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SECURITIES AND EXCHANGE COMMISSION
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: December 31, 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
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 ( )
Indicate by check mark whether the registrant is an accelerated file (as defined
in Rule 12b-2 of the Exchange Act). Yes( ) No(x)
As of January 31, 2003, the Registrant had 9,523,044 shares of Common Stock
outstanding.
1
PART I - FINANCIAL INFORMATION Page #
Item 1 Financial Statements
Consolidated Balance Sheets as of December 31, 2002 and
March 31, 2002 3
Consolidated Statements of Operations for the three-month
periods ended December 31, 2002 and December 31, 2001 5
Consolidated Statements of Operations for the nine-month
periods ended December 31, 2002 and December 31, 2001 6
Consolidated Statements of Cash Flows for the nine-month
periods ended December 31, 2002 and December 31, 2001 7
Notes to Consolidated Financial Statements 9
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 20
Item 3 Quantitative and Qualitative Disclosures About Market Risk 28
Item 4 Controls and Procedures 28
Part II OTHER INFORMATION
Item 1 Legal Proceedings 29
Item 6 Exhibits And Reports On Form 8-K 29
Signatures 30
Certifications 31
Exhibit Index 36
2
RENTRAK CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
(UNAUDITED)
December 31, March 31,
2002 2002
-----------------------------------------------------
CURRENT ASSETS:
Cash and cash equivalents $ 11,543,312 $ 12,028,684
Accounts receivable, net of allowance for doubtful
accounts of $1,009,006 and $1,086,143 9,711,218 11,237,396
Advances to program suppliers 1,084,789 1,042,768
Inventory 230,236 575,792
Income tax receivable 117,628 70,000
Deferred tax asset 2,320,047 2,295,567
Other current assets 1,633,520 3,084,665
Current assets of discontinued operations 659,057 2,180,360
-----------------------------------------------------
Total current assets 27,299,807 32,515,232
-----------------------------------------------------
PROPERTY AND EQUIPMENT, net 3,207,818 3,879,819
DEFERRED TAX ASSET 1,113,882 1,002,882
OTHER ASSETS 1,851,612 1,214,394
-----------------------------------------------------
TOTAL ASSETS $ 33,473,119 $ 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)
December 31, March 31,
2002 2002
----------------------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 15,580,452 $ 18,192,630
Accrued liabilities 610,681 549,277
Accrued compensation 785,489 1,338,748
Deferred revenue 192,354 379,106
Current liabilities of discontinued operations 259,240 379,298
----------------------------------------------------
Total current liabilities 17,428,216 20,839,059
----------------------------------------------------
LONG-TERM LIABILITIES:
Lease obligations and customer deposits 607,512 495,586
----------------------------------------------------
Total long-term liabilities 607,512 495,586
----------------------------------------------------
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: 9,522,419 shares
at December 31, 2002 and 9,866,283 at
March 31, 2002 9,522 9,866
Capital in excess of par value 39,780,440 41,730,216
Notes receivable - (377,565)
Cumulative other comprehensive income 180,879 180,453
Accumulated deficit (24,223,450) (23,910,288)
Less - Deferred charge - warrants (310,000) (355,000)
----------------------------------------------------
15,437,391 17,277,682
----------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 33,473,119 $ 38,612,327
====================================================
The accompanying notes are an
integral part of these consolidated
balance sheets.
4
RENTRAK CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended, December 31,
2002 2001
-----------------------------------------------------
REVENUES:
PPT $ 14,855,133 $ 18,145,847
Other 6,424,697 6,165,414
-----------------------------------------------------
21,279,830 24,311,261
-----------------------------------------------------
OPERATING COSTS AND EXPENSES:
Cost of sales 18,030,371 19,562,375
Selling, general, and administrative 3,743,390 3,356,150
-----------------------------------------------------
21,773,761 22,918,525
-----------------------------------------------------
INCOME (LOSS) FROM OPERATIONS (493,931) 1,392,736
-----------------------------------------------------
OTHER INCOME (EXPENSE):
Interest income 11,354 (24,538)
Interest expense - (1,896)
Other - 2,366,496
-----------------------------------------------------
11,354 2,340,062
-----------------------------------------------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAX
PROVISION (482,577) 3,732,798
INCOME TAX PROVISION (BENEFIT) (183,382) 1,391,227
-----------------------------------------------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS (299,195) 2,341,571
LOSS FROM DISCONTINUED
OPERATIONS, NET OF TAX BENEFIT
OF $46,193 AND $57,652 (75,369) (102,883)
-----------------------------------------------------
NET INCOME (LOSS) $ (374,564) $ 2,238,688
=====================================================
EARNINGS (LOSS) PER SHARE:
Basic:
Continuing operations $ (0.03) $ 0.24
Discontinued operations $ (0.01) $ (0.01)
-----------------------------------------------------
Total $ (0.04) $ 0.23
=====================================================
Diluted:
Continuing operations $ (0.03) $ 0.24
Discontinued operations $ (0.01) $ (0.01)
-----------------------------------------------------
Total $ (0.04) $ 0.23
=====================================================
The accompanying notes are an integral
part of these consolidated statements.
5
RENTRAK CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Nine Months Ended Nine Months Ended
December 31, 2002 December 31, 2002
-------------------------------------------------------------
REVENUES:
PPT $ 50,697,581 $ 53,656,538
Other 13,784,172 19,777,940
-------------------------------------------------------------
64,481,753 73,434,478
-------------------------------------------------------------
OPERATING COSTS AND EXPENSES:
Cost of sales 53,330,943 53,516,753
Selling, general, and administrative 11,299,645 14,876,633
Net gain from litigation settlement (361,847) -
-------------------------------------------------------------
64,268,741 68,393,386
-------------------------------------------------------------
INCOME FROM OPERATIONS 213,012 5,041,092
-------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest income 82,854 165,425
Interest expense - (10,872)
Other - 7,717,233
-------------------------------------------------------------
7,871,786
82,854
-------------------------------------------------------------
INCOME FROM CONTINUING
OPERATIONS BEFORE INCOME TAX
PROVISION 295,866 12,912,878
INCOME TAX PROVISION 112,429 4,971,457
-------------------------------------------------------------
INCOME FROM CONTINUING
OPERATIONS 183,437 7,941,421
LOSS FROM DISCONTINUED
OPERATIONS, NET OF TAX BENEFIT
OF $304,367 AND $381,685 (496,599) (609,706)
-------------------------------------------------------------
NET INCOME (LOSS) $ (313,162) $ 7,331,715
=============================================================
EARNINGS (LOSS) PER SHARE:
Basic:
Continuing operations $ 0.02 $ 0.75
Discontinued operations $ (0.05) $ (0.06)
-------------------------------------------------------------
Total $ (0.03) $ 0.69
=============================================================
Diluted:
Continuing operations $ 0.02 $ 0.74
Discontinued operations $ (0.05) $ (0.06)
-------------------------------------------------------------
Total $ (0.03) $ 0.68
=============================================================
The accompanying notes are an
integral part of these consolidated
statements.
6
RENTRAK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended December 31,
-------------------------------------------
2002 2001
-------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss) $ (313,162) $ 7,331,715
Adjustments to reconcile income (loss) to net cash
provided by operating activities
Loss from discontinued operations, net of tax 496,599 609,706
Compensation expense related to stock repurchases 326,121 -
Gain on disposition of assets - (7,741,808)
Depreciation and amortization 817,084 754,017
Amortization of warrants 45,000 45,000
Provision (recovery) for doubtful accounts and other assets (645,000) (415,247)
Reserves on advances to program suppliers 1,599,090 1,488,601
Deferred income taxes (135,480) 4,531,149
Change in specific accounts:
Accounts receivable 2,171,178 2,398,780
Advances to program suppliers (1,641,111) (1,967,598)
Inventory 345,556 380,883
Income tax receivable (47,628) (38,150)
Other current assets 1,676,145 996,354
Accounts payable (2,612,178) 1,117,355
Accrued liabilities & compensation (491,855) (328,902)
Deferred revenue and other liabilities (74,400) (1,398,248)
-------------------------------------------
Net cash provided by operations 1,515,959 7,763,607
-------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (909,872) (1,138,571)
Proceeds from sale of investments in Rentrak Japan - 4,071,556
Reductions (additions) of other assets and intangibles (97,429) 874,657
-------------------------------------------
Net cash provided by (used in) investing activities (1,007,301) 3,807,642
-------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) under line of credit - (1,917,705)
Repurchases of common stock and warrants (2,182,269) (598,857)
Issuance of common stock to employees 283,593 263,480
Issuance of common stock to non-employees - 150,560
-------------------------------------------
7
Net cash used in financing activities (1,898,676) (2,102,522)
-------------------------------------------
NET CASH PROVIDED BY (USED IN) CONTINUING OPS.
(1,390,018) 9,468,727
NET CASH PROVIDED BY DISCONTINUED OPS. 904,646 15,559
-------------------------------------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS
(485,372) 9,484,286
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 12,028,684 3,322,917
-------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 11,543,312 $ 12,807,203
===========================================
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the period for -
Interest $ - $ 28,929
Income taxes paid, net of refunds received 66,241 86,829
NON-CASH TRANSACTIONS
Change in unrealized gain (loss) on investment
securities, net of tax - 49,572
Exchange of investment in Rentrak Japan for
Rentrak common stock - 3,890,500
Forgiveness of note receivable in exchange for stock (377,565) (7,350,621)
Financing lease of Property and Equipment Sale 900,000 -
The accompanying notes are an integral part
of these consolidated statements.
8
RENTRAK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A: Basis of Presentation
The accompanying unaudited 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 and nine-month periods ended December
31, 2002, are not necessarily indicative of the results to be expected for the
entire fiscal year ending March 31, 2003. The 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 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 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.
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 143. "Accounting for Obligations
Associated with Retirement of Long-Lived Assets." SFAS No. 143 requires the
accrual, at fair value, of the estimated retirement obligation for tangible
long-lived assets if the Company is legally obligated to perform retirement
activities at the end of the related asset's life and is effective for fiscal
years beginning after June 15, 2002. The Company is evaluating the impact of
adopting SFAS No. 143 on its consolidated financial position, but does not
believe SFAS No. 143 will have a material impact on the Company's financial
statements.
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities." The statement requires that a liability for all
costs be recognized when the liability is incurred with exit or disposal
activities as opposed to when the entity commits to an exit plan under EITF No.
93-4, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." The statement will be applied prospectively to activities
exited from or disposed of and initiated after December 31, 2002.
9
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock Based
Compensation" The statement provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, this Statement amends the disclosure
requirements of Statement 123 to require prominent disclosures in both annual
and interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
Company is evaluating the impact of adopting SFAS No. 148. The statement will be
applied prospectively to periods after March 31, 2003.
10
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 and
nine-month periods ended December 31, 2002 and 2001 were as follows:
11
3-Months Ended 9-Months Ended
December 31, 2002 December 31, 2002
----------------------------------- -----------------------------------
Basic Diluted Basic Diluted
----- ------- ----- -------
Weighted average number of shares of
common stock outstanding used to
compute basic earnings (loss) per
common share 9,520,705 9,520,705 9,684,744 9,684,744
Dilutive effect of exercise of stock
options - - - 183,859
----------------- ----------------- ----------------- -----------------
Weighted average number of shares of
common stock used to compute diluted
earnings (loss) per common share
outstanding and common stock
equivalents 9,520,705 9,520,705 9,684,744 9,868,603
================= ================= ================= =================
Net income (loss) used in basic and
diluted earnings (loss) per common share:
Continuing operations $ (299,195) $ (299,195) $ 183,437 $ 183,437
Discontinued operations (75,369) (75,369) (496,599) (496,599)
----------------- ----------------- ----------------- -----------------
Net income (loss) $ (374,564) $ (374,564) $ (313,162) $ (313,162)
================= ================= ================= =================
Earnings (loss) per common share:
Continuing operations $ (0.03) $ (0.03) $ 0.02 $ 0.02
Discontinued operations (0.01) (0.01) (0.05) (0.05)
----------------- ----------------- ----------------- -----------------
Earnings (loss) per common share $ (0.04) $ (0.04) $ (0.03) $ (0.03)
================= ================= ================= =================
3-Months Ended 9-Months Ended
December 31, 2001 December 31, 2001
----------------------------------- -----------------------------------
Basic Diluted Basic Diluted
----- ------- ----- -------
Weighted average number of shares of
common stock outstanding used to compute
basic earnings (loss) per
common share 9,676,636 9,676,636 10,632,555 10,632,555
Dilutive effect of exercise of stock
options - 167,305 - 86,113
----------------------------------- -----------------------------------
Weighted average number of shares of
common stock used to compute diluted
earnings (loss) per common share
outstanding and common stock
equivalents 9,676,636 9,843,941 10,632,555 10,718,668
=================================== ===================================
Net income (loss) used in basic and
diluted earnings (loss) per common share:
Continuing operations $ 2,341,571 $ 2,341,571 $ 7,941,421 $ 7,941,421
Discontinued operations (102,883) (102,883) (609,706) (609,706)
----------------------------------- -----------------------------------
Net income (loss) $ 2,238,688 $ 2,238,688 $ 7,331,715 $ 7,331,715
=================================== ===================================
Earnings (loss) per common share:
Continuing operations $ 0.24 $ 0.24 $ 0.75 $ 0.74
Discontinued operations (0.01) (0.01) (0.06) (0.06)
----------------------------------- -----------------------------------
Earnings (loss) per common share $ 0.23 $ 0.23 $ 0.69 $ 0.68
=================================== ===================================
Options and warrants to purchase approximately 2,000,000 shares for the quarter
ended December 31, 2002, were outstanding but were not included in the
computation of diluted EPS because their effect would be antidilutive due to a
loss for the quarter. Options and warrants to purchase approximately 2,200,000
shares of common stock for the quarter ended December 31, 2001, and
approximately 1,700,000 and 2,600,000 shares for the nine-month periods ended
December 31, 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.
12
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, 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).
13
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):
Nine Months Ended Nine Months Ended Three Months Ended Three Months Ended
December 31, 2002 December 31, 2001 December 31, 2002 December 31, 2001
--------------------------------------------------------------------------------------
REVENUES: (1)
PPT $53,116,634 $55,135,629 $15,460,518 $18,284,018
3PF.COM, Inc. (2) 12,786,135 13,629,350 6,314,907 6,353,023
OTHER 774,914 7,670,150 244,129 798,819
--------------------------------------------------------------------------------------
$66,677,683 $76,435,129 $22,019,554 $25,435,860
======================================================================================
INCOME (LOSS) FROM
OPERATIONS: (1)
PPT 2,481,265 3,056,244 (165,214) 599,112
3PF.COM, Inc. (2,199,766) (3,600,959) (292,101) 819,070
OTHER 23,297 5,532,069 - -
--------------------------------------------------------------------------------------
$304,796 $4,987,354 ($457,315) $1,418,182
======================================================================================
IDENTIFIABLE ASSETS:
PPT $32,280,990 $40,596,396
3PF.COM, Inc. 6,566,303 7,857,397
OTHER 24,344 37,161
--------------------------------------------
$42,871,637 $48,490,954
============================================
(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
were $534,193 and $608,690 for the three-month periods ended December
31, 2002 and 2001, respectively, and were $1,620,203 and $1,816,461 for
the nine-month periods ended December 31, 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
14
of Twentieth Century Fox Film Corporation and MGM Home Entertainment, a
subsidiary of Metro Goldwyn Mayer, Inc. For the three-month period ended
December 31, 2002, the Company had one program supplier whose product generated
19 percent and a second that generated 14 percent of Rentrak revenue. No other
program supplier provided product which generated more than 10 percent of
revenue for the three-month period ended December 31, 2002. One customer
accounted for 24 percent of the Company's revenue in the three-month period
ended December 31, 2002. No other customer accounted for more than 10 percent of
the Company's revenue in the three-month period ended December 31, 2002. For the
nine-month period ended December 31, 2002, the Company had one program supplier
whose product generated 18 percent, a second that generated 14 percent, a third
that generated 13 percent and a fourth that generated 12 percent of Rentrak
revenue. No other program supplier provided product which generated more than 10
percent of revenue for the nine-month period ended December 31, 2002. One
customer accounted for 16 percent of the Company's revenue in the nine-month
period ended December 31, 2002. No other customer accounted for more than 10
percent of the Company's revenue in the nine-month period ended December 31,
2002.
For the three-month period ended December 31, 2001, the Company had one program
supplier whose product generated 21 percent and a second that generated 17
percent of Rentrak revenue. No other program supplier provided product that
generated more than 10 percent of revenue for the three-month period ended
December 31, 2001. One customer accounted for 19 percent of the Company's
revenue and a second accounted for 11 percent of the Company's revenue in the
three-month period ended December 31, 2001. No other customer accounted for more
than 10 percent of the Company's revenue in the three-month period ended
December 31, 2001. For the nine-month period ended December 31, 2001, the
Company had one program supplier whose product generated 20 percent, a second
that generated 15 percent, and a third that generated 12 percent of Rentrak
revenue. No other program supplier provided product that generated more than 10
percent of revenue for the nine-month period ended December 31, 2001. One
customer accounted for 11 percent of the Company's revenue in the nine-month
period ended December 31, 2001. No other customer accounted for more than 10
percent of the Company's revenue in the nine-month period ended December 31,
2001.
NOTE D: Discontinued Operations
Due to the significant increase in sell through activity throughout the
industry, the operations of BlowOut Video have not continued to meet the
expectations of management. As a result, during the three-month period ended
June 30, 2002, management initiated a plan to discontinue the retail store
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. Currently
BlowOut Video is operating one remaining store in Pennsylvania which is expected
to be closed by March 31,
15
2003, Rentrak plans to continue selling its contractually available end-of-term
PPT revenue sharing product through broker channels after the store operations
are fully discontinued.
BlowOut Video generated revenues of $0.6 million and a net loss of $75,369, or
$0.01 per share, operating two stores in the three-month period ended December
31, 2002, compared with revenues of $2.1 million and a net loss of $102,883 or
$0.01 per share, during the three-month period ended December 31, 2001, during
which it operated six stores.
BlowOut Video generated revenues of $2.5 million and a net loss of $496,599, or
$0.05 per share, in the nine-month period ended December 31, 2002, compared with
revenues of $5.7 million and a net loss of $609,706, or $0.06 per share, during
the nine-month period ended December 31, 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 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 covered by
the terminated agreements noted above have been reversed in non-cash
transactions. During the three-month period ended September 30, 2002, one of the
remaining officers exercised his right to have the Company purchase from him his
shares of stock associated with his loan. The proceeds from the purchase of his
stock by the Company were partially used to pay the remaining balance of his
loan associated with these shares. Additionally, during this three-month period
the other remaining officer allowed his right to have the Company purchase from
him his shares of stock associated with his loan to expire. The shares
associated with both of these officers' loans have been cancelled and the
related notes have been terminated. As a result, all common stock and related
notes receivable covered by all agreements associated with this officer loan
program noted above have been cancelled or terminated.
The loans bore interest at the federal funds rate in effect on the date of the
loan (6.5 percent) and interest was payable annually. The Company was not
accruing interest on the loans. The principal amount of the loans was due on the
earliest to
16
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 left
Rentrak's employment unless such departure followed 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 were secured by
the stock purchased. The loans were without recourse (except as to the stock
securing the loans) as to principal and were with full recourse against the
borrower as to interest. In accordance with generally accepted accounting
principles, the notes receivable arising from these transactions were 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.
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.
17
Based upon the results of the transactions noted above occurring in the fiscal
year ended March 31, 2002, the Company has no further obligations to, or
ownership in, Rentrak Japan.
NOTE G. Warrants
On July 22, 1994, Disney and Rentrak entered into an agreement whereby Disney
provides Rentrak titles to use in Rentrak's Pay-Per-Transaction revenue sharing
program. As compensation for entering into the agreement with Rentrak, Rentrak
issued warrants to Disney. The fair value of the warrants, approximately
$2,000,000, were recorded as a deferred charge to stockholders' equity and have
been amortized over the life of the initial agreement. The warrants were fully
amortized in July 1999. However, the warrants were exercisable through March 31,
2005.
On November 15, 2002, Rentrak and Disney entered into a cancellation agreement
to cancel the remaining 925,521 outstanding warrants. Under the cancellation
agreement, Rentrak paid Disney $300,000 in cash in consideration for the
cancellation of the warrants. In addition, Rentrak agreed to pay Disney
supplemental consideration in the event of a change of control (generally a
greater than 50% change in ownership of the outstanding Rentrak common stock by
another company or group seeking control). The amount of consideration to be
paid in the event of a change in control is based on the value per common share
paid by the purchaser. This compensation is also dependent on the timing of the
purchase. The supplemental consideration ranges from $300,000 to $2,000,000
depending on the price and timing of the purchase. The Company has not accrued
any amount as of December 31, 2002.
Note H. Debt Compliance
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 December 31, 2002; and (4) achievement of
specified current and leverage financial ratios. Based upon the financial
results reported as of December 31, 2002 and for the three and nine-month
periods then ended, the Company has determined it is not in compliance with the
tangible net worth covenant at December 31, 2002 and net profit financial
covenants for the periods ended December 31, 2002. The Company is in the process
of obtaining a waiver of non-compliance with these financial covenants at
December 31, 2002 and for the periods ended December 31, 2002. The Company
received a waiver of
18
compliance for its non-compliance with the net profit covenant for the
three-month period ended September 30, 2002. At December 31, 2002 and February
13, 2003, the Company had no outstanding borrowings under this agreement.
19
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 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 December 31, 2002, total revenue decreased $3.0
million, or 12 percent, to $21.3 million from $24.3 million for the three-month
period ended December 31, 2001. For the nine-month period ended December 31,
2002, total revenue decreased $8.9 million, or 12 percent, to $64.5 million from
$73.4 million for the nine-month period ended December 31, 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 ("DRS"), 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
20
requiring just-in-time fulfillment, and other revenues which include royalty
payments primarily from Rentrak Japan (See Note F.).
The $3.0 million decrease in total revenues for the three-month period ended
December 31, 2002 is primarily due to the decrease in PPT System order
processing fees and transaction fees. PPT business segment revenues decreased
primarily due to the fact that PPT Units shipped decreased 11 percent during the
three-month period ended December 31, 2002 compared to the three-month period
ended December 31, 2001. Total order processing and transaction fees decreased a
combined $3.5 million during the three-month period ended December 31, 2002
compared to the three-month period ended December 31, 2001. Order processing
fees decreased due to the decrease in Units noted above and a higher percentage
of Units with lower revenue sharing terms in the mix of various Units shipped
during those periods, resulting in a decline in the order processing fees per
Unit from period to period. Transaction fees decreased due to fewer than
expected rental turns of the Units in the stores and due to the decrease in
Units shipped during this period, a lesser title quality in the mix of Units,
and a decrease in DRS fees during the three-month period. These decreases in
order processing and transaction fees were partially offset by an approximate
$0.6 million net increase in sell-through and other revenues from the PPT
business segment. 3PF revenues decreased approximately $0.1 million during the
same three-month period from $6.4 million to $6.3 million.
The $8.9 million decrease in total revenues for the nine-month period ended
December 31, 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. PPT business segment revenues
decreased despite the fact that PPT Units shipped increased 11 percent during
the nine-month period ended December 31, 2002 compared to the nine-month period
ended December 31, 2001. Total order processing and transaction fees decreased a
combined $3.1 million during the nine-month period ended December 31, 2002
compared to the nine-month period ended December 31, 2001. Order processing fees
decreased due to a higher percentage of Units with lower order processing fee
revenue sharing terms in the mix of various Units shipped during those periods,
such that the order processing fees per Unit declined from period to period.
Transaction fees decreased due to fewer than expected rental turns of the Units,
a lesser title quality in the mix of Units, and a decrease in DRS fees during
the nine-month period. These decreases in order processing and transaction fees
were partially offset by an approximate $1.3 million net increase in
sell-through and other revenues from the PPT business segment. 3PF revenues
decreased approximately $0.8 million during this same nine-month period, due to
a loss of a key customer during the three-month period ended June 30, 2001.
Total cost of sales for the three-month period ended December 31, 2002 decreased
to $18.0 million from $19.6 million for the three-month period ended December
31, 2001, a decrease of $1.6 million, or 8 percent. A significant portion this
decrease in cost of sales is primarily attributable to the $2.9 million net
decrease in PPT business segment revenues noted above, offset by a $1.0 million
21
increase in agency labor cost at 3PF attributable to one of its clients
significant seasonal holiday business during the period. Total cost of sales as
a percent of total revenues was 85% for the three-month period ended December
31, 2002 compared to 80% for the three-month period ended December 31, 2001.
Total cost of sales for the nine-month period ended December 31, 2002 decreased
slightly to $53.3 million from $53.5 million for the nine-month period ended
December 31, 2001, a decrease of $0.2 million. 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 83% for the nine-month period
ended December 31, 2002 compared to 80% for the nine-month period ended December
31, 2001. This increase is primarily attributable to the overall change in mix
from period to period of studio Units shipped and rented in the PPT business
segment combined with the agency labor cost increase at 3PF for the three-month
period noted above.
Total selling, general and administrative expenses were $3.7 million for the
three-month period ended December 31, 2002, compared to $3.4 million for the
three-month period ended December 31, 2001, an increase of $0.3 million, or 9
percent. The increase in selling, general and administrative expenses for the
three-month period is primarily the result of: (1) an overall increase in the
PPT business segment's overall overhead costs of approximately $0.1 million
during the period; and (2) an approximate $0.7 million decrease in 3PF's overall
fulfillment overhead costs during the three-month period ended December 31, 2002
due to improved cost controls, combined with an approximate $0.9 million
recovery realized during the three-month period ended December 31, 2001 of a
receivable previously reserved for one of 3PF's clients that filed for
bankruptcy during the three-month period ended June 30, 2001, resulting in a net
increase of $0.2 million between the two three-month periods ended December 31.
Total selling, general and administrative expenses were $11.3 million for the
nine-month period ended December 31, 2002, compared to $14.9 million for the
nine-month period ended December 31, 2001, a decrease of $3.6 million, or 24
percent. The decrease in total selling, general and administrative expenses is
the result of an approximate $1.0 million decrease primarily attributable to the
following factors affecting the Company's PPT business segment: (1) an
approximate $0.4 million reduction in labor expense during this period due to
the capitalization cost of software development for the theatrical service
business initiative; (2) an increase of approximately $0.7 million in studio
advertising credits earned for its PPT business during the period; (3) an
approximate $0.8 million decrease in overall general expenses; (4) an
approximate $0.2 million decrease in Rentrak UK's overall overhead expenses due
to the resizing of those operations to correspond to lower business activity;
and (5) the recognition of $0.5 million in expense for the bonus accrual related
to the pre-tax financial results for the three-month period ended September 30,
2001. These expense reductions were offset by an approximate increase of $1.3
million in overall overhead cost for the continued investment in the development
of the Company's theatrical service business initiative as well as a $0.3
million charge to compensation expense during the three-month period ended
September 30, 2002, as the result of a former officer of the Company exercising
his right to have the Company purchase
22
from him his shares associated with his stock loan (See Note E.). The total
decrease in selling, general and administrative expenses is also the result of
an approximate $2.6 million decrease attributable to the following in the
Company's fulfillment business segment: (1) recognition of an approximate $0.8
million in expense related to the closure of the 3PF administrative offices in
Skokie, Illinois in April 2001; (2) an approximate $0.3 million of general
expenses related to non-recurring contract management fees incurred during the
nine-month period ended December 31, 2001; (3) an approximate $0.2 million net
provision recognized during the nine-month period ended December 31, 2001
related to one of 3PF's clients that filed for bankruptcy during the three-month
period ended June 30, 2001 as noted above; and (4) an approximate $1.3 million
net expense reduction in overall overhead due to the implementation of better
cost controls across 3PF's organization.
Operating loss from continuing operations for the three-month period ended
December 31, 2002 was $0.5 million compared to operating income from continuing
operations of $1.4 million for the three-month period ended December 31, 2001.
The decline for the fiscal 2003 three-month period ended December 31, 2002,
compared to the three-month period ended December 31, 2001, was primarily due
to: (1) the decrease in PPT business segment revenues and associated gross
margin and the increase in selling, general and administrative expense, as noted
above; and (2) the increase in 3PF's fulfillment cost of sales combined with the
increased selling, general and administrative expense during the period, as
noted above. Operating income from continuing operations for the nine-month
period ended December 31, 2002 was $0.2 million, compared to an operating loss
of $1.0 million from continuing operations for the nine-month period ended
December 31, 2001, excluding the effect of the $6.4 million in revenue noted
above and the selling, general and administrative expenses associated with the
Rentrak Japan relationship. The improvement for the fiscal 2003 nine-month
period was primarily due to: (1) an approximate $1.0 million decrease in
selling, general and administrative expenses from the Company's PPT business
segment noted above and a net gain from a litigation settlement partially offset
by a decline in PPT margins; and (2) a $2.6 million reduction in 3PF's overall
selling, general and administrative expense, as noted above, partially offset by
a reduction in 3PF margins.
Other income (expense) decreased from income of approximately $2.3 million for
the three-month period ended December 31, 2001 to $11 thousand for the
three-month period ended December 31, 2002, primarily due to the recognition of
other income relating to the $2.4 million payment received in October 2001
associated with the Rentrak Japan relationship (See Note F.). Other income
(expense) decreased from income of approximately $7.9 million for the nine-month
period ended December 31, 2001 to income of $82 thousand for the nine-month
period ended December 31, 2002, primarily due to the recognition of $8.0 million
in other income during the nine-month period ended June 30, 2001 related to the
business restructuring agreement between the Company and Rentrak Japan (See Note
F.).
23
The effective tax rate during the three and nine-month periods ended December
31, 2002 was 38% compared to 37% and 39% during the three-month and nine-month
periods ended December 31, 2001, respectively.
As a result, for the three-month period ended December 31, 2002, the Company
recorded a net loss from continuing operations of $0.3 million, or 1 percent of
total revenue, compared to income from continuing operations of $2.3 million, or
approximately 10 percent of total revenue, in the three-month period ended
December 31, 2001. The decrease in net income from continuing operations is
primarily attributable to: (1) the decrease in PPT business segment revenues and
associated gross margin, an increase in selling, general and administrative
expenses, and the receipt of $2.4 million in October 2001 associated with the
Rentrak Japan relationship, as noted above; and (2) the decline in 3PF's
fulfillment gross margin due to increased cost of sales, offset by a reduction
in its overall selling, general and administrative expenses, as noted above. For
the nine-month period ended December 31, 2002, the Company recorded net income
from continuing operations of $0.2 million, or less than 1 percent of total
revenue, compared to income from continuing operations of $7.9 million, or 11
percent of total revenue, in the nine-month period ended December 31, 2001. The
decrease in net income from continuing operations is primarily attributable to:
(1) the business restructuring between the Company and Rentrak Japan during the
three-month period ended June 30, 2001 (See Note F) in the PPT business segment,
combined with a reduction in PPT business segment revenues and gross margin,
partially offset by decreased selling, general and administrative expenses, as
noted above; and (2) the decline in 3PF fulfillment revenues, increase in cost
of sales and resulting reduction in gross margin, offset by an overall decline
in selling, general and administrative expenses, as noted above.
Discontinued Operations
- -----------------------
As discussed in Note D, during the three-month period ended June 30, 2002, the
Company elected to discontinue store operations of its retail subsidiary BlowOut
Video, Inc. Total revenue from BlowOut decreased $1.5 million from $2.1 million
for the three-month period ended December 31, 2001, to $0.6 million for the
three-month period ended December 31, 2002. Cost of sales from BlowOut decreased
$1.1 million from $1.6 million for the three-month period ended December 31,
2001, to $0.5 million for the three-month period ended December 31, 2002.
Selling, general and administrative expenses from BlowOut decreased $0.5 million
from $0.7 million for the three-month period ended December 31, 2001, to $0.2
million for the three-month period ended December 31, 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 six stores operated in the three-month
period ended December 31, 2002. Total revenue from BlowOut decreased $3.2
million from $5.7 million for the nine-month period ended December 31, 2001, to
$2.5 million for the nine-month period ended December 31, 2002. Cost of sales
from BlowOut decreased $2.2 million from $4.3 million for the nine-month period
ended December 31, 2001, to $2.1 million for the nine-month period ended
December 31, 2002. Selling, general and administrative
24
expenses from BlowOut decreased $1.2 million from $2.4 million for the
nine-month period ended December 31, 2001, to $1.2 million for the nine-month
period ended December 31, 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 operated in the nine-month period ended December 31,
2002.
Net loss from BlowOut decreased less than $0.1 million from $102,883 for the
three-month period ended December 31, 2001, to $75,369 for the three-month
period ended December 31, 2002. Net loss from BlowOut decreased $0.1 million
from $0.6 million for the nine-month period ended December 31, 2001, to $0.5
million for the nine-month period ended December 31, 2002.
Financial Condition
- -------------------
At December 31, 2002, total assets were $33.5 million, a decrease of $5.1
million from $38.6 million at March 31, 2002. As of December 31, 2002, cash
decreased $0.5 million to $11.5 million from $12.0 million at March 31, 2002
(see the Consolidated Statements of Cash Flows in the accompanying Consolidated
Financial Statements). Net accounts receivable decreased $1.5 million from $11.2
million at March 31, 2002 to $9.7 million at December 31, 2002, primarily due to
a reduction in revenues. At December 31, 2002, other current assets were $1.6
million, a decrease of $1.5 million from $3.1 million at March 31, 2002,
primarily due to the receipt, during May 2002, of the Reel.com cash settlement,
as to which agreement was reached in March 2002. Current assets of discontinued
operations decreased $1.5 million from $2.2 million at March 31, 2002 to $0.7
million at December 31, 2002, primarily due to a reduction of inventory related
to store closures during the nine-month period. Property and Equipment decreased
approximately $0.7 million from $3.9 million at March 31, 2002 to $3.2 million
at December 31, 2002. Other assets increased approximately $0.7 million from
$1.2 million at March 31, 2002 to $1.9 million at December 31, 2002. Both the
decrease in property and equipment and the increase in other assets are
associated with a sale of equipment to a customer of 3PF associated with a
financing lease.
At December 31, 2002, total liabilities were $18.0 million, a decrease of $3.3
million from $21.3 million at March 31, 2002. Accounts payable decreased $2.6
million from $18.2 million at March 31, 2002 to $15.6 million at December 31,
2002, primarily due to the timing of studio and other vendor payments, and as
the result of lower revenues and associated cost of sales. Accrued compensation
decreased $0.5 million from $1.3 million at March 31, 2002, to $0.8 million at
December 31, 2002, in part due to the payout of most 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 December 31, 2002.
At December 31, 2002, total stockholders' equity was $15.4 million, a decrease
of $1.9 million from the $17.3 million at March 31, 2002. Common stock and
capital in excess of par value decreased, on a combined basis, $1.9 million from
$41.7
25
million at March 31, 2002 to $39.8 million at December 31, 2002, primarily due
to the repurchase of stock under the Company's stock repurchase program and the
stock warrants repurchased by the Company in November 2002 (See Note G.). Notes
receivable decreased $0.4 million from $0.4 million as of March 31, 2002, to $0
as of December 31, 2002 (See Note E). Accumulated deficit increased $0.3 million
from $23.9 million at March 31, 2002 to $24.2 million at December 31, 2002 due
to the net loss from the nine-month period.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At December 31, 2002, the Company had cash of $11.5 million compared to $12.0
million at March 31, 2002. The Company's current ratio (current assets/current
liabilities) was 1.57 at December 31, 2002 compared to 1.56 at March 31, 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 December 31, 2002; and (4) achievement of
specified current and leverage financial ratios. Based upon the financial
results reported as of December 31, 2002 and for the three and nine-month
periods then ended, the Company has determined it is not in compliance with the
tangible net worth covenant at December 31, 2002 and net profit financial
covenants for the periods ended December 31, 2002. The Company is in the process
of obtaining a waiver of non-compliance with these financial covenants at
December 31, 2002 and for the periods ended December 31, 2002. The Company
received a waiver of compliance for its non-compliance with the net profit
covenant for the three-month period ended September 30, 2002. At December 31,
2002 and February 13, 2003, 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 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 2002, 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
26
in March 1999. In 1996, the Company agreed to guarantee any amounts outstanding
under BlowOut's credit facility. At 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 in the Company's 2002 Annual
Report Form 10-K 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
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.
27
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 December 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.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
- -------------------------------------------------
The Company's Chief Executive Officer and Chief Financial Officer have evaluated
the Company's disclosure controls and procedures, as defined by the Securities
and Exchange Commission, as of a date within 90 days of the filing date of this
report (the "Evaluation Date"). Based upon this evaluation, the Company's Chief
Executive Officer and Chief Financial Officer have concluded that the Company's
disclosure controls and procedures as of the Evaluation Date were effective to
ensure that information required to be disclosed by the Company is recorded,
processed, summarized and reported on a timely basis.
Change in Internal Controls
- ------------------------------
The Company maintains a system of internal accounting controls designed to
provide reasonable assurance that transactions are properly recorded and
summarized so that reliable financial records and reports can be prepared and
assets safeguarded. There are inherent limitations in the effectiveness of any
system of internal controls including the possibility of human error and the
circumvention or overriding of controls. Additionally, the cost of a particular
accounting control should not exceed the benefit expected to be derived.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect internal controls subsequent to the
Evaluation Date.
28
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 6. Exhibits and Reports on Form 8-K
(a) Exhibits - See the Exhibit Index on page 36 hereof,
(b) Reports on Form 8-K . A report on Form 8-K was filed on November 18, 2002,
reporting under Item 5, Other Events, the repurchase by the Company of stock
purchase warrants held by Disney Enterprises, Inc.
29
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 February, 2003
RENTRAK CORPORATION
By: /s/ Mark L. Thoenes
------------------------
Mark L. Thoenes
Chief Financial Officer
Signing on behalf of the registrant
30
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Paul A. Rosenbaum, certify that:
I have reviewed this quarterly report on Form 10-Q of Rentrak Corporation;
Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
Based on my knowledge, the financial statements, and other financial information
included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this quarterly report;
The registrant's other certifying officer and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:
Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
The registrant's other certifying officer and I have indicated in this quarterly
report whether or not there were significant changes in internal controls or in
31
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: February 14, 2003
By: /s/ Paul A. Rosenbaum
-------------------------
Paul A. Rosenbaum
Chairman and Chief Executive Officer
32
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Mark L. Thoenes, certify that:
I have reviewed this quarterly report on Form 10-Q of Rentrak Corporation;
Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
Based on my knowledge, the financial statements, and other financial information
included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this quarterly report;
The registrant's other certifying officer and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:
Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
33
The registrant's other certifying officer and I have indicated in this quarterly
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: February 14, 2003
By: /s/ Mark L. Thoenes
- -----------------------
Mark L. Thoenes
Chief Financial Officer
34
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 December 31, 2002, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Paul A.
Rosenbaum, 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
Chairman and Chief Executive Officer
Rentrak Corporation
February 14, 2003
In connection with the Quarterly Report of Rentrak Corporation (the "Company")
on Form 10-Q for the period ended December 31, 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:
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/ Mark L. Thoenes
- --------------------------------
Mark L. Thoenes
Chief Financial Officer
Rentrak Corporation
February 14, 2003
35
EXHIBIT INDEX
The following exhibit is filed herewith:
Exhibit
Number Exhibit
10.1 Revolving Line of Credit Agreement with Wells Fargo Bank dated
June 15, 2002.
10.2 Employment Agreement with Kenneth M. Papagan dated November
18, 2002, together with form of incentive stock option
agreement.
10.3 Employment Agreement with Timothy J. Erwin Dated November 1,
2002. *
10.4 Employment Agreement with Christopher E. Roberts dated
November 1, 2002. *
10.5 Employment Agreement with Ronald Giambra dated July 1, 2002.
*Portions omitted pursuant to a request for confidential treatment filed with
the Security and Exchange Commission.
36