
Statements should be read in conjunction with the Consolidated Financial
Statements and footnotes thereto included in the Company's 2002 Annual Report to
Shareholders.
The Condensed Consolidated Financial Statements reflect, in the opinion of
management, all material adjustments (which include only normal recurring
adjustments) necessary to present fairly the Company's financial position and
results of operations.
The Condensed 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 inter-company
accounts and transactions. Investments in affiliated companies owned 20 to 50
percent are accounted for by the equity method.
During the three-month period ended June 30, 2002, the FASB issued Statement of
Financial Accounting Standard No. 146 "Accounting for Costs Associated with Exit
or Disposal Activities" (SFAS 146). The Company expects that adoption of SFAS
146 will not have a material impact on the Company's financial condition or
results of operations.
8
NOTE B: Net Income 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
periods. 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 and warrants.
The weighted average number of shares of common stock equivalents and net income
used to compute basic and diluted earnings per share for the three month periods
ended June 30, 2002 and 2001 were as follows:
3-Months Ended 3-Months Ended
June 30, 2002 June 30, 2001
------------------------------------ ------------------------------------
Basic Diluted Basic Diluted
----- ------- ----- -------
Weighted average number of shares of common
stock outstanding used to compute basic
earnings (loss) per common share 9,886,817 9,886,817 11,215,706 11,215,706
Dilutive effect of exercise of stock
options - 420,803 - 48,109
------------------------------------ ------------------------------------
Weighted average number of shares of
common stock used to compute diluted
earnings (loss) per common share
outstanding and common stock equivalents 9,886,817 10,307,620 11,215,706 11,263,815
==================================== ====================================
Net income (loss) used in basic and
diluted earnings (loss) per common share:
Continuing operations $ 309,518 $ 309,518 $ 5,033,050 $ 5,033,050
Discontinued operations (145,014) (145,014) (338,137) (338,137)
------------------------------------ ------------------------------------
Net income $ 164,504 $ 164,504 $ 4,694,913 $ 4,694,913
==================================== ====================================
Earnings (loss) per common share:
Continuing operations $ 0.03 $ 0.03 $ 0.45 $ 0.45
Discontinued operations (0.01) (0.01) (0.03) (0.03)
------------------------------------ ------------------------------------
Earnings loss per common share $ 0.02 $ 0.02 $ 0.42 $ 0.42
==================================== ====================================
Options and warrants to purchase approximately 1,300,000 and 2,700,000 shares of
common stock for the three month periods ended June 30, 2002 and 2001,
respectively, were outstanding but were not included in the computation of
diluted EPS because the exercise prices of the options and warrants were greater
than the average market price of the common shares.
9
NOTE C: Business Segments, Significant Suppliers and Major Customer
The Company classifies its services in three segments, PPT, 3PF.COM, Inc.
("3PF") and Other. The PPT business segment includes the following business
activities: the PPT System whereby under its Pay-Per-Transaction (PPT) revenue
sharing program, the Company enters into contracts to lease videocassettes and
digital videodiscs ("DVD's"') from program suppliers (producers of motion
pictures and licensees and distributors of home video cassettes) which are then
leased to retailers for a percentage of the rentals charged by the retailers;
data tracking and reporting services provided by the Company to Studios; and
internet services provided by formovies.com, Inc., a subsidiary. 3PF is a
subsidiary of the Company which provides order processing, fulfillment and
inventory management services to Internet retailers and wholesalers and to other
businesses requiring just-in-time fulfillment. Other includes amounts received
pursuant to previous royalty agreements, primarily from Rentrak Japan. The Other
segment formerly included BlowOut Video, Inc., (BlowOut Video) a video retailer,
which the Company elected to discontinue during the three-month period ended
June 30, 2002 (See Note D).
10
Business Segments
Following are the revenues, income (loss) from continuing operations, and
identifiable assets of the Company's continuing business segments for the
periods indicated (unaudited):
Three Months Ended Three Months Ended
June 30, 2002 June 30, 2001
------------------------------------------------
NET SALES: (1)
PPT $18,840,978 $16,759,139
3PF.COM, Inc. (2) 4,069,910 4,772,482
OTHER 257,853 6,794,699
------------------------------------------------
$23,168,741 $28,326,320
================================================
INCOME (LOSS) FROM CONTINUING
OPERATIONS: (1)
PPT $1,287,497 $448,376
3PF.COM, Inc. (2) (795,401) (3,148,396)
OTHER 7,125 5,532,069
------------------------------------------------
$499,221 $2,832,049
================================================
IDENTIFIABLE ASSETS: (1)
PPT $40,970,227 $38,011,718
3PF.COM, Inc. 6,851,959 9,446,508
OTHER 20,856 23,666
------------------------------------------------
$47,843,042 $47,481,892
================================================
(1) Total amounts differ from those reported on the consolidated financial
statements, as intercompany transactions are not eliminated for segment
reporting purposes.
(2) 3PF's revenues related to the shipment of cassettes to PPT customers
was $563,049 and $773,813 for the three-month periods ended
June 30, 2002 and 2001, respectively.
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. For the
three-month period ended June 30, 2002, the Company had two program suppliers
whose product generated 17 percent, a third that generated 14 percent, and a
fourth that generated 11 percent of Rentrak revenue. No other program supplier
11
provided product which generated more than 10 percent of revenue for the
three-month period ended June 30, 2002. No customer accounted for more than 10
percent of the Company's revenue in the three-month period ended June 30, 2002.
For the three-month period ended June 30, 2001, the Company had one program
supplier whose product generated 15 percent, a second that generated 14 percent,
and a third that generated 11 percent of Rentrak revenue. No other program
supplier provided product which generated more than 10 percent of revenue for
the three-month period ended June 30, 2001. No customer accounted for more than
10 percent of the Company's revenue in the three-month period ended June 30,
2001.
NOTE D: Discontinued Operations
Management has been analyzing the business of BlowOut Video, the Company's
retail subsidiary. Currently BlowOut Video has three stores operating in Ohio,
Pennsylvania and New York. Due to the significant increase in sell through
activity throughout the industry, the operations of BlowOut Video have not met
the expectations of management. As a result, during the three months ended June
30, 2002, management initiated a plan to discontinue the operations of BlowOut
Video. The plan calls for an exit from the stores by the end of fiscal 2003,
either through cancellation of the lease commitments and liquidation of assets,
or through sale of the stores to a third party.
BlowOut Video generated revenues of $1.0 million and a net loss of $145,014, or
$0.01 per share, in the three-month period ended June 30, 2002, of fiscal 2003,
compared with revenues of $1.9 million and a net loss of $338,137, or $0.03 per
share, during the three-month period ended June 30, 2001, during which it
operated seven stores.
NOTE E: Related Party Transactions
On June 16, 2000, the Company loaned a total of $8,097,636 to two of its
officers to purchase 1,663,526 shares of stock upon exercise of their employee
stock options. During the three month period ended December 31, 2000, the
Company and one of these officers terminated his stock exercise agreement for
301,518 shares of stock and corresponding loan in the amount of $1,468,250. At
various times during the three month period ended September 30, 2000, the
Company loaned an additional $1,343,743 to some of its officers to purchase
283,277 shares of stock upon exercise of their employee stock options. During
the three month period ended December 31, 2000, the Company and one of these
officers terminated his stock exercise agreement for 50,535 shares of stock and
corresponding loan in the amount of $244,940. During fiscal 2002, a former
officer of the Company, who was loaned a total of $7,350,621 during the period
from June through September 2000 to purchase 1,495,750 shares of stock upon
exercise of his employee stock options, terminated his agreements with the
Company. Accordingly, the common stock and related notes receivable
12
covered by the terminated agreements noted above have been reversed in non-cash
transactions.
The loans bear interest at the federal funds rate in effect on the date of the
loan (6.5 percent) and interest is payable annually. The Company is not accruing
interest on the remaining loans. The principal amount of the loans 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 Rentrak, (2) one year after the
borrower leaves Rentrak'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. The loans are without recourse (except as to the
stock securing the loans) as to principal and are with full recourse against the
borrower as to interest. In accordance with generally accepted accounting
principles, the notes receivable arising from these transactions are presented
as deductions from stockholders' equity.
Note F: Rentrak Japan Agreement
Effective April 2, 2001, the Company entered into an agreement with Rentrak
Japan amending a 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 $5.7 million, forfeiture by Rentrak Japan of any
right of return of the 1999 prepaid royalty of $0.7 million, and forgiveness by
Rentrak Japan of approximately $0.6 million of liabilities due to Rentrak Japan
from the Company. Of these amounts, $6.4 million was recorded as revenue
consistent with the historical treatment of royalty payments. The remaining $0.6
million 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 $6.4 million. The resulting gain of $6.4 million
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 $1.0 million.
13
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 $3.9 million.
Based upon the results of the transactions noted above occurring in the year
ended March 31, 2002, the Company has no further obligations to, or ownership
in, Rentrak Japan.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward Looking Statements
Certain information included in Management's Discussion and Analysis of
Financial Condition and Results of Operations constitute forward-looking
statements that involve a number of risks and uncertainties. Forward looking
statements are 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 Pay Per Transaction ("PPT") System successfully, the
financial stability of 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
prerecorded videocassettes ("Cassettes") and digital videodiscs ("DVD's") from
program suppliers. Such factors are discussed in more detail in the Company's
Annual Report on Form 10-K for the fiscal year ended March 31, 2002.
Results of Operations
Continuing Operations - Domestic PPT Operations and Other Continuing
- --------------------------------------------------------------------------------
Subsidiaries
- ------------
For the three-month period ended June 30, 2002, total revenue decreased $4.7
million, or 17 percent, to $22.4 million from $27.1 million for the three-month
period ended June 30, 2001. Total 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 generated 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 revenue includes charges to customers of
the Company's subsidiary 3PF.COM, Inc. ("3PF"), which provides order processing,
fulfillment and inventory management services to Internet retailers and
wholesalers and other businesses requiring just-in-time fulfillment, and other
revenues which include royalty payments primarily from Rentrak Japan (See Note
F.).
15
The decrease in total revenues for the three-month period ended June 30, 2002 is
primarily due to the recognition of $6.4 million in revenue related to an
agreement between the Company and Rentrak Japan (See Note F.) during the
three-month period ended June 30, 2001, as well as a decrease in revenue of $0.7
related to 3PF services. The decrease in 3PF revenues is primarily due to a loss
of a key customer during the three month period ended June 30, 2001. These
decreases in revenue were partially offset by an increase in revenue from the
PPT business segment. PPT business segment revenues for the three-month period
ended June 30, 2002 increased to $18.8 million from $16.8 million for the
three-month period ended June 30, 2001, an increase of $2.0 million, or 12
percent. This increase is primarily due to an increase in the total number of
Cassettes leased under the PPT System partially offset by fewer rental
transactions on a per tape basis.
Cost of sales for the three-month period ended June 30, 2002 increased to $18.3
million from $16.5 million for the three-month period ended June 30, 2001, an
increase of $1.8 million, or 11 percent. This increase is primarily attributable
to the $2.0 million increase in PPT business segment revenues as noted above.
Cost of sales as a percent of total revenues, excluding the $6.4 million in
revenue related to the Rentrak Japan business restructuring (see Note F) was 82%
for the three-month period ended June 30, 2002 compared to 80% for the
three-month period ended June 30, 2001; and (5) the implementation of better
cost controls across 3PF's organization.
Selling, general and administrative expenses were $4.0 million for the
three-month period ended June 30, 2002, compared to $7.7 million for the
three-month period ended June 30, 2001, a decrease of $3.7 million, or 48
percent. The decrease in selling, general and administrative expenses is
primarily due to the June 30, 2001 period including: (1) a $0.9 million reserve
established for a 3PF customer trade account deemed uncollectible due to a
Chapter 11 bankruptcy filing by the customer in May 2001; (2) recognition of
$0.8 million in expense related to the closure of the 3PF administrative offices
in Skokie, Illinois in April 2001; (3) recognition of $0.2 million in commission
expense related to the Rentrak Japan restructuring; (4) the recognition of $0.5
million in expense for a bonus accrual related to the pre-tax financial results
for the three-month period ended June 30, 2001; and (5) the implementation of
better cost controls across 3PF's organization.
Operating income from continuing operations for the three-month period ended
June 30, 2002 was $0.5 million. This compares to an operating loss of $2.9
million for the three-month period ended June 30, 2001, excluding the effect of
the $6.4 million in revenue noted above and the selling, general and
administrative expenses associated with this agreement. The improvement for the
2002 period was primarily due to improved PPT revenues and decreased selling,
general and administrative expenses at 3PF as noted above.
Other income (expense) decreased from income of approximately $5.4 million for
the three-month period ended June 30, 2001 to $0 for the three-month period
ended June 30, 2002, primarily due to the recognition of $5.6 million in other
16
income during the 2001 period related to the business restructuring agreement
between the Company and Rentrak Japan (See Note F.).
The effective tax rate during the three-month period ended June 30, 2002 was 38%
compared to 39% during the three-month period ended June 30, 2001.
As a result, for the three-month period ended June 30, 2002, the Company
recorded net income from continuing operations of $0.3 million, or 1 percent of
total revenue, compared to income from continuing operations of $5.0 million, or
18 percent of total revenue, in the three-month period ended June 30, 2001. The
decrease in net income from continuing operations is attributable to the
business restructuring between the Company and Rentrak Japan during the
three-month period ended June 30, 2001 (See Note F) partially offset by the
improved PPT revenues and decreased selling, general and administrative,
expenses noted above.
Discontinued Operations
- -----------------------
As discussed in Note D, during the three-month period ended June 30, 2002, the
Company elected to discontinue operations of its retail subsidiary BlowOut
Video, Inc. Total revenue from BlowOut decreased $0.9 million from $1.9 million
for the three month period ended June 30, 2001, to $1.0 million for the three
month period ended June 30, 2002. Cost of sales from BlowOut decreased $0.7
million from $1.5 million for the three month period ended June 30, 2001, to
$0.8 million for the three month period ended June 30, 2002. Selling, general
and administrative, from BlowOut decreased $0.4 million from $0.9 million for
the three month period ended June 30, 2001, to $0.5 million for the three month
period ended June 30, 2002. The revenue, cost of sales, and selling, general and
administrative expenses, decreases are primarily due to the closure of four of a
total of seven stores in fiscal 2002.
Net loss from BlowOut decreased $0.2 million from $0.3 million for the three
month period ended June 30, 2001, to $0.1 million for the three month period
ended June 30, 2002.
Financial Condition
- -------------------
At June 30, 2002, total assets were $37.1 million, a decrease of $1.5 million
from $38.6 million at March 31, 2002. As of June 30, 2002, cash increased $0.2
million to $12.2 million from $12.0 million at March 31, 2002 (see the
Consolidated Statements of Cash Flows in the accompanying Consolidated Financial
Statements). Accounts receivable increased $0.3 million from $11.2 million at
March 31, 2002 to $11.5 million at June 30, 2002. At June 30, 2002, Advances to
program suppliers were $1.6 million, an increase of $.6 million from $1.0
million at March 31, 2002, primarily due to the timing of release dates for
certain titles. At June 30, 2002, Other current assets were $1.4 million, a
decrease of $1.7 million from $3.1 million at March 31, 2002, primarily due to
the cash receipt, during May 2002, of the Reel.com settlement which occurred in
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March 2002. Current assets of discontinued operations decreased $0.5 million
from $2.2 million at March 31, 2002 to $1.7 million at June 30, 2002.
At June 30, 2002, total liabilities were $20.2 million, a decrease of $1.1
million from $21.3 million at March 31, 2002. Accounts payable decreased $1.0
million from $18.2 million at March 31, 2002 to $17.2 million at June 30, 2002
primarily due to the timing of studio and other vendor payments. Accrued
liabilities increased $0.6 million from $0.5 million at March 31, 2002, to $1.1
million at June 30, 2002, primarily due to the receipt of a $0.2 million deposit
from a 3PF client and obligations related to the repurchase of the Company's
stock. Accrued compensation decreased $0.3 million from $1.3 million at March
31, 2002 to $1.0 million at June 30, 2002 in part due to the payout of a portion
of the bonus accrual related to the pre-tax financial results for the fiscal
year ended March 31, 2002. Net current liabilities of discontinued operations
decreased $0.1 million from $0.4 million at March 31, 2002 to $0.3 million at
June 30, 2002.
Accordingly, at June 30, 2002, total stockholders' equity was $16.9 million, a
decrease of $0.4 million from the $17.3 million at March 31, 2002. Common stock
and capital in excess of par value decreased, on a combined basis, $0.5 million
from $41.7 million at March 31, 2002 to $41.2 million at June 30, 2002 primarily
due to the repurchase of stock under the Company's stock repurchase program.
Accumulated deficit decreased $0.2 million from $23.9 million at March 31, 2002
to $23.7 million at June 30, 2002 due to net income from the three-month period.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2002, the Company had cash of $12.2 million compared to $12.0
million at March 31, 2002. The Company's current ratio (current assets/current
liabilities) was 1.56 at March 31, 2002 and June 30, 2002.
In May 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 percent. 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. Based upon the financial results
reported as of June 30, 2002 and for the three month period then ended, the
Company has determined it is in compliance with all financial covenants as of
June 30, 2002. At June 30, 2002 and August 14, 2002, the Company had no
outstanding borrowings under this agreement.
In 1992, the Company established a Retailer Financing Program whereby, on a
selective basis, it provided financing to Participating Retailers that the
Company
18
believed had 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 March 1999. In 1996, the Company agreed to guarantee any amounts outstanding
under BlowOut's credit facility. As March 31, 2002 there was no remaining
liability related to these discontinued operations. The payments, as made, were
recorded as a reduction of "net current liabilities of discontinued operations"
on the Company's balance sheet.
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 that its available sources
of liquidity will be sufficient to fund the Company's operations and other cash
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 2002 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.
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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. Actual results could materially
differ from these estimates and could have a material effect on the recorded
studio reserves.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE 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 June 30,
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.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is from time to time a party to legal proceedings and claims that
arise in the ordinary course of its business, including, without limitation,
collection matters with respect to customers. In the opinion of management, the
amount of any ultimate liability with respect to these types of actions is not
expected to materially affect the financial position or results of operations of
the Company as a whole.
Item 2. Changes in Securities and Use of Proceeds
During the three-month period ended June 30, 2002, the Company issued a warrant
to Wedbush Morgan Securities, Inc., to purchase 30,000 shares of the Company's
common stock at a purchase price of $7.50 per share in exchange for a cash
payment of $30.00 and as partial consideration for financial advisory services
in connection with various strategic opportunities or financing transactions
that may be available to the Company. The warrant, which will expire on May 16,
2009, was issued in reliance on the exemption from registration provided by
Section 4(2) of the Securities Act of 1933.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Reports on Form 8-K
A report on Form 8-K was filed on May 16, 2002, reporting under Item 4 a change
in the Company's independent public accountants from Arthur Andersen LLP to KPMG
LLP.
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SIGNATURE
Pursuant to the requirements 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.
Dated this 14th day of August, 2002
RENTRAK CORPORATION
By: /s/ Mark L. Thoenes
--------------------------------------
Mark L. Thoenes
Chief Financial Officer
Signing on behalf of the registrant
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CERTIFICATIONS PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Rentrak Corporation (the "Company")
on Form 10-Q for the period ended June 30, 2002, as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, Paul A. Rosenbaum,
Director, Chairman and Chief Executive Officer of the Company, certify, pursuant
to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act
of 2002, that, to the best of my knowledge:
1. The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in
all material respects, the financial condition and results of operations
of the Company.
/s/ Paul A. Rosenbaum
- ------------------------------
Paul A. Rosenbaum
Director, Chairman and Chief Executive Officer
Rentrak Corporation
August 14, 2002
In connection with the Quarterly Report of Rentrak Corporation (the "Company")
on Form 10-Q for the period ended June 30, 2002, as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, Mark L. Thoenes,
Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350,
as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that, to the
best of my knowledge:
3. The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
4. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ Mark L. Thoenes
- --------------------------------
Mark L. Thoenes
Chief Financial Officer
Rentrak Corporation
August 14, 2002
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